Chapter 3: Adjusting the Accounts

Question 1

What is a fiscal year?

Answer 1

An accounting time period that is one year long

Question 2

What is an interim period?

Answer 2

Accounting time periods that are less than one year long

e.g. month or quarter of a year

Question 3

What is accrual basis accounting?

Answer 3

A basis for accounting in which revenues are recorded when services are performed and expenses are recorded when incurred

Question 4

What is cash basis accounting?

Answer 4

A basis for accounting in which revenues are recorded when cash is received and an expense is recorded when cash is paid

Question 5

What are the two approaches to revenue recognition?

Answer 5

Contract-based approach and earnings approach

Question 6

When is the contract-approach used to recognize revenue?

Answer 6

When a company follows IFRS

Question 7

When is the earrings approach used to recognize revenue?

Answer 7

When a company follows ASPE. Requires revenue to be recognized when the performance is complete, the amount can be measured, and collection from the customer is profitable

Question 8

What basis does the revenue recognition principle follow under both ASPE and IFRS?

Answer 8

Accrual basis of accounting

Question 9

What is economic life divided into and what does it require?

Answer 9

Economic life is divided into reporting periods and requires the matching principle

Question 10

Why do revenue and expenses require adjustments?

Answer 10

To be reported in the correct period

Question 11

What are adjusting entries?

Answer 11

Entries made at the end of an accounting period to ensure that revenue and expense recognition criteria are followed

Question 12

Why and when are adjusting entries needed?

Answer 12

1) To ensure that revenue is recorded when earned and expenses are recorded as incurred

2) Every time financial statements are prepared

Question 13

Companies reporting under IFRS must prepare….

Answer 13

Quarterly financial statements. Adjusting entries are required every quarter

Question 14

Companies reporting under APSE must prepare….

Answer 14

Annually financial statements. Adjusting entries are required annually

Question 15

Why don’t accountants just record everything as it occurs?

Answer 15

• Some events are not recorded daily as it is not efficient to do so
• Some costs are not recorded during the accounting period because they expire with the passage of time rather than through daily transactions
• Some items may be unrecorded

Question 16

Every adjusting entry affects…

Answer 16

One income statement and one balance sheet account

Question 17

What is deprecation?

Answer 17

The allocation of the cost of a long-lived asset to expense over its useful life in a rational and systematic manner

Question 18

True or False: Long-lived assets do not incur a visible reduction in the “quantity” or value of the asset over-time

Answer 18

True

Question 19

What is accumulated depreciation?

Answer 19

The cumulative sum of the depreciation expense since the asset was purchased

Question 20

What is the contra-asset account?

Answer 20

An account with the opposite balance (credit) compared with its related asset account, which has a debit balance

Question 21

What is the carrying amount?

Answer 21

The difference between the cost of a depreciable asset and its accumulated depreciation. The unallocated or unexpired portion of the depreciable asset’s cost

Question 22

What is useful life?

Answer 22

The length of service of a depreciable asset

Question 23

What are prepaid expenses?

Answer 23

Expenses paid in cash and recorded as asset before used

Question 24

What are accrued expenses?

Answer 24

Expenses incurred but not yet paid in cash or recorded

Question 25

What is unearned revenue?

Answer 25

Cash received and recorded as a liability before services are performed

Question 26

What are accrued revenues?

Answer 26

Revenues for services performed but no yet received in cash or recorded