Accounting 206 McGraw-Hill Video Lecture & Assessment LO 2-5, 6, 7

On October 1 of Year 1 Zeta Company collected $1,200 cash for services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of revenue appearing on the Year 1 income statement would be

$300 Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 3 months = $300 service revenue Future obligation = $100 per month x 9 months = $900 unearned revenue

On August 1 of Year 1 Presco Enterprises paid $1,200 cash for an insurance policy that would provide protection for a one year term. The company's fiscal closing date is December 31. Based on this information, the amount of insurance expense appearing on the Year 1 income statement would be

$500 Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount used = $100 per month x 5 months = $500 insurance expense Future benefit = $100 per month x 7 months = $700 prepaid insurance

Knoll Company started Year 2 with a $500 in cash, $500 in supplies, and $1,000 in common stock accounts. During Year 2 the company experienced the following events. (1) Paid $400 cash to purchase supplies. (2) Physical count revealed $100 of supplies on hand at the end of Year 2. Based on this information the amount of supplies expense reported on the Year 2 income statement is

$800 Since the Company started the accounting period with $500 of supplies and then purchased an additional $400 of supplies during the accounting period, there was a total amount of $900 ($500 + $400) of supplies that were available to be used during the accounting period. Since there were only $100 of supplies on hand at the end of the accounting period then $800 ($900 - $100) had to be used. Assets, in this case supplies, used in the process of producing revenue are called expenses.

On November 1 of Year 1 Falloch, Inc. paid $2,400 cash for a contract allowing the company to use office space for one year. The company's fiscal closing date is December 31. Based on this information, the amount of cash flow from operating activities appearing on the Year 1 statement of cash flows would be

($2,400) The cash outflow is not affected by how much of the office space has or has not been used. Since $2,400 cash was paid in Year 1, there would be a $2,400 cash outflow from operating activities shown on the Year 1 statement of cash flows. There would be zero cash flow shown on the Year 2 statement of cash flows.

Lawyers Inc. accepted a $12,000 retainer for which the company agreed to provide services in the future. Recognizing this event would

-defer the recognition of revenue. -cause the company's assets to increase. -cause the company's liabilities to increase. Collecting cash for services to be provided in the future is an asset source transaction. The asset account (cash) and the liability account (unearned revenue) increase. The unearned revenue account shows the lawyer's obligation to perform services in the future. Revenue recognition is deferred until the services are actually performed.

Which of the following shows how the event "collected cash for services to be rendered in the future" affects a company's financial statements?

Balance Sheet Income Statement Statement of Cash Flows Assets= + Liabilities= + Equity= NA Rev.= NA Exp.= NA Net Income= NA Cash Flow= + OA Collecting cash for services to be rendered in the future is an asset source transaction. The asset account (cash) increases and the liability account (unearned revenue) increases. Since the revenue recognition is deferred (delayed), there is no effect on the income statement. A cash inflow from operating activities is shown on the statement of cash flows.

Which of the following shows how the adjusting entry to recognize services provided to a client who paid for the services prior to the work being performed

Balance Sheet Income Statement Statement of Cash Flows Assets= Na Liability= - Equity= + Rev.= + Expenses= NA Net Income= + Cash Flow= NA When a company collects cash for services before they are provided, the company recognizes an obligation to provide the services in the future (unearned revenue). When the company settles its obligation by providing services, the liability account (unearned revenue) decreases and the revenue account increases. This is a claims exchange transaction. The increase in revenue causes net income to increase. The increase in net income causes stockholders' equity (retained earnings) to increase. There is no effect on cash flow because the cash flow was previously recognized at the time the cash was collected from the client.

AAA Consulting Services collected $6,000 cash for services to be provided in the future. Which of the following shows how recognizing the cash receipt will affect the company's ledger accounts?

Cash = $6,000 Unearned Revenue= 6,000 Collecting cash for services to be provided in the future is an asset source transaction. The asset account (cash) and the liability account (unearned revenue) increase. The retained earnings is not affected because the revenue recognition is deferred.

Howard Company purchased $300 of supplies on account. Which of the following shows how is purchase will affect Howard's ledger accounts?

Cash: Supplies: 300 Accounts Payable: 300 Common Stock: Retained Earnings:

On October 1 of Year 1 Lesikar Company paid $1,200 cash for an insurance policy that would provide protection for a one year term. The company's fiscal closing date is December 31. Based on this information, the amount of prepaid insurance appearing on the Year 1 balance sheet would be

Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount used = $100 per month x 3 months = $300 insurance expense The expense recognition causes the asset (Prepaid Insurance) to decreases. Further the expense recognition causes net income to decrease which ultimately causes retained earnings to decrease.

On May 1 of Year 1 Matthew Company paid $2,400 cash for an insurance policy that would protect the company for one year. The company's fiscal closing date is December 31. Based on this information, the amount of insurance expense and the cash flow from operating activities shown on the Year 1 financial statements would be

Insurance Expense- $1,600 Cash Flow- ($2,400) Cost per month = $2,400 total ÷ 12 months = $200 per month As of December 31, Year 1: Amount used = $200 per month x 8 months = $1,600 insurance expense Future benefit = $200 per month x 4 months = $800 prepaid insurance Since all of the cash was paid in Year 1, the total $2,400 cash outflow would be shown on the Year 1 statement of cash flows. Zero would be shown in Year 2.

Bookmyer Company experienced a business event that affected its financial statements as indicated below.

Paid cash to purchase supplies. Paying cash to purchase supplies is an asset exchange transaction. One asset (cash) decreases and another asset (supplies) increases. Total assets are not affected. The income statement is not affected at the time supplies are purchased. Instead, the income statement will be affected at the time the amount of supplies used is determined at the end of the accounting period. Since cash was paid to purchase the supplies, there will be a cash outflow from operating activities shown on the statement of cash flows.

Which of the following shows how the event "paying cash for an insurance policy that protects the company for some future time period" affects a company's financial statements?

Paying cash for insurance that will be used in the future is an asset exchange transaction. One asset account (cash) decreases and another asset account (prepaid insurance) increases. The amount of total assets is not affected (NA). The income statement is not affected. The cash outflow is shown in the operating activities section of the statement of cash flows.

On June 1 of Year 1 Doe Company paid $1,800 cash for an insurance policy that would protect the company for one year. The company's fiscal closing date is December 31. Based on this information alone, the amount of prepaid insurance and insurance expense shown on the Year 2 financial statements would be

Prepaid Insurance- Zero Insurance Expense- $750 Cost per month = $1,800 total ÷ 12 months = $150 per month As of December 31, Year 1: Amount used = $150 per month x 7 months = $1,050 insurance expense Future benefit = $150 per month x 5 months = $750 prepaid insurance As of December 31, Year 2: Amount used = $150 per month x 5 months = $750 insurance expense Since all of the insurance is used by the end of Year 2, there would be a zero balance in the prepaid insurance account at the end of Year 2.

Which of the following statements is false?

Prepaid insurance is shown on the income statement. (Prepaid insurance is an asset account that appears on the balance sheet not the income statement.)

Which of the following shows how recognizing accrued expense will affect a company's financial statements?

Recognizing an accrued expense means that the company recognizes the expense in the current accounting period and will pay for the expense is a subsequent accounting period. As a result, liabilities increase. The expense recognition causes expenses to increase and thereby net income to decrease. The decrease in net income causes stockholders' equity (retained earnings) to decrease. There is no effect on cash flow in the current period because the cash is paid in a subsequent accounting period.

Which of the following shows how adjusting the accounts to recognize supplies expense will affect a company's financial statements?

Recognizing supplies expense at the end of the accounting period is an asset use transaction. The asset account (cash) decreases, supplies expense increases, net income decreases, and stockholders' equity (retained earnings) decreases. There is no effect on cash flow. The effect on cash flow occurs at the time the company pays for the supplies not when the supplies are expensed.

On May 1 of Year 1 Matthew Company collected $2,400 cash for services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of service revenue and the cash flow from operating activities shown on the Year 1 financial statements would be

Service Revenue= $1,600 Cash flow= $2,400 Revenue earned per month = $2,400 total ÷ 12 months = $200 per month As of December 31, Year 1: Amount earned = $200 per month x 8 months = $1,600 service revenue All of the cash was collected in Year 1, the cash inflow from operating activities on the December 31, Year 1 statement of cash flows would be $2,400.

On October 1 of Year 1 Wilburn Company paid cash for an insurance policy that would provide protection for a one year term. Which of the following shows how the required adjusting entry on December 31, Year 1 will affect Wilburn's financial statements?

The adjusting entry is an asset use transaction. The asset account (prepaid insurance) decreases reflecting the use of insurance coverage. The expense recognition decreases the amount of net income and ultimately stockholders' equity (retained earnings). The cash flow occurred at the time the insurance was purchased. There is no cashflow effect at the time the expense is recognized on December 31.

A cost may be recorded as an expense or as an asset purchase. This statements is (True/False)

True

On June 1 of Year 1 Zoe Company collected $1,800 cash for medical services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information the amount of unearned revenue and service revenue shown on the Year 1 financial statements would be

Unearned Revenue= $750 Service Revenue= $1,050 Revenue earned per month = $1,800 total ÷ 12 months = $150 per month As of December 31, Year 1: Amount earned = $150 per month x 7 months = $1,050 service revenue Future obligation = $150 per month x 5 months = $750 unearned revenue

On August 1 of Year 1 Accounting Associates (AA) collected $1,200 cash for consulting services to be provided for one year beginning immediately. Based on this information, which of the following show how the required adjustment on December 31, Year 1 would affect AA's ledger accounts?

Unearned Revenue= ($500) Retained Earnings= $500 Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 5 months = $500 service revenue Recognizing deferred revenue is a claims exchange transaction. The liability account (unearned revenue) decreases. The revenue recognition increases net income which ultimately increases retained earnings.

On December 31, Year 1 Adam Company incurred $3,000 of accrued salary expense. The Year 2 recognition of the cash payment for these expenses

decreased the amount of liabilities shown on year 2 balance sheet

A deferral

exists when a company pays cash before recognizing the associated expense.

A deferral

exists when a company receives cash before recognizing the associated revenue. (Note that revenues as well as expenses can be deferred. A deferral occurs whenever a company receives or pays cash but defers (delays) the recognition of the related revenue or expense. Recall that revenue cannot be recognized before the work has been done. This is true even if the company has already received the cash for the work that will be done in the future. In this case the company would receive the cash but defer the recognition of revenue until it has completed the work.)

When a company purchases supplies on account

liabilities increase

Baltimore Company paid cash to purchase insurance that would protect the company during the coming year. The recognition of this event would

not affect total assets or equity. The payment of cash for insurance that protects a company in the future is an asset exchange transaction. One asset account (cash) decreases and another asset account (prepaid insurance) increases. The amount of total assets is not affected. The income statement is not affected until the insurance is actually used to provide protection. However, the statement of cash flows is affected. More specifically, the cash outflow is shown in the operating activities section.

Delta Company started Year 2 with a $1,700 in cash, $700 in supplies, and $2,400 in common stock accounts. During Year 2 the company experienced the following events. (1) Paid $1,600 cash to purchase supplies. (2) Physical count revealed $400 of supplies on hand at the end of Year 2. Based on this information the year-end adjusting entry to recognize supplies expense would cause

total stockholders' equity to decrease by $1,900. The amount of supplies available for use is $2,300 ($700 beginning balance in the Supplies account plus the $1,600 amount of supplies purchased). Given that there was $400 of supplies on hand at the end of the accounting period, $1,900 ($2,300 available - $400 ending balance) of supplies must have been used during the period. The amount of supplies used would be recorded as an expense. The expense recognition would cause assets (supplies) to decrease by $1,900, supplies expense to increase by $1,900 and equity (retained earnings) to decrease by $1,900. The amount of cash flow from operating activities is a $1,600 outflow.

On August 1 of Year 1 Accounting Associates collected $1,200 cash for consulting services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of unearned revenue appearing on the December 31, Year 2 balance sheet would be

zero Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 5 months = $500 service revenue Future obligation = $100 per month x 7 months = $700 unearned revenue As of December 31, Year 2: Amount earned = $100 per month x 7 months = $700 service revenue All of the revenue has been earned by the end of Year 2 so the amount of unearned revenue is zero on December 31, Year 2.