CHAPTER 2 SMARTBOOK Flashcards
Revenue is recognized when it is earned and expenses when they are incurred, regardless of when cash changes hands when using
Accrual
An accrual occurs when a revenue is recognized ______ cash is exchanged.
before
Recognizing revenue on account affects the
Account receivales affect ONLY the income statement and balance sheet
Accrued salary expense occurs when an employee
works in Year 1, but is paid in Year 2
A change in stockholders’ equity is caused by
Issuing stock
Paying dividend
Earnings
An expense is an operating activity undertaken to generate revenue and can result in
a decrease in assets or increase in liabilities
The statement of cash flows
explains the change in cash from the beginning to the end of the accounting period
During Year 1, Silver Sinks, Inc. earned $33,000 of revenue on account. Cash collections of receivables were $28,000. The remainder of the receivables were collected in Year 2. As a result of these transactions, in Year 1 Silver Sink will report
Revenue of $33,000 (balance sheet) and cash inflow from operating activities of $28,000 because that is the CASH it collected from the account receivable.
The adjusting entry for amounts a company is obligated to pay an employee in the future affects
expenses
liabilities
retained earnings
Accrual acounting
recognizes revenue only when earned
records expenses when incurred
When an employee works in Year 1 but is paid in Year 2, the company must recognize a liability in
Year 1
A decrease in assets or an increase in liabilities resulting from operating activities undertaken to generate revenue is called a(n)
expense
A company recognized an accrued salary expense in Year 1 and paid its employees in Year 2. The financial statements affected in Year 2 are the
balance sheet: cash and salaries payable decrease
statement of cash flows because there is cash outflow by paying salaries
Purchasing prepaid rent has no effect on
Tota assets: cash decreases and prepaird rent increases
income statement: expense recognition is deferred until rent is used
When a company prepays rent for one year in August, there will be a difference between the amounts of cash flow from operating activities and net income reported for the year.
The full amount of prepaid rent will be reported on the statement of cash flows, but only 5 months of the rent will be reported as an expense for the year.
The Unearned Revenue account is shown in the
liabilities section of the balance sheet (account payable)
On September 1 of Year 1, a law firm collected cash for services to be provided in Year 2. Based on this information, how will the recognition of earned revenue affect the Year 2 balance sheet?
Liabilities (account payable) will decrease and equity (retained earnings) will increase.
Revenue that a company obtains by providing customers with goods or services results from
Either an increase in assets or decrease in liabilities. Increase in assets because it increases cash, or a decrease in liabilities because it collectes cash from the account payable
The amount of net income for the year can be directly traced to th
statement of changes in stockholders’ equity (retained earnings)
Which of the following accounts is closed at the end of the accounting cycle?
Salary expense (temporary account)
Purchasing prepaid rent is a(n) Blank______ transaction.
Asset exchange (cash for land in the asset section)
When cash is received in advance of providing a service both the cash and
unearned revenue (liabilities)
On September 1 of Year 1, a law firm collected cash for services to be provided in Year 2. How will the recognition of earned revenue affect the Year 2 income statement and statement of cash flows?
Net income will increase because it recognizes revenue and cash flows will not be affected because they already receive cash.
A decrease in a liability account Blank______ results in the recognition of revenue.
sometimes
unearned revenue appears on the
Balance sheet
Even though the term revenue is included in the account title, Unearned Revenue represents a liability (obligation) to provide goods or services to customers.
Which of the following describes the matching concept?
Expenses should be matched with the revenue they produce.
The purchase of supplies on account is a(n) Blank______ transaction.
Asset source transaction because the asset account SUPPLIES and the ACCOUNTS PAYABLE (expenses accrued) increase
Prepaid items are
Liabilities
The purchase of supplies on account affects the
balance sheet only because the income statement won’t be affected until supplies are used
Deferred expense are frequentil called
prepaid items
A cash payment to settle a Salaries Payable affects both the balance sheet and income statement.
