COMM 111 - Lecture 3/4

Question 1

What do revenues and expenses do to an account

Answer 1

Revenues:
- Increases in assets or settlements of liabilities from ongoing operations
Expenses:
- Decreases in assets or increases in libailties from ongoing operations

Question 2

what are gains and losses

Answer 2

Gains
- Increases in assets or decreases in liabilities resulting from disposal of assets / investments for more than their book value
- Example truck in timmies. So if you received more than you paid for the truck its not revenue its gains

Losses:
Decreases in assets or increases in liabilities resulting from disposal of assets/ invesments for less than their book value

Revenue is considered as the income that the business derived from its primary business activities. The gains are regarded as the income available from other business activities.

Question 3

Ongoing operations what is it and what is operating revenue and operating expense

Answer 3

Ongoing operations: sales of goods or rendering of services as the central focus of the
business

Operating Revenue: Increase in assets (Cash or Accounts Receivable) or settlement of liabilities (Unearned Revenue) from ongoing operations
– When Chipotle receives cash for selling a burrito bowl, the increase in assets is associated with Operating Revenue.
* Operating Expense: Decreases in assets (outflows or use) or liabilities incurred to generate revenues during the period
– To sell burrito bowls, Chipotle needs to pay for ingredients, wages for workers, rent for the store, and electricity to light the store. These are all operating expenses.

Question 4

What are operating gains/lossses

Answer 4

Gains/Losses from Disposal of Property, Plant, and Equipment are Operating Gains/Losses
– Chipotle owns a truck with a book value (current amount on the B/S) of $10,000. If they sell the truck for $12,000, they will recognize an Operating Gain of $2,000.
– If the truck is instead sold for $9,000, they will recognize an Operating Loss of $1,000

Question 5

What are non operating gains/losses

Answer 5

Gains/Losses from Sales of Investments are Non-Operating Gains/Losses
– Chipotle purchased shares of Qdoba for $100. If they sell these shares for $120,
they will recognize a $20 Non-Operating Gain
– If the shares are instead sold for $60, they will recognize a $40 Non-Operating Loss

Question 6

what is interest revnue, interest expense, income tax expense and earning per share

Answer 6

Interest Revenue: Interest or dividends received from ownership of stocks or bonds of other companies
* Interest Expense: Interest paid as a cost of borrowing money
* Income Tax Expense: Federal, state, local, and foreign taxes
on reported income
* Earnings per Share: Net Income divided by the Weighted Average Number of Shares Outstanding

Question 7

Cash basis accounting

Answer 7

Cash-Basis Accounting records revenues when cash is received and records expenses when cash is paid

Question 8

Accrual-Basis Accounting

Answer 8

Accrual-Basis Accounting records revenues when earned and expenses when incurred, regardless of the timing of cash receipts or payments

Question 9

when do you record revenue

Answer 9

A company must recognize revenue:
1. When the company transfers promised goods or services to
customers (Earned)
2. In the amount it expects to receive (Realized or Realizable)

Question 10

When are expenses realized and what i the pricniple name

Answer 10

Matching Principle - Expenses are recognized when the corresponding revenue is recognized

Question 11

Debits always have to equal

Answer 11

Debits always have to equal credits

Question 12

What does balance sheet have and what does income statement have ad what does cashflow have

Answer 12

Balance sheeet is Assets+L+SE
Income statment: Exenses and revenues
Cash flow: Operating, investing and financing activities

Question 13

Four types of adjusting entires

Answer 13

Sellers and buyers

Sellers Defarrles:
Deffered revenue (unearnt revenue)

Sellers Accrued:
Accrued revenue (Recivables)

Buyers Defarrles:
Deffered expense (Prepaid expense)

Buyers Accrued:
Accrued expense (Payable)

Question 14

What is Depreciation?

What is accumlated depreication

Answer 14

– A method of allocating the cost of equipment over its period of use

accumulated Depreciation is a “contra-asset” account

Contra-Assets are included in the Assets section of the balance sheet, but have a normal credit balance

contra asset account is An account that is offset against (reduces) another related asset account on the statement of financial position. An example would include accumulated depreciation.

Question 14

Depreication expense and accumualted expense go where?

Answer 14

Depreication expense go in tha income statement

Acummualted expense go in the balance sheet

Question 15

Why do we close income statments?
How to close entry?

Answer 15

Income Statement Accounts are Temporary
* Used to summarize performance over a period
* Need to be reset to zero at the end of the period

Debit all Revenue accounts for their full balance
2. Credit all Expense accounts for their full balance
3. Use a “plug” for Retained Earnings to make the JE balance

Question 16

If the Firm has a Net Income (Revenues > Expenses):

If the Firm has a Net Loss (Revenues < Expenses):

Answer 16

The credit to retained earning is the same as net income

The debit to retained earning is the same as net income loss

Question 17

Overstated vs understated correcting entries

Answer 17

Understated means that the asset amount provided is less than the actual one . Example

Error corrected would be:
Cash (+A) 4,000

this would be understated as the asset is greater than the original one . so the original one is understated

While overstated would be:

Cr.Rent expense (-E,+SE)
for Net income = Revenue + Expenses

Expense is overstated as he original expense is greater than th eone we corrected

Question 18

Adjusting entries defintinon

Answer 18

Adjusting entries are used to bring the financial statements up to date

They are used to record revenues and expenses which have occurred, but have not yet been recorded in the books