Chapter 4

Question 1

Accounting time periods

Answer 1

Genearlly a month, quarter, or a year

Question 2

Fiscal year

Answer 2

An accounting time period that is one year long

Question 3

Revenue recognition principle

Answer 3

Requires that companies recognize revenue in the accounting period in which it is earned

Question 4

Expense Recognition Principle

“Matching principle”

Answer 4

Expenses matched with revenues in the period when efforts are expended to generate revenues

Question 5

Krispy Kreme

Answer 5

Doubled number of donuts to boost quarterly sales

Question 6

Computer Associates International

Answer 6

Accused of backdating sales

Question 7

International note: accural basis

Answer 7

Acccrusal basis of accounting is central to all of these standards

Question 8

Adjusting entries

Answer 8

Ensure that the revenue recognition and expense recognition principles are followed

required every time a company prepares financial statements

Every adjusting entry will include one income statement account and one balance sheet account

Question 9

trial balance

Answer 9

the first pulling together of the transaction data

Question 10

International note: internal controls

Answer 10

Internal controls - system of checks and balances designed to detect and prevent fraud and errors

Foreign companies dont have to follow this in SOX

Unfair advantage because developing internal controls is expensive

Question 11

2 types of deferrals

Answer 11

Prepaid expenses

Unearned revenues

Question 12

Prepaid expenses or Prepayments

Answer 12

Expenses that will benefit more than one accounting period as assets

Question 13

Adjusting entry for prepaid expenses

Answer 13

An increase (debit) to a expense account

A decrease (credit) to an asset account

Question 14

Useful life

Answer 14

The period of service of an asset

Question 15

Depreciation

Answer 15

The process of allocating the cost of an asset to exepnse over its useful life

Question 16

Depreciation concept

Answer 16

An allocation concept, not a valuation concept

Allocates an asset’s cost to the periods in which it is used

Does not attempt to report the actual change in the value of the asset

Question 17

Contra asset account

Answer 17

Accmulated Depreciaition is called this

Question 18

Helpful hint: contra assets

Answer 18

All contra accounts have increases, decreases, and normal balances opposite to the account to which they relate

Question 19

Book value

Answer 19

The difference between the cost of any depreciable asset and its related accumulated depreciation

Question 20

Another term for book value

Answer 20

Carrying value

Question 21

Adjustment entry for unearned revenues

Answer 21

Results in a decrease (debit) to a liability account

Increase (credit) to a revenue account

Question 22

Accounting for prepaid expenses

Answer 22

Ex. insurance, supplies

Reason: prepaid expenses recorded in asset accounts have been used

accounts before adjustment: assets overstated/ expenses understated

Adjusting entry: dr. expenses/cr. assets

Question 23

Accounting for unearned revenues

Answer 23

Ex. rent, magazines

reason: unearned revenues recorded in liability have been earned

before adjustment: liabilities overstated/revenues understated

adjusting entry: dr. liablities/ cr revenues

Question 24

Adjustment entry for accrued revenues

Answer 24

Increase (debit) to an asset account

Increase (credit) to a revenue account

Question 25

Accounting for accrued revenues

Answer 25

Ex. rent, services performed but not collected reason: revenues have been earned but not yet received in cash or recorded before adjustment: assets understated/revenues understated adjusting entry: dr. assets / cr. revenues

Question 26

accrued expenses

Answer 26

Expenses incurred but not yet paid or recorded at the statement date

Question 27

Adjusting entry for accrued expenses

Answer 27

Results in an increase (debit) to an expense Increase (credit) to a liability

Question 28

Fannie Mae's

Answer 28

Improper adjusting entries resulted in delayed recognition of expense caused by interest-rate changes motivation: hit earnings estimates

Question 29

China and accrual accounting

Answer 29

switched from cash to accrual accounting to meet a projected budget deficit goal

Question 30

Accounting for acccrued expenses

Answer 30

Ex. interest, rent, salries reason: expenses have been incurred but not yet paid in cash or recorded before adjustment: expenses understated / liabilities understated adjusting entry: dr. expenses / cr. liabilities

Question 31

Prepaid expenses (AE)

Answer 31

dr. expenses cr. assets

Question 32

Unearned revenues (AE)

Answer 32

dr. liablities cr. revenues

Question 33

accrued revenues (AE)

Answer 33

dr. assets cr. revenues

Question 34

accrued expense (AE)

Answer 34

dr. expenses cr. liabilties

Question 35

Adjusted trial balance

Answer 35

Purpose: prove the equality of the total debit balances and the total credit balances in the ledger after adjustments Primary basis for the preparation of financial statements

Question 36

How do companies prepare financial statements?

Answer 36

Directly from an adjusted trial balance

Question 37

Temporary accounts

Answer 37

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period

Question 38

Permanent accounts

Answer 38

Balance sheet accounts whose balances are carried forward to the next accounting period

Question 39

Other term for temporary accounts

Answer 39

nominal accounts

Question 40

Other term for permanant accounts

Answer 40

Real accounts

Question 41

Closing entries

Answer 41

transfer net income and dividends to Retained Earnings, so the balance in Retained Earings agrees with the retained earnings statement

Question 42

Temporary

Answer 42

All revenue accounts All expense accounts Dividends

Question 43

Permanent

Answer 43

All asset accounts All liability accounts Stockholders' equity accounts

Question 44

Post-closing trial balance

Answer 44

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

Question 45

Income summary

Answer 45

A temporary account used in closing revenue and expense accounts

Question 46

Reversing entry

Answer 46

An entry made at the beginning of the next accounting period The exact opposite of the adjusting entry made in the previous period

Question 47

Earnings management

Answer 47

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

Question 48

High Quality of earnings

Answer 48

Full and transparent information that will not confus or mislead users of the financial statements

Question 49

One time items

Answer 49

Used to prop up earnings numbers ConAgra foods did this

Question 50

Inflate revenue

Answer 50

provide larger incentives for people to buy products to meet goals Bristol-Myers Squibb did this

Question 51

Improper adjusting entries

Answer 51

A way to manage earnings