Chapter 4

Question 1

under revenue recognition, revenue is earned (recognized) when….(3)

Answer 1

1. sales or performance effort is substantially complete
2. amount is determinable (measureable)
3. collection is reasonably assured

Question 2

when is revenue recognized for merchandising and service companies?

Answer 2

merchandising: point of sale
service: when service is performed

Question 3

what is the time period concept?

Answer 3

• many transactions affect more than one time period

- challenge is when to recognize revenue

Question 4

for long-term projects (ex construction) which method is used?

Answer 4

percentage of completion

Question 5

explain expense recognition

Answer 5

expenses are recognized when:

• incurred
• revenue is earned –> matching principle

Question 6

which type of accounting includes transactions being recorded in the period the events occur?

Answer 6

accrual basis of accounting

Question 7

explain the cash basis of accounting

Answer 7

• revenue recorded only when cash is received
• expenses recorded only when cash is paid
• can lead to misleading info: revenue and expense payments can be manipulated by timing, can increase or decrease profit

Question 8

T/F adjusting entries always affect both an income statement and a balance sheet account?

Answer 8

true

Question 9

what is the role of adjusting entries?

Answer 9

• assign revenues to period in which they’re earned and expenses to which they occur
• update asset and liability accounts

Question 10

what are the three types of adjusting entries?

Answer 10

1. deferrals: delayed income statement recognition
2. accruals: accelerated income statement recognition
3. depreciation: systematic allocation of cost of fixed asset to expense over asset’s useful life

Question 11

what is an adjusted trial balance?

Answer 11

• done after adjusting entries
• lists all accounts along with adjusted balances
• gives you info to make financial statements

Question 12

what are the temporary accounts?

Answer 12

all expenses, all revenues and dividends

Question 13

what are the permanent accounts?

Answer 13

all assets, all liabilities, most SHE accounts

Question 14

what is the new T account when you close the books?

Answer 14

income summary

Question 15

when closing the books, revenue and expense accounts are closed to ___ ___ and then ___ ____

Answer 15

income summary and retained earnings

Question 16

dividends are directly closed to ___ ___ when closing the accounts

Answer 16

retained earnings

Question 17

what is the purpose of closing entries?

Answer 17

• need to set temporary accounts back to zero

- needs to be done every accounting cycle