CHAPTER 2 SMARTBOOK

Question 1

Revenue is recognized when it is earned and expenses when they are incurred, regardless of when cash changes hands when using

Answer 1

Accrual

Question 2

An accrual occurs when a revenue is recognized ______ cash is exchanged.

Answer 2

before

Question 3

Recognizing revenue on account affects the

Answer 3

Account receivales affect ONLY the income statement and balance sheet

Question 4

Accrued salary expense occurs when an employee

Answer 4

works in Year 1, but is paid in Year 2

Question 5

A change in stockholders’ equity is caused by

Answer 5

Issuing stock
Paying dividend
Earnings

Question 6

An expense is an operating activity undertaken to generate revenue and can result in

Answer 6

a decrease in assets or increase in liabilities

Question 7

The statement of cash flows

Answer 7

explains the change in cash from the beginning to the end of the accounting period

Question 8

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

Answer 8

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.

Question 9

The adjusting entry for amounts a company is obligated to pay an employee in the future affects

Answer 9

expenses

liabilities

retained earnings

Question 10

Accrual acounting

Answer 10

recognizes revenue only when earned

records expenses when incurred

Question 11

When an employee works in Year 1 but is paid in Year 2, the company must recognize a liability in

Answer 11

Year 1

Question 12

A decrease in assets or an increase in liabilities resulting from operating activities undertaken to generate revenue is called a(n)

Answer 12

expense

Question 13

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

Answer 13

balance sheet: cash and salaries payable decrease

statement of cash flows because there is cash outflow by paying salaries

Question 14

Purchasing prepaid rent has no effect on

Answer 14

Tota assets: cash decreases and prepaird rent increases

income statement: expense recognition is deferred until rent is used

Question 15

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.

Answer 15

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.

Question 16

The Unearned Revenue account is shown in the

Answer 16

liabilities section of the balance sheet (account payable)

Question 17

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?

Answer 17

Liabilities (account payable) will decrease and equity (retained earnings) will increase.

Question 18

Revenue that a company obtains by providing customers with goods or services results from

Answer 18

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

Question 19

The amount of net income for the year can be directly traced to th

Answer 19

statement of changes in stockholders’ equity (retained earnings)

Question 20

Which of the following accounts is closed at the end of the accounting cycle?

Answer 20

Salary expense (temporary account)

Question 21

Purchasing prepaid rent is a(n) Blank______ transaction.

Answer 21

Asset exchange (cash for land in the asset section)

Question 22

When cash is received in advance of providing a service both the cash and

Answer 22

unearned revenue (liabilities)

Question 23

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?

Answer 23

Net income will increase because it recognizes revenue and cash flows will not be affected because they already receive cash.

Question 24

A decrease in a liability account Blank______ results in the recognition of revenue.

Answer 24

sometimes

Question 25

unearned revenue appears on the

Answer 25

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.

Question 26

Which of the following describes the matching concept?

Answer 26

Expenses should be matched with the revenue they produce.

Question 27

The purchase of supplies on account is a(n) Blank______ transaction.

Answer 27

Asset source transaction because the asset account SUPPLIES and the ACCOUNTS PAYABLE (expenses accrued) increase

Question 28

Prepaid items are

Answer 28

Liabilities

Question 29

The purchase of supplies on account affects the

Answer 29

balance sheet only because the income statement won’t be affected until supplies are used

Question 30

Deferred expense are frequentil called

Answer 30

prepaid items

Question 31

A cash payment to settle a Salaries Payable affects both the balance sheet and income statement.