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Questions and Answers
Which financial statement primarily uses the ending retained earnings balance?
Which financial statement primarily uses the ending retained earnings balance?
- Balance Sheet
- Statement of Cash Flows
- Income Statement
- Statement of Stockholders' Equity (correct)
The Retained Earnings shown on the Trial Balance represents the ending retained earnings amount ready for financial statement preparation.
The Retained Earnings shown on the Trial Balance represents the ending retained earnings amount ready for financial statement preparation.
False (B)
What is the purpose of the Adjusted Trial Balance in the financial reporting process?
What is the purpose of the Adjusted Trial Balance in the financial reporting process?
to prepare the financial statements
The beginning retained earnings amount is found on the ________ ________.
The beginning retained earnings amount is found on the ________ ________.
Supplies have debit balances of 120 and 420. Assuming these are beginning and ending balances, which is their effect on the income statement?
Supplies have debit balances of 120 and 420. Assuming these are beginning and ending balances, which is their effect on the income statement?
Under accrual basis accounting, when is revenue recognized?
Under accrual basis accounting, when is revenue recognized?
Under cash basis accounting, when is revenue recognized?
Under cash basis accounting, when is revenue recognized?
Expense recognition under accrual accounting is primarily driven by cash payments.
Expense recognition under accrual accounting is primarily driven by cash payments.
According to the expense recognition (matching) principle, when should an expense be recorded?
According to the expense recognition (matching) principle, when should an expense be recorded?
A deferred expense, also known as ______ expense, is classified as an asset.
A deferred expense, also known as ______ expense, is classified as an asset.
Rand Co. pays $3,000 rent for January. How much rent expense should Rand recognize in January?
Rand Co. pays $3,000 rent for January. How much rent expense should Rand recognize in January?
Which of the following factors determines when to record an expense?
Which of the following factors determines when to record an expense?
Match the accounting term with its respective description:
Match the accounting term with its respective description:
Which of the following statements accurately describes the purpose of adjusting entries?
Which of the following statements accurately describes the purpose of adjusting entries?
Adjusting entries always affect the cash account.
Adjusting entries always affect the cash account.
Clark Company purchased three years of flood insurance on January 1st for $45,000. How much insurance expense should be reported on the income statement for the first year?
Clark Company purchased three years of flood insurance on January 1st for $45,000. How much insurance expense should be reported on the income statement for the first year?
Prepaid expenses are classified as a(n) _______ on the balance sheet.
Prepaid expenses are classified as a(n) _______ on the balance sheet.
According to the revenue recognition principle, what are the two main factors to consider when recognizing revenue?
According to the revenue recognition principle, what are the two main factors to consider when recognizing revenue?
Match the following terms with their descriptions:
Match the following terms with their descriptions:
Revenue recognition is primarily driven by the receipt of cash.
Revenue recognition is primarily driven by the receipt of cash.
If a company fails to record the adjusting entry for depreciation expense, which of the following is most likely to occur?
If a company fails to record the adjusting entry for depreciation expense, which of the following is most likely to occur?
A company receives cash in advance for services to be provided in the future. What type of account is used to record this transaction, and is it a balance sheet or income statement account?
A company receives cash in advance for services to be provided in the future. What type of account is used to record this transaction, and is it a balance sheet or income statement account?
What is the primary difference between accrual accounting and cash basis accounting?
What is the primary difference between accrual accounting and cash basis accounting?
A cash inflow is not necessarily ______.
A cash inflow is not necessarily ______.
List the three phases of the Measurement process/Accounting cycle.
List the three phases of the Measurement process/Accounting cycle.
Target sells a $1,000 TV to a customer on September 15th, and the customer pays with a check. How much revenue should Target recognize in September?
Target sells a $1,000 TV to a customer on September 15th, and the customer pays with a check. How much revenue should Target recognize in September?
A magazine company receives $12,000 on September 16th for a one-year subscription starting in October. How much revenue should the magazine company recognize in September?
A magazine company receives $12,000 on September 16th for a one-year subscription starting in October. How much revenue should the magazine company recognize in September?
Explain why deferred revenue is classified as a 'liability' rather than 'revenue'.
Explain why deferred revenue is classified as a 'liability' rather than 'revenue'.
Match the following terms with their descriptions:
Match the following terms with their descriptions:
Which of the following is the correct formula to calculate Net Income?
Which of the following is the correct formula to calculate Net Income?
The Statement of Stockholders' Equity is prepared before the Income Statement.
The Statement of Stockholders' Equity is prepared before the Income Statement.
Seneca Company's Total Revenue is $89,000 and Total Expenses are $73,065. What is Seneca Company's Net Income?
Seneca Company's Total Revenue is $89,000 and Total Expenses are $73,065. What is Seneca Company's Net Income?
The income statement reports a company's financial _________ over a period of time.
The income statement reports a company's financial _________ over a period of time.
Which of the following expense categories is typically found on an income statement?
Which of the following expense categories is typically found on an income statement?
Depreciation Expense represents an actual cash outflow for a company during the accounting period.
Depreciation Expense represents an actual cash outflow for a company during the accounting period.
What is the difference between revenue and net income?
What is the difference between revenue and net income?
According to Seneca Company's Income Statement, what component is included in Total Expenses?
According to Seneca Company's Income Statement, what component is included in Total Expenses?
TR Company provided $300 of services on December 31st but did not bill the customers. If the adjusting entry is not recorded, what is the impact on the financial statements?
TR Company provided $300 of services on December 31st but did not bill the customers. If the adjusting entry is not recorded, what is the impact on the financial statements?
Adjusting entries are only required for accounts that have external transactions during the accounting period.
Adjusting entries are only required for accounts that have external transactions during the accounting period.
What is the primary purpose of preparing an adjusted trial balance?
What is the primary purpose of preparing an adjusted trial balance?
Failure to record depreciation expense will ______ net income.
Failure to record depreciation expense will ______ net income.
Which of the following is the correct adjusting entry for accrued revenue?
Which of the following is the correct adjusting entry for accrued revenue?
Why are adjusting entries necessary at the end of an accounting period?
Why are adjusting entries necessary at the end of an accounting period?
Seneca Company has an unadjusted balance of $5,000 for prepaid insurance. What information do you need to calculate the insurance expense?
Seneca Company has an unadjusted balance of $5,000 for prepaid insurance. What information do you need to calculate the insurance expense?
What is the effect on the accounting equation if a company fails to record an adjusting entry for depreciation expense?
What is the effect on the accounting equation if a company fails to record an adjusting entry for depreciation expense?
The adjusted trial balance is used to prepare the income statement and balance sheet.
The adjusted trial balance is used to prepare the income statement and balance sheet.
Accrued revenues are revenues that are ______ but not yet received in cash.
Accrued revenues are revenues that are ______ but not yet received in cash.
Flashcards
Revenue Recognition Principle
Revenue Recognition Principle
Recognizing revenue when a good or service is provided and collection is probable.
When to Record Revenue
When to Record Revenue
Record revenue in the period when the good or service is provided.
Cash vs. Revenue
Cash vs. Revenue
Cash inflow is not always revenue. Revenue is recognized when earned.
Deferred Revenue
Deferred Revenue
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Target TV Sales
Target TV Sales
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Magazine Subscriptions Revenue
Magazine Subscriptions Revenue
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September Magazine Revenue Recognition
September Magazine Revenue Recognition
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Cash Sale
Cash Sale
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Balance Sheet
Balance Sheet
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Income Statement
Income Statement
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Assets
Assets
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Liabilities
Liabilities
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Stockholders' Equity
Stockholders' Equity
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Accrual Basis Revenue Recognition
Accrual Basis Revenue Recognition
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Expense Recognition (Matching Principle)
Expense Recognition (Matching Principle)
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Period Costs
Period Costs
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Adjusted Trial Balance
Adjusted Trial Balance
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Statement of Stockholders' Equity
Statement of Stockholders' Equity
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Beginning Retained Earnings
Beginning Retained Earnings
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Ending Retained Earnings
Ending Retained Earnings
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Adjusted Trial Balance Amounts
Adjusted Trial Balance Amounts
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Accrual Accounting
Accrual Accounting
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Cash Basis Accounting
Cash Basis Accounting
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Accounting Cycle (Phase 1)
Accounting Cycle (Phase 1)
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Accounting Cycle (Phase 2)
Accounting Cycle (Phase 2)
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Adjusting Entries
Adjusting Entries
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Adjusting Entries and Cash
Adjusting Entries and Cash
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Prepayments or Deferrals
Prepayments or Deferrals
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Prepaid Expense
Prepaid Expense
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Total Revenues
Total Revenues
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Cost of Sales
Cost of Sales
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Depreciation Expense
Depreciation Expense
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Insurance Expense
Insurance Expense
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Supplies Expense
Supplies Expense
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Utilities Expense
Utilities Expense
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Wage Expense
Wage Expense
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Accrued Revenue
Accrued Revenue
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Interest Expense Adjustment
Interest Expense Adjustment
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Depreciation
Depreciation
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Accumulated Depreciation
Accumulated Depreciation
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Accounts Payable
Accounts Payable
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Note Payable
Note Payable
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Common Stock
Common Stock
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Retained Earnings
Retained Earnings
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Study Notes
- Chapter 3 covers the accounting cycle at the end of the period and the accrual basis of accounting.
Revenue Recognition Principle
- Revenue recognition involves providing a good or service and the collection being probable.
- Providing the good or service is the most important consideration.
Determining When to Record Revenue
- Revenue is recorded in the period when a good or service is provided.
- Cash inflow does not necessarily mean it is revenue.
- Revenue recognition is not driven by cash receipt; it is driven by being earned.
- Deferred revenue is a liability, not revenue.
Accrual Basis vs Cash Basis Accounting
- Accrual Basis Accounting recognizes revenue when it is earned not necessarily when cash is received.
- Cash Basis Accounting recognizes revenue when cash is received from an operating activity regardless of when the revenue is earned.
Expense Recognition (Matching Principle)
- Expense Recognition involves recording an expense when an asset is used up to earn revenue or a liability is incurred to earn revenue.
- Match the cost with the revenue the cost helped earn in the period it was earned.
Determining when to Record an Expense
- Record expenses when an asset is used or a liability incurred to generate revenue.
- A cash outflow is not necessarily an expense.
- Expense recognition is not driven by cash payment, it is driven by being incurred to earn revenue.
- Deferred expense, "prepaid expense" (is NOT an expense) it's an ASSET.
- Direct costs incurred to earn revenue are expensed when the revenue is earned.
- Period costs are indirect costs incurred to earn revenue and are matched to the period in which they occur.
Accrual Basis Compared With Cash Basis Accounting (Expenses)
- Accrual Basis Accounting recognizes expenses using the matching principle, based on when expenses are incurred, not paid.
- Cash Basis Accounting recognizes expenses when cash is paid for an operating item.
The Accounting Cycle
Phase 1 (during the accounting period)
- Transaction analysis
- Recording journal entries in the general journal
- Post amounts to ledger accounts (T accounts)
- Prepare a trial balance
Phase 2 (end of the accounting period)
- Analyze adjustments
- Record and post adjusting entries
- Prepare and distribute financial statements
- Record and post closing entries
Adjusting Entries
- Adjusting entries record events that have occurred but have not been recorded yet.
- It adjusts the balance of a balance sheet account and records an income statement account.
- Purpose is to ensure all accounting events have been recognized in the accounting records
- An adjusting entry will never affect the cash account.
Adjusting entries for prepayments/deferrals
- Cash is received/paid or obligation to pay before revenue/expense recognition.
- Prepaid expense or deferred expenses is an asset.
- Deferred revenue is a liability.
Deferred Revenue
- Cash is received before the good/service, and is a liability until provided.
Contra Accounts
- Contra Accounts go against and have an opposite balance of the primary account.
- Accumulated Depreciation is a contra asset that goes against long-term assets.
- It adds up the total depreciation taken on a long-term asset and has a credit balance.
- Book Value = Cost - Accumulated depreciation.
- Depreciation is an adjusting entry, as depreciation expense (income statement account) and accumulated depreciation (balance sheet)
Adjusting Entries for Accruals
- Cash is not paid or received yet.
- Accrued expenses: expense incurred before cash is paid, which creates a liability.
- Accrued revenue: a good or service is provided before cash is received and creates an asset.
Interest Calculation
- P x R x T
- P = Principal (face value), the borrowed amount.
- R = Annual interest rate.
- T = Length of time the money was used in the accounting period, based on a year because the interest rate is an annual rate.
Adjusted Trial Balance
- Not all accounts need to be adjusted.
Financial Statements for Seneca Company
- Adjusted balances in the revenue account(s) are totaled to find total revenues.
- Adjusted balances in the expense accounts are totaled to find total expenses.
- Net Income is the difference between total revenues and total expenses.
Classified Balance Sheet
- Operating Cycle: the cash to cash cycle of the entity
PART C: The Closing Process
- Permanent Accounts—Balance sheet accounts (NOT CLOSED)
- Temporary Accounts—Income statement accounts and Dividends Declared (CLOSED)
Purpose of closing accounts
- During the accounting period, revenue, expenses, and dividends (components of Retained Earnings) are directly recorded to the specific account; they were not recorded into Retained Earnings. The closing process accomplishes the transfer of the balances of these temporary accounts into Retained Earnings.
- It ensures all temporary accounts have zero balances to start the next accounting period.
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Description
Explore accounting principles, focusing on accrual vs. cash basis. Understand retained earnings, trial balances, and revenue recognition. Learn about deferred expenses and the matching principle.
