Financial Accounting Chapter 4

one income statement account and one balance sheet account

Every adjusting entry will include...

revenue

Expense are recognized when they contribute to the productions of ______________

stockholders' equity; overstated.

Failure to record interest expense will cause ________ to be

failure to apply the revenue recognition principle could lead to a misstatement of revenue

Generally accepted accounting principles require the application of the revenue recognition principle because....

debit Accounts Receivable and credit Service Revenue.

Juanita has performed $750 of consultancy for a client but has not billed the client as of the end of the accounting period. The adjusting entry in Juanita's books will be

Revenue

Receiving cash for services performed is an application of ______________ recognition.

Cash-basis accounting

Reporting income when the cash is received and expenses when the cash is paid.

Deferrals

- Prepaid expenses and unearned revenues - the recording of the related expense or revenue is deferred to a future period

Revenue Recognition

A _________ _________principle dictates that revenue should be recognized in the accounting records when the performance obligation is satisfied

Periodicity Assumptions

Accounting time periods are generally a month, a quarter, or a year-- artificial time periods

Liabilities

Accrued expenses are treated as...

not yet been recorded.

Accrued revenues have....

include a debit to an asset and a credit to revenue.

Adjusting entries Can..

a balance sheet account and an income statement account

Adjusting entries always impact...

not recorded as they occur.

Adjusting entries are often made because some business transactions are_________________

financial statements

Adjusting entries are required every time a company prepares __________ ______________

one income statement account and one balance sheet account

Adjusting entries will affect at least one...

lifetime

Adjustments would not be necessary if financial statements were prepared to reflect net income from ________ operations.

fiscal year

An accounting time period that is one year long is called a

one balance sheet account

An adjusting entry always impacts at least...

both a balance sheet account and an income statement account

An adjusting entry for an accrual affects which of the following accounts?

accrual basis of accounting

Because it best illustrates the matching principle, the _______ _____ __ _________is in accordance with GAAP (Generally Accepted Accounting Principles).

adjusting entries

Because some business transactions are not recorded daily, ________ is/are necessary

April 30

Bob's Electronics makes a sale for $1,250 on April 30. The customer is sent a statement on May 5 and a check is received on May 10. Bob's Electronics follows GAAP and applies the revenue recognition principle. When should the $1,250 be recognized?

$0

C & D Consulting uses a calendar year as its fiscal year. A customer pays C & D $1,500 on December 31st, 2022, for services to be performed from January 1st through March 31st, 2023. Using the accrual basis of accounting, how much revenue should C & D recognize in its December 31st, 2022, financial statements?

equally from March 1 to September 30

DigIt Landscapers hires seasonal workers from March 1 to September 30 each year. Payments to workers are made in equal installments in November and December of the current year and in January of the following year. DigIt Landscapers should recognize the expense related to its seasonal workers

Adjusting Entries

ensure that the revenue recognition and expense recognition principles are followed

accural

Under the __________ basis of accounting, expenses are recorded and reported when they are incurred if cash is not yet paid

Cash Basis

Under the _____________ _________ of accounting, cash must be received before revenue is recognized.

occur rather than in the period in which cash is paid or received

Under the accrual basis of accounting, events that change a company's financial statements are recognized in the period they-

a quarter, a year, and a month

What are generally accepted accounting time periods?

fiscal year

What is an accounting time period that is one year in length called?

when they contribute to the production of revenue

When are expenses recognized?

Prepaid expenses

are costs that expire either with the passage of time (e.g., rent and insurance) or through use (e.g., supplies)

Accural Basis Accounting

means that transactions that change a company's financial statements are recorded in the periods in which the events occur

Revenue Recognition Principle

requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied

$0

A customer calls their landscaper and schedules their monthly yard maintenance for the next year. The customer pays DigIt Landcapers $1,800 on December 31st, 2022, for services to be performed from March 31st, 2023 through October, 2023. Because DigIt Landscapers uses a calendar year as its fiscal year and the accrual basis of accounting, DigIt Landscapers will recognize revenue of ________ in its December 31st, 2022, financial statements.

April

A factory's employees work overtime to finish an order that is sold on April 30. The office sends a statement to the customer in early May and payment is received by June. The overtime wages should be expensed in the month of __________

June 30

A flower shop makes a large sale for $1,500 on June 30. The customer is sent a statement on July 5 and a check is received on July 10. The flower shop follows GAAP and applies the revenue recognition principle. When should the $1,500 be recognized?

accured revenue adjusting

A revenue-asset relationship exists with ______________ entries.

$150

BJ Corporation is a cash-basis business. BJ signed a six-month, 12% note payable of $5,000 on October 1st, 2022. By recording the interest expense related to the note only when it is paid on April 1st, 2023, BJ will understate expenses by ________ on its year-end financial statements on December 31st, 2022.

Interest Expense; Interest Payable

Companies that borrow money which will be paid in a subsequent period, and which accumulates interest, will debit ________ and credit ________ in an adjusting entry

Company B will receive more timely feedback regarding its financial health than Company A

Company A prepares and reviews its financial statements twice a year. Company B produces financial reports once every month. What can be concluded about these two companies? A

expense recognition principle

Match expenses with revenues in the period when the company makes efforts to generate those revenues

True

On April 1, 2022, Fun Corporation paid $15,000 cash for equipment that will be used in business operations. The equipment will be used for four years. If Fun records depreciation expense of $15,000 for the calendar year ending December 31, 2022, the company has violated the expense recognition principle. True or False

expense recognition principle

On April 1, 2022, Wong Corporation paid $50,000 cash for equipment that will be used in business operations. The equipment will be used for four years. The company records depreciation expense of $50,000 for the calendar year ending December 31, 2022. Which accounting principle has been violated?

$500

R & L Consulting uses a calendar year as its fiscal year. A customer pays R & L $1,500 on December 1, 2022, for services to be performed from December 1, 2022 through February 28, 2023. Using the accrual basis of accounting, how much revenue should R & L recognize in its December 31, 2022, financial statements?

April 1st to March 31st -> important to understand {12 month period fiscal year??}

Safra is an independent accountant who helps local businesses complete their tax returns. For one client, she gathers the financial statements for the company's fiscal year. Which of the following dates could represent this time period?

file annual tax returns.

The Internal Revenue Service requires all business to...

matching

The accrual basis of accounting is in accordance with GAAP (Generally Accepted Accounting Principles) because it best illustrates the ________ principle.

expenses with revenues

The expense recognition principle matches...

expenses with revenues.

The expense recognition principle matches......

May 31st of the following year

The fiscal year for Networth Bank begins on June 1st each year. Its fiscal year end will be on which date?

the accounting records when the performance obligation is satisfied

The revenue recognition principle dictates that revenue should be recognized in...

when the service is performed

When should all revenue be recognized in a service-type business?

Expense Recongnition

Which is the accounting concept on which adjustments for prepayments and accruals are based?

an adjusting entry for accrued revenues

Which of the following adjusting entries would involve debiting an asset account and crediting a revenue account?

accrued revenues

Which of the following are revenues that have not been recorded?

if it has few receivables or payables

Which of the following would justify a company using a cash basis of accounting?

fiscal years

XYZ Company's business year runs from February 1st to January 31st. ABC Company's business year runs from October 1st to September 30th. Although each period is 12 months, the companies employ different ________ years.

Expense recognition

________ is an accounting concept on which adjustments for prepayments and accruals are based.

Generally accepted accounting principles

________________________________ require the application of the revenue recognition principle because failure to apply the revenue recognition principle could lead to a misstatement of revenue.

Trial Balance

a list of accounts and their balances at a given time the first pulling together of the transaction data

Accurals

accrued revenues and accrued expenses Companies record transactions in the period in which the events occur

What are applications of revenue recognition?

billing customers on June 30 for services completed during June receiving cash for services performed recording revenue as an adjusting entry on the last day of the accounting period

$833.33

customer purchased a $2,500 package of spa services on December 1st, 2022. The customer can use the spa from December 1st, 2022 through February 28th, 2023. Using the accrual basis of accounting, and assuming the spa uses a calendar year as its fiscal year, the spa should recognize ________ in revenue on its December 31st, 2022 financial statements.