Exam 1 chap 3 Flashcards
- What is the difference between the cash method of accounting and the accrual method of accounting?
The cash method provides immediate recognition of revenues and expenses while Accruing method focuses on anticipated revenue and expenses
- Can you calculate net income on the cash method and on the accrual method?
Cash method = Total revenues - cash expenses
Accrual basis net income = Revenue recognized -Expenses incurred
- Can you calculate and write adjusting journal entries?
An adjusting journal entry occurs at the end of a reporting period to record any unrecognized income or expenses for the period.
- Examples of adjusting journal entries:
a. Prepaid rental revenue
b. Accrued rental expense
c. Unearned revenue that has been collected
d. Depreciation expense
e. Supplies expense at the end of the year
f. Adjusting prepaid expenses such as prepaid insurance.
a. Prepaid rental revenue
Payment of rent
b. Accrued expense
Utilities that were used for the month but an invoice hasn’t yet been received before the end of the period
c. Unearned revenue that has been collected
rent payment paid in advance
d. Depreciation expense
Company A purchases a building for $50,000,000, to be used over 25 years, with no residual value. The annual depreciation expense is $2,000,000, which is found by dividing $50,000,000 by 25.
e. Supplies expense at the end of the year
You can record how much money the company’s employees spend on supplies in your supply account by debiting supplies and crediting cash.
f. Adjusting prepaid expenses such as prepaid insurance
Each month, an adjusting entry will be made to expense $10,000 (1/12 of the prepaid amount) to the income statement through a credit to prepaid insurance and a debit to insurance expense. In the 12th month, the final $10,000 will be fully expensed and the prepaid account will be zero.
- What is the current ratio?
current assets/current liability
- How do you interpret the current ratio?
a higher ratio means the company has more assets than liabilities. For example, a current ratio of 4 means the company could technically pay off its current liabilities four times over.
- What is the net profit ratio (also called the profit margin ratio)?
net income/net sales
- How do you interpret the net profit ratio?
expresses how much profit is generated for every $1 that is made in sales. If the Net Profit Ratio is 30%, it means 30% of every dollar, or 30 cents is profit. It also gives a measure of the company’s expenditure for every dollar earned, which in this case is 70% or 70 cents.
