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emplaw

emplaw

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Published by: hls13bro on Dec 17, 2012
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05/18/2014

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AccruolsndDeferrols:imingsEverflhingnAccounting
Here'sWhereYou'veeen
ln Chopter , youstudiedhequolitiesfthe nformotionnhe inoncioltotementsAccountingnformotionhoulde useful.ouolsoeornedhotGAAPequiresccruolbosis ccounting-revenuesrerecognized henearnednd expensesremoichedto those evenues.
Here'sWhereYou'reoinq
InChopter ,vouwilleornmorebouthow he inoncioltotementshowronsoctionsin which heexchonge fthecoshondheexchongef goodsondservicesoppen tdlfferentimes. hese reoccruols nddeferrols
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Whenyouarefinished studyingthis chapter,youshould be ableto:1. Define accrualaccountingand explainhow incomeis measured'2. Explain accrualsand howtheyaffectthefi.nancialstatements;describeandper-form theadjustmentselatedo accruals.3" Explaindeferralsandhow theyaffect the financialstatements;describeandper-form theadjustmentselatedo deferrals.4.Constructthe basicfinancialstatementsrom agivenset of transactionshat in-cludeaccrualsand deferralsandrecognize he effectof these ransactionson ac-tualfinancial statements.5"Computeand explainworkingcapital andthequick ratio.6" Explainthebusinessisksassociatedwithfinancial recordsand accountinginformation.97
 
98CHAPTER.ACCRUALSNDDEFERRALS:TMTNGs EVERvTHINGNAccouNTtNG
#ffng*s*F"{s"f{eys
WhenJohnRigas,heformerchairmanndCEOfAdelphiaCom-munications,as found guiltyof bankandsecuritiesraudandsentencedo 15yearsnprison,t wasnotjusthecasef a CEOwho lootedapubliclyradedcommunicationsompany.ohnRigaswashe company'sounder.Heand hisson,TimothyRigas,wereconvicted f stealingver$2billionromthecompany.Somepeoplebelievehathavingomeoneikehe founderofa companyaspartof the managementeamwill helpprotecthecompanyfrommanagementbuses.fafirm'smanagersavesomeownershipn thecompany,heir nterestshouldbealignedwiththoseofthe shareholders.l-thoughthere maybe some ruthin this,onething isclear romthe caseofAdelphia:There sno substituteorethicalbehavior.nthis case,he founderof thecompanydrove he companyntobankruptcyosupporta lifeof ex-treme luxury.ForJohn Rigas, ver80yearsold,the onlyluxuryhe mayhaveleft ishe luxuryof spending helastyearsf hisife nail.
Measuringncome
After its firstmonth, Tom'sWearprepareda setof financialstatementsomeasureandre-portthe company'sactivityduring thatfirst monthand tomeasureand reportits financialpositionat the endof that month. Tom'sWear didboth again forthe secondmonth.At differentpointsoftimein thelifeof a company,owners,nvestors,creditors, andother interestedpartieswant to know thecompany'sfinancial positionandaccomplish-ments n order tomake all kindsof evaluationsanddecisions,ncludingwhetheror not thecompanys meetingtsgoals.The main goalis usuallyto makeaprofit;so measuringheprofitthe companyhas madeduring a specified periodplaysa big rolein evaluatinghowsuccessfullycompanyhasbeendoingtsbusrness.AsyoulearnednChapter 2, the incomestatementsummarizesevenuesand expensesforaperiodof time,usually ayear.Netincomecanalso be measuredora week,a month,or aquarter.For example,many companiesprovidequarterlyfinancialinformationto theirshareholders.hat informationwould includenet incomefor the quarter.Accountantsonsiderhe continuousife ofa businesss beingcomposedof discretepe-riodsof time-months,quarters,oryears.Theway we dividethe revenuesandexpensesmongthoseimeperiodssa crucialpartof accounting.hat swhy timingis everythingnaccount-ing.If revenue searnednotnecessarily ollected)na certainimeperiod, youmust be surethat it is includedon theincome statementor that period-notthe onebeforeand not theoneafter. fyouhaveusedsomesuppliesduringaperiod,henyouneed o includehecostofthosesuppliesaspartof the expensesn the ncomestatementor thatsameperiod.Sometimesyouwillsee heincomestatementeferredo as thestaternentfoper-ations andother times astheprofitandlossstatement. Howeveritis referredto, itwillusuallyappearas he firstfinancial statementn a company'sannualeport.Exhibit3.1showsthe incomestatements orChico'sFAS Inc.Whenyousee totalsales of$1,404,575,000or theyearendedJanuary28,2006, youknow thatall thesalesmadeinthat fiscalyear-ayearof business orthecompany-areincludedinthat amount,even f someof the cashhasnot beencollectedromthe customersy January28,2006.Similarly, theexpensesistedareonlytheexpensesncurredn that fiscal year,whetheror notthe companyhaspaidfor thoseexpensesyJanuary28,2006.Chico's hasworkedhardtogetthe amountsight.[,.(].1Defineaccrualccountingandexplainhowincomesmeasured.
 
CHAPTER3MEASURINGNCOME
99
EXHIBIT3.1Chico'sFAS,Inc.and SubsidiariesConsolidatedStatementsofIncome
(lnthousands,exceptpershare amounts)
lncome Statementsfor Chico's
Chico's hadnet salesof over$1.4billion during thefiscalyearended January 28,2006.Investors dependon thatinformation, so Chico's workshard togetitright.
FiscalYearEndedJan.uw28,January29,20062005
January31,2004
Net sales by Chico's/Somastores. .$1,095,938$889,429$698,100Net sales by WHIBM stores26I,601Net sales by catalog andInternet. . 36,151and store operating expenses. . 514,529Depreciation and amortization. ... 44,20IIncome from operations..298,313Interestincome,net ......8,236Income before incometaxes306,549Incometaxprovision.....112,568Netincome..$-193,981
142,09239,81826,831 22,780
Net sales o franchisees. .10,8858,530 7,801rNeteales,..,...,Costofgoodsold.......547,592411,908297,477Grossprofit857,043654,974471,022General, administrative
398,1732,48r224,3762,827226,70385,497
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289,11821,130160,77488816r,6626r,432$100,230Timingdifferencesin accountingare differencesbetween.the time when a companyearns evenuebyproviding aproduct orservice o customersand the time when thecash s collectedfrom thecustomers,and.the timewhenthe company ncursan expenseand hetime whenthe companypaysorthe expense.You will see n this chapterhow to identifytiming differencesandpresenthem on thefi-nancial statements.Asdiscussed nthepreviouschapter,youcanthink ofthe timingproblems n account-ing in two simple ways:.action before dollars.dollarsbeforeactionAnexample ofaction before dollarsis whena sales made onaccount.A customerbuys on credit and agreesopaylater.The actionof makingthe sale-theeconomicsub-stanceof the transaction-takesplace before dollarsareexchangednpayment.This typeof transaction-action first, dollarslater-is calledan accrual.Incontrast,an exampleof dollars beforeactionis whena firmbuys insurance.By itsnature, insurance mustbepurchasednadvance ofthe timeperiod to which it applies.Payment-when the dollars are exchanged-ismadefirst, and theuseof the insurance-the actionprovidedby insuranceprotection-comeslater.Dollarsfrst,action ater s calleda deferral.For timing differences,whetheraccrualsor deferrals,we mustlookat the accountinginformation on each sideof the differenceand adjusthat informationbefore t can bepre-sentedon the financial statements.
Timingdifferencesrisewhenrevenuesre earnedandcollected n differentaccountingeriods.heyalsoarisewhen expenses reincurred n one accountingperiodandpaidor inanother.An accrual sa transactionnwhich herevenuehasbeenearnedor theexoense asbeenncurredbut no cashhasbeenexchanged.A deferral s a transactionnwhich hecash s exchangedbefore he revenuesearnedor the exoenses ncurred.

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