ACC Chapter 4 Key Concepts

What is the relationship between the amount shown in the adjusted trial balance column for an account and that account's general ledger?

The amount shown in the adjusted trial balance column for an account equals the account balance in the ledger after adjusting entries have been journalized and posted.

The three trial balances that are required in the accounting cycle that involve journalizing

(1) journalize the transactions (2) journalize the adjusting entries (3) journalize the closing entries

Why may the financial information in an adjusted trial balance not be up-to-date and complete?

(1) Some events are not journalized daily because it is not useful or efficient to do so. (2) The expiration of some costs occurs with the passage of time rather than as a result of recurring daily transactions. (3) Some items may be unrecorded because the transaction data are not known.

Identify, in the order in which they are prepared, the three trial balances that are required in the accounting cycle

(1) trial balance (2) adjusted trial balance (3) post-closing trial balance

Before the adjustment indicate the type of adjusting entry that is needed to to correct the misstatement. (a) Assets are understated (b) Liabilities are overstated (c) Liabilities are understated (d) Expenses are understated (e) Assets are overstated (f) Revenue is understated

(a) Accrued revenues. (b) Unearned revenues. (c) Accrued expenses. (d) Accrued expenses or prepaid expenses. (e) Prepaid expenses. (f) Accrued revenues or unearned revenues.

A) What information do accrual-basis financial statements provide that cash-basis financial statements do not? B)What information do cash-basis financial statements provide that accrual-basis financial statements do not?

(a) Information presented on an accrual basis reveals important information about the relationship between efforts and results. This information is useful in predicting future results. Trends in revenues and expenses are thus more meaningful. (b) Information presented on a cash basis is useful for predicting the future availability of cash. Cash basis financial statements provide useful information about a company's sources and uses of cash

Half of the adjusting entry is given. Indicate the account title for the other half of the entry. a) Salaries and Wages Expense is debited b) Depreciation Expense is debited c) Interest Payable is credited d) Supplies is credited e) Accounts Receivable is debited f) Unearned Service Revenue is debited

(a) Salaries and Wages Payable. (b) Accumulated Depreciation. (c) Interest Expense. (d) Supplies Expense. (e) Service Revenue. (f) Service Revenue.

a) How does the periodicity assumption effect an accountant's analysis of accounting transactions? b) Explain the term fiscal year

(a) Under the periodicity assumption, an accountant is required to determine the effect of each accounting transaction on a specific accounting period. (b) An accounting time period that is one year in length

Distinguish between the two categories of adjusting entries, and identify the types of adjustments applicable to each category.

- Deferrals: consist of revenues collected before services are provided and expenses paid before they are incurred. - Accruals: consist of revenues for services performed prior to collection and expenses incurred prior to payment.

What items are disclosed on a post-closing trial balance. What is its purpose?

- balance sheet accounts. -to prove the equality of the permanent account balances that the company carries forward into the next accounting period

Identify and state two generally accepted accounting principles that relate to adjusting the accounts

-The revenue recognition principle, which states that revenue should be recognized in the time period in which the performance obligation is satisfied. -The expense recognition principle, which states that expenses be matched with revenues in the period when the company makes efforts to generate those revenues

Whistler Corp. performed services for a customer but has not received payment, nor has it recorded any entry related to the work. Which of the following types of accounts are involved in the adjusting entry: asset, liability, revenue, or expense? Indicate whether it would be credited or debited in the entry.

An asset is debited and a revenue is credited.

A company fails to recognize an expense incurred but not paid. Indicate which of the following accounts is debited and which is credited in the adjusting entry: asset, liability, revenue, or expense

An expense is debited and a liability is credited.

Explain the differences between depreciation expense and accumulated depreciation.

Depreciation expense: -expense account -normal balance is a debit. -shows the cost that has expired during the current accounting period Accumulated depreciation: -contra asset account - normal balance is a credit - the balance is the depreciation that has been recognized from the date of acquisition to the balance sheet date.

"An adjusting entry may affect more than one balance sheet or income statement account." Do you agree?

Disagree. An adjusting entry affects only one balance sheet account and one income statement account.

What types of accounts does a company debit and credit in a prepaid expense adjusting entry?

In a prepaid expense adjusting entry, expenses are debited and assets are credited.

What is the Income Summary account? Identify the types of summary data that may be posted to this account.

Income Summary - is a temporary account that is used in the closing process. The account is debited for expenses and credited for revenues. The difference, either net income or net loss, is then closed to Retained Earnings.

"The historical cost principle of accounting requires adjusting entries." Do you agree?

No, adjusting entries are required by the revenue and expense recognition principles.

"Depreciation is a process of valuation that results in the reporting of the fair value of the asset." Do you agree?

No. Depreciation is the process of allocating the cost of an asset to expense over its useful life. Depreciation results in the presentation of the book value of the asset, not its fair value

Why is it possible to prepare financial statements directly from an adjusted trial balance?

because the balances of all accounts have been adjusted to show the effects of all financial events that have occurred during the accounting period.

Explain quality of earnings

indicates the level of full and transparent information that a company provides to users of financial statements

What types of accounts are debited and credited in an unearned revenue adjusting entry?

liabilities are debited and revenues are credited

Major types of adjusting entries

prepaid expenses unearned revenues accrued revenues accrued expenses

Explain earnings management

the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Such action is undertaken to help a company meet target financial numbers