Chapter 2 Flashcards
When does a business recognize revenue?
The period in which the service was provided, regardless of whether cash has or has not been collected.
Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands, is commonly called _________ ________.
accrual accounting
T or F: GAAP requires accrual accounting.
True, most large companies in the US use it.
Can revenue be earned even when the customer has not paid?
Yes, it is recognized when revenue is earned or when the work is done. The same concept is applied to expenses.
Define the matching principle.
Costs incurred to generate revenues should be recorded in the same period as the corresponding revenue.
T or F: Any time there is a change to net income, retained earnings changes by the same amount.
True, because the statement of stockholder’s equity records how much their beginning retained earnings is changed by income.
If a business provides services on account during the month of February and then collects the money in May, how does affect the financial statements?
Accounts receivable and retained earnings increase on the balance sheet.
The money is recognized as revenue in the month of Feb and is reported on the income statement for that month
How are the financial statements changed when a partial settlement is paid on accounts receivable?
Cash assets increase and accounts receivable decreases on the balance sheet.
Since the revenue was captured in the month that the work was done, the income statement isn’t changed.
If a business pays their employees during the time they worked, what is it called and how is it reported?
It is called salaries expense.
Cash and retained earnings go down on the balance sheet.
Since we’re paying them during the time they worked, it is counted as an expense on the income statement and net income decreases.
This is an operating activity.
When is the one time that retained earnings decreases but net income is unchanged?
When dividends are paid to shareholders.
What is the difference between salaries expense and salaries payable?
Salaries expense is recorded when employees are being paid for work they have done.
Salaries payable is recorded when work has been done but the employees have not yet been paid.
What is interest expense and where is it recorded?
Interest expense is when money is actually paid out on a loan. It is recorded on the income statement.
