chapter 4 Flashcards
what is the normal balance for assets on a T account?
on debit side
what is the normal balance for liabilities on a T account?
on credit side
what is a normal balance for common shares on a T account?
on credit side
what is the normal balance for revenues on a T account?
on the credit side
what is the normal balance for expenses on a T account?
on the debit side
what is the normal balance for dividends on a T account?
on the debit side
what does accounting divide the economic life of a business into?
time periods
what are the 3 time periods an economic year can be split up into?
yearly (fiscal year)
quarterly (3 month)
monthly
does a fiscal year have to end on a year end?
no the end of the fiscal year can end whenever
do transactions impact more than one period?
yes they can
what is accrual basis accounting?
transactions affecting a company’s financial statements are recorded in the period the events occur rather than when cash is received or paid
when is revenue recorded in accrual basis accounting?
when it is earned, even if the cash has not been received
when are expenses recorded in accrual basis accounting?
when goods or services are consumed or used, not when cash is paid
when is revenue recorded in cash basis accounting?
only when cash is received
when are expenses recorded in cash basis accounting?
only when cash is paid
what are the 2 ways that cash basis accounting can lead to misleading information for decision making?
timing differences between the occurrence of the actual event and its related cash flow
revenue and expenses can be manipulated by timing the receipt and payment of cash
can a company have a negative cash position and still be profitable?
yes
what is a revenue?
increase in assets or settlement of liabailtes resulting from a company’s ordinary activities (selling goods or when a service is performed)
under ASPE, when are revenues recognized?
when services have been provided or the risks and rewards of ownership of the good have been transferred to the buyer, when revenue can be reliably measured and collection is reasonable certain
under IFRS, when are revenues recognized?
revenues are recognized when a company satisfies a performance obligation
what is the 5 step process to measure and report revenue under IFRS?
1) identify the contract with the client or customer
2) identify the performance obligations in the contract
3) determine the transaction price
4) allocate the transaction price to the performance obligation in the contract
5) recognize revenue when (or as) the company satisfies the performance obligation
when are expenses recognized?
when a decrease in assets occurs or an increase in liabilities due to companies ordinary revenue-generating activities
what are expenses tied to?
changes in assets and liabilities
what do expenses often coincide with?
with revenues, this is known as matching
what are adjusting entries?
entries made at the end of the accounting period to update accounts and produce up-to-date and relevant financial information
why are adjusting entries made?
because the trial balance may not be complete and up-to-date
why might the trial balance may not be complete or up-to-date?
some events are not recorded daily
some costs are not recorded during the account period as they expire with the passing of time
some items may be unrecorded because their amounts are not know
what are the 2 types of adjusting entries?
prepayments
accruals
what are the 2 types of prepayments?
prepaid expenses
deferred revenues
what are the 2 types of accruals?
accrued expenses
accrued revenues
what are prepaid expenses?
when expenses are paid before they are used or consumed as an asset is recorded
how do adjusting entries impact a prepaid expense account?
they increase (debits) an expense account and decrease (credit) the asset (prepaid) account
are prepaid expenses assets or liabilities?
assets
what are deferred revenues?
cash is received from customers before goods or services are provided to them (gift cards)
are deferred revenues assets or liabilities?
liabilities
how does an adjusting entry impact deferred revenues?
it decreases the liability (deferred revenues)
account and increases a revenue account to record revenues earned
is land depreciable?
no
