Accounting Exam Chapter 2

Which two accounts are affected by completing services on account?

(Cato has completed the work and sent bills to the clients, but not collected any cash)

What are the four steps of the accounting cycle?

1. Recording transactions 2. Adjusting the accounts 3. Preparing financial statements 4. Closing temporary accounts

Deferral

A revenue or an expense event that is recognized after cash has been exchanged. - ex: Johnson pays cash in 2016 to purchase office supplies it uses in 2017.

What is an asset source transaction?

A transaction that increases both an asset and a claim on assets - accounts receivable to increase - owners equity to increase - borrowing from creditors - earnings from operations

When you read services on account, which accounts are affected?

Accounts receivable Revenue

When you read services on account, what kind of accounting is this?

Accrual accounting

Why do income statements recognize accrual accounting?

Accrual accounting recognizes revenue in the accounting period in which it is earned when the associated cash is collected (Realized) ina subsequent accounting period

What kind of activity is an asset exchange transaction considered as? Why?

An Operating activity because the cash collection was derived from normal business operations

Asset use transactions:

An asset account decreases, and a corresponding claims account decreases

Asset source transactions?

An asset account increases, and a corresponding claims account increases

When "cash is collected from customers in partial settlement of its account receivable", what kind of transaction is this? What does this mean?

An asset exchange transaction - The total amount of assets is not affected - The revenue was recognized when the work was done, so it is not recognized now

Expense

An economic sacrifice resulting from operating activities undertaken to generate revenue

Expense:

An expense is an economic sacrifice incurred in the process of generating revenue. Its recognition is accompanied by a decrease in assets or an increase in liabilities resulting from consuming assets and services in an effort to produce revenue

When paying cash for advertising costs, what accounts are affected?

Assets and Retained earnings

What do asset source transactions affect? What doesn't it affect?

Balance sheet assets and stockholders' equity increases - Income statement

Why does unearned revenue not affect retained earnings/ revenues?

Because have to defer recognizing any revenue until it performs the consulting services.

Why is unearned revenue a liability?

Because its obligated to perform services in the future.

"On March 1, Cato pays 12,000 cash to lease office space for one year beginning immediately" Which two accounts are affected?

Cash (decreases) Prepaid rent (increases)

Which accounts are affected when a salary expense is recognized?

Cash Salary expense

"Cato pays $6,000 to the instructor to settle the salaires payable obligation:" Which accounts are affected?

Cash (decrease) Salaries payable (decrease)

"Cato receives $18,000 cash in advance from Westberry Company for consulting services. Cato agrees to perform over a one-year period beginning June 1, 2017." Which two accounts are affected?

Cash (increase) unearned revenue (increase)

Which accounts are affected when cash is collected from customers in partial settlement of its account receivable

Cash (increases) Accounts receivable decreases

Which two accounts are affected by issuing common stock?

Cash and common stock

Realization

Collecting money, generally from the sale of products or services

How do you find the amount adjusted at the end of the year when some of the prepaid rent is used?

Cost of annual lease / 12 months * months used

Marston, Inc. receives $8,000 on account. Choose 2 correct answers, then record in the t-accounts you set up and check your answer

Credit Accounts Receivable $8,000 Debit Cash $8,000

Accrual accounting

Describes a revenue or expense event that is recognized before cash is exchanged. - ex: Johnson would recognize the revenue in 2016 even though it does not collect the cash until 2017.

What kind of activity is borrowing money from the bank?

Finanacial activity

Recognition

Formally reporting an economic item or event in the financial statements

Which financial statements recognize accrual accounting?

Income statement and balance sheet

"On December 31, 2016, Libby adjusts its books to recognize the amount of interest expense incurred during 2016" Which two accounts are effected?

Interest payable increase Retained earnings decrease

What kind of activity is the purchasing of equipment?

Investing activity

What part of the equation is interest payable under?

Liabilities

What kind of activity is an interest payable considered?

NA

What kind of activity is the adjustment of unearned revenue?

NA

Do asset exchange transactions affect the income statement?

No

Does the supplies expense affect the statement of the cash flows?

No

What kind of activity is an advertising expense?

OA

What are liabilities?

Obligations - can arise from acquiring assets as well as recognizing expenses

Asset exchange transactions:

One asset account increases, and another asset account decreases

Claims exchange transactions:

One claims account increases, and another claims account decreases

What kind of activity is an asset use transaction?

Operating activity

Which kind of activity is the unearned revenue considered?

Operating activity

"Cato recognizes rent expense for the office space used during the 2017 accounting period" Which two accounts are affected?

Prepaid rent (decrease) Rent expense (decrease)

Out of recognition and realization, which term is used for accruals?

Recognition, companies may recognize revenue in the income statement in a different accounting period from the period in which they collect cash related to the revenue

What is an example of a claims exchange transaction?

Recognizing accrued expense

What does the balance of the salaries payable represent?

Represents the amount of cash the company is obligated to pay for wages in the future

Revenue:

Revenue is the economic benefit derived from operating the business. Its recognition is accompanied by an increase in assets or a decrease in liabilities resulting from providing products or services to customers

Which accounts close at the end of the year? Which account do they go into?

Revenue, expenses, dividends

At the end of 2016 Cato recorded accrued salary expense of 6000. The salary expense is for courses the instructor taught in 2016. However, Cato will not pay the instructor cash until 2017. Which accounts will be affected by this transaction?

Salaries payable (increases) Salaries expense (Decreases

Does the interest payable affect the net income?

Yes, it is considered an expense

"After determining through a physical count that it has $150 of unused supplies on hand as December 31, Cato recognizes supplies expense" Which accounts does this affect?

Supplies (decrease) Supplies expense (decrease)

"Cato purchases $800 of supplies on account" Which accounts are affected?

Supplies (increase) Accounts payable (increase)

What is important to remember that accrual accounting requires?

That companies recognize expenses in the period in which they are incurred regardless of when cash is paid

When accrual accounting is reported on income statements, how does this amount differ from the amount of cash flow from operating activities?

The net income may be different from the amount of cash flow from operating activities shown on the statement of cash flows

In the income statement, does the supplies expense affect it?

Yes, it is considered an expense

Do advertising costs affect the income statement?

Yes, it is considered as an expense

What is the goal of the matching concept? What is it?

To match expenses with revenues Recognizing the expense or revenue when they incurr it

"Cato recognizes the portion of the unearned revenue it earned during the accounting period." Which two accounts does it affect?

Unearned revenue (decrease) Consulting revenue (increase)

How do you solve to find the recognized unearned revenue during the year.

Unearned revenue / period of services * amount used

What is an adjusting entry?

When have to adjust the account balances

What is a claims exchange transaction?

When two parts of the claims either go up or down. (balancing each other out)

What is asset use transaction?

When using cash payment for an expense (including salary)

Which financial statements do rent expenses effect?

income statement (bc of net income) and the amount of stockholder's equity (retained earnings) shown on the balance sheet