Chapter 4

Question 1

Accrual basis accounting

Answer 1

Transactions that change a company’s financial statements are recorded in the periods which the events occur, even if cash was not exchanged

Question 2

Cash basis accounting

Answer 2

Companies record revenue at the time they receive cash-not in accordance with GAAP

Question 3

Adjusting entries

Answer 3

Ensures that the revenue recognition and expense recognition principles are followed - necessary because the trial balance may mot be complete or up to date

Question 4

Why could the trial balance not be complete or up to date?

Answer 4

Some events are not recorded daily because its not efficient to do so
Some costs are not recorded during the accounting period because these costs expire with the passage of time
Some items may not be recorded

Question 5

Types of adjusting entries

Answer 5

Deferrals ( prepaid expenses, unearned revenues) and accruals (accrued revenues, accrued expenses)

Question 6

Prepaid expenses

Answer 6

Expenses paid in cash before they are used or consumed

Question 7

Unearned revenues

Answer 7

Cash received before services are performed

Question 8

Accrued revenues

Answer 8

Revenue services performed but not yet received in cash or recorded

Question 9

Accrued expenses

Answer 9

Expenses incurred but not yet paid in cash or recorded

Question 10

An adjusting entry for prepaid expenses

Answer 10

Increase (a debit) to an expense account

Decrease (a credit) to an asset account

Question 11

Types of prepaid expenses

Answer 11

Supplies (increase, a debit, to an asset account)
Insurance (an increase, a debit, in the asset account prepaid insurance)
Depreciation (

Question 12

Book value

Answer 12

The difference btw the cost of any depreciable asset snd its related accumulated depreciation

Question 13

Unearned revenues adjusting entry

Answer 13

Decrease (debit) to a liability account and increase (credit) to a revenue account

Question 14

Accrued revenues adjusting entry

Answer 14

Increase (debit) to an asset account and increase (credit) a revenue account

Question 15

Accrued expenses adjusting entry

Answer 15

Increase (debit) to an expense account and increase (credit) to a liability account

Question 16

Earnings management

Answer 16

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in the net income

Question 17

Quality of earnings

Answer 17

Indicates the level of full and transparent info that a company provides to users of its financial statements

Question 18

Ways to manage earnings

Answer 18

One time items: non-recurring
Inflate revenue: done in short run
Improper adjusting entries

Question 19

Temporary accounts

Answer 19

Revenue, expense, and dividend accounts whose balances a company transfers to retained earnings at the end of an accounting period (aka nominal)

Question 20

Permanent accounts

Answer 20

Balance sheet accounts whose balances are carried forward to the next accounting period -> assets, liabilities, stockholders’ equity (aka real) NOT CLOSED

Question 21

Closing entries

Answer 21

Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders equity account, retained earnings
Provide a zero balance in each temporary account

Question 22

Income summary

Answer 22

A temporary account used in closing revenue and expense accounts

Question 23

Post closing trial balance

Answer 23

A list of permanent accounts and their balances after a company has journalized and posted closing entries

Question 24

Worksheet

Answer 24

A multiple column form that may be used in the adjustment process and in preparing financial statements (not a permanent accounting record)