Accounting Chapter 4 Flashcards by Melissa Hernandez

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.

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Accrued expenses

Expenses incurred but not yet paid in cash or recorded.

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Accrued revenues

Revenues for services preformed but not yet received in cash or recorded

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Adjusted trial balance

A list of accounts and their balances after all adjustments have been made

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Adjusting entries

Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed.

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Book Value

The difference between the cost of a depreciable asset and its related accumulated depreciation.

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Cash-basis accounting

Accounting basis in which a company records revenue only when it receives cash and an expense only when it pays cash.

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Closing entires

Entires at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders’ equity account, Retained Earnings

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Contra Asset Account

An account that is offset against account on the balance sheet.

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Depreciation

The process of allocating the cost of an asset to expense over its useful life.

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Earnings management

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.

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Expense recognition principle

The principle that matches expenses with revenues in the period when the company makes efforts to generate those revenues

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Fiscal year

An accounting period that is one year long

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Income summary

A temporary account used in closing revenue and expense accounts

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Periodicity assumption

An assumption that the economic life of a business can be divided into artificial time periods.

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Permanent accounts

Balance sheet accounts whose balances are carried forward to the next accounting period.

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Post-closing trial balance

A list of permanent accounts and their balances after a company has journalized and posted closing entries.

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Prepaid expenses

Expenses paid in cash before they are used or consumed.

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Quality of earnings

Indicates the level of full and transparent information that a company provides to users of its financial statements.

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Revenue recognition principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

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Reversing entry

An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.

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Temporary accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

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Unearned revenues

Cash received and a liability recorded before services are performed.

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Useful life

The length of service of a productive asset

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Worksheet

A multiple-column form that companies may use in the adjustment process and in preparing financial statements.

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 Accrued expenses Permanent accounts Reversing entry

Accrual-basis accounting

Expenses incurred but not yet paid in cash or recorded. Accrued expenses Adjusted trial balance Book value Prepaid expenses

Accrued expenses

Revenues for services performed but not yet received in cash or recorded. Accrued revenues Depreciation Periodicity assumption Useful life

Accrued revenues

A list of accounts and their balances after all adjustments have been made. Accrual-basis accounting Accrued expenses Accrued revenues Adjusted trial balance

Adjusted trial balance

Entries made at the end of an accounting period to ensure that the revenue recognition and expense recognition principles are followed. Adjusted trial balance Adjusting entries Contra asset account Post-closing trial balance

Adjusting entries

The difference between the cost of a depreciable asset and its related accumulated depreciation. Accrued revenues Adjusted trial balance Book value Earnings management

Book value

Accounting basis in which a company records revenue only when it receives cash and an expense only when it pays cash. Adjusted trial balance Cash-basis accounting Closing entries Depreciation

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. Cash-basis accounting Closing entries Periodicity assumption Worksheet

Closing entries

An account that is offset against an asset account on the balance sheet. Accrued expenses Cash-basis accounting Contra asset account Permanent accounts

Contra asset account

The process of allocating the cost of an asset to expense over its useful life. Adjusted trial balance Adjusting entries Depreciation Revenue recognition principle

Depreciation

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. Cash-basis accounting Earnings management Periodicity assumption Useful life

Earnings management

The principle that matches expenses with revenues in the period when the company makes efforts to generate those revenues. Cash-basis accounting Expense recognition principle Revenue recognition principle Temporary accounts

Expense recognition principle

An accounting period that is one year long. Fiscal year Income Summary Quality of earnings Revenue recognition principle

Fiscal year

A temporary account used in closing revenue and expense accounts. Accrued expenses Accrued revenues Adjusting entries Income Summary

Income Summary

An assumption that the economic life of a business can be divided into artificial time periods. Periodicity assumption Permanent accounts Quality of earnings Reversing entry

Periodicity assumption

Balance sheet accounts whose balances are carried forward to the next accounting period. Adjusting entries Fiscal year Income Summary Permanent accounts

Permanent accounts

A list of permanent accounts and their balances after a company has journalized and posted closing entries. Expense recognition principle Fiscal year Post-closing trial balance Useful life

Post-closing trial balance

Expenses paid in cash before they are used or consumed. Adjusted trial balance Book value Prepaid expenses Temporary accounts

Prepaid expenses

Indicates the level of full and transparent information that a company provides to users of its financial statements. Accrued revenues Prepaid expenses Quality of earnings Temporary accounts

Quality of earnings

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied. Accrued revenues Periodicity assumption Revenue recognition principle Useful life

Revenue recognition principle

An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period. Closing entries Earnings management Reversing entry Worksheet

Reversing entry

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period. Adjusting entries Depreciation Permanent accounts Temporary accounts

Temporary accounts

Cash received and a liability recorded before services are performed. Accrued revenues Post-closing trial balance Unearned revenues Worksheet

Unearned revenues

The length of service of a productive asset. Accrued expenses Adjusting entries Temporary accounts Useful life

Useful life

A multiple-column form that companies may use in the adjustment process and in preparing financial statements. Depreciation Income Summary Quality of earnings Worksheet

Worksheet

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

False

The final step in the accounting cycle is to prepare: adjusting entries. closing entries. financial statements. a post-closing trial balance.

a post-closing trial balance.

The cash basis of accounting is not in accordance with generally accepted accounting principles. True False

True

The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same. False True

False

The accounting cycle begins with the journalizing of the transactions. False True

False

The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that: dividends should be matched with stockholder investments. efforts should be matched with accomplishments. cash payments should be matched with cash receipts. assets should be matched with liabilities.

efforts should be matched with accomplishments.

A small company may be able to justify using a cash basis of accounting if they have: all sales and purchases on account. no accountants on staff. few receivables and payables. sales under $1,000,000.

few receivables and payables.

Expense recognition is tied to revenue recognition. True False

True

The difference between the balance of a plant asset account and the related accumulated depreciation account is termed: book value. contra asset. liability. market value.

book value.

Based on the account balances below, what is the total of the debit and credit columns of the adjusted trial balance? ``` Service revenue $4,300 Equipment $7,400 Cash 1,525 Prepaid insurance 1,225 Unearned service revenue 5,320 Depreciation expense 640 Salaries and wages expense 1,050 Accum. depreciation 1,280 Common stock 390 Retained earnings 550 ``` $11,840 $10,150 $11,430 $10,560

$11,840

The accrued interest for a three month note payable of $10,000 dated December 1, 2013 at an interest rate of 6% is $150 on December 31, 2013. False True

False

Accrued expenses are: paid and recorded in an asset account after they are used or consumed. paid and recorded in an asset account before they are used or consumed. incurred but not yet paid or recorded. incurred and already paid or recorded.

incurred but not yet paid or recorded.

The closing entry process consists of closing: all permanent accounts. out the Retained Earnings account. all temporary accounts. all asset and liability accounts.

all temporary accounts.

A company purchased office supplies costing $3,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be: debit Supplies Expense, $3,900; credit Supplies, $3,900. debit Supplies, $2,100; credit Supplies Expense, $2,100. debit Supplies Expense, $2,100; credit Supplies, $2,100. debit Supplies, $900; credit Supplies Expense, $900.

debit Supplies Expense, $2,100; credit Supplies, $2,100.

An adjusted trial balance must be prepared before the adjusting entries can be recorded. False True

False

The revenue recognition principle dictates that revenue is recognized in the period in which the cash is received. True False

False

The expense recognition principle requires that expenses be recognized in the same period that they are paid. True False

False

What is the periodicity assumption? The economic life of a business can be divided into artificial time periods. Companies should recognize revenue in the accounting period in which the performance obligation is satisfied. The fiscal year should correspond with the calendar year. Companies should match expenses with revenues.

The economic life of a business can be divided into artificial time periods.

Which principle dictates that efforts (expenses) be matched with results (revenues)? Periodicity principle. Historical cost principle. Revenue recognition principle. Expense recognition principle.

Expense recognition principle.

The generally accepted accounting principle which dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied is the accrued revenues principle. expense recognition principle. periodicity assumption. revenue recognition principle.

revenue recognition principle.

The cash basis of accounting is in accordance with generally accepted accounting principles. False True

False

If revenues are recognized only when a customer pays, what method of accounting is being used? Cash-basis Matching basis Accrual-basis Recognition basis

Cash-basis Under the cash-basis of accounting, revenues are recognized when cash is received, not when.performance obligation is satisfied.

Which one of these statements about the accrual-basis of accounting is false? This basis is in accord with generally accepted accounting principles. Companies record events that change a company’s financial statements in the periods in which the events occur. Companies recognize revenue in the period in which the performance obligation is satisfied. Companies record revenue only when they receive cash, and record expense only when they pay out cash.

Companies record revenue only when they receive cash, and record expense only when they pay out cash.

In 2013, Costello Company performs work for a customer and bills the customer $10,000; it also pays expenses of $3,000. The customer pays Costello in 2014. If Costello uses the accrual-basis of accounting, then Costello will report net income of $7,000 in 2014. expenses of $3,000 in 2014. revenue of $10,000 in 2014. revenue of $10,000 in 2013.

revenue of $10,000 in 2013. The accrual-basis of accounting records revenues when the performance obligation is satisfied and expenses when incurred. Cash movement is not necessary.

Which statement is correct? As long as management is ethical, there are no problems with using the cash basis of accounting. As long as a company consistently uses the cash-basis of accounting, generally accepted accounting principles allow its use. 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.

Accrued expenses are expenses that have already been paid. False True

False Accrued expenses are expenses that have been incurred in the period but which have not yet been entered into the financial records. Accruals are done to follow the revenue recognition and expense recognition principles.

Which of the following is not a type of adjusting entry? Prepaid expenses Accrued revenues Accrued expenses Earned revenues

Earned 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.

Each of the following is a major type (or category) of adjusting entry except prepaid expenses. accrued revenues. accrued expenses. earned expenses.

earned expenses.

Which one of the following is not a justification for adjusting entries? Adjusting entries are necessary to bring the general ledger accounts in line with the budget. Adjusting entries are necessary to enable financial statements to be in conformity with GAAP. Adjusting entries are necessary to ensure that the revenue recognition principle is followed. Adjusting entries are necessary to ensure that the expense recognition principle is followed.

Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Book value is equal to cost minus accumulated depreciation. False True

True

Cash received before services are performed which is recorded as a debit to a Cash account and a credit to a liability account is called an accrued revenue. an unearned revenue. an unrecorded revenue. None of these answer choices are correct.

an unearned revenue.

Which of the following is not a typical example of a prepaid expense? Wages Supplies Insurance Rent

Wages

The difference between an asset's cost and its accumulated depreciation is called real value. market value. fair value. book value.

book value.

Cash received before services are performed are recorded as equity. expenses. liabilities. revenues.

liabilities

Adjustments for unearned revenues: increase liabilities and increase revenues. increase assets and increase revenues. decrease revenues and decrease assets. decrease liabilities and increase revenues.

decrease liabilities and increase revenues.

Adjustments for prepaid expenses decrease assets and increase expenses. decrease assets and increase revenues. decrease revenues and increase assets. decrease expenses and increase assets.

decrease assets and increase expenses.

Ignatenko Company purchased office supplies costing $5,000 and debited Supplies for the full amount. Supplies on hand at the end of the accounting period were $1,300. The appropriate adjusting journal entry to be made would be Supplies Expense $1,300 Supplies $1,300 Supplies $3,700 Supplies Expense $3,700 Supplies Expense $3,700 Supplies $3,700 Supplies $1,300 Supplies Expense $4,000

Supplies Expense $3,700 Supplies $3,700 This entry correctly adjusts supplies to a balance of $1,300 and records the expense for the period of $3,700.

On September 1 the Petite-Sizes Store paid $12,000 to the Mega-Mall Co. for 3 months rent beginning September 1. Prepaid Rent was debited for the payment. If Petite-Sizes Store prepares financial statements on September 30, the appropriate adjusting journal entry to make on September 30 would be Prepaid Rent $4,000 Rent Expense $4,000 Prepaid Rent $8,000 Rent Expense $8,000 Rent Expense $8,000 Prepaid Rent $8,000 Rent Expense $4,000 Prepaid Rent $4,000

Rent Expense $4,000 | Prepaid Rent $4,000

On July 1, Mesa Verde, Inc. purchased a 3-year insurance policy for $12,600. Prepaid Insurance was debited for the entire amount. On December 31, when the annual financial statements are prepared, the appropriate adjusting journal entry would be Insurance Expense $2,100 Prepaid Insurance $2,100 Prepaid Insurance $2,100 Insurance Expense $2,100 Insurance Expense $10,500 Prepaid Insurance $10,500 Prepaid Insurance $10,500 Insurance Expense $10,500

Insurance Expense $2,100 Prepaid Insurance $2,100 This entry correctly adjusts the accounts to recognize that six months of the 36 month policy have expired and are recorded as expense.

At December 31, 2013, before any year-end adjustments, Macarty Company's Prepaid Insurance account had a balance of $2,700. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be $1,900 $1,500 $1,200 $2,700

$1,500

On August 1 the Darius Co. purchased a photocopy machine for $8,000. The estimated annual depreciation on the machine is $1,680. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 of the first year would be Depreciation Expense $1,680 Accumulated Depreciation $1,680 Depreciation Expense $140 Accumulated Depreciation $140 Depreciation Expense $700 Accumulated Depreciation $700 Depreciation Expense $700 Equipment $700

Depreciation Expense $700 Accumulated Depreciation $700 1680/12=140 140*5=700

Bonita Realty Management Co. received a check for $30,000 on October 1, which represents a one year advance payment of rent on an office it rents to a client. Unearned Rental Revenue was credited for the full $30,000. Financial statements are prepared on December 31. The appropriate adjusting journal entry to make on December 31 would be Unearned Rent Revenue $22,500 Rent Revenue $22,500 Unearned Rent Revenue $7,500 Rent Revenue $7,500 Rent Revenue $22,500 Unearned Rent Revenue $22,500 Rent Revenue $2,500 Unearned Rent Revenue $2,500

Unearned Rent Revenue $7,500 Rent Revenue $7,500 This entry correctly reduces the liability and recognizes the revenue earned in the period. 30,000/12=2,500 2,500*3=7,500

If the adjusting entry is not made for unearned revenues the result will be to understate retained earnings and overstate revenues. overstate liabilities and understate revenues. overstate assets and understate liabilities. understate net income and overstate retained earnings.

overstate liabilities and understate revenues. The missing entry would reduce a liability through a debit entry and increase revenues through a credit entry.

Prior to an accrual adjustment, the revenue account (and the related asset account) or the expense account (and the related liability account) is understated. True False

True

Which of the following is not a typical example of an accrued expense? Interest Taxes Depreciation Wages

Depreciation

During the adjusting process two transactions were missed. The first is for unearned rent revenue of which $450 was earned during the period, the second was for accrued interest payable of which $275 is owed for the period. As a result of these omissions liabilities are overstated by $725. revenue is overstated by $725. assets are overstated by $725. net income is understated by $175.

net income is understated by $175.

Adjustments for accrued revenues: decrease assets and decrease revenues. decrease liabilities and increase revenues. increase assets and increase liabilities. increase assets and increase revenues.

increase assets and increase revenues.

At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. Which of the following statements is true? Assets at the end of the year are understated. Stockholders’ equity at the end of the year is understated. Salaries and Wages Expense for the year is overstated. Liabilities at the end of the year are understated.

Liabilities at the end of the year are understated.

On August 1, Luang Corporation signed a $30,000, 14%, 2-year note to help finance renovations being made to the corporation headquarters. Assuming interest is accrued only when the year ends on December 31, the appropriate journal entry for the first year would be Interest Expense $1,750 Interest Payable $1,750 Interest Expense $4,200 Notes Payable $4,200 Interest Expense $1,750 Notes Payable $1,750 Interest Expense $4,200 Interest Payable $4,200

Interest Expense $1,750 Interest Payable $1,750 30,000*.14=4,200 4,200/12=350*5=1,750

Saira works for a sports franchise which pays wages and salaries earned on a monthly basis. A new accountant was hired by the sports franchise in late May. Due to inexperience, the new accountant failed to accrue Saira’s salary for May. What is the impact on the May 31 financial statements of the sports franchise? Revenues are overstated; income is understated. Expenses are understated; income is overstated. Liabilities are overstated; retained earnings is overstated. Liabilities are understated; assets are overstated.

Expenses are understated; income is overstated.

Employees at the Waco Waffle House were paid on Friday, December 27 for the five days ending on December 27. The next payday is Friday, January 3. Employees work 5 days a week. The weekly payroll amounts to $3,800. The appropriate adjusting journal entry on December 31 would be to credit Salaries and Wages Payable for $3,800 $2,280 $760 $1,520

$1,520

A company lends $15,000 at 8% interest for 3 months on June 1. If adjusting entries are recorded on June 30, how much will be credited to Interest Revenue? $300 $1,200 $900 $100

$100 The formula is Principal x Rate x Time or $15,000 x 8% x (1/12) since interest is stated in an annual rate yielding a value of $100.

An Adjusted Trial Balance is prepared after the books of a company are closed at the end of the accounting period. False True

False The Adjusted Trial Balance is used to prepare the company’s financial statements. The final step in the accounting cycle is the closing process.

Which statement is incorrect concerning the adjusted trial balance? The adjusted trial balance provides the primary basis for the preparation of financial statements. 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. The adjusted trial balance lists the account balances segregated by assets and liabilities. The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries.

The adjusted trial balance lists the account balances segregated by assets and liabilities.

Financial statements can be prepared directly from the adjusted trial balance. post-closing trial balance. reversing trial balance. trial balance.

adjusted trial balance.

At the end of the accounting period, all balance sheet accounts are closed out. False True

False Balance sheet account are permanent accounts which carry a balance from one period to the next. Only temporary accounts (revenues, expenses, dividends) are closed out at the end of the accounting period.

The following journal entries have been made during the closing process: ``` Sales Revenues 8,750 Service Revenues 2,375 Income Summary 11,125 Income Summary 5,775 Sales Expenses 3,550 Service Expenses 975 Administrative Expenses 1,250 Retained Earnings 1,125 Dividends 1,125 ``` What was the net change in Retained Earnings? Retained Earnings increased by $5,350 during this period. Retained Earnings decreased by $4,225 during this period. Retained Earnings increased by $4,225 during this period. Retained Earnings decreased by $5,350 during this period.

Retained Earnings increased by $4,225 during this period. Retained Earnings increases through revenues, $11,125, and decreases through expenses and dividends, $5,775 and $1,125, so the increase in Retained Earnings is $4,225.

With the adjusted trial balance in hand you see that the debit totals of the real accounts is $18,250 and the credit totals of the real accounts is $14,550. The debit total of the nominal or temporary accounts is $3,475 while the credit total of the nominal or temporary accounts is $7,175. From this you know that: retained earnings will increase by $3,700 through the closing process. net income is $3,700 for the fiscal period. there is an error in the adjusted trial balance. net loss is $3,700 for the fiscal period.

retained earnings will increase by $3,700 through the closing process. The difference of nominal or temporary account debits and credits of a debit of $3,700 indicates growth in the company for the fiscal period – an increase in retained earnings, not net income or loss since you do not know revenue and expense or dividend issues.

In the closing process total revenues are determined to be $4,750 while total expenses are determined to be $3,875 and total dividends are $1,150. The retained earnings account will: decrease by $275 due to net income. decrease by $875 due to net income. increase by $875 due to net income. increase by $275 due to net income.

increase by $875 due to net income. Retained earnings will increase by revenues of $4,750 less expenses of $3,875, or $875. Dividends do not affect net income.

Which account will have a zero balance after a company has journalized and posted closing entries? Service Revenue. Accumulated Depreciation. Prepaid Insurance. Advertising Supplies.

Service Revenue.

Which types of accounts will appear in the post-closing trial balance? Temporary accounts. Accounts shown in the income statement columns of a work sheet. None of these answer choices are corrrect. Permanent accounts.

Permanent accounts.

Which of the following correctly describes the closing process? Each revenue and each expense account is closed individually to Retained Earnings. Net income or net loss is transferred to the Cash account. Net income or net loss is transferred to Retained Earnings. Permanent accounts become ready to accumulate data in the next accounting period.

Net income or net loss is transferred to Retained Earnings. The closing process closes the accounts in groupings such as revenues, then expenses. The accounts are not closed individually. Net income or losses are transferred to the Retained Earnings account through the closing process.

The closing entry process consists of closing all temporary accounts. out the Retained Earnings account. all asset and liability accounts. all permanent accounts.

all temporary accounts. The closing process closes all temporary or nominal accounts such as revenues, expenses, and dividends. Real or permanent accounts such as assets, liabilities, stock, and retained earnings accounts are not closed.

The accounting cycle requires that closing entries be prepared on a monthly basis. True False

False This statement is incorrect. Closing entries usually take place only at the end of a company’s annual accounting period.

All of the following are required steps in the accounting cycle except: journalizing and posting closing entries. preparing a worksheet. preparing an adjusted trial balance. preparing a post-closing trial balance.

preparing a worksheet.

The final step in the accounting cycle is to prepare financial statements. a post-closing trial balance. closing entries. adjusting entries.

a post-closing trial balance.

Which is the correct order of steps in the accounting cycle? Post transactions, journalize transactions, prepare a trial balance, prepare financial statements. Journalize and post transactions, journalize and post closing entries, journalize and post adjusting entries. Prepare financial statements, prepare adjusting entries, prepare closing entries, prepare a post-closing trial balance. Journalize and post transactions, journalize and post adjusting entries, journalize and post closing entries.

Journalize and post transactions, journalize and post adjusting entries, journalize and post closing entries.

In computing net cash provided by operating activities, certain non-cash items such as depreciation must be eliminated from net income. True False

True This statement is correct. The income statement is prepared on an accrual-basis and therefore contains items of revenue and expense which do not represent cash inflows or outflows.

Which of the following is not based on accrual accounting? Net income Total assets Net cash provided by operating activities Retained earnings

Net cash provided by operating activities

Which of the following is not included in the computation of net cash provided by operating activities? Cash received from customers. Supplies used. Payment of rent. Purchase of insurance.

Supplies used.