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1、Chapter3OperatingDecisionsandtheAccountingSystemANSWERSTOQUESTIONS1.Atypicalbusinessoperatingcycleforamanufacturerwouldbeasfollows:inventoryispurchased,cashispaidtosuppliers,theproductismanufacturedandsoldoncredit,andthecashiscollectedfromthecustomer.2.Thetimeperiodassumptionmea
2、nsthatthefinancialconditionandperformanceofabusinesscanbereportedperiodically,usuallyeverymonth,quarter,oryear,eventhoughthelifeofthebusinessismuchlonger.3.NetIncome=Revenues+Gains-Expenses-Losses.Eachelementisdefinedasfollows:Revenues--increasesinassetsorsettlementsofliabilitie
3、sfromongoingoperations.Gains--increasesinassetsorsettlementsofliabilitiesfromperipheraltransactions.Expenses--decreasesinassetsorincreasesinliabilitiesfromongoingoperations.Losses--decreasesinassetsorincreasesinliabilitiesfromperipheraltransactions.4.Bothrevenuesandgainsareinflo
4、wsofnetassets.However,revenuesoccurinthenormalcourseofoperations,whereasgainsoccurfromtransactionsperipheraltothecentralactivitiesofthecompany.Anexampleissellinglandatapriceabovecost(atagain)forcompaniesnotinthebusinessofsellingland.Bothexpensesandlossesareoutflowsofnetassets.Ho
5、wever,expensesoccurinthenormalcourseofoperations,whereaslossesoccurfromtransactionsperipheraltothecentralactivitiesofthecompany.Anexampleisalosssufferedfromfiredamage.5.Accrualaccountingrequiresrecordingrevenueswhenearnedandrecordingexpenseswhenincurred,regardlessofthetimingofca
6、shreceiptsorpayments.Cashbasisaccountingisrecordingrevenueswhencashisreceivedandexpenseswhencashispaid.6.Thefourcriteriathatmustbemetforrevenuetoberecognizedundertheaccrualbasisofaccountingare(1)deliveryhasoccurredorserviceshavebeenrendered,(2)thereispersuasiveevidenceofanarrang
7、ementforcustomerpayment,(3)thepriceisfixedordeterminable,and(4)collectionisreasonablyassured.7.Theexpensematchingprinciplerequiresthatexpensesberecordedwhenincurredinearningrevenue.Forexample,thecostofinventorysoldduringaperiodisrecordedinthesameperiodasthesale,notwhenthegoodsar
8、eproducedandheldforsale.8.Netincomeequalsrevenu
