Accounting Test 3+4

23A. If a payment of a deferred expense was recorded under the alternative treatment, what account would be debited in the adjusting entry?

If a payment of a deferred expense was recorded under the alternative treatment, an asset account would be debited in the adjusting entry.

fiscal year

A 12-month pd, October through Septmeber, for planning the federal budget

What is a contra account

A contra account is an account that is paired with and listed immediately after its related account in the chart of accounts and associated financial statement, and whose normal balance is the opposite of the balance of the related account

What is a deferred expense? Provide an example.

A deferred expense is an advance payment of a future expense, and is considered an asset rather than an expense. When the prepayment is used up, the used portion of the asset becomes an expense via an adjusting entry. An example of a deferred expense is Prepaid Insurance

What is a fiscal year? Why might companies choose to use a fiscal year that is not a calendar year?

A fiscal year is an accounting year of any 12 consecutive months. A company might choose to use a fiscal year that is not a calendar year, if the low point in business activity is other than December 31.

What is a worksheet, and how is it used to help prepare an adjusted trial balance?

A worksheet is an internal document that helps summarize data for the preparation of the financial statements. As a summary device, it helps identify the accounts that need adjustments. On a worksheet, accounts are listed, the unadjusted balances in the accounts are copied directly from the ledger (the unadjusted trial balance), adjustments are entered, and the adjusted trial balance is completed (from which the financial statements can be prepared).

Which method of accounting (cash or accrual basis) is consistent with Generally Accepted Accounting Principles?

Accrual basis accounting is consistent with generally accepted accounting principles.

What does accumulated depreciation represent?

Accumulated depreciation is the sum of all depreciation expense recorded to date for a depreciable asset.

When are adjusting entries completed, and what is their purpose

Adjusting entries are completed at the end of the accounting period to record revenues in the period in which they are earned and expenses in the period in which they are incurred. Adjusting entries also update asset and liability accounts. Adjustments are needed to properly measure net income (loss) on the income statement and assets and liabilities on the balance sheet

contra account

An account with a balance that is opposite, or "contra," to that of its related accounts.

What is an accrued expense? Provide an example

An accrued expense is an expense that a company has incurred but not yet paid. For example, salaries expense is incurred by a company as employees work, even though the company might not pay the employees until a later period.

What is an accrued revenue? Provide an example.

An accrued revenue is a revenue that a company has earned but not yet collected in cash. For example, service revenue is earned by a company as it provides services to a customer, even though the company might not collect cash from the customer until a later period.

When is an adjusted trial balance prepared, and what is its purpose?

An adjusted trial balance is prepared after adjustments have been journalized and posted. An adjusted trial balance is a list of all of the accounts with their adjusted balances, and its purpose is to ensure that total debits equal total credits of all accounts. The adjusted trial balance is used to prepare the final financial statements.

Time Period Concept

Assumes that a business's activities can be sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.

How is book value calculated, and what does it represent?

Book value is a depreciable asset's cost minus accumulated depreciation. Book value represents the cost invested in the asset that the company has not yet expensed.

What is the difference between cash basis accounting and accrual basis accounting?

Cash basis accounting records revenues only when cash is received and expenses only when cash is paid. Accrual basis accounting records revenues when earned and expenses when incurred.

What is the closing process?

Closing the books (often referred to as the closing process) consists of journalizing and posting the closing entries in order to get the accounts ready for the next period. The closing process zeroes out all revenue accounts and all expense accounts in order to measure each period's net income separately from all other periods. The closing process also zeroes out the dividends account. In addition, the closing process updates the Retained Earnings account balance for net income or loss during the period and any dividends paid to stockholders.

Identify two asset categories on the classified balance sheet, and give examples of each category

Current: Accounts Payable, Salaries Payable, Interest Payable. Long-term: Mortgage Payable, Notes Payable.

Identify two asset categories on the classified balance sheet, and give examples of each category.

Current: Cash, Accounts Receivable, Office Supplies. Property, Plant, and Equipment: Equipment, Land, Buildings.

What is a deferred revenue? Provide an example.

Deferred revenue is a liability created when a company collects cash from customers in advance of doing work. For example, an example of a deferred revenue is the collection of cash for services to be provided by the company in the future

.If a business had a net loss for the year, what would be the closing entry to close Income Summary and transfer the net loss to the Retained Earnings account?

If a business has a net loss, the closing entry to close Income Summary would be a debit to Retained Earnings and a credit to Income Summary.

22A. If a payment of a deferred expense was recorded under the alternative treatment, what account would be debited at the time of payment?

If a payment of a deferred expense was recorded under the alternative treatment, an expense account would be debited at the time of payment.

If an accrued expense is not recorded at the end of the year, what is the impact on the financial statements?

If an accrued expense is not recorded at the end of the year, the financial statements will be inaccurate. On the balance sheet, liabilities will be understated and equity will be overstated. On the income statement, expenses will be understated (thus net income will be overstated).

What does liquidity mean?

Liquidity measures how quickly and easily an account can be converted to cash, because cash is the most liquid asset.

What types of accounts are listed on the post-closing trial balance?

Only assets, liabilities, and stockholders' equity accounts including the Common Stock and Retained Earnings accounts (permanent accounts) appear on the post-closing trial balance.

Cash Basis Accounting

Reporting income when the cash is received and expenses when the cash is paid.

21A. What are reversing entries? Are they required by GAAP?

Reversing entries are special journal entries that ease the burden of accounting for transactions in a later period. Reversing entries are the exact opposite of certain adjusting entries. Reversing entries are used in conjunction with accrual-type adjustments, such as accrued salaries expense and accrued service revenue. Generally Accepted Accounting Principles do not require reversing entries.

List the steps of the accounting cycle.

Step 1. Start with beginning account balances. Step 2. Analyze and journalize transactions as they occur. Step 3. Post journal entries to the accounts. Step 4. Compute the unadjusted balance in each account and prepare the unadjusted trial balance. Step 5. Enter the unadjusted trial balance on the worksheet and complete the worksheet (optional). Step 6. Journalize and post adjusting entries. Step 7. Prepare the adjusted trial balance. Step 8. Prepare the financial statements. Step 9. Journalize and post the closing entries. Step 10. Prepare the post-closing trial balance.

5. Under the revenue recognition principle, when is revenue recorded? Under the revenue recognition principle, revenue is determined using a five step process:

Step 1: Identify the contract with the customer. Step 2: Identify the performance obligations in the contract. Step 3: Determine the transaction price. Step 4: Allocate the transaction price to the performance obligations in the contract. Step 5: Recognize revenue when (or as) the entity satisfies each performance obligation. In essence, the company records revenue when the entity satisfies each performance obligation.

What are the steps in the closing process?

Step 1: Make the revenue accounts equal zero via the Income Summary account. This closing entry transfers total revenues to the credit side of the Income Summary account. Step 2: Make expense accounts equal zero via the Income Summary account. This closing entry transfers total expenses to the debit side of the Income Summary account. Step 3: Make the Income Summary account equal zero via the Retained Earnings account. This closing entry transfers net income (or net loss) to the Retained Earnings account. Step 4: Make the Dividends account equal zero via the Retained Earnings account. This entry transfers the dividends to the debit side of the Retained Earnings account.

What are temporary accounts? Are temporary accounts closed in the closing process?

Temporary accounts (also known as nominal accounts) are accounts that relate to a particular accounting period and are closed at the end of that period. All temporary accounts (dividends, revenues, Income Summary and expenses) are closed (zeroed).

How is the Income Summary account used? Is it a temporary or permanent account?

The Income Summary account summarizes the net income (or net loss) for the period by collecting the sum of all the expenses (a debit) and the sum of all the revenues (a credit). The Income Summary account is like a temporary "holding tank" that shows the amount of net income or net loss of the current period. Its balance—net income or net loss—is then transferred (closed) to the Retained Earnings account (the final account in the closing process). Income Summary is a temporary account.

What does the balance sheet report?

The balance sheet reports assets, liabilities, and stockholders' equity as of the last day of the period

What is the current ratio, and how is it calculated?

The current ratio measures a company's ability to pay its current liabilities with its current assets. This ratio is computed as follows: Current ratio = Total current assets / Total current liabilities.

What document are financial statements prepared from?

The financial statements are prepared from the adjusted trial balance or worksheet.

Why are financial statements prepared in a specific order? What is that order?

The financial statements are prepared in a specific order because net income from the income statement is used on the statement of retained earrings to determine ending retained earnings. Ending retained earnings is then transferred to the balance sheet to determine total stockholders' equity. The income statement is prepared first, then the statement of retained earnings, and then the balance sheet.

What does the income statement report

The income statement reports revenues and expenses and calculates net income or net loss for the time period.

If a business had a net loss for the year, where would the net loss be reported on the worksheet

The net loss amount should be entered in the credit column of the income statement (to balance out) and in the debit column of the balance sheet (to balance out).

What are permanent accounts? Are permanent accounts closed in the closing process?

The permanent accounts (also known as real accounts)—the assets, liabilities, common stock and retained earnings—are not closed at the end of the period. Permanent account balances are carried forward into the next time period. All accounts on the balance sheet are permanent accounts.

What is the process of allocating the cost of a plant asset over its useful life called?

The process of allocating the cost of a plant asset over its useful life is called depreciation.

What does the statement of retained earnings show?

The statement of retained earnings shows how retained earnings changed during the period due to net income (or net loss) and dividends.

Which accounting concept or principle requires companies to divide their activities into small time segments such as months, quarters, or years?

The time period concept requires companies to divide its activities into small time segments such as months, quarters, or years.

What are the two basic categories of adjusting entries? Provide two examples of each.

The two basic categories of adjusting entries are deferrals and accruals. • Two examples of deferrals are prepaid expenses (such as Prepaid Rent and Office Supplies) and unearned revenues (such as Unearned Service Revenue). • Two examples of accruals are accrued expenses (such as Accrued Salaries Expense) and accrued revenues (such as Accrued Service Revenue)

What are the two rules to remember about adjusting entries?

The two rules to remember about adjusting entries are: 1. Adjusting entries never involve the Cash account. 2. Adjusting entries either a. Increase a revenue account (credit revenue) or b. Increase an expense account (debit expense).

How could a worksheet help in preparing financial statements?

The worksheet contains columns for the income statement and the balance sheet and calculates net income.

Under the matching principle, when are expenses recorded

Under the matching principle, expenses are linked to the revenues they generate. Expenses are recorded in the same period as the revenues generated by the expenses

In the recording of depreciation expense, which account is credited?

When recording depreciation expense, the Accumulated Depreciation account is credited

The Pink Peonies Law Firm prepays for advertising in the local newspaper. On January 1, the law firm paid $3,000 for 10 months of advertising. How much advertising expense should Pink Peonies Law Firm record for the two months ending February 28 under the a. cash basis? b. accrual basis?

a. $3,000 advertising expense using cash basis b. $600 * advertising expense using accrual basis * Calculations: $3,000 Advertising prepaid on January 1 for 10 months 10 Months $300 Advertising expense per month Thus, $300 Advertising expense per month × 2 months $600 Advertising expense for January and February

Accruals

accrued revenues and accrued expenses

Accrued revenues arise when

company performs service but has not yet collected cash

adjusting entries

journal entries recorded to update general ledger accounts at the end of a fiscal period

What is a classified balance sheet?

organizes assets and liabilities into important subgroups that provide more information to decision makers

Accrual Basis Accounting

reporting income when it is earned and expenses when they are incurred