Accounting chapter 4 Test Questions – Flashcards
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revenue
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is the price of goods sold and services rendered during a given accounting period. Revenue alone is either an inflow of cash or the creation of a receivable which increases total asset. On the other side, owners' equity also increases
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revenue recognition principle
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states that revenue is recognized when it is earned without regard to when the payment is received. Revenue is considered earned when the service has been provided or when the goods are delivered
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expenses
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the cost of the goods and services used up in the process of earning revenue. Examples: - cost of goods sold -salaries - advertising - rent - depreciation of many long-term revenues
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expense recognition principle
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requires that the revenue earned should be matched (offset) with the expenses incurred in the same period
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the revenue recognition principle and the expense recognition principle are helpful guides used in determine net income or net loss for a period
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true
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Accrual Accounting
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The two general rules of the accrual basis of accounting are: - revenue is recognized when earned - expenses are recognized when incurred
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Cash basis Accounting
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the two general rules of the cash basis of accounting are: - revenue is recognized when cash is collected - expenses are recognized when cash is disbursed
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The a service-type business, revenue is considered earned
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C. when the service is performed
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Using accrual accounting, expenses are recorded and reported only
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A. when they are incurred whether or not cash is paid
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Adjusting Entries
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to allocate revenue and expenses among accounting periods in accordance with the revenue recognition and expense recognition principles - only made at the end of each accounting period to ensure that financial statements reflect these events
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Adjusting entries are made to ensure that:
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- expenses are recognized in the period in which they are incurred - revenues are recognized in the period in which the performance obligation is satisfied -balance sheet and income statement accounts have correct balances at the end of an accounting period
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Deferrals
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1. Prepaid Expenses: expenses paid in cash and recorded as assets before they are used or consumed 2. Unearned Revenues: cash received before service are preformed
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Accruals
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1. Accrued expenses: expenses incurred but not yet paid in cash or recorded 2. Accrued Revenues: revenues for services preformed but not yet received in cash or recorded
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Deferred Expense
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a cost that will benefit more than one accounting period is originally recorded by debiting an asset account (insurance, supplies, and buildings and equipment)
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Depreciation Formula
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( Cost - CV ) / Use life
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An adjusting entry to a prepaid expense is required to recognize expired expenses
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true
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Deferred Revenues
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collecting cash in advance for services to be preformed in the future
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Accrued Expense
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an expense that has been incurred but has not been recorded or paid
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Accrued Revenues
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a revenue that has not been earned during the current period, but has not been billed to customers or recorded in the accounting period
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closing entires deal primarily with the balances of permanent accounts
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False
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Which of the following is a true statement about closing the books of a corporation?
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C. Revenues and expenses are closed to the Income Summary account
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earnings management
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is the panned timing of revenues, expenses, gains, and losses to smooth out bumps in net income
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high quality earnings
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provide full and transparent information that will not confuse or mislead users of F/S
