Chapter 5 Notes

1
Chapter 5 Notes

• The Unit 2 test (covering chap 4 and chap 5) will
  occur on Wed October 15

2
Fiscal Period

• Fiscal Period is same as accounting period.
• Fiscal period is the period of time over which
  earnings are measured.
• What happens if the income statement does not
  mention when part of the title?
• The readers have no idea whether the net income
  is from one month of business operation or one
  year of business operation or one quarter of
  business operation.

3
Fiscal Period

• The most common fiscal period for small business
  is one year. The most common fiscal period for
  big corporation is one quarter ( 3 months)
• The fiscal year does not have to be same as the
  calendar year.
• For example, fiscal year can be May 1 to April 30
  of next year.
• If the income statement cover one quarter
  starting from Nov 1 to January 31. How would you
  write down in the income statement?

4
Time Period Concept (GAAP)

• Time period concept is an accounting standard
  that provides accounting will take place over
  consistent fiscal periods.
• These fiscal periods have to be (are usually)
  consistent such as one month, one year or one
  quarter.
• In order to compare the performance of managers
  or of the employees, the owner (or manager)
  usually likes to see several income statements
  such as income statement of 2010, 2011, 2012 and
  2013.
• Then they can easily see the trend.

5
Revenue Recognition Principle

• It requires that revenue should be recorded in
  the accounts at the time the transaction is
  completed.
• Transaction is completed The service is
  provided or the customer received the goods.
• This accounting principle should be honored under
  both Canadian GAAP and IFRS.
• For example, if a customer buys laptop from
  Futureshop on credit on Setpember 1st. The
  customer pays the money on October 15. When can
  futureshop record this transaction as revenue?
• The futureshop should recognize the transaction
  on September 1st.

6
The Matching Principle

• Separating revenue and expenses into specific
  fiscal periods (such as one month or one year)
  means that accountant must follow two steps
• They must be careful to record the proper amount
  of revenues in the proper period.
• They must subtract only those expenses which
  helped earn the revenue they recorded in step
  one.

7
The Matching Principle

• For most transactions, recording the proper
  revenue is easy because accountants mechanically
  follow the revenue recognition principle.
• The matching principle states that each expense
  item must be recorded in the same period as the
  revenue that the expense helped to earn.

8
The Matching Principle

• If accountants do not follow matching principle,
  net income numbers will be incorrect, meaning
  income statement will show incorrect information.
• For example, if Futureshop purchased flyer
  service from marketing company (called MR
  Printing) on Nov 1, 2014 which will be used for
  boxing day sale (December 26, 2014).
• Futureshop will pay the service fee on January
  15, 2015. (The flyer service fee is 2000.)

9
The Matching Principle

• The fiscal period ends on December 31, when will
  they record the advertising expense?
• The futureshop will record this advertising
  expense in 2014 income statement because this
  expense was used to generate the 2014 revenue.
• How will the futureshop record the transactions?
• On November 1st, the accountant will credit AP
  Park Press account and debit advertising
  expense account.

10
The Matching Principle

• On December 15, the accountant will debit AP
  Park Press account and credit Bank account.
• If the flyer was for the two weeks of December
  24, 2014 to January 7 2015, then would the
  transactions be different?
• Only half of the advertising expense (1000)
  will be recorded in 2014 income statement and the
  rest of 1000 will be recorded in 2015 income
  statement.

11
The Matching Principle

• What is matching principle?

12
The Matching Principle

• What if this company made income statements every
  month? In which month, should they record this
  advertising expense?
• This advertising expense should be recorded in
  December 2014 Income Statement. (rather than Nov
  2014 IS)

13
The Matching Principle

• If a construction company has two year building
  project in Mississuaga downtown. They will
  receive 10 million on December 31 2013. They
  started the building project January 1, 2012.
• By December 31, 2012, accountant realizes that
  the construction company already incurred 3
  million dollar expense for this project. (and
  half of the work is done.)

14
The Matching Principle

• What happens if he just follows revenue
  recognition principle?
• He must wait until Dec 31, 2013 in order to
  record the revenue.
• What happens if he follows matching principle?
• He can record half of the revenue at the end of
  2012.
• Which one (RRP or MP) delivers more accurate net
  income numbers for 2012 and 2013?
• Generally speaking MP provides more consistent
  and reasonable net income numbers.

15
Classwork / Homework

• P149 review questions 2, 4, 8, 9
• P150 Exercise 1 and 5
• P166 Review EX 4
• I will take up P150 Ex 2 today. (was HW for
  yesterday)