Powerpoint 5

Question 1

Revenue Recognition Principle

Answer 1

Requires companies to recognize revenue in the acc. period in which it’s earned

Revenue is receieved when the service is provided, or goods are transferred, even if cash not received

ex. Dry Cleaning Revenues

Question 2

Periodicity assumption

Answer 2

The economic life of business can be divided into artificial time periods

many transactions affect more than one

Question 3

Expense recognition principle

Answer 3

States that expenses are to be matched with revenues in the period when the efforts are expended to generate these revenues

not only when expenses are paid (cash)

Ex. Salaries payable

Question 4

Major assumption about Revenue recognition principle and Expense recognition principle

Answer 4

Periodicity assumption

Question 5

Cash basis

Answer 5

Record events only in the periods in which cash is received or paid

Question 6

accrual basis

Answer 6

Companies record, in the period in which the events occur, events that change a company’s financial statements even if cash has not been exchanged

Question 7

What basis do we follow under U.S. GAAP?

why?

Answer 7

Accrual basis

Cash basis does not record revenue when earned - violating the revenue recognition principle

Cash basis does not record expense when incurred - violating expense recognition principle

Question 8

Adjusting entries?

Answer 8

1. Some events not recorded daily because not efficient
2. Some costs expire with passage of time
3. Some items may be unrecorded
   ex. utily bill next month

Question 9

Four types of adjusting entries

Answer 9

Prepaid expenses

Unearned revenues

Accrued revenues

Accrued expenses

Question 10

Prepaid expenses

Answer 10

Costs that expire either with the passage of time or through use

ex. rent or supplies

Question 11

Unearned revenues

Answer 11

Cash received and recorded as liabilities before revenue is actually earned

i.e. season football tickets

Question 12

Accrued revenues

Answer 12

Revenues earned but not yet received in cash or recorded

Question 13

Accrued expenses

Answer 13

Expenses incurred but not yet paid in cash or recorded

Question 14

Deferrals

Answer 14

1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed
2. Unearned revenues: Cash received and recorded as liabilities before revenue is earned

Question 15

Accruals

Answer 15

1. Accrued revenues: Revenues earned but not yet received in cash or recorded
2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded

Question 16

Interest information

Answer 16

1. Face value of note
2. Interest rate (anual)
3. Length of time note is outstanding

Question 17

Formula for computing interest

Answer 17

Face value of note x Annual interest rate x Time in term of one year = interest

Question 18

Adjusting entries: prepaid expenses

Answer 18

Assets overstated / expenses understated

Dr. Expenses / Cr. Assets

Question 19

Adjusting entries: unearned revenues

Answer 19

Liabilities overstated / revenues understated

dr. liabilities / cr. revenues

Question 20

Adjusting entries: accrued revenues

Answer 20

assets understated / revenues understated

dr. assets / cr. revenues

Question 21

adjusting entries: accrued expenses

Answer 21

expenses understated / liabilities understated

dr. expenses / cr. liabilities

Question 22

Financial statements are prepared from ____________

Answer 22

the Adjusted Trial Balance

Question 23

Temporary accounts

Answer 23

Accounts related only to a given accounting period

ex. revenues, expenses, and dividends

Question 24

Permanent accounts

Answer 24

accounts that are not closed

Question 25

Closing entries

Answer 25

Transfer net income (or net loss) and dividends to retained earnings, resulting in a zero balance in each temporary account

Question 26

Post-closing trial balance

Answer 26

A list of all permanent accounts and their balances after closing entries are journalized and posted

Question 27

High quality of earnings

Answer 27

A company that provides full and transparent information

• builds confidence in the financial reporting of the company

Question 28

Earnings management

Answer 28

The “planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income”

Question 29

Examples of earnings management

Answer 29

One time earnings

Inflate revenues

Improper adjusting entries

Question 30

Both GAAP and IFRS use ___________

Answer 30

accrual accounting

Question 31

Revenue Recognition US GAAP

Answer 31

> 100 rules

“realized, relizable, and earned”

Question 32

Revenue Recognition IFRS

Answer 32

Single standard

Probability the economic benefits associated with the transaction will flow to the company

revenues and costs must be capable of being measured reliably

Question 33

Reavaluation of PPE GAAP

Answer 33

Does not allow re-valuation

Question 34

Revaluation of PPE - IFRS

Answer 34

Allows re-valuation

Question 35

Income - GAAP

Answer 35

Net difference between revenues and expenses

Question 36

Income - IFRS

Answer 36

Both revenues from normal operating activities, and gains, which arise from activities outside the normal sales of goods and services

Question 37

Expenses - GAAP

Answer 37

Those costs incurred in the normal course of operations

Question 38

Expenses - IFRS

Answer 38

Both costs incurred in the normal course of operations and losses that are not part of normal opeations