Recognition & Measurement
A company receives $100 cash before delivering food. which accounts are affected and how?
Debit Cash (+A) 100 and Credit Unearned Revenue (+L) 100.
Chipotle pays $200 cash for supplies in January but uses half in March. How are recognition and measurement applied across the periods?
Debit Supplies (+A) 200; Credit Cash (–A) 200.
March:
Debit Supplies Expense (+E, –SE) 100; Credit Supplies (–A) 100.
Chipotle purchased $369,800 supplies, paying $289,800 in cash and owing the rest on account. Record the entry.
Debit Supplies (+A) 369,800
Credit Cash (–A) 289,800
Credit Accounts Payable (+L) 80,000.
From the unadjusted trial balance, total restaurant sales revenue was $1,071,700 and total operating expenses were $316,100. Compute “Income from Operations."
$755,600
What does the Net Profit Margin ratio measure?
How effective management is at generating profit from each dollar of sales.
A company has a $100 cash deposit in advance (recorded as Unearned Revenue). When the food is delivered, how is revenue recognized under the revenue recognition principle?
Unearned Revenue (–L) $100
Restaurant Sales Revenue (+R, +SE) $100
If Chipotle uses $400 in employee services during the period but will pay next quarter, which liability account arises and why?
Wages Payable (+L) Increases, because under accrual basis the expense is matched when incurred, not when paid.
Chipotle sold food totaling $1,071,700; $25,700 was on account, the rest in cash. Show the effects on the accounting equation.
Cash +1,046,000
Accounts Receivable +25,700
Restaurant Sales Revenue (+R, +SE) +1,071,700.
A company has sales revenue of $120,000 and operating expenses of $85,000. What is income from operations?
$35,000
A company reports strong sales growth, but its Net Profit Margin has been declining each year. Without doing calculations, what could this signal about the company’s operations, and why is the ratio more insightful than just looking at net income?
Declining NPM shows that costs are rising faster than revenues, or pricing power is weakening.Even if net income is positive or growing, each sales dollar is generating less profit.It signals issues like higher operating expenses, poor cost control, or pressure from competition. That’s why NPM is more useful than raw net income
Explain why the time period assumption creates recognition and measurement issues when preparing income statements.
Because businesses must decide when to recognize revenues/expenses and how much to measure for each period, even though activities may span multiple periods.
A company pays its annual insurance premium in January, but records the full amount as an expense in January. How would this misstate its income statement?
January expenses would be overstated and later months understated, violating the matching principle that spreads costs to the periods they benefit.
A company sold land costing $9,000 for $4,800 cash. Record the transaction and explain the income statement impact.
Debit Cash 4,800
Debit Loss on Disposal of Assets (+E, –SE) 4,200
Credit Land (–A) 9,000
Impact = loss reported under operating expenses.
A company reports:
Income from Operations = $120,000
Other Items: Interest Revenue = $4,000
Income Tax Expense = $15,000
What is Net Income?
Income before Taxes = 120,000 + 4,000 = 124,000
Net Income = 124,000 – 15,000 = $109,000
A company has Net Income of $90,000 and Sales of $300,000. Calculate the Net Profit Margin.
30%
A company pays $12,000 for one year of insurance on January 1. Under accrual accounting, how should this be reported in the first month?
Expense $1,000 for January, Prepaid Insurance (A-) $1000.
Why is it important to record expenses “when incurred to generate revenue,” even if cash is not yet paid?
To satisfy the matching principle, aligning costs with the benefits they help produce, ensuring net income is measured correctly.
Chipotle received $39,000 cash from customers paying on account. Why does this not affect revenues?
Because revenue was already recognized at delivery; this transaction only shifts Accounts Receivable (–A) to Cash (+A).
Why are peripheral activities (like interest revenue or gains on investments) presented separately from operating results?
To distinguish between results from core operations and incidental/secondary activities.
Why might investors track the trend of Net Profit Margin alongside stock price movements?
Because higher margins signal stronger profitability and cost control, which often support higher valuations.
If a company wants to manipulate income upward under accrual accounting, which recognition principle could be abused, and how?
The revenue recognition principle could be violated by recording revenue before it is actually earned. Example: Sometimes managers want to make their company look more profitable than it really is. One way to do that is to record revenue too early.
Journalize the following:
Chipotle pays $275 for same-day repairs and $75,400 for utilities incurred this quarter, both in cash.
Debit Repairs Expense 275
Debit Utilities Expense 75,400
Credit Cash 75,675
Chipotle paid employees $177,000 for current work and $73,900 for last quarter’s wages payable. Record the entry and explain how both liabilities and expenses are affected.
Debit Wages Expense (+E, –SE) 177,000; Debit Wages Payable (–L) 73,900; Credit Cash (–A) 250,900. This decreases liabilities and recognizes current-period expense.
Two companies have the same sales and expenses for the year. One uses cash basis, the other accrual. At year-end, one has uncollected customer payments. Which company will report lower net income, and why?
The cash basis company, because it only counts revenue when cash is received not when earned.
Two companies both report a Net Profit Margin of 20%. Company A has Net Income of $200,000 on Sales Revenue of $1,000,000. Company B has Net Income of $2,000,000 on Sales Revenue of $10,000,000.
If you were comparing these two firms, why might equal Net Profit Margin ratios still be misleading for decision-makers, and what additional factors would you consider?
Even though both firms show the same profitability percentage, they are not equally attractive:
Company B is much larger in scale (absolute profit $2M vs. $200K).
Investors and creditors might care about size, stability, growth, and industry benchmarks, not just the margin ratio.
Additional factors: cash flow strength, consistency of margins over time, leverage (debt levels), and whether margins come from core operations or unusual items.