FAR 2 Module 3 Flashcards
What is a noninterest-bearing note and how would it be reported when dealing with interest payable?
A noninterest-bearing note is a loan where the borrower does not make periodic interest payments.
No interest payable is recorded for the noninterest-bearing note because the interest is included in the note’s face value and will be
accounted for in its carrying value on the balance sheet.
What is the matching principle and how are expenses recorded under this principle?
An accrual accounting fundamental concept
Expenses are required to be recorded in the same period as the revenues they help generate, regardless of when they are paid
What does amortization mean?
“Amortize the cost over time.”
gradually reduce or pay off a debt, asset, or expense over time through regular payments or systematic accounting adjustments.
Similar to depreciation
Depreciation = Tangible assets
Amoritzation = Intangible assets (prepaid) expenses
If deferred revenue balances on unperformed service contracts DEC 31 Y2 was significantly less than the balance at DEC 31 Y1, why would this be the case?
If Year 2 contracts were signed earlier in the year than before
More warranty work would have been performed by year end
This reduces the deferred revenue balance more than in prior years
What are the most common adjusting JE’s?
Accrual vs Deferral
What is the difference?
Deferral postpones recognizing revenue or expenses until a future period, even if cash is received.
Accrual refers to recognizing revenue or expenses when they occur, not when cash is exchanged.
Accrual = Recognized early.
Deferral = Recognized later.
What does cumulative mean?
What is the cumulative effect of an accounting principle change, and how is it treated if found in net income?
Cumulative means the total amount accumulated (gathered or collected) over time.
Beginning RE of the year is adjusted for The cumulative effect of an accounting principle change, NOT included with Net income
Under U.S. GAAP, when should gains be recognized? Should they be allocated over periods?
Gains should be recognized in the period they are realized (when the transaction occurs).
The ENTIRE gain should be recognized in the period it is realized.
It shouldn’t be allocated over multiple periods
