Financial Accounting Chapter 4 Flashcards

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Questions and Answers

What is the periodicity assumption?

Accounting divides the economic life of a business into artificial time periods.

What is the revenue recognition principle?

Requires that companies recognize revenue in the accounting period in which it is earned.

What is the expense recognition principle?

The practice of expense recognition.

What is the matching principle?

The same thing as the expense recognition principle. Signup and view all the answers

What is the difference between accrual and cash-basis accounting?

Accrual basis accounting records transactions when events occur, while cash basis accounting records revenues only when cash is received and expenses only when cash is paid. Signup and view all the answers

Why do we make adjusting entries?

To ensure revenues are recorded in the period they are earned and expenses are recognized in the period they are incurred. Signup and view all the answers

What are adjusting entries?

Adjusting entries are made to ensure that revenue and expense recognition principles are followed. Signup and view all the answers

Why are adjusting entries necessary?

Because the trial balance is the first pulling together of the transaction data. Signup and view all the answers

When are adjusting entries required?

Every time a company prepares financial statements. Signup and view all the answers

Every adjusting entry will include what two types of accounts?

Income statement account and balance sheet account. Signup and view all the answers

What are the two types of adjusting entries?

Accruals and deferrals. Signup and view all the answers

What are prepaid expenses and what type of account are they?

Companies record payments for expenses that will benefit more than one accounting period as assets. Signup and view all the answers

What kind of account is supplies?

Asset. Signup and view all the answers

When do companies recognize supplies expense?

At the end of the accounting period. Signup and view all the answers

What is meant by useful life?

The period of service. Signup and view all the answers

What is depreciation?

The process of allocating the cost of an asset to expense over its useful life. Signup and view all the answers

Why is an adjusting entry needed for depreciation?

To recognize the cost that has been used during the period and to report the unused cost at the end of the period. Signup and view all the answers

In accounting, what does depreciation have to do with value?

It allocates an asset's cost to the periods in which it is used and does not report the actual change in the value of the asset. Signup and view all the answers

What account is a contra asset?

Accumulated depreciation. Signup and view all the answers

What is the entry to record depreciation?

Depreciation expense/accumulated depreciation. Signup and view all the answers

What is book value and how is it calculated?

The difference between the cost of a depreciable asset and its related accumulated depreciation. Signup and view all the answers

What is the purpose of depreciation?

It is not valuation but a means of cost allocation. Signup and view all the answers

What are unearned revenues and what type of account are they?

Cash received before revenue is earned, increasing a liability. Signup and view all the answers

What are accruals?

The second category of adjusting entries. Signup and view all the answers

Adjusting entries for accruals will increase what two types of accounts?

Balance sheet and income statement. Signup and view all the answers

What are accrued revenues?

Revenues earned but not yet recorded at the statement date. Signup and view all the answers

What are accrued expenses?

Expenses incurred but not yet paid or recorded at the statement date. Signup and view all the answers

What is the formula for computing interest?

Face value of note x annual interest rate x time in terms of one year = interest. Signup and view all the answers

What is an adjusted trial balance?

After a company has journalized and posted all adjusting entries, it prepares another trial balance from the ledger. Signup and view all the answers

What is the purpose of an adjusted trial balance?

To prove the equality of the total debit balances and the total credit balances in the ledger after all adjustments. Signup and view all the answers

Financial statements can be prepared from what statement?

Income statement. Signup and view all the answers

What are temporary accounts?

Revenues, expenses, and dividends related to only a given accounting period. Signup and view all the answers

What are permanent accounts?

All balance sheet accounts. Signup and view all the answers

Why do we make closing entries?

To achieve a zero balance in each temporary account. Signup and view all the answers

What accounts should be on the post-closing trial balance?

Your permanent accounts. Signup and view all the answers

What is earning management?

Managing the numbers, not the business. Signup and view all the answers

Study Notes

Periodicity and Principles

Periodicity assumption divides the economic life of a business into set time periods for accounting purposes.
Revenue recognition principle mandates that revenue is recognized in the period it is earned, not necessarily when cash is received.
Expense recognition principle dictates that expenses should be recorded in the period they occur, aligning with revenue recognition.

Adjusting Entries

Adjusting entries ensure compliance with revenue and expense recognition principles, adjusting accounts to reflect true earnings and expenses.
Required whenever financial statements are prepared to ensure accurate reporting.
Every adjusting entry involves an income statement account and a balance sheet account.

Types of Adjusting Entries

Types include accruals (earned but not yet recorded) and deferrals (cash received or paid before the revenue or expense is recognized).
Prepaid expenses are recorded as assets when payment is made for expenses benefiting future periods.
Supplies are considered an asset until they are recognized as an expense at the end of the accounting period.

Depreciation and Valuation

Depreciation allocates the cost of tangible assets over their useful lives, reflecting usage rather than market value.
Accumulated depreciation is the contra asset account representing total depreciation expense deducted from an asset's cost.
Book value is calculated as the asset's purchase price minus its accumulated depreciation.

Revenues and Expenses

Unearned revenues result in increased liabilities as cash is received before the service is performed.
Accrued revenues are earned but not yet recorded, while accrued expenses are incurred but not yet paid, impacting both balance sheet and income statement.

Trial Balances

An adjusted trial balance is prepared after all adjusting entries are made to ensure the equality of total debits and credits.
The purpose of the adjusted trial balance is to confirm accurate financial recording before preparing financial statements.

Account Types and Closing Entries

Temporary accounts include revenue, expense, and dividend accounts, which reset after each accounting period.
Permanent accounts encompass all balance sheet accounts that carry forward balances into future periods.
Closing entries are made to reset temporary accounts to zero, preparing them for the next accounting period.

Earnings Management

Earnings management involves manipulating financial statements to present desired results, focusing on numbers rather than the actual performance of the business.

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Description

Test your knowledge with these flashcards covering key concepts from Financial Accounting Chapter 4. Learn about the periodicity assumption, revenue recognition principles, and expense recognition principles as you prepare for your accounting exams.