BUA 201 Ch. 4

Book value

The difference between the cost of a depreciable asset and its related accumulated depreciation.

Useful life

The length of service of a productive asset.

Earnings management

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.

Describe the nature and purpose of the adjusted trial balance.

An adjusted trial balance is a trial balance that shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period.

Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? (LO 1) (a) Expense recognition principle. (b) Historical cost principle. (c) Periodicity principle. (d) Revenue recognition principle.

(a) Expense recognition principle.

Which types of accounts will appear in the post-closing trial balance? (LO 7) (a) Permanent accounts. (b) Temporary accounts. (c) Expense accounts. (d) None of the above.

(a) Permanent accounts.

Which account will have a zero balance after a company has journalized and posted closing entries? (LO 7) (a) Service Revenue. (b) Supplies. (c) Prepaid Insurance. (d) Accumulated Depreciation.

(a) Service Revenue.

Adjustments for unearned revenues: (LO 4) (a) decrease liabilities and increase revenues. (b) increase liabilities and increase revenues. (c) increase assets and increase revenues. (d) decrease revenues and decrease assets.

(a) decrease liabilities and increase revenues.

Colleen Mooney earned a salary of $400 for the last week of September. She will be paid on October 1. The adjusting entry for Colleen's employer at September 30 is: (LO 5) (a) No entry is required. (b) Dr. Salaries and Wages Expense 400 Cr. Salaries and Wages Payable 400 (c) Dr. Salaries and Wages Expense 400 Cr. Cash 400 (d) Dr. Salaries and Wages Payable 400 Cr. Cash 400

(b) Dr. Salaries and Wages Expense 400 Cr. Salaries and Wages Payable 400

Adjustments for accrued revenues: (LO 5) (a) increase assets and increase liabilities. (b) increase assets and increase revenues. (c) decrease assets and decrease revenues. (d) decrease liabilities and increase revenues.

(b) increase assets and increase revenues.

Queenan Company computes depreciation on delivery equipment at $1,000 for the month of June. The adjusting entry to record this depreciation is as follows: (LO 4) (a) Dr. Depreciation Expense 1,000 Cr. Accumulated Depreciation- Queenan Comp 1,000 (b) Dr. Depreciation Expense 1,000 Cr. Equipment 1,000 (c) Dr. Depreciation Expense 1,000 Cr. Accumulated Depreciation- Queenan Comp 1,000 (d) Dr. Equipment Expense 1,000 Cr. Accumulated Depreciation- Queenan Comp 1,000

(c) Dr. Depreciation Expense 1,000 Cr. Accumulated Depreciation- Queenan Comp 1,000

The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is: (LO 4) (a) Dr. Supplies 600 Cr. Supplies Expense 600 (b) Dr. Supplies 750 Cr. Supplies Expense 750 (c) Dr. Supplies Expense 750 Cr. Supplies 750 (d) Dr. Supplies Expense 600 Cr. Supplies 600

(c) Dr. Supplies Expense 750 Cr. Supplies 750 ($1,350- $600 = $750)

Which statement is incorrect concerning the adjusted trial balance? (LO 6) (a) An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. (b) The adjusted trial balance provides the primary basis for the preparation of financial statements. (c) The adjusted trial balance does not list temporary accounts. (d) The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries.

(c) The adjusted trial balance does not list temporary accounts.

What is the periodicity assumption? (LO 1) (a) Companies should recognize revenue in the accounting period in which services are performed. (b) Companies should match expenses with revenues. (c) The economic life of a business can be divided into artificial time periods. (d) The fiscal year should correspond with the calendar year.

(c) The economic life of a business can be divided into artificial time periods.

Adjustments for prepaid expenses: (LO 4) (a) decrease assets and increase revenues. (b) decrease expenses and increase assets. (c) decrease assets and increase expenses. (d) decrease revenues and increase assets.

(c) decrease assets and increase expenses.

Adjusting entries are made to ensure that: (LO 3) (a) expenses are recognized in the period in which they are incurred. (b) revenues are recorded in the period in which the performance obligation is satisfied. (c) balance sheet and income statement accounts have correct balances at the end of an accounting period. (d) All of the above.

(d) All of the above.

Which one of these statements about the accrual basis of accounting is false? (LO 2) (a) Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged. (b) Companies recognize revenue in the period in which the performance obligation is satisfied. (c) This basis is in accord with generally accepted accounting principles. (d) Companies record revenue only when they receive cash, and record expense only when they pay out cash.

(d) Companies record revenue only when they receive cash, and record expense only when they pay out cash.

All of the following are required steps in the accounting cycle except: (LO 8) (a) journalizing and posting closing entries. (b) preparing an adjusted trial balance. (c) preparing a post-closing trial balance. (d) reversing entries.

(d) reversing entries.

Each of the following is a major type (or category) of adjusting entry except: (LO 4, 5) (a) prepaid expenses. (b) accrued revenues. (c) accrued expenses. (d) unearned expenses.

(d) unearned expenses.

Adjusted trial balance

A list of accounts and their balances after all adjustments have been made.

Post-closing trial balance

A list of permanent accounts and their balances after a company has journalized and posted closing entries.

Worksheet

A multiple-column form that companies may use in the adjustment process and in preparing financial statements.

Income Summary

A temporary account used in closing revenue and expense accounts.

Cash-basis accounting

Accounting basis in which a company records revenue only when it receives cash and an expense only when it pays cash.

Accrual-basis accounting

Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.

Prepare adjusting entries for accruals.

Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues for services performed and expenses incurred in the current accounting period that have not been recognized through daily entries.

Contra asset account

An account that is offset against an asset account on the balance sheet.

Fiscal year

An accounting period that is one year long.

Periodicity assumption

An assumption that the economic life of a business can be divided into artificial time periods.

Reversing entry

An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.

Permanent accounts

Balance sheet accounts whose balances are carried forward to the next accounting period.

Unearned revenues

Cash received and a liability recorded before services are performed.

Explain why adjusting entries are needed, and identify the major types of adjusting entries.

Companies make adjusting entries at the end of an accounting period. These entries ensure that companies record revenues in the period in which the performance obligation is satisfied and that companies recognize expenses in the period in which they are incurred. The major types of adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.

Prepare adjusting entries for deferrals.

Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue for services performed in the current accounting period.

Closing entries

Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.

Adjusting entries

Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed.

Accrued expenses

Expenses incurred but not yet paid in cash or recorded.

Prepaid expenses (prepayments)

Expenses paid in cash before they are used or consumed.

Quality of earnings

Indicates the level of full and transparent information that a company provides to users of its financial statements.

Understand the causes of differences between net income and net cash provided by operating activities.

Net income is based on accrual accounting, which relies on the adjustment process. Net cash provided by operating activities is determined by adding cash received from operating the business and subtracting cash expended during operations.

Accrued revenues

Revenues for services performed but not yet received in cash or recorded.

Explain the purpose of closing entries.

One purpose of closing entries is to transfer net income or net loss for the period to Retained Earnings. A second purpose is to "zero-out" all temporary accounts (revenue accounts, expense accounts, and Dividends) so that they start each new period with a zero balance. To accomplish this, companies "close" all temporary accounts at the end of an accounting period. They make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed.

Temporary accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Revenue recognition principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Expense recognition principle (matching principle)

The principle that matches expenses with revenues in the period when the company makes efforts to generate those revenues.

Depreciation

The process of allocating the cost of an asset to expense over its useful life.

Describe the required steps in the accounting cycle.

The required steps in the accounting cycle are (a) analyze business transactions, (b) journalize the transactions, (c) post to ledger accounts, (d) prepare a trial balance, (e) journalize and post adjusting entries, (f) prepare an adjusted trial balance, (g) prepare financial statements, (h) journalize and post closing entries, and (i) prepare a post-closing trial balance.

Explain the revenue recognition principle and the expense recognition principle.

The revenue recognition principle dictates that companies recognize revenue when a performance obligation has been satisfied. The expense recognition principle dictates that companies recognize expenses in the period when the company makes efforts to generate those revenues.

Differentiate between the cash basis and the accrual basis of accounting.

Under the cash basis, companies record events only in the periods in which the company receives or pays cash. Accrual-based accounting means that companies record, in the periods in which the events occur, events that change a company's financial statements even if cash has not been exchanged.