ACCT 1400 - Chapter 4
Net income on a cash basis is referred to as ______.
"Net cash provided by operating activities"
What is depreciation?
...
Prepare adjusting entries for accruals.
Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries.
Accounting for accrued revenues, reason for adjustment:
revenues have been earned but not yet received in cash or recorded
Cash received before revenue was earned and recorded as liabilities.
unearned revenues
The length of service of a productive asset.
useful life
All temporary accounts will have ____ balances.
zero
Financial statements are prepared directly from the Adjusted Trial Balance:
- income statement - retained earnings statement - balance sheet
Each of the following is a major type (or category) of adjusting entry except: A. earned expenses B. prepaid expenses C. accrued expenses D. accrued revenues
A. earned expenses
in general, the shorter the time period, the difficulty of making the proper adjustments to accounts: A. is increased B. is decreased C. is unaffected D. depends on if there is a profit or loss
A. is increased
a company spends $20 million dollars for an office building. over what period should the cost be written off? A. when the $20 million is expended in cash B. all in the first year C. over the useful life of the building D. after $20 million in revenue is earned
C. over the useful life of the building
Which type of accounts will not appear in the post-closing trial balance? A. asset accounts B. permanent accounts C. liability accounts D. temporary accounts
D. temporary accounts
Cash Basis Accounting:
Record revenue when money is received and record expenses when we pay for them. Small companies may justify using this method if they have few receivables and payables.
An account that is offset against an asset account on the balance sheet.
contra asset account
Under the cash basis of accounting, and amount received from a customer in advance of providing the services would be reported as a(n):
revenue
Each account is analyzed to determine whether it is complete and up-to-date.
trial balance
An accrued expenses adjusting entry serves two purposes:
(1) Records the obligations, and (2) Recognizes the expenses.
Prepayments often occur in regard to:
- insurance - supplies - advertising - rent - equipment - buildings
Companies may manage earnings by:
- one-time items to prop up earnings numbers. - inflate revenue numbers in the short-run. - improper adjusting entries.
Adjusting entries affect at least one ________ ________ account and one ________ _________ account.
...
An accounting period could be a month, quarter, calendar year, or fiscal year.
...
What account will you never use when preparing adjusting entries?
...
What accounts are found on a post closing trial balance?
...
What are Adjusting Entries? When are they prepared? Why are they prepared?
...
What are the 4 major types of adjusting entries?
...
What is the difference in prepaid expenses and accrued expenses?
...
What is the purpose of closing entries? When are they prepared? What accounts are closed?
...
At December 31, 2010, before any year-end adjustments, Bollis Company's Prepaid Insurance account had a balance of 2,700. It was determined that 1,000 of the Prepaid Insurance has expired. The adjusted balance for Insurance Expense for the year would be: A. 1,000 B. 1,700 C. 2,700 C. 1,400
A. 1,000
Laramie Company had the following transactions during 2010: - Sales of 4,500 on account - collected 2,000 for services to be performed in 2011 - paid 1,125 cash in salaries - purchased airline tickets for 250 in december for a trip to take place in 2011 What is Laramie's 2010 net income using accrual accounting? A. 3,375 B. 5,375 C. 5,125 D. 3,125
A. 3,375
Which of the following would be unethical? A. Recording backdated revenue. B. Recording accrued interest revenue. C. Recording accrued salaries and wages expense. D. Recording prepaid expense adjustments.
A. Recording backdated revenue.
an adjusting entry would be include which of the following accounts? A. cash B. interest receivable C. property tax payable D. unearned revenue
A. cash
Joyce company purchased office supplies costing 5,000 and debited Office Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed 1,400 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: A. debit Office Supplies Expense, 3,600; credit Office Supplies, 3,600. B. debit Office Supplies, 1,400; credit Office Supplies Expense, 1,400. C. debit Office Supplies Expense, 1,400; credit Office Supplies, 1,400. D. debit Office Supplies, 3,600; credit Office Supplies Expense, 3,600.
A. debit Office Supplies Expense, 3,600; credit Office Supplies, 3,600.
which types of accounts will appear in the post-closing trial balance? A. permanent accounts B. temporary accounts C. accounts shown in the income statement columns of a work sheet D. none of the above
A. permanent accounts
From an accounting standpoint, the acquisition of long-lived assets is essentially a(n): A. prepaid expense. B. accrual of expense. C. accrual of revenue. D. accrual of unearned revenue
A. prepaid expense.
Unearned revenues are: A. received and recorded as liabilities before they are earned. B. earned and recorded as liabilities before they are received. C. earned and already received and recorded. D. earned but not yet received or recorded.
A. received and recorded as liabilities before they are earned.
Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the adjusting entry is for the amount of supplies: A. used. B. remaining. C. either used or remaining. D. purchased.
A. used.
Adjusting entries can be classified as either _______________ or _______________. Prepayments are either prepaid _______________ or unearned _______________. Adjusting entries for accruals are required in order to record _______________earned and _______________ incurred in the current accounting period that have not been recognized through daily entries and thus are not reflected in the accounts.
Adjusting entries can be classified as either (prepayments) or (accruals). Prepayments are either prepaid (expenses) or unearned (revenue). Adjusting entries for accruals are required in order to record (revenue) earned and (expenses) incurred in the current accounting period that have not been recognized through daily entries and thus are not reflected in the accounts.
Application of the revenue recognition and matching principles results in _______________ _______________ _______________. Accrual basis accounting means that transactions that change a company's financial statements are recorded in the _______________ in which the _______________ _______________, rather than in the periods in which the company _______________ or _______________.
Application of the revenue recognition and matching principles results in (accrual basis accounting). Accrual basis accounting means that transactions that change a company's financial statements are recorded in the (periods) in which the (events occur), rather than in the periods in which the company (receives) or (pays).
Given the data below, determine net income under the accrual basis of accounting. - Cash received from customers (44,000) - Accounts receivable (12,000) - Cash paid for expenses (26,000) - Accounts payable (related to expenses) (3,000) - Prepaid rent for next period (7,000) A. 18,000 B. 27,000 C. 20,000 D. 11,000
B. 27,000
there are usually how many closing journal entries? A. 5 B. 4 C. 3 D. 2
B. 4
Lawton Company collected 7,200 in May of 2009 for 4 months of service which would take place from October of 2009 through January of 2010. The revenue reported from this transaction during 2009 would be: A. 0 B. 5,400 C. 7,200 D. 1,800
B. 5,400
The Harris Company purchased a computer for 3,000 on December 1. It is estimated that annual depreciation on the computer will be 600. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: A. debit Depreciation Expense, 600; credit Accumulated Depreciation 600. B. debit Depreciation Expense, 50; credit Accumulated Depreciation 50. C. debit Depreciation Expense, 2,400; credit Accumulated Depreciation 2,400. D. debit Office Equipment, 3,000; credit Accumulated Depreciation, 3,000.
B. debit Depreciation Expense, 50; credit Accumulated Depreciation 50.
Draxon Company borrowed 30,000 from the bank signing a 6%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be: A. debit Interest Expense, 1,800; credit Interest Payable, 1,800. B. debit Interest Expense, 150; credit Interest Payable, 150. C. debit Note Payable, 1,800; credit Cash, 1,800. D. debit Cash, 450; credit Interest Payable, 450.
B. debit Interest Expense, 150; credit Interest Payable, 150.
Net income is recorded on the work sheet under the: A. debit column of the adjusting trial balance and the credit column of retained earnings B. debit column of the income statement and the credit column of the balance sheet C. credit column of the adjusting trial balance and the debit column of retained earnings D. credit column of the income statement and the debit column of the balance sheet
B. debit column of the income statement and the credit column of the balance sheet
the matching principle matches: A. customers with businesses B. expenses with revenues C. assets with liabilities D. creditors with businesses
B. expenses with revenues
On April 1, 2010, Propel Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. Propel records depreciation expense of $9,000 for the calendar year ending December 31, 2010. Which accounting principle has been violated? Why? A. depreciation principle, because depreciation expense is $12,000 per year B. no principle has been violated because P has correctly matched the expense for using the equipment to the period it generated revenue C. matching principle because the cash was paid in 2010 and should be expensed in 2010. D. matching principle because depreciation expense should be $8,000
B. no principle has been violated because P has correctly matched the expense for using the equipment to the period it generated revenue
Revenue should be recognized when a. cash is received b. the service is performed c. the customer places an order d. the customer charges an order
B. the service is performed
adjusting entries are: A. not necessary if the accounting system is operating properly B. usually required before financial statements are prepared C. made whenever management desires to change an account balance D. made to balance sheet accounts only
B. usually required before financial statements are prepared
The revenue recognition principle dictates that revenue should be recognized in the accounting records: A. in the period that income taxes are paid. B. when it is earned. C. when cash is received. D. at the end of the month
B. when it is earned.
In a service-type business, revenue is considered earned: A. at the end of the month. B. when the service is performed. C. at the end of the year. D. when cash is received.
B. when the service is performed.
Nova Real Estate signed a four-month note payable in the amount of 6,000 on September 1. The note requires interest at an annual rate of 6%. The amount of interest to be accrued at the end of September is: A. 360 B. 90 C. 30 D. 60
C. 30
Manning Corporation issues a one-year 6% 200,000 note on April 30, 2010. Interest expense for the year ended December 31, 2010 was: A. 12,000 B. 9,000 C. 8,000 D. 7,000
C. 8,000
A christmas shop signs a three-month note payable to help finance increases in inventory for the christmas shopping seasons. the note is signed on October 1 in the amount of 20,000 with annual interest of 9%. What is the adjusting entry to be made on December 21 for the interest expense accrued to that date, if no entries have been made previously for the interest? A. Interest Expense 150 Interest Payable 150 B. Interest Expense 300 Interest Payable 300 C. Interest Expense 450 Interest Payable 450 D. Interest Expense 1,800 Note Payable 1,800
C. Interest Expense 450 Interest Payable 450
Snell Tables paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are 3 more working days in January (29-21). Employees work 5 days a week and the company pays 800 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? A. Wages Expense 800 Wages Payable 800 B. Wages Expense 4,000 Wages Payable 4,000 C. Wages Expense 2,400 Wages Payable 2,400 D. No adjusting entry is required
C. Wages Expense 2,400 Wages Payable 2,400
The primary difference between prepaid and accrued expenses is that prepaid expenses have: A. been incurred and accrued expenses have not. B. not been paid and accrued expenses have. C. been recorded and accrued expenses have not. D. not been recorded and accrued expenses have.
C. been recorded and accrued expenses have not.
Adjustments for unearned revenue: A. increase assets and increase revenues. B. decrease revenues and decrease assets. C. decrease liabilities and increase revenues. D. increase liabilities and increase revenues.
C. decrease liabilities and increase revenues.
Under the accrual basis of accounting: A. cash must be received before revenue is recognized B. net income is calculated by matching cash outflows against cash inflows C. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. D. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.
C. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
Accrued expenses are: A. incurred and already paid or recorded. B. paid and recorded in an asset account before they are used or consumed. C. incurred but not yet paid or recorded. D. paid and recorded in an asset account after they are used or consumed.
C. incurred but not yet paid or recorded.
If a business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit: A. cash B. prepaid rent C. unearned rent revenue D. accrued rent revenue
C. unearned rent revenue
Expenses sometimes make their contribution to revenue in a different period than when the expense is paid. When wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the first period? A. due from employees B. due to employer C. wages payable D. wages expense
C. wages payable
Given the data below, determine net income under the cash basis of accounting. - Cash received from customers (44,000) - Accounts receivable (12,000) - Cash paid for expenses (26,000) - Accounts payable (related to expenses) (3,000) - Prepaid rent for next period (7,000) A. 18,000 B. 27,000 C. 20,000 D. 11,000
D. 11,000
Which of the following accounts is an owner's equity account? a. Cash b. Accounts Payable c. Prepaid Insurance d. Julia Davis, Capital
D. Julia Davis, Capital
Closing entries: A. are prepared before the financial statements. B. reduce the number of permanent accounts. C. summarize the activity in every account. D. cause the revenue and expense accounts to have zero balances.
D. cause the revenue and expense accounts to have zero balances.
accumulated depreciation is a(n): A. expense account B. stockholders' equity account C. liability account D. contra asset account
D. contra asset account
the Village Laundry Company purchased 6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. on June 30, an inventory of the laundry supplies indicated only 2,000 on hand. the adjusting entry that should be made by the company on June 30 is: A. debit Laundry Supplies Expense, 2,000; credit Laundry Supplies 2,000. B. debit Laundry Supplies, 4,500; credit Laundry Supplies Expense, 4,500. C. debit Laundry Supplies, 4,500; credit Laundry Supplies Expense, 4,500. D. debit Laundry Supplies Expense, 4,500; credit Laundry Supplies, 4,500.
D. debit Laundry Supplies Expense, 4,500; credit Laundry Supplies, 4,500.
A law firm received 2,000 cash for legal services to be rendered in the future. the full amount was credited to the liability account unearned service revenue. if the legal services have been rendered at the end of the accounting period and not adjusting entry is made, this would cause: A. expenses to be overstated B. net income to be overstated C. liabilities to be understated D. revenues to be understated
D. revenues to be understated
In order for revenues to be recorded in the period in which they are earned, and for expenses to be recognized in the period in which they are incurred, _______________ _______________are made to revenue and expense accounts at the end of the _______________ _______________. In short, adjusting entries are needed to ensure that the _______________ _______________ and the _______________ _______________ are followed.
In order for revenues to be recorded in the period in which they are earned, and for expenses to be recognized in the period in which they are incurred, (adjusting entries) are made to revenue and expense accounts at the end of the (accounting period). In short, adjusting entries are needed to ensure that the (revenue recognition) and the (matching principles) are followed.
Matching Principle:
Requires that expenses be recorded in the same period in which the revenues they helped produce are recorded.
Revenue Recognition Principle:
Revenue recognized in the accounting period in which it is earned. (Revenue is considered earned when the service has been provided or when the goods are delivered.)
The _______________ _______________ _______________ dictates that revenue be recognized in the accounting period in which it is earned. In a service company, revenue is considered to be earned at the time the _______________ is _______________.
The (revenue recognition principle) dictates that revenue be recognized in the accounting period in which it is earned. In a service company, revenue is considered to be earned at the time the (service) is (performed).
The practice of expense recognition is referred to as the _______________ _______________ because it dictates that efforts (_______________) be matched with accomplishments (_______________).
The practice of expense recognition is referred to as the (matching principle) because it dictates that efforts (expenses) be matched with accomplishments (revenues).
Under _______________ _______________ _______________, revenue is recorded only when the cash is received, and an expenses is recorded only when cash is paid. An income statement presented under the cash basis of accounting does not satisfy _______________ _______________ _______________ _______________. Why? Because it fails to record _______________ that has been earned but for which the cash has not been received, thus violating the _______________ _______________ _______________. In addition, expenses are also not matched with earned revenues, and therefore the _______________ _______________ is violated.
Under (cash basis accounting), revenue is recorded only when the cash is received, and an expenses is recorded only when cash is paid. An income statement presented under the cash basis of accounting does not satisfy (general accepted accounting principles). Why? Because it fails to record (revenue) that has been earned but for which the cash has not been received, thus violating the (revenue recognition principle). In addition, expenses are also not matched with earned revenues, and therefore the (matching principle) is violated.
An accounting time period that is one year in length is called:
a fiscal year
Data for an adjusting entry described as "accrued wages, $2,020" means to debit a. Wages Expense and credit Wages Payable b. Wages Payable and credit Wages Expense c. Accounts Receivable and credit Wages Expense d. Drawing and credit Wages Payable
a. Wages Expense and credit Wages Payable
In order for revenues to be recorded in the period in which they are earned, and for expenses to be recognized in the period in which they are incurred: a. adjusting entries are made. b. cash basis accounting is used. c. closing entries are made. d. none of the above.
a. adjusting entries are made.
Accumulated depreciation is a: a. contra asset account. b. contra revenue account. c. unearned revenue account. d. expense account.
a. contra asset account.
The balance in the prepaid rent account before adjustment at the end of the year is $15,000, which represents three months' rent paid on December 1. The adjusting entry required on December 31 is a. debit Rent Expense, $5,000; credit Prepaid Rent, $5,000 b. debit Prepaid Rent, $10,000; credit Rent Expense, $5,000 c. debit Rent Expense, $10,000; credit Prepaid Rent, $5,000 d. debit Prepaid Rent, $5,000; credit Rent Expense, $5,000
a. debit Rent Expense, $5,000; credit Prepaid Rent, $5,000
An account is said to have a debit balance if a. the amount of the debits exceeds the amount of the credits b. there are more entries on the debit side than on the credit side c. its normal balance is debit without regard to the amounts or number of entries on the debit side d. the first entry of the accounting period was posted on the debit side
a. the amount of the debits exceeds the amount of the credits
Using accrual accounting, expenses are recorded and reported only a. when they are incurred, whether or not cash is paid b. when they are incurred and paid at the same time c. if they are paid before they are incurred d. if they are paid after they are incurred
a. when they are incurred, whether or not cash is paid
Accounting basis in which transactions that change a company's financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash.
accrual basis accounting
Accrual Basis of Accounting:
adheres to GAAP because it follows the matching principle and the revenues recognition principle. Events are recorded when they occur rather than when cash is paid or received.
After all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts
adjusted trial balance
The _________ is the primary basis for the preparation of the financial statements.
adjusted trial balance
The _______ purpose is to prove the equality of debit balances and credit balances in the ledger.
adjusted trial balance's
cash payment BEFORE expense recorded
adjusting entries for "prepaid expenses"
The cost of office supplies to be used in future periods is ordinarily shown on the balance sheet as a(n) a. capital b. asset c. contra asset d. liability
b. asset
The adjusting entry to record the depreciation of equipment for the fiscal period is a. debit Depreciation Expense; credit Equipment b. debit Depreciation Expense; credit Accumulated Depreciation c. debit Accumulated Depreciation; credit Depreciation Expense d. debit Equipment; credit Depreciation Expense
b. debit Depreciation Expense; credit Accumulated Depreciation
A debit may signify a(n) a. decrease in asset accounts b. decrease in liability accounts c. increase in the capital account d. decrease in the drawing account
b. decrease in liability accounts
If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which of the following describes the effect of the credit portion of the entry? a. decreases the balance of an owner's equity account b. increases the balance of an liability account c. increases the balance of an asset account d. decreases the balance of an expense account
b. increases the balance of an liability account
The primary difference between deferred and accrued expenses is that deferred expenses have a. been incurred and accrued expenses have not b. not been incurred and accrued expenses have been incurred c. been recorded and accrued expenses have not been incurred d. not been recorded and accrued expenses have been incurred
b. not been incurred and accrued expenses have been incurred
Using accrual accounting, revenue is recorded and reported only a. when cash is received without regard to when the services are rendered b. when the services are rendered without regard to when cash is received c. when cash is received at the time services are rendered d. if cash is received after the services are rendered
b. when the services are rendered without regard to when cash is received
The unearned rent account has a balance of $40,000. If $3,000 of the $40,000 is unearned at the end of the accounting period, the amount of the adjusting entry is a. $3,000 b. $40,000 c. $37,000 d. $43,000
c. $37,000
Which of the following is NOT true concerning cash basis accounting? a. Does not follow GAAP. b. Records revenue when cash received. c. Matches expenses with the revenues they help to produce. d. Records expenses when cash is paid.
c. Matches expenses with the revenues they help to produce.
Which of the following companies would probably not have unearned revenue: a. Delta Airlines. b. Hurst Publishing Company. c. Poppa John's Pizza. d. All State Insurance Company.
c. Poppa John's Pizza.
The general term employed to indicate an expense that has not been paid and has not yet been recognized in the accounts by a routine entry is a. capital b. deferral c. accrual d. inventory
c. accrual
A business pays weekly salaries of $20,000 on Friday for a five-day week ending on that day. The adjusting entry necessary at the end of the fiscal period ending on Thursday is a. debit Salaries Payable, $16,000; credit Cash, $16,000 b. debit Salary Expense, $16,000; credit Drawing, $16,000 c. debit Salary Expense, $16,000; credit Salaries Payable, $16,000 d. debit Drawing, $16,000; credit Cash, $16,000
c. debit Salary Expense, $16,000; credit Salaries Payable, $16,000
A post-closing trial balance will show: a. zero balances for all accounts b. zero balances for balance sheet accounts c. only balance sheet accounts d. only income statement accounts
c. only balance sheet accounts
Which of the following types of accounts have a normal credit balance? a. assets and liabilities b. liabilities and expenses c. revenues and liabilities d. capital and drawing
c. revenues and liabilities
Supplies are recorded as assets when purchased. Therefore, the credit to supplies in the adjusting entry is for the amount of supplies a. that are in the ending balance b. purchased c. used d. either used or remaining
c. used
A chart of accounts is a. the same as a balance sheet b. usually a listing of accounts in alphabetical order c. usually a listing of accounts in financial statement order d. used in place of a ledger
c. usually a listing of accounts in financial statement order
Revenue is recorded only when cash is received, and an expenses is recorded only when cash is paid.
cash basis accounting
Accounting basis in which a company records revenue only when it receives cash, and an expense only when it pays cash.
cash-basis accounting
Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, retained earnings.
closing entries
At the end of the accounting period, companies transfer the temporary account balances to the permanent stockholders' equity account—Retained Earnings.
closing the books
Adjusting entries are made to ensure that: a. expense are recognized in the period in which they are incurred. b. revenues are recorded in the period in which they are earned. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. All of the above.
d. All of the above.
Depreciation is: a. the wearing away of an asset. b. the process of an asset becoming obsolete. c. a valuation process. d. The process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner.
d. The process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner.
In which of the following types of accounts are increases recorded by debits? a. assets, liabilities b. drawing, liabilities c. expenses, liabilities d. assets, expenses
d. assets, expenses
Which of the following groups of accounts have a normal debit balance? a. revenues, liabilities, capital b. capital, assets c. liabilities, expenses d. assets, expenses
d. assets, expenses
Adjusting entries for accruals: a. are required in order to record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries and thus are not yet reflected in the accounts. b. will increase both a balance sheet and an income statement account. c. are not required under GAAP. d. both a and b above.
d. both a and b above.
Unearned revenues are: a. prepayments. b. liabilities. c. temporary accounts. d. both a and b above.
d. both a and b above.
Accounts have developed two principles to use as guidelines in determining the amount of revenues and expenses to be reported in a given period. These principles are the: a. cash basis accounting principle. b. revenue recognition principle. c. matching principle. d. both b and c above.
d. both b and c above.
The debit side of an account a. depends on whether the account is an asset, liability or owner's equity b. can be either side of the account depending on how the accountant set up the system c. is the right side of the account d. is the left side of the account
d. is the left side of the account
The classification and normal balance of the drawing account is a. an expense with a credit balance b. an expense with a debit balance c. a liability with a credit balance d. owner's equity with a debit balance
d. owner's equity with a debit balance
Which of the following describes the classification and normal balance of the fees earned account? a. asset, credit b. liability, credit c. owner's equity, debit d. revenue, credit
d. revenue, credit
An assumption that the economic life of a business can be divided into artificial time periods: a. cash basis assumption. b. accrual assumption. c. calendar year assumption. d. time period assumption.
d. time period assumption.
All of the following are examples of prepaid expenses except: a. prepaid rent. b. prepaid insurance. c. supplies. d. unearned revenues.
d. unearned revenues.
The process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner.
depreciation
Accounting for accrued expenses, adjusting entry:
dr. expenses cr. liabilities
the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income
earnings management
Accounting for accrued expenses, reason for adjustment:
expenses have been incurred but not yet paid in cash or recorded
Accounting for accrued expenses, accounts before adjustment:
expenses understated. liabilities understated.
Accounting for accrued expenses examples are:
interest, rent, salaries
Unearned revenue is classified as a(n):
liability
Entries made at the end of an accounting period to ensure that the revenue recognition and matching principles are followed.
matching principle
The principle that dictates that efforts (expenses) be matched with accomplishments (revenues).
matching principle
The statement of cash flows, reports ______.
net cash provided by operating activities.
prepaid expenses are:
paid and recorded in an asset account before they are used or consumed
The purpose of the post-closing trial balance is to:
prove the equality of the permanent account balances that the company carries forward into the next accounting period
company provides full and transparent information.
quality of earnings
The principle that revenue be recognized in the accounting period in which it is earned.
revenue recognition principle
the basics of adjusting entries includes:
Includes one income statement account and one balance sheet account.
Describe the required steps in the accounting cycle.
The required steps in the accounting cycle are: (a) analyze business transactions, (b) journalize the transactions, (c) post to ledger accounts, (d) prepare a trial balance, (e) journalize and post adjusting entries, (f) prepare an adjusted trial balance, (g) prepare financial statements, (h) journalize and post closing entries, and (i) prepare a post-closing trial balance.
In summary, research is critical to all aspects for effective marketing communications.
The revenue recognition principle dictates that companies recognize revenue in the accounting period in which it is earned. The expense recognition principle dictates that companies recognize expenses when expenses make their contribution to revenues.
Differentiate between the cash basis and the accrual basis of accounting.
Under the cash basis, companies record events only in the periods in which the company receives or pays cash. Accrual-based accounting means that companies record, in the periods in which the events occur, events that change a company's financial statements even if cash has not been exchanged.
Adjusting entry results in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.
adjusting entries for "unearned revenues"
Adjusting entry to record the revenue that has been earned and to show the liability that remains.
adjusting entries for "unearned revenues"
cash receipt BEFORE revenue recorded
adjusting entries for "unearned revenues"
accounting for prepaid expenses, accounts before adjustment:
assets overstated. expenses understated.
Accounting for accrued revenues, accounts before adjustment:
assets understated. revenues understated.
Adjustments for accrued revenues: a. increase assets and increase liabilities. b. increase assets and increase revenues. c. decrease assets and decrease revenues. d. decrease liabilities and increase revenues.
b. increase assets and increase revenues.
Adjusting entries make it possible to report correct amounts on the ______ and on the _______.
balance sheet income statement
The difference between the cost of a depreciable asset and its related accumulated depreciation.
book value
An assumption that the economic life of a business can be divided into artificial time periods.
periodicity assumption
Balance sheet accounts whose balances are carried forward to the next accounting period.
permanent accounts
A list of permanent accounts and their balances after a company has journalized and posted closing entries.
post-closing trial balance
Adjusting entry results in an increase (a debit) to an expense account and a decrease (a credit) to an asset account.
prepaid expenses
Costs that expire either with the passage of time or through use.
prepaid expenses
Expenses paid in cash and recorded as assets before they are used or consumed.
prepaid expenses
Increases (debits) an expense account and Decreases (credits) an asset account.
prepaid expenses
Assets that result from the payment of expenses that benefit more than one accounting period.
prepaid expenses (prepayments)
accounting for prepaid expenses, reasons for adjustment:
prepaid expenses recorded in asset accounts have been used
Indicates the level of full and transparent information that a company provides to users of its financial statements.
quality of earnings
Accounting for unearned revenues examples are:
rent, magazine subscriptions, customer deposits for future service
Revenue recognition principleThe principle that companies recognize revenue in the accounting period in which it is earned.
revenue recognition principle
adjusting entries for accrued revenues results in:
revenue recorded BEFORE cash receipt
An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.
reversing entry
Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.
temporary accounts
Expenses incurred but not yet paid in cash or recorded.
accrued expenses
Revenues earned but not yet received in cash or recorded.
accrued revenues
A list of accounts and their balances after all adjustments have been made.
adjusted trial balance
Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed.
adjusting entries
needed to ensure that the revenue recognition and expense recognition principles are followed.
adjusting entries
Expenses incurred but not yet paid in cash or recorded
adjusting entries for "accrued expenses"
Revenues earned but not yet received in cash or recorded.
adjusting entries for "accrued revenues"
Payment of cash, that is recorded as an asset because service or benefit will be received in the future.
adjusting entries for "prepaid expenses"
- Generally a month, a quarter, or a year. - Fiscal year vs. calendar year
periodicity assumption
An accrued revenues adjusting entry serves two purposes:
(1) Shows the receivable that exists, and (2) Records the revenues earned.
Unearned revenues often occur in regard to:
- rent - airline tickets - magazine subscriptions - customer deposits
accrued revenues often occur in regard to:
- rent - interest - services performed
Accrued expenses often occur in regard to:
- rent - interest - taxes - salaries
Made to record:
1. accrued revenues 2. accrued expenses in the current accounting period that have not been recognized through daily entries.
Deferrals are either:
1. prepaid expenses 2. unearned revenues
Describe the nature and purpose of the adjusted trial balance.
An adjusted trial balance is a trial balance that shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period.
Explain why adjusting entries are needed, and identify the major types of adjusting entries.
Companies make adjusting entries at the end of an accounting period. These entries ensure that companies record revenues in the period in which they are earned and that companies recognize expenses in the period in which they are incurred. The major types of adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.
Prepare adjusting entries for deferrals.
Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue earned in the current accounting period.
______ does not attempt to report the actual change in the value of the asset.
Depreciation
Understand the causes of differences between net income and net cash provided by operating activities.
Net income is based on accrual accounting, which relies on the adjustment process. Net cash provided by operating activities is determined by adding cash received from operating the business and subtracting cash expended during operations.
Explain the purpose of closing entries.
One purpose of closing entries is to transfer net income or net loss for the period to Retained Earnings. A second purpose is to "zero-out" all temporary accounts (revenue accounts, expense accounts, and dividends) so that they start each new period with a zero balance. To accomplish this, companies "close" all temporary accounts at the end of an accounting period. They make separate entries to close revenues and expenses to Income Summary; Income Summary to Retained Earnings; and Dividends to Retained Earnings. Only temporary accounts are closed.
adjusting entries for accruals made to record:
Revenues earned and OR Expenses incurred in the current accounting period that have not been recognized through daily entries.
Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? a. Expense recognition principle. b. Cost principle. c. Periodicity principle. d. Revenue recognition principle.
a. Expense recognition principle.
Which types of accounts will appear in the post-closing trial balance? a. Permanent accounts. b. Temporary accounts. c. Expense accounts. d. None of the above.
a. Permanent accounts.
Which account will have a zero balance after a company has journalized and posted closing entries? a. Service Revenue. b. Supplies. c. Prepaid Insurance. d. Accumulated Depreciation.
a. Service Revenue.
Adjustments for unearned revenues: a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets.
a. decrease liabilities and increase revenues.
Transactions recorded in the periods in which the events occur.
accrual - basis accounting
Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.
accrual-basis accounting
Expenses are recognized when incurred, even if cash was not paid.
accrual-basis accounting
Revenues are recognized when earned, even if cash was not received.
accrual-basis accounting
Which statement is incorrect concerning the adjusted trial balance? a. An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. b. The adjusted trial balance provides the primary basis for the preparation of financial statements. c. The adjusted trial balance does not list temporary accounts. d. The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries.
c. The adjusted trial balance does not list temporary accounts.
What is the periodicity assumption? a. Companies should recognize revenue in the accounting period in which it is earned. b. Companies should match expenses with revenues. c. The economic life of a business can be divided into artificial time periods. d. The fiscal year should correspond with the calendar year.
c. The economic life of a business can be divided into artificial time periods.
Adjustments for prepaid expenses: a. decrease assets and increase revenues. b. decrease expenses and increase assets. c. decrease assets and increase expenses. d. decrease revenues and increase assets.
c. decrease assets and increase expenses.
Expenses are recognized only when cash is paid.
cash-basis accounting
Prohibited under generally accepted accounting principles (GAAP).
cash-basis accounting
Revenues are recognized only when cash is received
cash-basis accounting
Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.
closing entries
Adjusting entries are made to ensure that: a. expenses are recognized in the period in which they are incurred. b. revenues are recorded in the period in which they are earned. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. All of the above.
d. All of the above.
Which one of these statements about the accrual basis of accounting is false? a. Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged. b. Companies recognize revenue in the period in which it is earned. c. This basis is in accord with generally accepted accounting principles. d. Companies record revenue only when they receive cash, and record expense only when they pay out cash.
d. Companies record revenue only when they receive cash, and record expense only when they pay out cash.
Which one of these statements about the accrual basis of accounting is false? a. Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged. b. Companies recognize revenue in the period in which it is earned. c. This basis is in accord with generally accepted accounting principles. d. Companies record revenue only when they receive cash, and record expense only when they pay out cash.
d. Companies record revenue only when they receive cash, and record expense only when they pay out cash.
Each of the following is a major type (or category) of adjusting entry except: a. prepaid expenses. b. accrued revenues. c. accrued expenses. d. earned expenses.
d. earned expenses.
All of the following are required steps in the accounting cycle except: a. journalizing and posting closing entries. b. preparing an adjusted trial balance. c. preparing a post-closing trial balance. d. reversing entries.
d. reversing entries.
Companies report a portion of the cost of a long-lived asset as an expense (_______)during each period of the asset's useful life.
depreciation
Increases (debits) an expense account and Decreases (credits) an asset account.
depreciation
The process of allocating the cost of an asset to expense over its useful life.
depreciation
Accounting for accrued revenues, adjusting entries:
dr. assets cr. revenues
accounting for prepaid expenses, adjusting entry:
dr. expenses cr. assets
accounting for unearned revenues, adjusting entry:
dr. liabilities cr. revenues
he planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.
earnings management
"let the expenses follow the revenues"
expense recognition principle
expenses matched with revenues in the period when efforts are expended to generate revenues
expense recognition principle
The principle that dictates that companies match efforts (expenses) with results (revenues).
expense recognition principle (matching principle)
Adjusting entries for "accrued expenses" results in:
expenses recorded BEFORE cash payment
An accounting period that is one year long.
fiscal year
A temporary account used in closing revenue and expense accounts.
income summary
Accounting for prepaid expenses examples are:
insurance, supplies, advertising, rent, depreciation
Accounting for accrued revenues examples are:
interest, rent, services performed but not collected
accounting for unearned revenues, accounts before adjustment:
liabilities overstated. revenues understated.
Cash received and reported as liabilities before revenue is earned.
unearned revenues
Cash received before a company earns revenues and recorded as a liability until earned.
unearned revenues
Receipt of cash that is recorded as a liability because the revenue has not been earned.
unearned revenues
accounting for unearned revenues, reasons for adjustment:
unearned revenues recorded in liability accounts have been earned
A multiple-column form that companies may use in the adjustment process and in preparing financial statements.
worksheet
