Chapter 3&4 Concepts

Brown Company prepared a tax return for a client and sent that client a bill for $750. Which of the following describes how Brown Company will account for the fee relating to this work?

Credit Service Revenue for $750

Matisse Co. pays $12,000 for rent of office space that will cover the next six months. Which of the following describes how Matisse will account for the payment for rent?

Debit Prepaid Rent for $12,000

Income Statement

- Summarizes the financial impact of operating activities undertaken by the company during the accounting period 1st Section: Revenues 2nd Section: Operating Expenses Net Income or Net Loss

Which of the following statements about financial statements are true?

- The balance sheet takes stock of what exists at a point in time - Balance sheet accounts are considered permanent - Income statement accounts are considered temporary

Which of the following statements about accrual adjustments are true?

- They are used to increase balance sheet accounts and increase corresponding income statement accounts - Each accrual adjustment involves one asset and one revenue account or one liability and one expense account

Which of the following statements about the Accumulated Depreciation account are true?

- This contra-account is subtracted when determining total assets on the balance sheet - It is a balance sheet account - Its balance increases each year

The Deferred Revenue T-account will show which of the following? (Select all that apply.)

- the amounts the seller has fulfilled of its obligations that were collected in advance on the debit side - the amounts received in advance that the seller has not yet fulfilled of its obligations on the credit side - the normal ending balance on the credit side

Net income appears on the ______. (Select all that apply.)

- Income statement - Statement of retained earnings

On December 31, Year 1, Chaco made the required adjustment to adjust its accounts to accrue salaries and wages expense. How does this year-end adjustment impact the amounts reported on the company's financial statements?

- It increases a liability - It increases an expense

Which of the following statements about revenues are true?

- Operating activities include transactions impacting revenue accounts - Revenues are the amounts a business charges its customers for services it provides or goods it sells to them - Revenue is reported when the company fulfills its promise to transfer control of a good or services to a customer

Deferral adjustments are needed when the business:

- Pays cash before the expense has been incurred - Receives cash before the revenue has been generated

Expense Accounts

- Rent Expense - Advertising Expense - Interest Expense - Insurance Expense - Other Operating Expenses - Salaries & Wages Expense

Accrual Basis Accounting

- Required by GAAP/IFRS - Revenues recorded when generated - Expenses recorded when incurred - Not Relevant - Date on which cash is exchanged

Which of the following are listed on the income statement?

- Revenues - Expenses

Which of the following line items appear on an income statement? (Select all that apply.)

- Wages Expense - Revenues

Expenses

- Costs of operating the business - Incurred to generate revenues in the period covered by the income statement - Reported when a business uses up its resources to generate revenues during the period regardless of when the company pays for the resources

The adjusting entry to record depreciation, includes a debit to ____ ____ and a credit to ____ ____

- Depreciation - Expense - Accumulated - Depreciation

Revenue Recognition Principle

Step 1: Identify the contract - A contract is written, verbal, or implied. Step 2: Identify the seller's performance obligation(s) - What goods and services does the seller promise? Step 3: Determine the transaction price - What is the seller entitled to receive? Step 4: Allocate the transaction price to the performance obligation(s) - Refer to stand-alone prices Step 5: Recognize revenue when (or as) each performance obligation is satisfied - "When" = at a point in time (e.g., at delivery) - "as" = over a period of time (e.g., monthly)

Berry Dive Shop receives a total of $500 today from its customer for scuba diving lessons. The lessons begin in the next fiscal year. Which of the following describes how the company will account for this transaction?

Credit Deferred Revenue for $500

Which of the following entries records the adjustment to revenue for which the seller has performed its obligations but has not yet been collected or billed?

Debit Accounts Receivable and credit Sales Revenue

During May, Aldine Company advertised its products and received a bill, dated May 31, for $2,000 to be paid during the following month. Which of the following describes how Aldine will account for the receipt of the bill for advertising services?

Debit Advertising Expense for $2,000

On June 30, Manning Company wrote checks to employees, totaling $1,500 for wages related to hours worked in June to provide services to its customers. Which of the following describes how Matisse will account for the payment to employees?

Debit Salaries and Wages Expense for $1,500

Select the following statements that are correct regarding Dividends? (Check all that apply.)

- Dividends are closed into retained earnings by crediting Dividends. - Dividends are closed into retained earnings by debiting Retained Earnings. - Dividends have a normal debit balance.

Revenue Accounts

- Sales Revenue - Service Revenue - Rent Revenue - Other Revenue

Under accrual basis accounting, if a company delivers a product on account to the customer, which of the following is reported by the company?

- An asset on the balance sheet - A revenue on the income statement

Which of the following statements about deferral adjustments are true?

- They are used to decrease balance sheet accounts and increase corresponding income statement accounts - Each deferral adjustment involves one asset and one expense account or one liability and one revenue account

Matisse Co. reported total revenues of $100,000 and total expenses of $90,000. The net profit margin is:

10%

On April 30, Cary's Carpet Cleaning, Inc. provided $500 of carpet cleaning services to a customer with payment to be received in May. Complete the necessary adjustment for the month of April.

Accounts Receivable - Debit 500 Service Revenue - Credit 500

____ basis accounting is the only acceptable method for external reporting of net income.

Accrual

Which of the following is (are) increased with a debit?

Asset accounts

The adjusting entry to record the revenue earned by the seller fulfilling its obligation results in a(n) ____ to the Deferred Revenue account. (Enter one word per blank.)

Decrease, debit, reduction, or dr

Which of the following transactions constitutes an accrual adjustment involving a revenue account?

Interest Revenue on a note receivable

Which of the following is not an example of an operating activity?

Purchasing a long-term asset

The net profit margin ratio is calculated by dividing net income by ______.

Revenue

Which of the following is incorrect regarding the Income Tax Payable account?

The account represents tax refunds due to the company.

Monster Music Company provided music lessons for customers for $10,000, receiving $6,000 in cash and the rest on account. What is Monster Music Company's revenue if it used the cash basis of accounting instead of accrual basis accounting?

$6,000 - Cash-basis revenue equals the cash collected or $6,000. Accrual-basis revenue would equal $10,000. - $6,000 was received in cash.

In its 1st month of business, Brewed Awakenings, Inc. purchased $1,000 of supplies of which it had paid $700 and owes the rest. At the end of the month, it had $400 of supplies available for use. What is the amount of Supplies Expense on the income statement?

$600

On December 31, Year 1, Chaco made the required adjustment to adjust its accounts for services that were performed on account during the last week of the month but have not yet been recorded. How does this year-end adjustment impact the amounts reported on the company's financial statements?

- It increases an asset - It increases a revenue

Cash Basis Accounting

- Not Allowed by GAAP/IFRS - Revenues are recorded when cash is received - Expenses are recorded when cash is paid - Relevant - Date on which cash is exchanged

Accrual adjustments are needed when the business:

- Pays cash after the expense has been incurred - Receives cash after the revenue has been generated

A contra-account ______. (Select all that apply.)

- example is Accumulated Depreciation because it has a normal credit balance - has a normal balance opposite of the account it offsets

Which ratio change provides good news about a company?

An increase in the net profit margin ratio

Which of the following is correct?

Measurement of net income involves estimations.

Under accrual basis accounting, if cash is received from the customer when the product is delivered to that customer, in addition to the cash that is received, which of the following is reported by the company?

A revenue on the income statement

Which of the following is another way to express the expanded accounting equation?

Assets - Liabilities = Common Stock + Retained Earnings

What is used to increase the balances of revenue accounts?

Credits

Which balance sheet line item reports the amount collected in advance for which the seller has not yet fulfilled of its obligations to the buyer?

Deferred Revenue

The financial statement that reports revenues and expenses is the ______.

Income statement

Which of the following is increased with a credit?

Sales Revenue

Accounts Receivable should be increased for ______.

Which the seller has performed of its obligations during the period but not yet collected

If Revenues is credited, then the possible debits are ______. (Select all that apply.)

- Deferred Revenue - Accounts Receivable - Cash

Deferred Revenue is credited when ______.

Cash is collected in advance of the revenue

Adjusting entries are made at the ____ of the accounting period, while daily transactions are made throughout the accounting period. (Enter one word per blank.)

End

What is the best place to begin to identify accounts that need adjustments?

Unadjusted trial balance

How do adjustments affect financial results?

- All revenues and expenses will be reported in the period in which they are generated and incurred - The financial statements will present the best picture of whether the company's business activities were profitable that period and what economic resources the company owns and owes at the end of that period

The adjusting entry to record the amortization of a long-term asset that lacks physical substance includes a debit to and a credit to . (Enter one word per blank.)

- Amortization - Expense - Accumulated - Amortization

Revenues

- Amounts charged for goods or services - Reported when the company fulfills its promise to transfer control of a good or service to a customer

Which of the following statements regarding adjusting entries is true?

- Cash is never part of an accrual or deferral adjusting journal entry - Adjusting entries affect one balance sheet account - Adjusting entries affect one income statement account

Under accrual basis accounting, if cash is received from the customer before the product is delivered to that customer, in addition to the cash that is received, which of the following is reported by the company?

A liability on the balance sheet

Assume that a company has prepared and posted its closing entries. Which of the following statements is true?

All revenue accounts, expense accounts, and the dividends account will have zero balances.

What is the purpose of an adjusted trial balance?

An adjusted trial balance is prepared to check that the accounting records are still in balance, after having posted all adjusting entries to the T-accounts.

Which of the following amounts are shown on the adjusted trial balance and on the statement of retained earnings?

Beginning-of-year balance for Retained Earnings

Reporting revenues only when cash is received and expenses only when cash is paid is called the ____ basis of accounting. (Enter one word per blank.)

Cash

Match the description with each of the accounts that may be debited when Service Revenue is credited.

Cash - Collections occur in the same period as the services Accounts Receivable - Collections occur in advance of the performance of the service Deferred Revenue - The service is performed prior to the collections

Stockholders' equity consists of ______, which is the amount contributed, and ______, which is generated from profitable operations (i.e., from revenues being greater than expenses).

Common Stock; Retained Earnings

What is used to increase the account balance of the Dividends account?

Debits

What is used to increase the balances of expense accounts?

Debits

The unadjusted trial balance of Cary's Carpet Cleaning, Inc. reports $3,600 of Deferred Revenue, which represents the amounts that a major industrial customer had paid in advance for carpet cleaning during the months of April and May. By cleaning carpets during April, the company has fulfilled $2,000 of its obligation. Complete the necessary adjustment for the month of April.

Deferred Revenue - Debit 2,000 Service Revenue - Credit 2,000 (The company has fulfilled $2,000 of its obligation and generated that amount of revenue.)

Cleaning equipment was used by Cary's Carpet Cleaning, Inc. in April to generate revenues. The company estimates $2,400 of depreciation each year. Complete the necessary adjustment for the month of April.

Depreciation Expense - Debit 200 Accumulated Depreciation - Credit 200 ($2400 per year x 1/12 = $200)

As of December 31, $2,500 of interest expense has accrued on a $50,000 note payable. The note payable and the accrued interest will become due and payable next year. How will the interest affect the adjustments at the end of the period?

Interest Expense should be increased, because the cost of interest relates to the current period.

Operating Activities

Short-term day-to-day activities. - Buy goods and services - Pay cash to suppliers/employees - Sell goods and services - Collect cash from customers (Generally involve transactions impacting a Revenue Accounts or Expense Account)

Which of the following is the source of the Retained Earnings amount that is shown on the balance sheet?

Statement of retained earnings

Cary's Carpet Cleaning, Inc. purchased $2,500 of supplies during April, its first month of operations. There were only $1,000 of supplies on hand on April 30. Complete the necessary adjustment for the month of April.

Supplies Expense - Debit 1,500 Supplies - Credit 1,500

When are revenues recorded under the accrual basis method of accounting?

When they are generated

Closing journal entries are recorded ______.

after the financial statements have been prepared

Permanent Accounts

Includes: Balance sheet - Assets - Liabilities - Stockholders' Equity Balances carry over from year to year

Temporary Accounts

Includes: Income statement - Revenues - Expenses Amounts reported only for the current period - Beginning balances are zero - Increase during the year as earned/incurred - Ending balances include only activities during the current period

If you want to compute a company's net profit margin, which of the following financial statements do you need?

Income Statement Only

Which of the following statements is true about an unadjusted trial balance?

It lists the balance of each account to check the equality of total debits and credit

Collecting cash from customers for services provided is a(n) ______ activity.

Operating

Investing activities are concerned with acquiring long-term assets; financing activities provide the money needed to operate the business and to provide the capital for investing activities; and ____ activities are involved with providing goods and services to the customer. (Enter only one word per blank.)

Operating

Which of the following types of accounts are found in closing journal entries?

Revenue accounts, expense accounts, the Dividends account, and the Retained Earnings account

Cary's Carpet Cleaning, Inc. owes $1,000 of wages to employees for work done during the last week of April. Complete the necessary adjustment for the month of April.

Salaries and Wages Expense - Debit 1,000 Salaries and Wages Payable - Credit 1,000

Expense Recognition Principle

Expenses are recorded in the same period as the revenues to which they relate

True or false: The unadjusted trial balance reports the increases and decreases in each account that occurred during the accounting period.

False: a trial balance lists all the accounts with their current unadjusted balances and indicates whether the total debits equals total credits for all of the accounts.

Why Adjustments Are Needed

Financial statements report the end of the year account balances GAAP - Requires certain accounts be adjusted

Adjusting entries are important because ______. (Select all that apply.)

- without them, the financial statements would be misleading. - adjustments ensure that the balance sheet reports all of the economic resources the company owns and all of the obligations the company owes

Indicate how each of the following transactions on June 30 affect the company's financial statements. 1. On June 30, The Corner Café paid cash for insurance for the six-month period that covers the last two quarters of the year. 2. On June 30, Corner Café paid in wages to employees who worked during the last week of June. 3. On June 30, Corner Café received a bill for electricity used during June. The company will not pay the bill until shortly before its due date in July.

1. An Asset (other than Cash) on the balance sheet is increased 2. An expense on the income statement is increased 3. A liability on the balance sheet and an expense on the income statement are both increased

Neeta Landscaping Company provides lawn care services to a customer and immediately receives $45. Which of the following describes how the company will account for this transaction?

Credit Service Revenue for $45

After the adjustments have been recorded, Deferred Revenue on the balance sheet reports the amount of ______.

The sales or services still owed to the customer

Deferred Revenue should be reduced and Revenue increased for the amount of revenue ______ during the period.

The seller performs of its obligations to its customers

What is the purpose of preparing an adjusted trial balance?

To ensure that total debits equal total credits after the adjustments have been recorded

Under accrual basis accounting, which of the following is required by the expense recognition principle?

Expenses are recognized in the same period as the revenues to which they relate.

Gift cards are an example of a transaction in which a company receives payment in advance of fulfilling a sale or performing a service. This type of transaction will result in:1) an increase to the account called Cash, an asset, and 2) a(n) ____ to the account called ____ ____, a ____

- Increase or credit - Deferred or Unearned - Revenue - Liability

On September 1, Year 1, a tenant of Bloomington Company business paid its rent in advance for the months of October, November, and December. On December 31, Year 1, Bloomington made the required adjustment to adjust its accounts. How does this year-end adjustment impact the amounts reported on the company's financial statements?

- It decreases a liability - It increases a revenue

On September 1, Year 1, Hales Company paid its rent in advance for the months of October, November, and December. On December 31, Year 1, Hales made the required adjustment to adjust its accounts. How does this year-end adjustment impact the amounts reported on the company's financial statements?

- It decreases an asset - It increases an expense

Why are adjustments made to the accounting records at the end of the period?

- To ensure assets and liabilities are reported at appropriate amounts - To ensure the related revenues and expenses are reported in the proper period

Why are the adjustments important to the preparation of the financial statements? (Check all that apply.)

- Unadjusted financial statements could present a misleading and incomplete picture of the company's financial results. - Adjustments ensure that the balance sheet reports all of the economic resources the company owns and all of the obligations the company owes. - Adjustments ensure the revenues the seller has performed of its obligation and expenses incurred are reflected in the income statement.

In its first year of business, Wok 'n' Roll, Inc. it provided $100,000 of goods to its customers of which $80,000 was collected. It also incurred $90,000 in expenses for which $80,000 was paid. Which of the following statements are correct? (Check all that apply.)

- Wok 'n' Roll should report net income of $10,000 for external reporting purposes. - Wok 'n' Roll should use accrual basis accounting for external reporting purposes to conform with GAAP and IFRS.

For each item listed below, indicate whether the company should report it on the income statement this period. 1. Bank of America charges customers a monthly service fee 2. Target buys a new building to use as a retail store 3. Dell pays to deliver computers to customers 4. Pizza Hut buys supplies to be used next month 5. Snap pays this week's wages to employees

1. Yes - Service Revenue 2. No (a building is an asset, not an expense) 3. Yes - Delivery Expense 4. No (supplies are assets until used up) 5. Yes - Salaries and Wages Expense