Financial Accounting Chapter 4

Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

False

The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

False

Expenses are recognized when: they are billed by the supplier. they contribute to the production of revenue. the invoice is received. they are paid.

they contribute to the production of revenue.

The revenue recognition principle dictates that revenue should be recognized in the account-ing records:

when the performance obligation is satisfied.

An adjusting entry always involves a balance sheet account and an income statement account.

True

Unearned revenue is a prepayment that requires an adjusting entry when services are per-formed.

True

Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders' equity are overstated.

True

At December 31, 2022, before any year-end adjustments, Dallis Company's Prepaid Insurance account had a balance of $5,800. It was determined that $2,600 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be: $5,800 $2,600 $2,800 $3,200

$2,600

La More Company had the following transactions during 2022:• Sales of $9,000 on account• Collected $4,000 for services to be performed in 2023• Paid $3,750 cash in salaries for 2022• Purchased airline tickets for $500 in December for a trip to take place in 2023 What is La More's 2022 net income using accrual accounting? $5,250 $5,750 $9,750 $9,250

5,250 Solution: $9,000-$3,750=$5,250(Sales-salaries)

An expense incurred; not yet paid or recorded.

Accrued Expenses

Interest expense incurred; not yet paid.

Accrued Expenses

A revenue for which performance obligation is satisfied; not yet collected or recorded.

Accrued Revenues

Rent not yet collected; performance obligation already satisfied.

Accrued Revenues

Adjusting entries are made to ensure that: expenses are recognized in the period in which they are incurred. revenues are recorded in the period in which the performance obligation is satisfied. balance sheet and income statement accounts have correct balances at the end of an accounting period. All of these answer choices are correct.

All of these answer choices are correct.

Monetary unit assumption

Assumes that the dollar is the "measuring stick" used to report financial performance

Otto's Tune-Up Shop follows the revenue recognition principle. Otto services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized? September 6 September 5 August 1 August 31

August 31

Full disclosure principle

Ensures that all relevant financial information is reported

A revenue account is closed with a credit to the revenue account and a debit to Income Summary.

False

Accumulated Depreciation is a liability account and has a credit normal account balance.

False

Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

False

The accounting cycle begins with the journalizing of the transactions.

False It begins with the analysis of teh transaction followed by journalizing.

Historical cost principle

Indicates that fair value changes subsequent to purchase are not recorded in the accounts.

Economic entity assumption

Indicates that personal and business recordkeeping should be separately maintained

Going concern assumption

Is the rationale for why plant assets are not reported at liquidation value

An expense not yet incurred; paid in advance.

Prepaid Expenses

Office supplies on hand that will be used in the next period.

Prepaid Expenses

Matching principle

Requires recognition of expenses in the same period as related revenues

Materiality

Requires that accounting standards be followed for all items of significant size

Periodicity assumption

Separates financial information into time periods for reporting purposes

Which statement is correct? As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use. As long as management is ethical, there are no problems with using the cash basis of accounting. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.

The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.

The only accounts that are closed are temporary accounts.

True

A revenue not yet recognized; collected in advance.

Unearned Revenues

Subscription revenue collected; not yet recognized.

Unearned Revenues

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 no adjusting entry is made, this would cause: expenses to be overstated. revenues to be understated. net income to be overstated. liabilities to be understated.

revenues to be understated.