Chapter 3 Flashcards
True or false: cash and profits are the same thing.
False
What does the accrual accounting method measure?
The impact that a business transaction has on a company’s assets and liabilities.
What does the cash-basis accounting method measure?
Cash transactions, i.e. cash receipts and cash payments.
True or false: the majority of companies use the accrual accounting method.
True
What does the term “liquidation” mean?
A company that’s going out of business.
True or false: a decrease in liabilities increases equity.
True
What does “the matching concept” refer to?
The relationship between revenue and expenses.
True or false: a deferral and an accrual is the same thing.
False
What’s the most common long-term deferral?
Depreciation.
True or false: accrued expenses increase liabilities and decrease equity.
True
How do you calculate “Net amount of PPE”?
Cost - Accumulated depreciation
True or false: dividends and expenses are the same thing.
False
What’s another word for “timing”?
“periodicity”.
What are monthly and quarterly time periods called?
“interim periods”.
Explain the accrual accounting method.
Transactions are recorded in the periods in which the events occur and companies recognize revenue and expenses when a service is provided.
Explain the cash-basis accounting method.
Revenue is recorded when cash is received and expenses are recorded when cash is paid.
Provide examples of the transactions that the accrual accounting method records.
Collecting cash from customers, borrowing money, and issuing shares.
Provide examples of the non-cash transactions that the accrual accounting method records.
Sales on account, depreciation expenses, and usage of pre-paid rent, insurance, and supplies.
What does the Revenue Principle entail?
- when to record revenue
- the amount of revenue to record
True or false: according to the Revenue Principle, revenue is recognized when it can be measured reliably.
True
What does the Expense Recognition Principle entail?
- identify all expenses incurred during a given period
- measure the expenses and recognize them in the same period in which any related revenue is earned
What does the Matching Concept entail?
- identify all expenses incurred during a given period
- measure the expenses and recognize them in the same period in which any related income is earned
What’s the definition of a deferral?
An adjustment of payment of an item of cash in advance.
Why is unearned service revenue a liability?
Because there’s a receipt of cash before earning a revenue.
Why are accrued expenses a liability?
Because it’s an expense that hasn’t been paid yet.
True or false: accrued revenue is revenue that’s been both earned and collected.
False
Explain the straight-line depreciation method.
You divide the price of the asset first by the number of years that’s expected to be in use, then by 12 (months).
What does accumulated depreciation show?
The sum of all depreciation expenses.
What are the two characteristics of a contra account?
- it always has a companion account
- the normal balance is opposite that of the companion account
Every adjusting entry affects what?
- revenue or expenses (to measure income)
- assets or liabilities (to update the balance sheet)
