1、2 - 1Chapter 2Measuring Income toAssess Performance2 - 2Learning ObjectivesAfter studying this chapter, you should be able to:u Explain how accountants measure income.u Use the concepts of recognition, matching, and cost recovery to record revenues and expenses.u Prepare an income statement and show
2、 how it is related to a balance sheet.u Calculate operating cash flows and show how cash flow differs from income.2 - 3Learning ObjectivesAfter studying this chapter, you should be able to:u Account for cash dividends and prepare a statement of retained income.u Compute and explain earnings per shar
3、e, price-earnings ratio, dividend-yield ratio, and dividend-payout ratio.2 - 4Introduction to Income MeasurementuIncome is a measurement of accomplishment or a means of evaluating performance. All income should be measured in the same way following a common set of rules. Using a common set of rules
4、allows decision makers to compare the performance of one company with that of other companies because measurement is the same in all companies.2 - 5Operating Cycleu Operating cycle - the time span during which cash is used to acquire goods and services, which in turn are sold to customers, who in tu
5、rn pay for their purchases, with cashCash$100,000MerchandiseInventory$100,000AccountsReceivable$160,000Buy SellCollect2 - 6The Accounting Time PerioduCompanies need a way to measure performance over discrete time periods. The most popular period for measuring income is the calendar year, but many co
6、mpanies use a fiscal year, which is a year that ends on a date other than December 31, usually at the low point in annual business activity. Companies also prepare statements for interim periods, generally on a quarterly or monthly basis.2 - 7Revenues and ExpensesuRevenues (sales) - gross increases
7、in owners equity arising from increases in assets received in exchange for the delivery of goods or services to customersuExpenses - decreases in owners equity that arise because goods or services are delivered to customers2 - 8Revenues and ExpensesuIncome (profit) - the excess of revenues over expe
8、nses Revenues - Expenses = ProfituRetained income - additional owners equity generated by income or profits Revenues increase owners equity. Expenses decrease owners equity.2 - 9Accrual Basis and Cash BasisuThe most common ways of measuring income are the accrual basis and the cash basis. Accrual ba
9、sis - recognizes the impact of transactions for the time periods when revenues and expenses occur even if no cash changes hands Cash basis - recognizes the impact of transactions only when cash is received or disbursed2 - 10Accrual Basis and Cash BasisuUnder the accrual basis: Revenues are recorded
10、when earned. For example, a sale on account is recorded as revenue when the transaction takes place even though the seller receives no cash at that moment. Expenses are recorded when incurred. For example, a purchase on account is recorded as an expense when the transaction takes place even though the buyer disburses no cash at that moment.
