ACCT 201 CH. 3

On November 1, Atlas Inc. paid a premium of $3,600 for a three-year general business insurance policy that covers risks from fire and theft. What amount of insurance will expire each month?

$100 $100 ($3,600 / 36 months) of Atlas's insurance will expire each month.

Accrued Revenues

(Accrued Assets) Revenues that have been earned but are not recorded in the accounts. EX: Notes Receivable, Accrued Rent

Accrued Expenses

(Accrued Liabilities) Expenses that have been incurred but are not recorded in the accounts EX: Unpaid Wages, Utility Expenses, Taxes

Deferred Expenses

(Prepaid Expenses) Initially recorded as assets but become expenses overtime EX: Prepaid Interest, Supplies, Prepaid advertising, Prepaid insurance

Deferred Revenues

(Unearned Revenues) Initially recorded as liabilities but become revenues over time or through normal operations of the business. EX: Unearned Rent, Tuition received in advance, Insurance Premiums,

Calculate the quick ratio using the following information. (Round to two decimal places.) Cash $50,000 Accounts receivable $130,000 Inventories $210,000 Prepaid assets $15,000 Current liabilities $200,000

0.90 Inventories and prepaid assets are not quick assets. Therefore, they are excluded from the calculation of the quick ratio. Quick ratio = Quick assets / Current liabilities = ($50,000 + $130,000) / $200,000 = 0.90

What are some Current Liabilities?

Accounts Payable, Wages Payable, Notes Payable (1 month), Unearned Revenue

Why is the Accrual Basis Required by GAAP (Generally Accepted Accounting Principles)?

Because it is generally a better predictor of the profitability of a company that is net cash flows from operating activities to the cash basis of accounting.

What are some current assets?

Cash, Accounts Receivable, Prepaid Insurance, Supplies

Deferrals

Created by recording a transaction in a way that delays or defers the recognition of an expense or revenue. Something you have paid for. Pay First; Use Later

Accruals

Created when a revenue or expense has been earned or incurred but has not been recorded Something you have not paid for Use First; Pay Later

The quick ratios of Excellent Corp. and Synergy Inc. are 1.5 and 0.9, respectively. Which of the following inferences can be made from the information available?

Excellent Corp. is in a stronger liquidity position than Synergy Inc. The quick ratio is used to assess a company's ability to pay its short-term obligations. The quick ratio indicates that Excellent Corp. is in a stronger liquidity position than Synergy Inc.

_____ may also be reported on the balance sheet as plant assets.

Fixed assets Assets that may also be reported on the balance sheet as property, plant, and equipment are physical assets of a long-term nature.

What does not depreciate?

Land

What are some Long Term Liabilities?

Notes Payable (5 years)

_____ are written claims against debtors who promise to pay the amount of the credit instrument plus interest.

Notes receivable Current assets are cash and other assets that are expected to be converted to cash or sold or used up within one year or less, through normal operations.

What are some Fixed Assets?

Office Equipment - Accumulated Depreciation, Land

Which of the following is an example of a deferred expense?

Prepaid interest Deferred expenses are initially recorded as assets but become expenses over time or through normal operations of the business.

Depreciation

Reduction in the ability of a fixed asset

Which of the following is true of the quick ratio of a company?

The quick ratio is a better metric than quick assets for comparing among companies. The quick ratio eliminates the effect of size differences among companies.

Synergy Inc. purchased supplies for $240 on account. How does this transaction affect the financial statements?

The statement of cash flows and the income statement are unaffected. Synergy Inc. has purchased and received the supplies with a promise to pay in the near future. Such liabilities that are incurred in the normal operations are called accounts payable.

On December 1, Atlas Inc. paid a premium of $3,600 for a two-year general business insurance policy that covers risks from fire and theft. Which of the following is the effect of this transaction on Atlas's financial statements?

There is a change in the mix of assets in the balance sheet. By paying the premium, Atlas Inc. has purchased an asset, insurance coverage, in exchange for cash.

Which of the following is true of quick assets?

They exclude inventories and include accounts receivable. Quick assets exclude inventories and include accounts receivable. Inventory is normally not included as a quick asset since inventory must be sold and any related receivable collected before it is converted to cash.

The fixed asset account is not reduced directly for depreciation because:

a record of the initial cost of a fixed asset needs to be maintained for tax and other purposes. The reduction in the ability of a fixed asset to provide service is called depreciation. However, it is difficult to objectively determine the physical decline in a fixed asset's ability to provide service. For this reason, depreciation is estimated based on the asset's useful life and the fixed asset account is not reduced directly for depreciation. Instead, an offsetting or contra asset account, called accumulated depreciation, is added to the balance sheet.

Under the expense recognition principle, expenses are recorded:

in the same period as the related revenues that they generate Under the expense recognition principle, expenses are recorded in the same period as the related revenues that they generate.

The accrual basis of accounting is essential to assess and interpret the financial condition and performance of a company because:

it is generally a better predictor of the profitability of a company than is the cash basis of accounting. Accrual accounting is generally a better predictor of the profitability of a company than is net cash flows from operating activities and the cash basis of accounting.

Under the cash basis, the_____ is not used.

matching concept Under the cash basis, the matching concept is not used. That is, expenses are recorded when paid in cash, not necessarily in the period when the revenue is earned.

The quick ratio is computed as:

quick assets divided by current liabilities. The quick ratio is computed as quick assets divided by current liabilities.

A service provider records an account receivable when:

services have been rendered and the cash is yet to be received. When services are provided with the cash to be received at a later time, the services are said to be provided on account.

Accumulated Depreciation

the total amount of depreciation expense that has been recorded since the purchase of a plant asset