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Financial Accounting > Accrual Accounting and Income Statement > Flashcards

Accrual Accounting and Income Statement Flashcards

1
Q

What does an income statement report?

A

It reports increase in shareholders’ equity due to operations over a period of time.

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2
Q

What is the income statement equation?

A

Net Income = Revenue – Expenses

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3
Q

Net income is also called “earnings”. True or False?

A

True

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4
Q

Net income is also called “net profit”. True or False?

A

True

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5
Q

Net income is also called “net worth”. True or False?

A

False

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6
Q

All income statement items are based on Accrual Accounting principles. What does it mean?

A

Accounting recognition of revenues and expenses are tied to business activities, not to cash flows.

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7
Q

What is the revenue recognition criteria?

A

Revenues are recognized when goods or services are provided. It explains why Revenues ≠ Cash inflows!

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8
Q

Revenues ≠ Cash inflows. True or False? Why?

A

True. Because revenues are recognized when goods or services are provided.

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9
Q

What is the matching principle?

A

Expenses are recognized in the same period as the revenues they helped to generate. It explains why Expenses ≠ Cash outflows!

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10
Q

Expenses ≠ Cash outflows. True or False? Why?

A

True. Because expenses are recognized in the same period as the revenues they helped to generate.

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11
Q

Net income ≠ Net cash flow. True or False? Why?

A

True. It is due to the revenue recognition criteria.

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12
Q

What is a revenue?

A

Revenue is an increase in shareholders’ equity (not necessarily cash) from providing goods or services.

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13
Q

What conditions are in the revenue recognition criteria?

A

Revenue is recognized when both:
– It is earned (i.e. goods or services are provided) and
– It is realized (i.e. payment for goods or services received in cash or something that can be converted to a known amount of cash).

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14
Q

What are expenses?

A

Expenses are decreases in shareholders’ equity (not necessarily cash) that arise in the process of generating revenues.

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15
Q

What conditions are in the expenses recognition criteria?

A

Expenses are recognized when either:
– Related revenues are recognized (product costs) or
– Incurred, if difficult to match with revenues (period costs and unusual events)

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16
Q

What are the underlying recognition concepts of revenue and expenses?

A

The underlying recognition concepts are the
– Matching principle (product vs. period costs)
– Conservatism principle (unusual events): recognize anticipated losses immediately, recognize anticipated gains only when realized.

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17
Q

BOC delivers $500,000 worth of washing machines in December to customers who don’t have to pay until February. How much revenue is recognized in December?

A

$500,000

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18
Q

BOC collects $300,000 cash in December for washing machines delivered in October. How much revenue is recognized in December?

A

$0

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19
Q

BOC Realty leases space to a tenant for the months of December and January for $20,000, all of which is paid for in cash in December. How much revenue is recognized in December?

A

$10,000

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20
Q

BOC Aerospace receives an order for a $400,000 jet in December to be delivered in July. How much revenue is recognized in December?

A

$0

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21
Q

BOC Bank is owed $100,000 of interest on a loan for December and receives the payment in January. How much revenue is recognized in December?

A

$100,000

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22
Q

BOC issues 20,000 shares of stock in December and receives $10/share, which is $2/share more than they expected. How much revenue is recognized in December?

A

$0

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23
Q

BOC Automotive buys engines worth $2,000,000 in December for cash. How much expense is recognized in December?

A

$0

24
Q

BOC Automotive uses the engines to make cars at a total cost of $10,000,000 in December. How much expense is recognized in December?

A

$0

25
Q

BOC Automotive sells cars costing $8,000,000 in December for
$15,000,000. How much expense is recognized in December?

A

$8,000,000

26
Q

BOC Automotive incurs $180,000 in salaries for its marketing staff in December. How much expense is recognized in December?

A

$180,000

27
Q

BOC Automotive pays its auditor $50,000 in December for services to be rendered in December and January. How much expense is recognized in December?

A

$25,000

28
Q

BOC Automotive pays $1,200,000 in cash dividends in December. How much expense is recognized in December?

A

$0

29
Q

Why is ADJUSTING ENTRIES an important step in the ACCOUNTING CYCLE?

A

Because it updates account balances in accordance with accrual accounting prior to the preparation of financial statements through INTERNAL TRANSACTIONS.

30
Q

What are the two big categories of adjunsting entries?

A
  • Deferred Revenues and Expenses

- Accrued Revenues and Expenses

31
Q

What is the difference between “Deferred Revenues and Expenses” and “Accrued Revenues and Expenses”?

A
  • Deferred Revenues and Expenses update existing account balances to reflect current accounting values (Cash flow in PAST, but record revenue/expense NOW)
  • Accrued Revenues and Expenses create new account balances to reflect unrecorded assets or liabilities (Record revenue/expense NOW, but cash flow in FUTURE)
32
Q

What is the DEFERRED EXPENSE? How is it reported on the balance sheet?

A

DEFERRED EXPENSE is a term used to describe a payment that has been made, but it won’t be reported as an expense until a future accounting period. A deferred expense is reported on the balance sheet as an asset until it expires. As it is expiring, it will be moving from the balance sheet to the income statement where it will be reported as an expense. The deferral must always achieve the matching principle.

33
Q

“Are there any assets that have been “used up” this period and should be expensed?”

What concept does this question refer?

A

Deferred Expenses.

34
Q

List three examples of Deferred Expenses on the balance sheet.

A

– Prepaid Rent
– Prepaid Insurance
– Depreciation or amortization

35
Q

The entries involving expending deferred expenses are called adjusting entries. How do this journal entries look like? When are they recorded?

A

This journal entries look like:
Dr. Expense
Cr. Prepaid Asset
They are recorded prior to the preparation of financial statements.

36
Q

What is the DEFERRED REVENUE? How is it reported on the balance sheet?

A

DEFERRED REVENUE is a term used to describe an amount that was received by a company in advance of earning it. So it is not yet revenue! The amount unearned (and therefore deferred) as of the date of the financial statements should be reported as a liability. The title of the liability account might be Unearned Revenues or Deferred Revenues.

37
Q

“Are there any liabilities that have been fulfilled by

delivery of goods or services that should be recognized as revenue?” What concept does this question refer?

A

Deferred Revenues

38
Q

List two examples of Deferred Revenues on the balance sheet.

A

– Unearned rental revenue

– Deferred subscription revenue

39
Q

The entries involving earning deferred revenues are called adjusting entries. How do this journal entries look like? When are they recorded?

A

This journal entries look like:
Dr. Unearned Revenue Liability
Cr. Revenue
When the deferred revenue becomes earned, an adjusting entry is prepared.

40
Q

What are ACCRUED EXPENSES? When are they recorded?

A

Accrued expenses are expenses that have occurred but are not yet recorded through the normal processing of transactions. Since these expenses are not yet in the accountant’s general ledger, they will not appear on the financial statements unless an adjusting entry is entered prior to the preparation of the financial statements.

41
Q

“Have any expenses accumulated during the period that

have not yet been recorded?” What concept does this question refer?

A

Accrued Expenses

42
Q

List three examples of Accrued Expenses on the balance sheet.

A

– Income Taxes Payable
– Interest Payable
– Salaries and Wages Payable

43
Q

The entries involving recording accrued expenses are called adjusting entries. How do these journal entries look like? When are they recorded?

A

These journal entries look like:
Dr. Expense
Cr. Payable Liability
They are recorded prior to the preparation of financial statements.

44
Q

What are accrued revenues? When are they recorded?

A

Accrued revenues are fees and interest that have been earned and sales that occurred, but they have not yet been recorded through the normal invoicing paperwork. Since these are not yet in the accountant’s general ledger, they will not appear on the financial statements unless an adjusting entry is entered prior to preparing the financial statements.

45
Q

“Have any revenues accumulated during the period that

have not yet been recorded?” What concept does this question refer?

A

Accrued Recenues

46
Q

List two examples of Accrued Revenues on the balance sheet.

A

– Interest Receivable

– Rent Receivable

47
Q

The entries involving recording accrued revenues are called adjusting entries. How do these journal entries look like? When are they recorded?

A

These journal entries look like:
Dr. Receivable Asset
Cr. Revenue
They are recorded prior to the preparation of financial statements.

48
Q

What Depreciation and Amortization do?

A

They allocate the original cost of a long-lived asset over its useful life matching the total cost of assets to the revenues it generates over its period of use.

49
Q

Explain Depreciation

A

Buildings, machinery, equipment, furniture, fixtures, computers, outdoor lighting, parking lots, cars, and trucks are examples of assets that will last for more than one year, but will not last indefinitely. During each accounting period (year, quarter, month, etc.) a portion of the cost of these assets is being used up. The portion being used up is reported as Depreciation Expense on the income statement. In effect depreciation is the transfer of a portion of the asset’s cost from the balance sheet to the income statement during each year of the asset’s life.

50
Q

What two principles are calculation and reporting of depreciation based upon?

A
  • Cost principle

- Matching principle

51
Q

What does Cost Principle requires from Depreciation?

A

This principle requires that the Depreciation Expense reported on the income statement, and the asset amount that is reported on the balance sheet, should be based on the historical (original) cost of the asset. (The amounts should not be based on the cost to replace the asset, or on the current market value of the asset, etc.)

52
Q

What does Matching Principle requires from Depreciation?

A

This principle requires that the asset’s cost be allocated to Depreciation Expense over the life of the asset. In effect the cost of the asset is divided up with some of the cost being reported on each of the income statements issued during the life of the asset. By assigning a portion of the asset’s cost to various income statements, the accountant is matching a portion of the asset’s cost with each period in which the asset is used. Hopefully this also means that the asset’s cost is being matched with the revenues earned by using the asset.

53
Q

How many depreciation methods exist? List them.

A

There are several depreciation methods allowed for achieving the matching principle. The depreciation methods can be grouped into two categories: straight-line depreciation and accelerated depreciation.

54
Q

How can we refer to assets that are depreciable?

A

The assets mentioned above are often referred to as fixed assets, plant assets, depreciable assets, constructed assets, and property, plant and equipment.

55
Q

Can land be depreciated?

A

Asset land is not depreciated, because land is assumed to last indefinitely.

Financial Accounting (8 decks)

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