Powerpoint 5 Flashcards

1
Q

Revenue Recognition Principle

A

Requires companies to recognize revenue in the acc. period in which it’s earned

Revenue is receieved when the service is provided, or goods are transferred, even if cash not received

ex. Dry Cleaning Revenues

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2
Q

Periodicity assumption

A

The economic life of business can be divided into artificial time periods

many transactions affect more than one

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3
Q

Expense recognition principle

A

States that expenses are to be matched with revenues in the period when the efforts are expended to generate these revenues

not only when expenses are paid (cash)

Ex. Salaries payable

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4
Q

Major assumption about Revenue recognition principle and Expense recognition principle

A

Periodicity assumption

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5
Q

Cash basis

A

Record events only in the periods in which cash is received or paid

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6
Q

accrual basis

A

Companies record, in the period in which the events occur, events that change a company’s financial statements even if cash has not been exchanged

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7
Q

What basis do we follow under U.S. GAAP?

why?

A

Accrual basis

Cash basis does not record revenue when earned - violating the revenue recognition principle

Cash basis does not record expense when incurred - violating expense recognition principle

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8
Q

Adjusting entries?

A
  1. Some events not recorded daily because not efficient
  2. Some costs expire with passage of time
  3. Some items may be unrecorded
    ex. utily bill next month
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9
Q

Four types of adjusting entries

A

Prepaid expenses

Unearned revenues

Accrued revenues

Accrued expenses

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10
Q

Prepaid expenses

A

Costs that expire either with the passage of time or through use

ex. rent or supplies

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11
Q

Unearned revenues

A

Cash received and recorded as liabilities before revenue is actually earned

i.e. season football tickets

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12
Q

Accrued revenues

A

Revenues earned but not yet received in cash or recorded

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13
Q

Accrued expenses

A

Expenses incurred but not yet paid in cash or recorded

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14
Q

Deferrals

A
  1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed
  2. Unearned revenues: Cash received and recorded as liabilities before revenue is earned
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15
Q

Accruals

A
  1. Accrued revenues: Revenues earned but not yet received in cash or recorded
  2. Accrued expenses: Expenses incurred but not yet paid in cash or recorded
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16
Q

Interest information

A
  1. Face value of note
  2. Interest rate (anual)
  3. Length of time note is outstanding
17
Q

Formula for computing interest

A

Face value of note x Annual interest rate x Time in term of one year = interest

18
Q

Adjusting entries: prepaid expenses

A

Assets overstated / expenses understated

Dr. Expenses / Cr. Assets

19
Q

Adjusting entries: unearned revenues

A

Liabilities overstated / revenues understated

dr. liabilities / cr. revenues

20
Q

Adjusting entries: accrued revenues

A

assets understated / revenues understated

dr. assets / cr. revenues

21
Q

adjusting entries: accrued expenses

A

expenses understated / liabilities understated

dr. expenses / cr. liabilities

22
Q

Financial statements are prepared from ____________

A

the Adjusted Trial Balance

23
Q

Temporary accounts

A

Accounts related only to a given accounting period

ex. revenues, expenses, and dividends

24
Q

Permanent accounts

A

accounts that are not closed

25
Q

Closing entries

A

Transfer net income (or net loss) and dividends to retained earnings, resulting in a zero balance in each temporary account

26
Q

Post-closing trial balance

A

A list of all permanent accounts and their balances after closing entries are journalized and posted

27
Q

High quality of earnings

A

A company that provides full and transparent information

  • builds confidence in the financial reporting of the company
28
Q

Earnings management

A

The “planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income”

29
Q

Examples of earnings management

A

One time earnings

Inflate revenues

Improper adjusting entries

30
Q

Both GAAP and IFRS use ___________

A

accrual accounting

31
Q

Revenue Recognition US GAAP

A

> 100 rules

“realized, relizable, and earned”

32
Q

Revenue Recognition IFRS

A

Single standard

Probability the economic benefits associated with the transaction will flow to the company

revenues and costs must be capable of being measured reliably

33
Q

Reavaluation of PPE GAAP

A

Does not allow re-valuation

34
Q

Revaluation of PPE - IFRS

A

Allows re-valuation

35
Q

Income - GAAP

A

Net difference between revenues and expenses

36
Q

Income - IFRS

A

Both revenues from normal operating activities, and gains, which arise from activities outside the normal sales of goods and services

37
Q

Expenses - GAAP

A

Those costs incurred in the normal course of operations

38
Q

Expenses - IFRS

A

Both costs incurred in the normal course of operations and losses that are not part of normal opeations

39
Q
A