Exam 2 Flashcards
requires that companies recognize revenue in the period in which it is earned. revenue is recorded when it is earned, not when cash is received.
revenue recognition principle
in a service company when is revenue earned?
at the time the service is performed
often referred to as the matching principle; dictates that efforts (expenses) be matched with results (revenue)
expense recognition principle
what kind of asset is accumulated depreciation?
contra asset
T/F depreciation is an accrued expense
false
t/f The operating cycle of a merchandising company is ordinarily shorter than that of a service company.
false
gross profit =
sales revenue - cost of goods sold
net income =
gross profit - operating expenses
quality of earnings ratio
net cash provided by operating activities divided by net income
best quality of earnings ratios
greater than 1
accural
add to
accrued expense
incurred but not yet paid or record
accrued expense adjusting entry
dr. expense cr. liability (payable)
accrued revenue
increase in a revenue that has been earned, but not yet received or recorded
accrued revenue adj entry
dr. asset cr. revenue
deferral
delay
deferred revenue
unearned, delay in recognition of revenue already received, but not yet earned
deferred revenue adj entry
dr. liability cr. revenue
deferred expense
delay in recognition of an expense already paid, but not yet used, used vs unused
deferred expense adj entry
dr. asset cr. expense
On August 1 the Darius Co. purchased a photocopy machine for $8,000. The estimated annual depreciation on the machine is $1,680. If the company prepares annual financial statements on December 31, the appropriate adjusting journal entry to make on December 31 would be
debit Depreciation Expense $700; credit Accumulated Depreciation $700.
During the adjusting process two transactions were missed. The first is for unearned rent revenue of which $450 was earned during the period, the second was for accrued interest payable of which $275 is owed due to the passage of time. As a result of these omissions:
net income is understated by $175.; The omission associated with unearned rent revenues increases net income by $450 while the omission of interest expense and interest payable, accrued expenses, increases expenses and increases liabilities by $275. As a result, revenues are understated by $450 while expenses are understated by $275 so net income is understated by $175. Assets are not affected by these errors but liabilities are overstated by $175.
Financial statements can be prepared directly from the:
adjusted trial balance
In the closing process total revenues are determined to be $4,750 while total expenses are determined to be $3,875 and total dividends are $1,150. The retained earnings account will:
increase by $875 due to net income.; Retained earnings will increase by revenues of $4,750 less expenses of $3,875, or $875. Dividends do not affect net income.
With the adjusted trial balance in hand you see that the debit totals of the real accounts is $18,250 and the credit totals of the real accounts is $14,550. The debit total of the nominal or temporary accounts is $3,475 while the credit total of the nominal or temporary accounts is $7,175. From this you know that:
retained earnings will increase by $3,700 through the closing process; Debits of $18,250 and 3,475 equal credits of $14,550 and $7,175 so debits equal credits. The difference of nominal or temporary account debits and credits of a debit of $3,700 indicates growth in the company for the fiscal period – an increase in retained earnings.
The final step in the accounting cycle is to prepare
post closing trial balance
A net loss will appear in which column of the worksheet?
Balance Sheet - Debit; and income statement credit colu mn
Under IFRS, revenue recognition is determined by how many standards?
1
Cash basis accounting is:
not in accordance with IFRS.
