✨RECITATION 1 (L04)

Question 1

Give examples for Adjusting Entries

ACCURED ADJUSTMENTS:
Timing: Cash flow occurs after recognition.

• (a) Salaries,
• (b) Service

DEFERRED ADJUSTMENTS:
Timing: Cash flow occurs before recognition.

• (c) Insurance,
• (d) Subscription

Answer 1

(a) Salaries

• Dr Salaries Expense (+E)
• Cr Salaries Payable (+L)

(b) Service Revenue

• Dr Accounts Receivable (+A)
• Cr Service Revenue (+R)

(c) Insurance

• Dr Insurance Expense (+E)
• Cr Prepaid Insurance (-A)

(d) Subscription Revenue

• Dr Unearned Revenue (-L)
• Cr Subscription Revenue (+R)

Question 2

Explain the following
Balance Sheet Accounts via question: What i ..

• Assets
• Liabilities
• Equity
• Net Income

Answer 2

• “what i have”
  Assets = Liabilities + Equity
• “what i owe”
  Liability
• “what it’s worth”
  Equity = (Common Stock - Dividends) + (Revenues - Expenses)
• “what i gain”
  Net Income = (Revenues - Expenses)

Question 3

Adjusting Entries

• Basic Principle
• Relevant Accounts

Answer 3

• Basic Principle: Timing
  Accured or Deferred Payment
  (angehäuft oder aufgeschoben)
• Expense or Revenue (+R, +E, ±SE)

Question 4

Give two examples for Adjusting Entries of Deferred Items:

• Unearned Revenue
• Prepaid Expense

Answer 4

• Unearned Revenue (-L):
  Service
• Prepaied Expense (-A):
  Insurance, Depreciation, ..

Question 5

What are Accruals (not previously recorded)? Give two examples for Adjusting Entries!

Answer 5

• Interest Income (+R,+SE)
• Wages Expense (+E,-SE)

Question 6

What is treasury stock

Answer 6

Shares of a company’s own stock

• that it has issued
• subsequently bought back from the market.

Question 7

Managers can boost decicling sales by …

• lengthening credit periods
• lowering credit standards.

Problems (3)

Answer 7

The resulting increase in accounts receivable …

• can cause net income to outpace operating cash flow.
• Consequently, many view a large receivalbel increase as a warning sign.

Question 8

Accured Expenses

Answer 8

Expensed incurred before the end of the accounting period, but not jet paid for. Examples:

• Wages earned by employees not paid end of the year
• Employee benefits not yet paid, such as vacation

Question 9

How to set up a income statement? (3)

Answer 9

Revenue e.g.
sales revenue, service revenue, interest income, or any other sources of income.

Expenses

• Cost of Goods Sold (COGS):
  e.g. direct materials, direct labor, and manufacturing overhead.
• Gross Profit Calculation:
  Subtract the COGS from the total revenue
• Other Expenses:
  e.g. advertising and other general expenses

Net Income Calculation
Add or subtract the income and expenses

Question 10

How to prepare a Statement of Stockholders’ Equity? (2)

Answer 10

HORIZONTAL

• Common Stock
• ,+ Retained Earnings
• = Total Stockholders’ Equity

VERTICAL

• Beginning Balance:
• Stock Issuance:
• Dividends:
• Net Income:
• Ending Balance:

Question 11

Name the two types of Pre- / Deferred payments.
How is it recorded in the ?

Answer 11

Unearned Revenue: Allocate earned portion of unearned revenues to revenue to reflect revenues earned in the period.

• Unearned Revenue (-L)
• (Sales) Revenue (+R, +SE)

Prepaid Expenses: Allocate used or expired assets to reflect expenses incurred in the period (-> depreciation, amortization)

• (Insurance) Expense (+E,-SE)
• Prepaid Insurance (-A)

Question 12

Name the two types of Accruals.

Answer 12

Accured Revenues:

• Dt (Interest) Receivable (+A)
• Cr (Interest) Income (+R,+SE)

Accured Expenses:

• Dt (Wages) Expense (+E,-SE)
• Cr (Wages) Payable (-L)

Question 13

Why do I have ..

• revenues on the credit side
  (eg. consulting services)
• expense’s on the debit side
  (eg. rent, wages)
  in the trial balance? (3)

Answer 13

Trial balance lists all ledger accounts and balances, ensuring total debits equal total credits.

• Revenues are recorded on the credit side as they increase owner’s equity or company’s net income.
• Expenses are recorded on the debit side as they decrease owner’s equity or company’s net income.

Question 14

Accumulated Amortization (2)

Answer 14

The sum of prior amortization expense

Contra Account:
Appears as a negative number (credit) in the asset section of the balance sheet

Offsets intangible asset value
recorded at cost, such as

• patents,
• trademarks,
• copyrights,
• franchise licenses and goodwill

Question 15

Accumulated Depreciation

Answer 15

Offsets tangible asset value recorded at cost such as property, plant and equipment

Question 16

Financial Statement Relationship

Answer 16

Interdependence of Financial Statements

• Income Statement:
  Calculates Net Income
  (Profit & Loss)
• Balance Sheet:
  Net income increases or net loss decreases Retained Earnings (Position Account)
• Statement of Cash Flows:
  Uses Net Income and Balance Sheet changes to report cash flows.
• Statement of Shareholders’ Equity:
  Details changes in Equity from the Balance Sheet.

Question 17

Income Statement Defined

• Time Frame
• Formular
• “Net Income” goes where

Answer 17

Reports financial performance for a specific period.

• Revenue - Expenses = Net Income (Profit & Loss)
• Net Income flows to retained earnings on the Balance Sheet.

Question 18

Income Statement

• Formular
• what is operating Income

Answer 18

Reports financial performance over a period.

• Formular
  Revenues - Expenses = Net Income
• Operating Income:
  Derived from normal business activities.