chapter 4: adjustments, financial statements, and quality of earnings Flashcards
what are entry adjustments and what do they show?
reflect the proper amount of revenues and expenses in a period
they are updated records
what is the accounting cycle and its steps?
it is a processs used by entities to:
analyze and record transactions
adjust records at the end of the period
prepare financial statements
prepare records for the next cycle
what can be a solution too the issue of recording cash transactions and incurred expenses or earned revenues?
adjusting entries
what are adjusting entries
entries necessary at the end of the accounting period to identify and record all revenues and expenses of that period
what are the four types of adjustments?
deferred revenues
prepaid expenses
accrued revenues
accrued expenses
what are the two type of adjustments in which cash was already received or paid?
deferred revenues
prepaid expenses
what are the two type of adjustments in which cash will be received or paid?
accrued revenues
accrued expenses
deferred revenues
you got cash but haven’t provided service yet
its unearned revenue
a liability that was previously recorded and must be adjusted to reflect the amount of revenues earned
prepaid (deferred) expenses
you paid for something before receiving it or service
previously acquired asset that needs adjustment at end of period to reflect amount of expense incurred in using the assets to generate revenue
prepaid expenses
accrued revenues
revenue is earned but the cash isn’t been paid yet
previously unrecorded revenues that need to be recorded at the end of the accounting period to reflect amount earned
to find out related receivable account too
accounts or notes receivable
accrued expenses
you received the thing but you haven’t paid for it yet
previously unrecorded expenses that need to be recorded at the end of the accounting period to reflect amount earned
expense is incurred, but liability not recorded yet
often times, accrued liabilities
what would the adjusting entry of a deferred revenue look like?
less liabilities
more revenues
what would the adjusting entry of a accrued revenue look like?
more assets
more revenues
what would the adjusting entry of a deferred expenses look like?
more expenses
less assets
what would the adjusting entry of a accrued expense look like?
more expense
more liability
property and equipment belong in which adjustment account?
deferred revenue
they are considered prepaid expenses
they are considered to be used over many years
how do you keep track of depreciation and historical costs?
with a contra account
what a contra account
an account that is a reduction to the primary account
directly related to the main account, but has an opposite balance on the t account
what happens to a certain account when its contra account’s balance increases?
the main account’s balance decreases
what is the contra account for property and equipment’?
the accumulated depreciation account
its credited
what is the carrying amount (book value or net value) in the statement of financial position
it is the ending balance of the property and equipment account and its depreciation account
why is income taxes payable (accrued expenses) recorded last?
all other adjustments should be incorporated in completing earnings before income taxes
we have to find pre tax earrings first
when adjusting balances, why is the cash account never adjusted?
cash already received or paid by end or period
will be received or paid after end of period
cash transactions always included at a different point in time
ture or false?
each adjustment entry always include one account on the statement of earnings snd one account on the statement of financial position
truuuue booooy
what does the term “materiality” describe?
the significance of financial statement information in influencing economic decision by financial users
it suggests that minor items that would not influence a decision of a financial statement user has to be treated and explained in the simplest way possible
what does materiality depend on?
the nature of the item and its monetary value
what makes an item be considered material?
an item is material if it exceeds 1 to 1.5% of total assets or sales
if it exceeds 5 to 10% of net earnings
what does the net profit margin ratio (measure of profitability) do?
compares net earnings to the revenues generated during the period
how much profit is earned at a percentage of revenues generated during the period
what does the return on equity (measure of profitability) do?
relates net earnings to shareholders’ investment in a business
how much a firm earned as a result of shareholders’ investment
you have two measures of profitability observed in this chapter
net profit margin ratio
return on equity
which one would you use to answer the following question:
how effective is management at controlling revenues and expenses to generate more earnings?
net profit margin ratio
what does a rising net profit margin ratio mean?
more efficient management of revenues and expenses
what do finical analysts expect with the net profit margin ratio?
they expect it to rise or at least maintain over time for a company
you have two measures of profitability observed in this chapter
net profit margin ratio
return on equity
which one would you use to answer the following question:
how well has management used shareholders’ investments to generate net earnings during the period?
return on equity
what do analysts do with a company’s ROE
they see if their competitive strategies and shit are working
what are permanent (real) accounts?
balances that are not reduced to = at the end of the accounting period
the ending balances carry onto the next period
when is the only time that a permanent t account has a reduced balance to 0?
when asset is no longer owned
what are temporary (nominal) accounts?
accounts that have to be reduced to 0 at the end of the period
which account balances are included as temporary accounts?
anything in statement of earnings (expenses, revenues, gains, losses) and the statement of earnings itself
sometimes dividends declared
why do you reduce the temporary accounts to 0?
so that the entries may be closed for the next accounting period
what are the two purposes of closing entries
- transfer the balances in the temporary account to retained earnings
- to establish a zero balance in each temporary account to start accumulation in the next accounting period
what are the three journal entries required to close accounts
- one to close revenues and gain account
- one to close the expense and loss accounts
- one to close the declared dividends accounts
what is the income summary account
a temporary account used during closing process to facilitate closing temporary accounts
how do you close revenues and gain account
they are credits
you have to debit them
how do you close expense and loss accounts
they are debits
you have to credit them
what is a post closing trial balance?
it is the account made for the last step of the accounting cycle
used to check that debits = credits
used to make sure that all temporary accounts have been closed
