chapter 4: adjustments, financial statements, and quality of earnings

Question 1

what are entry adjustments and what do they show?

Answer 1

reflect the proper amount of revenues and expenses in a period

they are updated records

Question 2

what is the accounting cycle and its steps?

Answer 2

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

Question 3

what can be a solution too the issue of recording cash transactions and incurred expenses or earned revenues?

Answer 3

adjusting entries

Question 4

what are adjusting entries

Answer 4

entries necessary at the end of the accounting period to identify and record all revenues and expenses of that period

Question 5

what are the four types of adjustments?

Answer 5

deferred revenues

prepaid expenses

accrued revenues

accrued expenses

Question 6

what are the two type of adjustments in which cash was already received or paid?

Answer 6

deferred revenues

prepaid expenses

Question 7

what are the two type of adjustments in which cash will be received or paid?

Answer 7

accrued revenues

accrued expenses

Question 8

deferred revenues

Answer 8

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

Question 9

prepaid (deferred) expenses

Answer 9

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

Question 10

accrued revenues

Answer 10

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

Question 11

accrued expenses

Answer 11

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

Question 12

what would the adjusting entry of a deferred revenue look like?

Answer 12

less liabilities

more revenues

Question 13

what would the adjusting entry of a accrued revenue look like?

Answer 13

more assets

more revenues

Question 14

what would the adjusting entry of a deferred expenses look like?

Answer 14

more expenses

less assets

Question 15

what would the adjusting entry of a accrued expense look like?

Answer 15

more expense

more liability

Question 16

property and equipment belong in which adjustment account?

Answer 16

deferred revenue

they are considered prepaid expenses

they are considered to be used over many years

Question 17

how do you keep track of depreciation and historical costs?

Answer 17

with a contra account

Question 18

what a contra account

Answer 18

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

Question 19

what happens to a certain account when its contra account’s balance increases?

Answer 19

the main account’s balance decreases

Question 20

what is the contra account for property and equipment’?

Answer 20

the accumulated depreciation account

its credited

Question 21

what is the carrying amount (book value or net value) in the statement of financial position

Answer 21

it is the ending balance of the property and equipment account and its depreciation account

Question 22

why is income taxes payable (accrued expenses) recorded last?

Answer 22

all other adjustments should be incorporated in completing earnings before income taxes

we have to find pre tax earrings first

Question 23

when adjusting balances, why is the cash account never adjusted?

Answer 23

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

Question 24

ture or false?

each adjustment entry always include one account on the statement of earnings snd one account on the statement of financial position

Answer 24

truuuue booooy

Question 25

what does the term “materiality” describe?

Answer 25

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

Question 26

what does materiality depend on?

Answer 26

the nature of the item and its monetary value

Question 27

what makes an item be considered material?

Answer 27

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

Question 28

what does the net profit margin ratio (measure of profitability) do?

Answer 28

compares net earnings to the revenues generated during the period

how much profit is earned at a percentage of revenues generated during the period

Question 29

what does the return on equity (measure of profitability) do?

Answer 29

relates net earnings to shareholders’ investment in a business

how much a firm earned as a result of shareholders’ investment

Question 30

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?

Answer 30

net profit margin ratio

Question 31

what does a rising net profit margin ratio mean?

Answer 31

more efficient management of revenues and expenses

Question 32

what do finical analysts expect with the net profit margin ratio?

Answer 32

they expect it to rise or at least maintain over time for a company

Question 33

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?

Answer 33

return on equity

Question 34

what do analysts do with a company’s ROE

Answer 34

they see if their competitive strategies and shit are working

Question 35

what are permanent (real) accounts?

Answer 35

balances that are not reduced to = at the end of the accounting period

the ending balances carry onto the next period

Question 36

when is the only time that a permanent t account has a reduced balance to 0?

Answer 36

when asset is no longer owned

Question 37

what are temporary (nominal) accounts?

Answer 37

accounts that have to be reduced to 0 at the end of the period

Question 38

which account balances are included as temporary accounts?

Answer 38

anything in statement of earnings (expenses, revenues, gains, losses) and the statement of earnings itself

sometimes dividends declared

Question 39

why do you reduce the temporary accounts to 0?

Answer 39

so that the entries may be closed for the next accounting period

Question 40

what are the two purposes of closing entries

Answer 40

1. transfer the balances in the temporary account to retained earnings
2. to establish a zero balance in each temporary account to start accumulation in the next accounting period

Question 41

what are the three journal entries required to close accounts

Answer 41

1. one to close revenues and gain account
2. one to close the expense and loss accounts
3. one to close the declared dividends accounts

Question 42

what is the income summary account

Answer 42

a temporary account used during closing process to facilitate closing temporary accounts

Question 43

how do you close revenues and gain account

Answer 43

they are credits

you have to debit them

Question 44

how do you close expense and loss accounts

Answer 44

they are debits

you have to credit them

Question 45

what is a post closing trial balance?

Answer 45

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