Chapter 4

Question 1

In general when is revenue recognized

Answer 1

• in merchandising companies when merchandise is sold and delivered (point of sale)
• in service companies when the service is performed

Question 2

Under ASPE revenue is recognized when:

Answer 2

• performance of an obligation is substantially complete
• revenue can be reliably measured
• collection is reasonably certain

Question 3

Under IFRS when is revenue recognized

Answer 3

• when a company satisfies a performance obligation

Question 4

What is the five step process to measure and report revenue:

Answer 4

• Identify the contract with the client of customer
• Identify the performance obligations in the contract
• determine the transaction price
• allocate the transaction price to the performance obligations in the contract
• recognize revenue when (or as) the company satisfies the performance obligation

Question 5

Expenses are recognized when:

Answer 5

Due to ordinary activity, a decrease in future economic benefit occurs (decrease in an asset or increase in a liability)

Question 6

When are expenses recorded

Answer 6

often recorded in the same period in which the revenues they helped produce are recorded

Question 7

Describe the cash basis of accounting

Answer 7

• revenue is recorded only when cash is received
• expenses are recorded only when cash is paid
• can lead to misleading financial statements as revenue and expenses can be manipulated by timing the receipt and payment of cash
• in Canada only allowed for farming or fishing

Question 8

Describe the Accrual basis of accounting

Answer 8

• revenue is recorded when earned, rather than when cash is received
• expenses are recorded when incurred, rather than when cash is paid

Question 9

Adjustin entries can be categorized as

Answer 9

• prepayments: prepaid expenses and unearned revenues
• accruals: accrued revenues and accrued expenses

Question 10

Describe prepayments

Answer 10

• Cash has been spent but the item acquired has not been used or consumed (pre paid expenses)
• cash has been collected but the revenue has not been earned (unearned revenues)
  –> entry to cash has been recorded but its going to stay on the balance sheet because it hasn’t been used yet

Question 11

Describe accruals

Answer 11

• revenue has been earned but not collected (accrued revenues)
• expenses were incurred, but not yet paid (accrued expenses)
• here the entry to cash has not yet been recorded!

Question 12

income statements (revenue and expenses) and dividends close to what

Answer 12

close to retained earnings

Question 13

what are considered temporary accounts

Answer 13

• all expense accounts
• all revenue accounts
• dividends account

Question 14

what are considered permanent accounts

Answer 14

• all asset accounts
• all liability accounts
• all shareholder’s equity accounts

Question 15

Describe the 9 steps in the accounting cycle

Answer 15

1. analyze business transactions
2. journalize the transactions
3. post to general ledger accounts
4. prepare a trial balance
5. journalize and post adjusting entries (prepayments and accruals)
6. prepare an adjusted trial balance
7. prepare financial statements
8. journalize and post closing entries
9. prepare a post closing trial balance