Operating Decisions

• The Operating Cycle is the time it takes for a company to pay cash to suppliers, sell goods to customers, and collect cash from customers.
• Expenses are costs of operating the business that are incurred to generate revenues.
• Operating Income is net sales minus operating expenses, including the cost of goods sold, and is the measure of profit from central ongoing operations.
• Earnings per Share = Net Income / Weighted average number of shares of common stock outstanding
• Gains are money gained on disposal of assets
• Losses are money lost on disposal of assets
• Under Cash Basis Accounting, transactions are recorded when money changes hands
• Cash basis statements are not useful for external decision-makers because revenues and expenses are often postponed or accelerated long before or after goods are delivered
• Cash basis statements are not useful for external decision-makers because other than cash, assets and liabilities are not reported in financial statements
• Under Accrual Basis Accounting, revenues are recognised when goods are delivered, and expenses are recognised in the same period as the benefits to which they relate, regardless of when cash is received or paid.
• The Revenue Recognition Principle requires that a company recognize revenue when it delivers promised goods in the amount it expects to receive, regardless of whether it receives cash before, during, or after the transaction.
• The Expense Recognition Principle (Matching Principle) requires that a company recognises expenses in the accounting period when it receives the benefits from those expenses.
• Net Profit Margin Ratio = Net Income / Operating Revenues
• The Net Profit Margin Ratio measures how much of every sales dollar generated during the period is profit. A rising net profit margin indicates more efficient management of sales and expenses.
• The time period assumption assumes that the financial performance of a business can be reported periodically, usually every month, quarter, or year, even though the life of the business is much longer.