ACCT 2110 Exam 2

Question 1

Explain Cash Basis Accounting

Answer 1

Revenue is recorded when cash is received, regardless of when goods /services are delivered/provided

Question 2

Explain Accrual Based Accounting

Answer 2

• Alternative to cash-based
• Required by GAAP
• Superior bc it recognizes things when they actually occur, regardless of cash (matching principle)

Question 2

Key Elements of Accrual Accounting

Answer 2

Time Period Assumption
Expense Recognition Principle
Revenue Recognition Principle

Question 3

What is the Time Period Assumption

Answer 3

• Allows companies to artificially divide their operations into time periods so they can satisfy user’s demands for information
• Companies frequently engage in continuing activities that affect more than 1 time period

Question 4

What is the Revenue Recognition Principle

Answer 4

Determines when revenue is recorded and reported
Revenue is recognized or recorded in the period in which a company satisfies a performance obligation
Typically occurs when revenue is “earned” (delivery of goods/service), not when company receives cash

Question 5

What is the Matching Principle

Answer 5

Expense recognition (matching) is the process of identifying an expense with a particular time period

Question 6

Why Cash Basis Accounting? (Basis, Revenue, and Expenses)

Answer 6

Cash Basis
Revenue recorded when cash is received
Expenses recognized when cash is paid

Question 7

Why Accrual Basis of Accounting

Answer 7

-Follows revenue rec and matching principles
-Transactions recorded in the time period of events
- Required by GAAP
- Requires adjusting journal entries

Question 8

Adjusting Entries

Answer 8

journal entries made at the end of an accounting period to record the completed portion of partially completed transactions
Necessary to apply the revenue recognition and expense recognition principles

Question 9

Explain Account Adjustments

Answer 9

Result of timing difference between when an expense or revenue is recognized, and cash is received/paid
Purpose is to ensure revenues and expenses are reported in proper time period
Made at the end of the period before making financial statements

Question 10

Rules of Adjusting the Accounts

Answer 10

• Never include cash
• End of period
• Affect at least 1 income statement and 1 balance sheet account

Question 11

Deferrals “Prepayments”

Answer 11

Cash exchange happens BEFORE revenue/expense recognized

Question 12

Deferred Expense

Answer 12

Prepaid (Asset)

Question 13

Deferred Revenues

Answer 13

Unearned (Liability) until service is provided

Question 14

Depreciation Expense

Answer 14

Process of allocating the cost of an asset to expense over its useful life

Question 15

Contra Accounts

Answer 15

Accounts that have a balance that is opposite of the balance in the related account
When an asset has a normal debit balance, a contra asset account has a normal credit balance

Question 16

Book Value

Answer 16

Resulting difference when the contra asset account is deducted from the balance of the related asset account on the balance sheet

Question 17

2 Accrual Categories

Answer 17

Accrued Expenses - incurred but not yet paid such as payroll, taxes, utilities
Accrued Revenue - earned but not yet received in cash or recorded