quiz 3

A​ & D Window Cleaning performed​ $450 of services but has not yet billed customers for the month. If A​ & D fails to record the adjusting​ entry, what is the impact on the financial​ statements? A. balance​ sheet: assets​ overstated, equity understated income​ statement: expenses understated B. balance​ sheet: liabilities​ overstated; equity understated income​ statement: revenues understated C. balance​ sheet: assets​ understated, equity understated income​ statement: revenues understated D. balance​ sheet: assets​ understated; equity overstated income​ statement: expense understated

C

Which of the following is true of accrual basis accounting and cash basis​ accounting? A. Accrual accounting is not allowed under GAAP. B. Cash basis accounting records all transactions. C. Accrual accounting records revenue only when it is earned. D. All of the above are true.

C

The revenue recognition principle requires A. expenses to be matched with revenue of the period. B. time to be divided into annual periods to measure revenue properly. C. revenue to be recorded only after the cash is received. D. revenue to be recorded only after the business has satisfied its performance obligation.

D

Guides accounting for​ expenses, ensures that all expenses are recorded when they are incurred during the​ period, and matches those expenses against the revenues of the period.

Matching principle

guides accounting for expenses and ensure that all expenses are recorded when they are incurred during the period and that expenses are matched against the revenues of the period. (sometimes called the expense recognition principle)

Matching principle

Requires companies to record revenue when it satisfies each performance obligation.

Revenue recognition principle

Assumes that a​ business's activities can be sliced into small time segments and that financial statements can be prepared for specific periods.

Time period concept

the adjusted trial balance shows

account balances after adjustments

indicate which category of adjustment (deferral or accrual) is described $1000 of advertising expense was incurred but not paid.​ (Use Advertising​ Payable.)

accrual

indicate which category of adjustment (deferral or accrual) is described $1000 of rent revenue was earned but not recorded or received.

accrual

records the effect of each transaction as it occurs—that is, revenues are recorded when earned and expenses are recorded when incurred.

accrual basis accounting

When a business incurs an expense before paying for it

accrued expense

the sum of all depreciation expense recorded for the depreciable asset to date

accumulated depreciation account

the process of updating the accounts at the end of the period

adjusting the accounts

not allowed under Generally Accepted Accounting Principles (GAAP)

cash basis accounting

records only transactions with cash: cash receipts and cash payments. When cash is received, revenues are recorded. When cash is paid, expenses are recorded.

cash basis accounting

indicate which category of adjustment (deferral or accrual) is described Equipment depreciation was $1,400.

deferral

indicate which category of adjustment (deferral or accrual) is described Office Supplies on hand at the end of the year totaled $325. The beginning balance of Office Supplies was $700. ​(Assume no office supplies were purchased during the​ period.)

deferral

indicate which category of adjustment (deferral or accrual) is described Unearned revenue of $3,200 has been earned.

deferral

recording the usage of office supplies during the period is an example of what kind of entry

deferral (prepaid)

advance payments of future expenses (also called prepaid expenses)

deferred expenses

The allocation of a plant asset's cost over its useful life

depreciation

The 12-month accounting period used for the annual financial statements

fiscal year

are long-lived, tangible assets used in the operation of a business. (also called plant assets)

property, plant, and equipment assets

The expected value of a depreciable asset at the end of its useful life

residual value

tells accountants when to record revenue and requires companies follow a five-step process

revenue recognition principle

allocates an equal amount of depreciation each year and is calculated as: straight-line depreciation = (cost-residual value)/useful life

straight-line method

an internal document that helps summarize data for the preparation of financial statements.

worksheet