Exam 1, Chapters 2, 3, 4 - Concepts

Question 1

List:

Types of Journal Entries

Answer 1

1. Daily Journal Entry

2. Adjusting Journal Entries

Question 2

List:

Steps in the Account Cycle (in order)

Answer 2

1. Transaction Analysis
2. Journal Entires (?)
3. Financial Statement Preparation

Question 3

Answer:

For each transaction, the analysis should tell you if the transaction ___(a)___ while at the same time ___(b)___, or does it ___(c)___ while at the same time ___(d)___

Answer 3

a. increase asset
b. increase liability
c. increase asset
d. decrease another asset

Question 4

Answer:

We use a ___(a)___ to practice/perform transaction analysis

Answer 4

a. spreadsheet

Question 5

Answer:

If you perform services, you earn ______

Answer 5

revenue

Question 6

Answer:

Revenue is part of your ___(a)__ which is part of your ___(b)___. If you earn revenue it is recorded under the ___(c)___ column of your transaction analysis

Answer 6

a. net income
b. retained earnings
c. revenue

Question 7

Answer:

Revenue from services performed on account grants you ___(a)___ and it is recorded on the ___(b)___ column of the transaction analysis

Answer 7

a. title to receive cash in the future

b. accounts receivable

Question 8

Answer:

In transaction analysis, we study the effect of ___(a)___ on ___(b)___

Answer 8

a. each transaction

b. different accounts

Question 9

Define:

Debit/Credit Model

Answer 9

Anything on the left hand side is an asset and any asset increases your debit. Anything on the right hand side is a liability or shareholder equity and any increase on the right hand side increases your credit.

Question 10

Answer:

In the debit/credit model you don’t write numbers as ___(a)___ or ___(b)___ because if you debit ___(c)___, there is a/an ___(d)___, and when you credit ___(e)___, there is a/an ___(f)___

Answer 10

a. positive
b. negative
c. any type of asset
d. increase that type of asset
e. a common stock or any type of liability or shareholders’ equity
f. increase in liability or shareholders’ equity

Question 11

Answer:

Using the debit/credit model: you purchase land for $20,000, what happens with the accounting equation?

Answer 11

You debit land (increase asset - land)

You credit cash with $20,000

Question 12

Answer:

Using the debit/credit model: What happens when you borrow $9,000 cash from the bank?

Answer 12

You borrowed cash, so cash increases, cash is an asset so you debit $9,000
You borrowed $9,000, which is a notes payable (liability), so you credit $9,000

Question 13

Define:

Double-entry rule

Answer 13

In the credit/debit model, any action on one side of the equation will have an equal transaction on the other side. These can be increases or decreases - both sides can increase/decrease simultaneously, or one can increase while the other decreases, but the amount will be the same

Any increase in asset you debit

Any decrease in asset you credit

Any increase in liability or equity you credit

Any decrease in liability or equity you debit

Question 14

Answer:

Using the debit/credit model: What happens when you provide services on account for $8,000

Answer 14

You have an accounts receivable for $8,000, which is an asset, so you debit $8,000

You have service revenue of $8,000, which increases net income, so increase in retained earnings. Retained earnings is part of shareholders’ equity, so you credit $8,000

Question 15

Answer:

Explain how/why service revenue is something we credit in the credit/debit model

Answer 15

Service revenue increases net income, an increase in net income increases retained earnings, and retained earnings are part of shareholders’ equity, which is on the right side of the equation and is a credit

Question 16

Answer:

Any revenue increase will increase ___(a)___, so we ___(b)___ according to the double-entry rule

Answer 16

a. shareholders’ equity

b. credit

Question 17

Answer:

In accordance with the debit/credit model:

Any increase in asset you ___(a)___

Any decrease in asset you ___(b)___

Any increase in liability or equity you ___(c)___

Any decrease in liability or equity you ___(d)___

Answer 17

a. debit
b. credit
c. credit
d. debit

Question 18

Answer:

Using the debit/credit model: What happens when you pay $5,500 cash for expenses?

Answer 18

Cash decreases $5,500, which is an asset decrease, so we credit cash $5,500

An expense decreases net income, which decreases retained earnings, which decreases stockholders’ equity, so we debit $5,500 (decrease in equity is a debit)

Question 19

Answer:

Explain why we debit an expense in the debit/credit model

Answer 19

An expense decreases net income, which decreases retained earnings, which decreases stockholders’ equity, so we debit the amount of the expense

Decrease in equity is a debit

Question 20

Answer:

Using the debit/credit model: You pay dividends to owners

Answer 20

You pay dividends in cash, so cash decreases, cash is an asset, so you credit the decrease in cash

Dividends decrease shareholders’ equity, decrease in equity in amount of dividends paid, so you debit

Question 21

Answer:

Dividends are a/an ___(a)___, so it is not shown on the ___(b)___, it is not a/an ___(c)___.

Answer 21

a. contra equity
b. income statement
c. expense

Question 22

Answer:

Why do we debit dividends?

Answer 22

Any dividends will decrease retained earnings, which are part of shareholders’ equity, so equity decreases. Any decrease in equity is a debit

Question 23

Answer:

Dividends are paid directly ___(a)___ instead of ___(b)___, so it is not included on the ___(c)___

Answer 23

a. out of net income
b. within net income
c. income statement

Question 24

Answer:

Dividends are a ___(a)___ shareholders’ equity, which will ___(b)___ retained earnings because you only want the ___(c)___

Answer 24

a. decrease in
b. reduce
c. company to pay dividends

Question 25

Answer:

The double-entry rule says that if anything on the left hand side of the equation increases you ___(a)___, if anything on the right hand side of the equation increases you ___(b)___, which means that any time an asset decreases, you ___(c)___ and any time a liability or equity account decreases, you ___(d)___

Answer 25

a. debit
b. credit
c. credit
d. debit

Question 26

Define:

Adjusting Journal Entries

Answer 26

Prepared at the end of the accounting period

Not triggered by document flow, so accountants must complete this by the end of the period

Prepared in addition to daily journal entries so we can strictly follow the revenue recognition principle and matching principle

Question 27

Answer:

Why do we prepare adjusting journal entries in addition to daily journal entries?

Answer 27

So we can strictly follow the revenue reduction principle and the matching principle

Question 28

Define:

Revenue Recognition Principle

Answer 28

Decides when revenue should be recognized.

It says revenue generally occurs or should be recognized when cash is realized or realizable and when the revenue is earned

Question 29

Define:

Realized

Answer 29

Realized means that cash is realized - you get cash

Question 30

Define:

Realizable

Answer 30

You have a reasonable belief or reasonable assurance that you’re going to receive cash in the near future.

It is not realized yet, but will be realized in the future

Question 31

Define:

Earned

Answer 31

Companies substantially accomplish what it must do to be entitled to the benefit represented by this revenue, which means that you earned it

Question 32

Answer:

If you earned service revenue, that means you have ______

Answer 32

accomplished all of the services

Question 33

Answer:

If you want to earn product production revenue, you have to ______

Answer 33

finish the delivery of products to the customer

Question 34

Answer:

If you want to receive revenue, first it must be ___(a)__, and in terms of cash it could be ___(b)___ or ___(c)___

Answer 34

a. earned
b. realized
c. realizable

Question 35

Define:

Matching Principle

Answer 35

Says that revenue and expense go together

Let the expense follow the revenue

If you recognize revenue this period, you have to recognize the matched expense in the time period

Question 36

Answer:

Matching principle is about ___(a)___ and revenue recognition principle is about ___(b)___

Answer 36

a. expense

b. revenue

Question 37

Answer:

Explain how prepaid insurance is both an asset and an expense

Answer 37

At the time you pre-pay insurance it is an asset because you will enjoy the benefits of the insurance in the future
For each period the insurance covers, the accountant must include the cost of the insurance as an expense

It is an adjusting journal entry

Ex - You pay $120 for 1 year of insurance. When you pay the premium, the pre-paid insurance is an asset. Each month you must account for the $10 expense of the insurance for that month

Question 38

Answer:

Prepaid insurance is an example of a ______ journal entry

Answer 38

adjusting

Question 39

Answer:

Explain why prepaid insurance is an adjusting journal entry

Answer 39

It appears on two financial statements that change in unison

It appears on the income statement as an expense (you prepaid $120 for one year, so each month it is shown as a $10 expense)

It appears on the balance sheet as an asset. At the time of prepayment, it is an asset in the amount of $120 (the balance), however this asset decreases by $10 each month in unison with it being shown as an expense on the income statement

Question 40

Answer:

Explain why deferred revenue is an adjusting journal entry

Answer 40

You receive cash prior to the service or good being provided, so it is unearned revenue and is a liability account

If you receive $300 prepayment for rent for 3 months, so you debit cash $300

Each month covered under the prepayment you debit unearned rent revenue $100 (because liability decreased by $100) and credit rent revenue $100 (balance decreases $100 each month)

Question 41

List:

Types of Adjusting Journal Entries

Answer 41

1. Prepaid Expense
2. Deferred Revenue
3. Accrued Revenue
4. Accrued Expense

Question 42

Define:

Accrued revenue

Answer 42

You recognize revenue before cash is received

We recognize revenue when cash is not realized, and then when cash is realized in the future, you receive cash

(cash is realizable)

Question 43

Answer:

Explain how accrued revenue is an adjusting journal entry

Answer 43

You debit cash receivable, which tells people that you earned the cash, but have not yet received it

For example, you invest money with a set interest rate. You debit interest receivable for the amount of interest you expect to receive before it is realized. Once it is realized you debit cash and credit interest receivable

Question 44

Define:

Accrued Expense

Answer 44

You recognize expenses before you pay cash for them

Question 45

Answer:

Explain why accrued expense is an adjusting journal entry

Answer 45

You account for the expense as a debit and once it is paid you shift the amount paid as a credit

Example - monthly interest payment on money borrower. You account for all interest that will be owed as an expense debit, as monthly interest payments are made you credit the expense for the amount of interest paid with each payment