...CASE 2-1 Revenue and Expense Recognition—Orthodontic Centers of America CASE OBJECTIVES The objective of this case is to evaluate the revenue and expense recognition methods used by the company. INTRODUCTION The following information was extracted from the 1999 and 2000 annual reports of Orthodontic Centers of America [OCA]. The company provides practice management services to orthodontic practices in the United States. OCA acquires and develops orthodontic centers and manages the business operations and marketing aspects of affiliated orthodontic practices. At December 31, 2000, there were 592 orthodontic centers, of which the company developed 306 and acquired 361 (75 were consolidated into another center). The affiliated orthodontists control the orthodontic practices, determine which personnel, including orthodontic assistants, to hire or terminate, and set their own standards of practice in order to promote quality orthodontic care. A typical patient receives an initial consultation and preliminary procedures (teeth impressions, x-rays, and the placing of spacers between the teeth for braces) in advance of the next appointment. The patient signs a contract for treatment in the event the orthodontist recommends orthodontic treatment. Generally, braces are applied two weeks later and subsequent adjustments to the braces are made every four to eight weeks. The contract specifies the terms and the length of the treatment as well as the total fees. The average contract length...
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...at the end of the accounting period to record all revenues and expenses that have not been recorded but belong in the current period. They update the balance sheet and income statement accounts at the end of the accounting period. 2. A trial balance is a list of the individual accounts, usually in financial statement order, with their debit or credit balances. It is used to provide a check on the equality of the debits and credits. 3. The four different types are adjustments for: (1) Unearned revenues -- previously recorded liabilities that need to be adjusted at the end of the period to reflect revenues that have been earned (e.g., Unearned Ticket Revenue must be adjusted for the portion of ticket revenues earned in the current period). (2) Accrued revenues -- revenues that have been earned by the end of the accounting period but which will be collected in a future accounting period (e.g., recording Interest Receivable for interest revenues not yet collected). (3) Prepaid expenses -- previously recorded assets that need to be adjusted at the end of the period to reflect incurred expenses (e.g., Prepaid Insurance must be adjusted for the portion of insurance expense incurred in the current period). (4) Accrued expenses -- expenses that have been incurred by the end of the accounting period but which will be paid in a future accounting period (e.g., recording Utilities Payable for utilities expense incurred during the period that has not yet been...
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...CHAPTER 4 Accrual Accounting Concepts ASSIGNMENT CLASSIFICATION TABLE | | | | |Brief | | | |A | |B | |Study Objectives | |Questions | |Exercises | |Exercises | |Problems | |Problems | | | | | | | | | | | | | |*1. Explain the revenue | |1, 2, 3, 4 | |1 | |1, 2 | |1A | |1B | |recognition principle and the matching | | | | | | | | | | | |principle. | | | | | | | | | | | | | | | | | | | | | | | |*2. Differentiate between | |5 | |2 | |3 | |2A, 3A | |2B, 3B | |the cash basis and the accrual basis of | | | | | | | | | | | |accounting. ...
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...D.E.A.L.O.R Divdends Expenses Assets Debit Liabilities Owners' equity Revenues Credit Debit Credit General Form Date Account name Debit Account name Credit Initial Investment in a Company Date Cash Assets Debit Common Stock Liabilities + + Cash Owners' Equity + Common Stock Credit Purchase Building with a Loan Date Buildings Assets Debit Notes Payable = +Buildings Liabilities + Owners' Equity + Note Payable Credit Purchase Equipment for Cash Date Equipment Assets Debit Cash Credit Pay one year's Rent Date Prepaid Rent = Debit Provide Business Services on Credit Date Accounts Recievable Debit Service Revenue Credit Liabilities + Owners' Equity = Liabilities + Owners' Equity = Liabilities + Owners' Equity +Buildings -Cash Assets Cash = +Prepaid Rent -Cash Assets +Accounts Recievable Credit +Service Revenue (Revenue increases NI increases RE) Provide Business Services for Cash Date Cash Assets Debit Service Revenue = Liabilities + +Cash +Service Revenue (Revenue increases NI increases RE) Credit Pay for Advertising with Cash Date Advertising Expense Cash Assets Debit = Liabilities + -Cash Purchase Supplies on Account Assets Debit Accounts Payable = +Supplies Liabilities + Purchase Supplies Assets Debit Cash Credit ...
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...Bergmann BE 4-1 A) The revenue for the airlines will be recognized when the flight is complete in December. This is because the customer can still cancel and get a refund. B) The revenue for home theater system cannot start to be recognized until the first payments are made one year later. C) The revenue for selling game tickets online for a season can be recognized right away as most season tickets are nonrefundable. The revenue can recognized in April. D) The revenue for the loan should be recognized when is repaid in November. E) The revenue for sweater should be recognized when the bill is paid in October. The reason for this is because the sweater was purchased on account and that account must be paid in order for the revenue to be recognized. P 4-2 A (A) 1. June 30 Supplies Expense…………………………………………………….. 1,280 Supplies…………………………………………………………... 1,280 (To record supplies used) 2. 30 Utilities Expense……………………………………………………... 180 Utilities Payable……………………………………………….. 180 (To record unpaid utility bill) 3. 30 Insurance Expense…………………………………………………. 240 Prepaid Insurance……………………………………………. 240 (To record insurance expired) 4. 30 Unearned Service Revenue…………………………………… 4,100 Service Revenue…………………………………………….. 4,100 (To record revenue earned) 5. 30...
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...CHAPTER 4 Accrual Accounting Concepts Study Objectives 1. Explain the revenue recognition principle and the matching principle. 2. Differentiate between the cash basis and the accrual basis of accounting. 3. Explain why adjusting entries are needed, and identify the major types of adjusting entries. 4. Prepare adjusting entries for deferrals. 5. Prepare adjusting entries for accruals. 6. Describe the nature and purpose of the adjusted trial balance. 7. Explain the purpose of closing entries. 8. Describe the required steps in the accounting cycle. 9. Understand the causes of differences between net income and cash provided by operating activities. 10. Describe the purpose and the basic form of a worksheet. Summary of Questions by Study Objectives and Bloom’s Taxonomy |Item | | 1. | | 1. | | 1. | | 1. ...
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...CHAPTER 4 THE ACCOUNTING CYCLE: ACCRUALS AND DEFERRALS OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES Brief Exercises B. Ex. 4.1 B. Ex. 4.2 B. Ex. 4.3 B. Ex. 4.4 B. Ex. 4.5 B. Ex. 4.6 B. Ex. 4.7 B. Ex. 4.8 B. Ex. 4.9 B. Ex. 4.10 Learning Objectives 3, 4 3, 4 3 3 6 4 5 5 5 8 Topic Deferred expenses and revenue Deferred expenses and revenue Accounting for supplies Accounting for depreciation Accrued revenue Unearned revenue Accrued salaries Accrued interest Accrued taxes Concept of materiality Skills Analysis Analysis Analysis Analysis Analysis Analysis Analysis Analysis Analysis Judgment, communication, analysis Exercises 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 4.11 4.12 4.13 4.14 4.15 Topic Accounting terminology Effects of adjusting entries Deferred expenses and revenue Deferred expenses and revenue Accrued revenue Real World: American Airlines Deferred revenue Accruals and deferrals Notes payable and interest Interpreting business transactions Adjustments and the balance sheet Real World: Various firms Deferred revenue Analyzing the adjusted trial balance Effects of adjusting entries Accounting principles Real World: Home Depot an annual report Using Learning Objectives 1–9 1–6, 9 1-7 1-7 1-7 1, 2, 4 1-6, 9 1, 2, 5 1–7, 9 1, 3–5, 7 1, 4, 7 1–7, 9 1–6 1–8 1, 2 Skills Analysis Analysis Analysis Analysis Analysis Analysis Analysis Analysis Analysis, judgment Communication, analysis Analysis, judgment Analysis Analysis Communication...
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...flow through time 2.) in terms of the its status or state as of one moment of time Flows in a business are continuous (see diagram below) Selling Activities Collection Activities Purchasing or Production Activities Financial Accounting: Basic Accounting Concepts: (The Income Statement) There are three commonly types of businesses, namely merchandising, service oriented, and manufacturing. In all of these three types of businesses the income statement focuses on the section the flow diagram is labelled selling activities. In selling activities reporting consist of two elements, inflows and outflows. For the inflow: Revenue-the result from sale of goods and services to customers For the outflow: Expenses- the outflows that were made in order to generate these revenues Income is the amount by which revenues exceed expenses. Since the word income is often used with various qualifying adjectives, the term net income is used to refer...
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...Income Short Exercises (10 min.) S 3-1 Millions Sales revenue……………………………………………. 960 Cost of goods sold……………………………………… (270) All other expenses……………………………………… (300) Net income……………………………………………….. $ 390 Beginning cash………………………………………….. $ 105 Collections ($700 − $30)……………………………….. 935 Payments for: inventory………………………………. (370) everything else………………………. (285) Ending cash……………………………………………… $ 385 (10 min.) S 3-2 Statement Reports (Amounts in millions) Income statement Interest expense………………. $1.8 Balance sheet Notes payable ($3.9 + $2.3 − $2.0)…………. $4.2 Interest payable……………….. 0.1 (10 min.) S 3-3 At the end of each accounting period, the business reports its performance through the preparation of financial statements. In order to be useful to the various users of financial statements they must be up-to-date. Accounts such as cash, Equipment, Accounts Payable, Common Stock and Dividends are up-to date and require no adjustment at the end of the accounting period. Accounts such as Accounts Receivable, Supplies, Salary Expense and Salaries Payable may not be up to date as of the last day of the accounting period. Why? Because certain transactions that took place in the month may not have been recorded. The accrued salaries, which are owed to the employees yet have not been paid, are an expense related to the current period. The salaries that are owed to the employees...
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...CHAPTER 3 ADJUSTING THE ACCOUNTS SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY Item | SO | BT | Item | SO | BT | Item | SO | BT | Item | SO | BT | Item | SO | BT | Exercises | 1. | 1 | AP | 10. | 2 | AP | 19. | 2,3 | AP | 28. | 2,3 | AP | *37. | 5 | AP | 2. | 1 | AP | 11. | 2 | AP | 20. | 2,3 | AP | 29. | 2,3,4 | AP | *38. | 5 | AP | 3. | 1 | AP | 12. | 2 | AP | 21. | 2,3 | AP | 30. | 2,3,4 | AP | *39. | 5 | AP | 4. | 1 | AP | 13. | 2,3 | C | 22. | 2,3 | AP | 31. | 3 | AP | *40. | 5 | AP | 5. | 1 | AP | 14. | 2,3 | C | 23. | 2,3 | AP | 32. | 3 | AP | *41. | 5 | AP | 6. | 1 | AP | 15. | 2,3 | AN | 24. | 2,3 | AP | 33. | 3 | AP | | | | 7. | 1,2 | AP | 16. | 2,3 | AN | 25. | 2,3 | AP | 34. | 3 | AP | | | | 8. | 1,2 | AP | 17. | 2,3 | AP | 26. | 2,3 | AP | 35. | 4 | AP | | | | 9. | 1,2 | AP | 18. | 2,3 | AP | 27. | 2,3 | AP | 36. | 4 | AP | | | | Note: C = Comprehension AN = Analysis AP = Application * This topic is dealt with in an Appendix to the chapter. SUMMARY OF QUESTIONS BY LEVEL OF DIFFICULTY (LOD) Item | SO | LOD | Item | SO | LOD | Item | SO | LOD | Item | SO | LOD | Item | SO | LOD | Exercises | 1. | 1 | M | 10. | 2 | E | 19. | 2,3 | E | 28. | 2,3 | H | *37. | 5 | M | 2. | 1 | E | 11. | 2 | M | 20. | 2,3 | E | 29. | 2,3,4 | H | *38. | 5 | H | 3. | 1 | M | 12. | 2 | H | 21. | 2,3 | E | 30. | 2,3,4 | H | *39. | 5 | H | 4. | 1 | E | 13. | 2,3 | H | 22. | 2,3 | M | 31. | 3 | E | *40....
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... |$ 2,920 | | |Accounts Receivable ($3,231 – $180) |3,051 | | |Supplies ($800 – $500) |300 | | |Equipment ($3,800 + $500) |4,300 | | |Accounts Payable ($2,666 – $206 – $260) | |$ 2,200 | |Unearned Service Revenue ($1,200 – $325) | |875 | |Common Stock | |6,000 | |Dividends |575...
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...863.00 259,979.00 Long-term solvency ratio =1.38 Contribution ratio: Contribution ratio = Largest revenue source Total revenues Contribution ratio =632,889.00 1,244,261.00 Contribution ratio =0.51 Programs/expense ratio: Programs/expense ratio =Total program expenses Total expenses Programs/expense ratio =945,579.77 1,316,681.00 Programs/expense ratio =0.72 General and management/Expense ratio: Total general and management expenses General and management/Expense ratio = Total expenses General and management/Expense ratio =371,101 1,316,681.00 General and management/Expense ratio =0.28 Fund-raising/Expense ratio: Fund-raising/Expense ratio =Total fund-raising expenses Total expenses Fund-raising/Expense ratio =79,888 1,316,681.00 Fund-raising/Expense ratio =0.06 Revenue/expense ratio: Revenue/Expense ratio =Total revenues Total expenses Revenue/Expense ratio =1,244,261 1,316,681 Revenue/Expense ratio =0.94 Current Ratio: 2004 Current ratio=Current assets Current liabilities Current ratio =302,902.00 337,033.00 Current ratio =0.90 Long-term solvency ratio: Long-term solvency ratio =Total assets Total liabilities Long-term solvency ratio =699,004.00 338,937.00 Long-term solvency ratio =2.06 Contribution ratio: Contribution ratio = Largest revenue source Total revenues Contribution ratio =1,078,837.00 2,191,243.00 Contribution ratio =0.49...
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...contribution ratio, programs/expense ratio, general and management/expense ratio, and revenue/expense ratio for the years 2003 and 2004. Current Ratio: 2003 Current Ratio = Current Assets Current Liabilities Current Ratio =82,058 93,975 Current Ratio = 0.87 2004 Current Ratio = Current Assets Current Liabilities Current Ratio =302,902 337,033 Current Ratio = 0.90 (rounded -up) Long-Term Solvency Ratio: 2003 Long-Term Solvency Ratio Total = Total Assets Total Liabilities Long -Term Solvency Ratio = 359,863 259,979 Long -Term Solvency Ratio =1.38 2004 Long-Term Solvency Ratio Total = Total Assets Total Liabilities Long -Term Solvency Ratio = 699,004 338,937 Long -Term Solvency Ratio = 2.06 Contribution Ratio: 2003 Contribution Ratio = Last Revenue Source Total Revenue Contribution Ratio = 632,889 1,244,261 Contribution Ratio =0.51 (rounded -up) 2004 Contribution Ratio = Last Revenue Source Total Revenue Contribution Ratio =1,078,837 2,191,243 Contribution Ratio = 0.49 Programs/Expense Ratio: 2003 Program/Expense Ratio = Total Revenue Total Expense Program / Expense Ratio =1,244,261 1,316,681 Program / Expense Ratio =1.0 2004 Program/Expense Ratio = Total Revenue Total Expense Program/Expense Ratio = 2,191,243 1,972,131 Program/Expense Ratio =1.11 Management/Expense Ratio 2003 ...
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...or not cash is received or paid. Revenues are recognized when they are earned, and expenses are recognized when they are incurred—not necessarily when the cash changes hands. The cash basis of accounting recognizes revenues only when cash is received and expenses only when cash is paid. 2. The revenue principle provides guidance on (a) when to record revenue. (b) the amount of revenue to record. 3. The matching principle directs the accounting for expenses. Accountants identify all the expenses incurred during the period, measure those expenses, and match them against the revenue earned during the period. Matching expenses against revenues means to subtract the expenses from the revenues to compute net income or net loss for the period. Chapter 3 Accrual Accounting and the Financial Statements 153 4. Five categories of adjusting entries, with examples, are: a. Prepaid expenses — prepaid rent, prepaid insurance, and supplies b. Amortization — amortization of buildings, furniture, and equipment c. Accrued expenses — accrued salary expense and accrued interest expense d. Accrued revenues — accrued service revenue and accrued interest revenue e. Unearned revenues — unearned service revenue and unearned subscription revenue 5. Yes, all adjusting entries affect net income or net loss. Adjusting entries assign revenues to the period in which they are earned and expenses to the period in which they are incurred, and revenues and expenses affect income or loss. 6. At the end...
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...UNIVERSITY OF SCIENCES AND TECHNOLOGY Date: 27th November, 2011 INTRODUCTION Based on the “Cineplex Entertainment : The Loyalty Program” Case Study the following question needed to be answered: Question No. 03: What is the likely increase in Cineplex Entertainment Revenue from your proposed Incentive Program @ 0%, 5%, 10%, 15% or 20%. What would be the varying Financial Consequences for Complex? Would you proceed with the reward program? Based on the Information in the Case Study an Incremental Analysis for expected Revenues and Expenses is done which intern provides the expected profits of different Options of Loyalty Programs being considered. The Incentive Program chosen for analyzing the case is “Internal Development”. ANALYSIS The given information regarding the Attendance and Revenues is as follows: Revenues | Year | 2006 | 2005 | 2004 | Box Office Revenue | - | 308,673,000 | 209,440,000 | Concessions Revenue | - | 137,323,000 | 85,423,000 | Other Revenue | - | 44,303,000 | 20,923,000 | Attendance | 61,000,000 | 39,945,000 | 28,096,000 | Total Revenue | - | 530,244,000 | 343,882,000 | Box Office Revenue per Patron | - | 7.73 | 7.45 | Concessions Revenue per Patron | - | 3.44 | 3.04 | Based on this information The Incremental Attendance is Calculated and then Cannibalization Rate is incorporated to find out the Incremental Attendance with the Cannibalization Rate of 12.5, 25 and 50% respectively. Attendance | Year | | 2006 (E)...
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