General theory

Question 1

Discount notatio

Answer 1

x/10 n/30

if paid within ten days x% off, must be paid within 30 days

Question 2

FoB destination

Answer 2

Seller pays freight expenses (belongs to seller until it arrives at destination)

Question 3

When receiving a discount amount saved…

ie from buyer’s perspective

Answer 3

goes into inventory (ex. I saved $7 on my car, that $7 is registered in inventory, why idk)

Question 4

When you need to pay something (ex. you paid w/ card)

Answer 4

accounts payable

Question 5

When you’ve been paid but haven’t earned it

Answer 5

Unearned Revenue

Question 6

Share capital

Answer 6

common shares

Question 7

Retained earnings go into…

Answer 7

Shareholder’s equity (SE)

Question 8

Increase right side/ decrease left side

Answer 8

debit

Question 9

increase left side/ decrease right side

Answer 9

credit

Question 10

Revenue can be recognized when

Answer 10

• Performance has be completed
• Revenue is measurable
• Collection is reasonably certain

Question 11

expense recognition

Answer 11

• when future economic value is diminished

- when assets decrease or liabilities increase

Question 12

accrual based accounting

Answer 12

expenses/revenue recorded when used/earned

Question 13

Cash based accounting

Answer 13

expenses/revenue recorded when cash used/received

note: this leads to misleading info

Question 14

Prepaid expenses (type of adjusting entry)

Answer 14

(prepayment) expense paid in cash and recorded as assets before they are used

Question 15

accrued expenses (adjusting entry)

Answer 15

expenses incurred but not yet payed

Question 16

Unearned revenue (adjst entry)

Answer 16

cash received and recorded as liability

Question 17

accrued revenues (adjusting entry)

Answer 17

Revenues earned, but not yet payed in cash

Question 18

Depreciation

Answer 18

allocating the cost of an asset over its expected lifetime

Question 19

What is an adjusting entry?

Answer 19

Journal entry made at the end of the cycle to match the matching principle

Question 20

what is the matching principle?

Answer 20

states that expenses need to match the revenue that is paying for them (in terms of dating)

Question 21

When does revenue occur? (4 things)

Answer 21

• at point of sale (most of the time)
• at completion of production (done in limited circumstances ex. w/ natural resources)
• after sale (cash collection doubtful)
• during construction (long projects)

Question 22

For long projects, two additional conditions for revenue recognition:

Answer 22

1. presence of long-term, legally enforceable, contract

2. it is possible to estimate the percentage of completion (cost & revenues)

Question 23

using milestones to estimate revenue examples

Answer 23

of stories/floors, km of road built

Question 24

Cost incurred to total estimate cost revenue recognition is…

Answer 24

comparing the cost incurred at given moment to the estimated total cost (quote)
(note: if managers are making estimates, they can manipulate the revenue earned/expenses incurred)

Question 25

Contract-completed method

Answer 25

rarely used. revenue is only recognized after contract is completely met because on of the two long term conditions were not met.

Question 26

If payment is unreliable

Answer 26

Use installments and recognize as you go

Question 27

order of application for revenue recognition

Answer 27

1. Identify contract
2. identify obligations
3. determine price
4. allocate price
5. recognize revenue (while following principles)

Question 28

If the buyer can walk away from long term project…

Answer 28

then revenue can only be recognized at the end

continuous production