Week 4 - Income Statement and Adjusting Entries

Question 1

What is the matching principle

Answer 1

Expenses are matched to revenue they might help generate

Question 2

What is conservatism or prudence principle

Answer 2

Recognise anticipated losses immediately, recognise anticipated gains only when they arise

Question 3

Income statement format

Answer 3

Sales
COGS
Gross Profit
Operating Expenses
Operating Income
Interest Gains/Expenses
Pre-tax income
Taxes 
Net income

Question 4

What is an accrued expense

Answer 4

costs for the current period which have not been recorded as an expense yet but is recorded on income statement as accrued expense

Question 5

What is a prepaid expense

Answer 5

Expense recorded but related to consumption in a future accounting period

Question 6

I rent an office paying quarterly, 6000 per quarter, starting March 1 2018. I pay 6000 on Dec 1 2018 covering until feb 28 2019. what is my IS and BS for 2018.

Answer 6

Rent expense = 3 x 6000 = 18000
December rent = 1/3 x 6000 = 2000
prepaid expense = 2/3 x 6000 = 4k
cash out = 24000
prepaaid expense account = 4000
rent expense = 20000

Question 7

What is deferred revenue

Answer 7

When customer pays but you havent done the service or good yet = liability

Question 8

fiscal year = calendar year
for december, employees must be paid 25k
salary is paid jan 5 next year
what is entry on dec 31

Answer 8

Dec 31: Dr salary expense, Cr accrued expense

Jan 5: Dr accrued expense,
Cr Cash

Question 9

How is depreciation recorded

Answer 9

as an expense related to how long it was used - so if i buy a factory halfway through period, end of period the depreciation expense is half of yearly depreciation

Question 10

How is depreciation logged on BS

Answer 10

Gross asset
accumulated dep
Net asset

Question 11

cost of sales formula

Answer 11

opening inventory + purchases = goods available

goods available-closing inventory = COGS

Question 12

how does the prudence principle work if there is an inventory write down

Answer 12

you use the lower value out of the carrying amount (initial cost) and the net realisable value (est. selling price minus costs involved in selling and distributing)

Question 13

What is the doubly entry for inventory write down

Answer 13

Dr write down (IS)
Cr Inventory (BS)

Question 14

Cost of inventory at end = 1100 including 150 for mens clothes which firm then decides to sell at 30% of their cost (writing down by 70%)
Beginning inventory = 1050
Purchases = 6520
What is COGS

Answer 14

Beginning 1050 + purchases 6520 = 7570
- closing inventory (1100-0.7x150=995)
COGS = 7570-995 = 6575

Question 15

when would you need to adjust for bad and doubtful debt

Answer 15

iif customers do not pay the receivables

Question 16

Bad debt (irrecoverable debt) what happens and double entry

Answer 16

write off (Dr bad debt write off (IS), Cr accounts receivable (BS))
so expense on IS of the write off, then minus the value from accounts receivable from BS directly (don't add a section for less bad debt)

Question 17

what does a firm do when there is doubtful debt

Answer 17

they create a provision against them

Question 18

what is double entry when firm decides some remaining debts are doubtful

Answer 18

Dr doubtful debt expense (IS) = expense on IS

Cr Provision for doubtful debt (BS) = this is subtracted from accounts receivable to get net AR

Question 19

what happens if previous period you had 1500 provision for doubtful debt, but then this period another 1000 bad debt and provision % remains same as last year - how do u book this

Answer 19

first Dr bad debt write off and Cr AR
then work out new total provision which is AR-BD x % but then subtract previous provision and the new addition to the account here is the DR doubtful debt expense and Cr provision for doubtful debt

then on BS you have 
new AR balance 
-write off
-provision for DD last year + this year
=net AR

Question 20

what happens if previous year DD provision was 2000 and BD write off was 1000 where Gross AR was 41K (net 38k) but this time no write-off, new AR balance is 22k and provision still 5%

Answer 20

provision = 5% x 22k = 1100
change in DD = 2000-1100 = 900 decrease
Dr Provision for doubtful debt (BS)
Cr doubtful debt expense (IS)
both of only 900 
But then BS:
AR = 22000
-DD (1100)
Net AR of 20,900