Chapter 4 Take-aways

Question 1

4 types of adjusting entries

Answer 1

• deferred revenues
• accrued revenues
• deferred expenses
• accrued expenses

Question 2

Adjusting entries have no effect on the

Answer 2

cash account

Question 3

Adjusted account balances are used in preparing the following financial statements

Answer 3

• Statement of earnings: rev - exp = net earnings
• statement of changes in equity
• statement of financial position

Question 4

Net profit margin ratio

Answer 4

• Net earnings/Net sales
• How much profit is earned as a percentage of revenues generated during the period
• Rising net profit margin ratio = more efficient management of rev and exp.

Question 5

ROE: Return on Equity

Answer 5

• Net earnings/Average shareholders’ equity
• How much firm earned for each dollar of shareholders’ investment
• Assess the company’s overall business strategies

Question 6

Temporary accounts (rev, exp, gains and losses) are closed to a zero balance when

Answer 6

at the end of the accounting period to allow for the accumulation of these items in the following period

Question 7

deferred expenses

Answer 7

• previously recorded assets
• need to be adjusted at the end of period to reflect expenses that have been incurred/used up

Question 8

Deferred revenues

Answer 8

• previously recorded liabilities
• need to be adjusted at the end of period

Question 9

Accrued revenues

Answer 9

• have been earned by the end of the accounting period
• will be collected in the future accounting period (recording interest receivable for interest earned but not yet collected)

Question 10

Accrued expenses

Answer 10

• have been incurred by the end of the accounting period
• will be paid in the future accounting period
• (recording an expense and a corresponding accrued liability for utilities used during the period but not yet paid)