Exam 2

Question 1

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.

Answer 1

revenue recognition principle

Question 2

in a service company when is revenue earned?

Answer 2

at the time the service is performed

Question 3

often referred to as the matching principle; dictates that efforts (expenses) be matched with results (revenue)

Answer 3

expense recognition principle

Question 4

what kind of asset is accumulated depreciation?

Answer 4

contra asset

Question 5

T/F depreciation is an accrued expense

Answer 5

false

Question 6

t/f The operating cycle of a merchandising company is ordinarily shorter than that of a service company.

Answer 6

false

Question 7

gross profit =

Answer 7

sales revenue - cost of goods sold

Question 8

net income =

Answer 8

gross profit - operating expenses

Question 9

quality of earnings ratio

Answer 9

net cash provided by operating activities divided by net income

Question 10

best quality of earnings ratios

Answer 10

greater than 1

Question 11

accural

Answer 11

add to

Question 12

accrued expense

Answer 12

incurred but not yet paid or record

Question 13

accrued expense adjusting entry

Answer 13

dr. expense cr. liability (payable)

Question 14

accrued revenue

Answer 14

increase in a revenue that has been earned, but not yet received or recorded

Question 15

accrued revenue adj entry

Answer 15

dr. asset cr. revenue

Question 16

deferral

Answer 16

delay

Question 17

deferred revenue

Answer 17

unearned, delay in recognition of revenue already received, but not yet earned

Question 18

deferred revenue adj entry

Answer 18

dr. liability cr. revenue

Question 19

deferred expense

Answer 19

delay in recognition of an expense already paid, but not yet used, used vs unused

Question 20

deferred expense adj entry

Answer 20

dr. asset cr. expense

Question 21

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

Answer 21

debit Depreciation Expense $700; credit Accumulated Depreciation $700.

Question 22

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:

Answer 22

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.

Question 23

Financial statements can be prepared directly from the:

Answer 23

adjusted trial balance

Question 24

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:

Answer 24

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.

Question 25

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:

Answer 25

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.

Question 26

The final step in the accounting cycle is to prepare

Answer 26

post closing trial balance

Question 27

A net loss will appear in which column of the worksheet?

Answer 27

Balance Sheet - Debit; and income statement credit colu mn

Question 28

Under IFRS, revenue recognition is determined by how many standards?

Answer 28

1

Question 29

Cash basis accounting is:

Answer 29

not in accordance with IFRS.