Lecture 4

Question 1

I/S

Answer 1

reports NI earned by the business over a period of time as a result of its profit-directed activities

changes in shareholders’ equity due to profit-directed activities during an accounting period

Question 2

ΔRE =

Answer 2

= NI - DIV

= REV - EXP - DIV

Question 3

Cash Basis

Answer 3

revenues w/ increase in cash

expenses w/ decrease in cash

Question 4

downside to cash basis

Answer 4

reflects cost/benefit of ops transactions only when cash payments and receipts occur

delays recognizing revenues even if firm has sold inventory

poor matching of true costs of generating revenues to the periods in which they’re generated

doesn’t reflect assets & liabilities accurately

Question 5

Accrual basis

Answer 5

revenue is the increase in assets and/or decrease in liabilities resulting from selling goods/services

expense is the decrease in assets and/or increase in liabilities for the purpose of generating revenue in the period

Question 6

conditions for revenue recognition

Answer 6

EARNED AND REALIZABLE

1. company has earned it (delivered goods/services)
2. evidence of arrangement for customer payment
3. price is fixed or determinable
4. collection of cash/benefits is reasonably assured

Question 7

conditions for expense recognition

Answer 7

matching principle: recognize cost and/or assets used as expenses in the period in which they produce revenue

Question 8

Dr./Cr. Rev

Answer 8

• +

Question 9

Dr./Cr. Exp

Answer 9

+ -

Question 10

passive journal entry

Answer 10

generated by end-of-period adjustment to update an account for a change due to the passage of time

Question 11

temporary accounts:

Answer 11

revenue, expense, dividends

Question 12

steps to closing books:

Answer 12

Dr. Rev, Cr. RE
Cr. Exp, Dr. RE
Cr. DIV, Dr. RE