Chapter 4

Question 1

revenue recognition and expense recognition

Answer 1

¨ Determining the amount of revenues and expenses to report in a given accounting period can be difficult.

Question 2

revenue recognition principle

Answer 2

requires that revenue be recognized in the accounting period in which the performance obligation is satisfied. When a company agrees to perform a service or sell a product to a customer, it has created a performance obligation. (recognized when earned)

Question 3

expense recognition principle

Answer 3

requires that efforts (expenses) be matched with accomplishments (revenues).

Question 4

accrual-basis accounting

Answer 4

means that transactions that change a firm’s financial statements are recorded in the periods in which the events occur, even if cash was not exchanged. (recognized revenue when earned and expenses when incurred regardless of cash)
• Cash basis accounting does not satisfy the requirements of Generally Accepted Accounting Principles (GAAP), whereas accrual basis accounting does.
 Accrual basis accounting provides an objective measurement of net income.

Question 5

cash basis accounting

Answer 5

revenue is recognized (recorded) when cash is received. Expenses are recognized (recorded) only when cash is paid. (they will have to have collected the cash already); everyone is required by all publicly traded companies

Question 6

difference between accrual basis and cash basis accountin

Answer 6

receognized revenue when earned and expenses when incurred regardless of what happens with cash

Question 7

adjusting entries

Answer 7

are needed to ensure that the revenue recognition and expense recognition principles are followed (in accrual basis accounting)
 Every adjusting entry will include one income statement account and one balance sheet account.
WILL NEVER INVOLVE CASH

Question 8

trial balance

Answer 8

may not contain up-to-date and complete data for several reasons
 Some events are not recorded daily because it is not efficient to do so.
 Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions.
 Some items may be unrecorded.

Question 9

two types of adjusting entries

Answer 9

• Adjusting entries can be classified as either deferrals or accruals. Each of these classes has two subcategories.

Question 10

defferals

Answer 10

can be prepaid expenses or unearned expenses

Question 11

accruals

Answer 11

are either accrued revenues or accrued expenses

Question 12

prepaid expenses

Answer 12

expenses paid in cash and recorded as assets until they are used or consumed. Prepaid expenses are costs that expire with the passage of time (i. e. rent and insurance) or through use (i. e. supplies).
- in a prepaid expense, as we use the prepaid insurance over time we incur that expense. At the end of every month, we recognize our insurance expense for a fraction of the total cost

Question 13

unearned revenue

Answer 13

cash received and recorded as liabilities before the services are performed; recognize revenue as you earn it

Question 14

adjusting entry for prepaid expenses will result in…

Answer 14

an increase (a debit) to an expense account and a decrease (a credit) to an asset account.
	An adjusting entry for unearned revenues will result in a decrease (a debit) to a liability account and an increase (a credit) to a revenue account.

 An adjusting entry for deferrals (prepaid expenses or unearned revenues) will decrease a balance sheet account and increase an income statement account.

Question 15

accrued revenue

Answer 15

revenues for services performed but not yet received in cash or recorded at the statement date.
 an adjusting entry for accrued revenues will result in an increase (a debit) in an asset account and an increase (a credit) to a revenue account.

Question 16

accrued expenses

Answer 16

expenses incurred but not yet paid in cash or recorded at the statement date.
 an adjusting entry for accrued expenses results in an increase (a debit) to an expense account and an increase (a credit) to a liability account.
 an adjusting entry for accruals (accrued revenues or accrued expenses) increases both a balance sheet and an income statement account.

Question 17

Trial balance proves

Answer 17

that debits = credits

Question 18

what accounts normally get closed?

Answer 18

income statement accounts
ex: once you are done collecting revenue for the month, that roles into your retained earnings, and for the next month, you basically start at 0 again and begin the process over again

Question 19

closing entries

Answer 19

transfer net income (or net loss) and dividends to Retained Earnings.
-causes the ending balance of RE (amount shown on balance sheet) to agree with the balance shown on the RE Statement

 Close the revenue accounts to the Income Summary account.

 Close the expense accounts to the Income Summary account.

 Close the Income Summary account to Retained Earnings.

 Close Dividends to Retained Earnings.

Question 20

…===closing entries produce a …..

Answer 20

a zero balance in each temporary account (revenues, expenses, and dividends)
 These accounts are then ready to accumulate data for the next accounting period.

 Permanent accounts (assets, liabilities, common stock and retained earnings) are not closed.

Question 21

permanent accounts

Answer 21

(assets, liabilities, common stock, and RE) are not closed

Question 22

after the closing entries have been journalized and posted…

Answer 22

a post-closing trial balance is prepared. (make sure debits and credits equal each other

 The post-closing trial balance shows the balances of all of the permanent accounts.

 The permanent account balances are carried forward to the next accounting period.

 All of the temporary accounts have a zero balance.

Question 23

required steps in the accounting process

Answer 23

•	Analyze business transactions.
•	Journalize the transactions.
•	Post to ledger accounts.
•	Prepare a trial balance.
•	Journalize and post adjusting entries—deferrals and accruals.
•	Prepare an adjusted trial balance.
•	Prepare financial statements:
	     Income statement
	     Retained earnings statement
	     Balance sheet
•	Journalize and post closing entries.
•	Prepare a post-closing trial balance.

Question 24

causes and differences between net income and cash provided by operating activities

Answer 24

¨ Net income is based on accrual basis accounting and is accomplished through the adjusting entry process.

¨ Cash provided by operating activities is determined by comparing cash received from operating activities to cash expenditures from operating activities.

 Cash provided by operating activities is essentially net income determined under the cash-basis of accounting.(use cash flow statement to see what actually happens to cash)