Module 3

Question 1

Time Period Concept:

Answer 1

-> Assumes that a business’s activities can be sliced into small time segments and
-> That financial statements can be prepared for
specific periods such as a month, quarter, or year.

Question 2

What is the length of the basic accounting period?

Answer 2

1 Year

Question 3

Cash Basis of Accounting:

• What is it
• When are transactions recorded?
• When are revenues recognized?
• When are expenses recorded?

Answer 3

• It is a method for recording transactions
• Transactions are only recorded when cash changes hands
• Revenue is recognized once cash is received
• Expenses are recorded once cash is paid out

Question 4

What are the advantages of the cash basis of accounting?

Answer 4

It is good for small businesses that only use cash by being simple and cheap (no need to hire accountants).

Question 5

What are the disadvantages of the cash basis of accounting?

Answer 5

It often times does not provide a clear picture of a business’s activities and it is not allowed internationally.

Question 6

Accrual Basis of Accounting:

Answer 6

-Revenue is recognized as its earned and expenses are recorded as they are incurred. (When the transactions happen(when products are delivered or when services are provided)).

Question 7

The Matching Principle:

Answer 7

Revenues, and all expenses incurred in order to generate that revenue, need to be recognized in the same accounting period.

Question 8

Accrual Accounting:

Answer 8

Reporting financial statements based on economic events rather than when cash transactions occur.

Question 9

Accruals:

Answer 9

Accruals are adjusting journal entries that adjust revenues and expenses to reflect economic activity rather than cash transactions.

Question 10

Revenue Recognition Principle:

Answer 10

Tells accountants when to record revenue and
requires companies follow a five-step process:
1. Identify the contract with the customer

2. Identify the performance obligations in the contract
3. Determine the transaction´s price
4. Allocate the transaction´s price to performance obligations in the contract
5. Recognize revenue when (or as) the entity satisfies each performance obligation

Question 11

Matching Expenses against Revenues:

• Definition:
• Goal:
• Example:

Answer 11

• It means to subtract expenses incurred during one month from revenues
  earned during that same month.
• Goal: Compute an accurate net income or net loss for the time period
• Monthly Rent

Question 12

Adjusting Entries:

Answer 12

Entries that are made at the end of the accounting period are used to record revenues to the period in which they are earned and expenses to the period in which they occur.

Question 13

Plant Asset:

Answer 13

-> Long-lived, tangible assets such as land, buildings, and equipment, used in the
operation of a business
-> As these assets are used their value and usefulness decline

Question 14

Depreciation:

Answer 14

-> The process by which businesses
spread the allocation of a plant
asset’s cost over its useful life
-> All plant assets are depreciated
with the exception of land. Land
is not depreciated because its
usefulness does not typically
decline with use

Question 15

Accumulated Depreciation:

Answer 15

The sum of all the depreciation expense recorded for a depreciable asset
-> “Contra Asset Account” – Has two main characteristics:
– Paired with and listed immediately after its related account in the chart of accounts and
associated financial statement
– Its normal balance (debit or credit) is the opposite of the normal balance of the related account

Question 16

Deferred Revenues:

Answer 16

-> A liability created when a business collects cash from customers
in advance of completing a service or delivering a product
-> “Deferred until earned”
-> Example Smart Touch: Dec 21: “We’ll pay you in advance for the e-learning services
you will provide us over the next 30 days”

Question 17

Book value:

Answer 17

A depreciable asset’s cost minus accumulated depreciation