Financial Accounting Concepts
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Questions and Answers

What adjusting entry is necessary for prepaid insurance?

  • Decrease Insurance Expense by ¥100
  • Decrease Prepaid Insurance by ¥100 (correct)
  • Increase Insurance Expense by ¥100 (correct)
  • Increase Prepaid Insurance by ¥100

    • Supplies Expense must be recorded as an adjusting entry of ¥2,000 when supplies on hand total ¥800.

    True

    What is the monthly depreciation expense for the equipment?

    ¥200

    The adjusted amount for accumulated depreciation is __________ after recording the depreciation expense.

    <p>¥5,200</p> Signup and view all the answers

    Match the adjusting entries to their accounts:

    <p>Prepaid Insurance = Insurance Expense Supplies = Supplies Expense Accumulated Depreciation—Equipment = Depreciation Expense Unearned Service Revenue = Service Revenue</p> Signup and view all the answers

    What amount of unearned service revenue was earned during March?

    <p>¥4,600</p> Signup and view all the answers

    Accumulated Depreciation—Equipment is a liability account.

    <p>False</p> Signup and view all the answers

    To reflect the consumption of supplies, the adjusting entry debits Supplies Expense and credits __________.

    <p>Supplies</p> Signup and view all the answers

    What is the monthly expense recognized for the prepaid insurance paid by Yazici Advertising?

    <p>₺50</p> Signup and view all the answers

    Depreciation attempts to reflect the actual change in the value of an asset.

    <p>False</p> Signup and view all the answers

    What is the purpose of a contra asset account?

    <p>To offset the value of a related asset account.</p> Signup and view all the answers

    Each month, Yazici Advertising recognizes a depreciation expense of _____ for its equipment.

    <p>₺40</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Prepaid Expenses = Payments made for goods or services to be received in the future Accrued Expenses = Expenses that are recognized before cash is paid out Depreciation = The systematic allocation of the cost of an asset over its useful life Accumulated Depreciation = The total depreciation expense that has been allocated to an asset since it was acquired</p> Signup and view all the answers

    What type of account is Accumulated Depreciation?

    <p>Contra asset account</p> Signup and view all the answers

    When supplies are used, a journal entry is made to increase the Supplies Expense account.

    <p>True</p> Signup and view all the answers

    What is the book value of an asset?

    <p>The difference between the cost of the asset and its accumulated depreciation.</p> Signup and view all the answers

    What is the monthly depreciation expense calculated for the equipment purchased by FastForward Co.?

    <p>$375</p> Signup and view all the answers

    Unearned revenues are recorded as assets on the statement of financial position.

    <p>False</p> Signup and view all the answers

    What entry is made to adjust unearned revenue when services are performed?

    <p>Debit to liability account and credit to revenue account</p> Signup and view all the answers

    The straight-line method of depreciation calculates expense as the difference between asset cost and _________ divided by useful life.

    <p>residual value</p> Signup and view all the answers

    Match the following terms with their correct definitions:

    <p>Accrued expenses = Liabilities that represent expenses that have been incurred but not yet paid Prepaid expenses = Expenses paid in advance before they are incurred Accrued revenues = Income that has been earned but not yet received Unearned revenues = Cash received for services not yet performed</p> Signup and view all the answers

    In the context of accounting, what does adjusting entries affect?

    <p>Both revenue and expense accounts</p> Signup and view all the answers

    The accumulated depreciation account is considered a contra asset account.

    <p>True</p> Signup and view all the answers

    What is the useful life of the equipment purchased by FastForward Co. in months?

    <p>48 months</p> Signup and view all the answers

    Study Notes

    Financial Accounting Concepts

    • The economic life of a business is divided into artificial time periods for accounting purposes. This is known as the time period assumption or periodicity assumption.
    • Accountants divide the economic life into monthly, quarterly, or annual periods.
    • Monthly and quarterly periods are called interim periods.
    • Fiscal year: A one-year accounting period, often not coinciding with a calendar year.
    • Calendar year: January 1 to December 31.
    • Accrual Basis Accounting: Transactions are recorded in the period in which the events occur, regardless of when cash is received or paid. Revenues are recognized when services are performed, and expenses are recognized when incurred.
    • Cash Basis Accounting: Revenues are recorded when cash is received, and expenses are recorded when cash is paid. This is not in accordance with IFRS.
    • Revenue Recognition Principle: Revenue is recognized in the accounting period in which the performance obligation is satisfied.
    • Expense Recognition Principle: Expenses are matched with revenues in the period the revenue was earned. "Let the expenses follow the revenues".
    • Adjusting entries ensure that the revenue recognition and expense recognition principles are followed, because the trial balance may not be up to date.
    • Adjusting entries are required for all financial statements.
    • Adjusting entries include one income statement account and one balance sheet account.
    • Deferrals: Expenses or revenues that are recognized at a date later than the point when cash was originally exchanged.
      • Prepaid expenses: Payment of expenses before the resources (e.g., insurance) are used.
      • Unearned revenues: Cash received before services are performed.
    • Accruals: Adjusting entries for revenues for services performed but not recorded, or expenses incurred but not yet paid.  
      • Accrued revenues: Revenues from services performed but not yet received.
      • Accrued expenses: Expenses incurred but not yet paid.
    • Depreciation: The process of allocating the cost of an asset to an expense over its useful life.
    • Accumulated depreciation: A contra asset account that reduces the value of the asset on the balance sheet.
    • Book value: The difference between the cost of an asset and its accumulated depreciation.
    • The Adjusted Trial Balance is prepared after all adjusting entries are journalized and posted.
    • The Adjusted Trial Balance proves the equality of debit balances and credit balances in the ledger.
    • The Adjusted Trial Balance is the primary basis for preparing financial statements.

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    Financial Accounting IFRS 3rd Edition PDF

    Description

    Test your understanding of essential financial accounting concepts including time period assumptions, fiscal years, and the differences between accrual and cash basis accounting. This quiz covers crucial principles like the Revenue Recognition Principle. Prepare to solidify your grasp on how businesses report their financial activities.

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