accounting-miller-exam 2

in an accrual accounting system there are timing differences between?

*cash flows* and the *recognition* of *expenses* or *revenue*

for which generally accepted accounting principles require disclosure in notes accompanying the financial statements

-a large lawsuit was filed against the company two days after the balance sheet date -the depreciation method in use, given that several different methods are acceptable under generally accepted accounting principles

assume the Fisher Company usually earns taxable income but sustains a loss in the current period. the entry to record income taxes expense in the current period will most likely?

-include a credit to the income taxes expense account -be an adjusting entry rather than an entry to record a transaction completed during the period

the concept of materiality?

-is based upon what users of financial statements are thought to consider important -permits accountants to ignore generally accepted accounting principles in certain situations -permits accountants to use the easiest and most convenient means of accounting for events that are immaterial

for a publicly owned company, what account activities are likely to occur at or shortly after year-end?

-preparation of income tax return -adjusting and closing of the accounts -drafting of disclosures that accompany the financial statements -an audit of the financial statements by an independent CPA firm

Best Hardware uses a periodic inventory system. its inventory was $38000 at the beginning of the year and $40000 at the end. during the year Best made purchases of merchandise totaling $107000

-prior to making adjusting and closing entries at year-end, the balance in Best's inventory account is $38000 -as sales transactions occur, Best makes no entries to update its inventory records or to record the cost of goods sold

mark and Amanda own an appliance store and a restaurant. the appliance store and a restaurant. the *appliance* store sells merchandise on a 12-month installment plan; the restaurant sells only for cash

-the appliance store has a longer operating cycle than the restaurant -the appliance store probably uses a perpetual inventory system, whereas the restaurant probably uses a periodic system -as inventory is sold, its cost is transferred from the income statement to the balance sheet

four general adjusting entry categories

1. converting assets to expenses 2. converting liabilities to revenue 3. accruing unpaid expenses 4. accruing uncollected revenue

costs are matched with revenue in one of two ways

1. direct association of costs with specific revenue transactions (only works for those costs and expenses that can be directly associated with specific revenue transactions 2. systematic allocation of costs over the useful life of the expenditure

every adjusting entry affects?

1. income statement (revenue or expense) 2. balance sheet (asset or liability)

two important characteristics of all adjusting entires

1. involves the recognition of either revenue or expenses 2. revenue and expenses represent changes in owners equity but there must also be a corresponding change in either assets or liabilities

suppliers, unexpired/pre-paid insurance, suppliers expense, insurance expense and depreciation are examples of?

I. assets to expense

unearned revenue, customer deposits, and earned revenue are examples of?

II. liabilities to revenue

interest/ salary expense and interest/ salaries payable are examples of?

III. accrue expenses (used goods but haven't been paid)

depreciation is?

a non-cash expense

accrue receivable, interest receivable, and service revenue earned are examples of?

accrue revenue

the purpose of adjusting entries is to:

apply the realization principle and the matching principle to transactions affecting two or more accounting periods

an adjusting entry does what?

assigns *revenues* to the period in which they are *earned* and *expenses* to the periods in which related goods or services are used

*rarely* do adjusting entries include an entry to?

cash

accrual

cash comes after transaction date (example: receivables and payables)

deferral

cash comes before (example: prepaid account or unearned revenue)

an account with a credit balance that is offset against or deducted from an asset account to produce the proper balance sheet amount for the asset

contra-asset account

what journal entry is required to close the income summary account of a profitable company?

debit income summary, credit retained earnings

straight line method formula

depreciation expense = cost of asset/estimated useful life

what account would never be reported in the income statement as an expense?

dividend expense

what account would never appear in the after-closing trial balance?

dividends and income taxes expense

depreciation is only an?

estimate

an expired asset becomes an?

expense

the cpa firm auditing mason street recording studios found that total stockholders' equity was understated and liabilities were overstated. what error could have been the cause?

failure to record the earned portion of fees received in advance

something of little or no consequence. may be accounted for in the most convenient manner without regard to other theoretical concepts

immaterial

what financial statement is prepared first?

income statement

revenue and expenses close into?

income summary

the summary account in the ledger to which revenue and expense accounts are closed at the end of the period

income summary

the accounting principle of offsetting revenue with the expenses incurred in producing that revenue

matching principle

most companies make adjusting entries every?

month

purpose of *adjusting entries*?

needed at the end of each accounting period to make certain that appropriate amounts of revenue and expenses are reported in the company's income statement *because* some business activities affect the revenue and expenses of *multiple* accounting periods

adjusting entries are the means by which accountants apply the?

realization and matching principals

the accounting principle that governs the timing of revenue recognition (*basically indicates that revenue should be recognized in the period in which it is earned*)

realization principle

materiality

refers to the relative importance of an item or an event

dividends close to?

retained earnings

income summary closes to?

retained earnings

the most widely used means of estimating periodic depreciation expense is the?

straight-line method of depreciation

book value?

the net amount at which an asset appears in financial statements. for depreciable assets, it represents costs that will be offset against the revenue of future periods

depreciable assets

their economic usefulness diminishes over time (ex: buildings, and equipment)

accrued revenue

used to describe revenue that has been earned during the period but that has not been recorded prior to the closing date

the period of time that a depreciable asset is expected to be useful to the business. this is the period over which the cost of the asset is allocated to depreciate expense

useful life