Chapter 3: Accrual Accounting And Income Flashcards Preview

BUS 214: Financial Accounting > Chapter 3: Accrual Accounting And Income > Flashcards

Flashcards in Chapter 3: Accrual Accounting And Income Deck (49)
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1
Q

Accrual Accounting

A

Records the impact of a business transaction as it occurs. When a business performs a service the accountant records the transaction even if the business receives or pays no cash

2
Q

Cash-Basis Accounting

A

Records only cash transactions, cash receipts, and cash payments. Cash receipts are revenues and cash payments are expenses

3
Q

GAAP

A

Requires accrual accounting

4
Q

Balance Sheet Defect

A

If we fail to record a sale on account, the balance sheet reports no accounts receivable. Therefore assets are overstated

5
Q

Income Statement Defect

A

A sale on account provides revenue that increases the company’s wealth. Ignoring that understates revenue and net income on the income statement

6
Q

Cash transactions

A

Collecting cash from customers, receiving cash from interest earned, paying expenses, borrowing money, paying off loans, issuing stock

7
Q

Non-Cash transactions

A

Sales on account, purchases of inventory on account, accrual of expenses incurred but not yet paid, depreciation expense, usage of prepaid rent, and earning of revenue when cash was collected in advance

8
Q

Time Period Concept

A

Ensures that accounting information is reported at regular intervals. The basic accounting period is one year. A fiscal year ends any other date than December 31

9
Q

Revenue Principle

A

Deals with when to record revenue (make a journal entry) and the amount of revenue to record. Revenue must be recorded after it is earned. The amount of revenue to record is the cash value of the goods or services transferred to the customer

10
Q

Expense Recognition Principle

A

Deals with identifying all of the expenses incurred during the accounting period and measure the expenses, and recognize them in the same period in which any related revenues are earned

11
Q

What accounts need to be adjusted?

A

Accounts receivable, supplies, and prepaid rent must be adjusted because certain transactions have not been recorded

12
Q

Deferrals

A

Is an adjustment for payment of an item or receipt of cash in advance. Assets are used up and can become expensive. An adjusting entry is needed to update the asset account and the expense. There are also deferral adjustments for liabilities. A company may collect cash in advance of earning revenue which is called unearned service revenue

13
Q

Depreciation

A

Allocates the cost of a plant asset to expense over the assets useful life. Depreciation is the most common long term deferral. Records wear and tear of assets

14
Q

Accruals

A

Is the opposite of a deferral. An accrual is recording an expense or revenue before cash is collected.

15
Q

Examples of Accruals

A

Income tax expense and interest expense

16
Q

Prepaid Expenses

A

Is an expense that is paid in advance. Are assets because they provide a future benefit to the company

17
Q

Plant Assets

A

Are long lived tangible assets, such as land, buildings, furniture, and equipment. All plant assets except for land decline in usefulness and this decline is an expense. Depreciation is the process of allocating cost to expense for a long term plant asset

18
Q

Accumulated Depreciation

A

The account that shows the sum of all depreciation expense from using the asset. The balance increases over the useful life

19
Q

Contra Account

A

Always has a companion account and its normal balance is opposite that of the companion account. Accumulated depreciation is the contra account to equipment

20
Q

Book Value (of a plant asset)

A

The net amount of a plant asset (cost minus accumulated depreciation) is the assets carrying cost

21
Q

Accrued Expense

A

Refers to a liability that arises from an expense that has not yet been paid. Companies don’t record accrued expenses daily or weekly. Instead, they wait until the end of the period and use an adjusting entry to update each expense

22
Q

Accrued Revenues

A

Businesses often earn revenue before they receive the cash. A revenue that has been earned but not yet collected

23
Q

Unearned Revenue

A

Some businesses collect cash from customers before earning the revenue. This creates a liability. Only when the job is completed does the business earn the revenue

24
Q

Adjusted Trial Balance

A

Lists all of the accounts and their balances in a single place

25
Q

Closing the Books

A

Means to prepare the accounts for the next periods transactions

26
Q

Closing Entries

A

Set the revenue, expenses, and dividend balances back to 0 at the end of the period

27
Q

Temporary Accounts

A

The closing process involves only revenues, expenses, and dividends

28
Q

Permanent Accounts

A

Assets, liabilities, and stockholder’s equity are permanent accounts because they are the beginning balances of the next period

29
Q

First Step to Close the Accounts

A

Debit each revenue account for the amount of its credit balance. Credit retained earnings

30
Q

Second Step to Close the Accounts

A

Credit each expense account for the amount of the debit balance. Debit retained earnings

31
Q

Third step to close the accounts

A

Credit the dividends account for the amount of the debit balance. Debit retained earnings

32
Q

Liquidity

A

Measures how quickly an item can be converted to cash

33
Q

Liquidity of Current Assets

A

Are the most liquid assets. They will be converted to cash, sold, or consumed during the next 12 months

34
Q

Operating Cycle

A

Is the time span during which cash is paid for goods and services, and these goods and services are sold to bring in cash

35
Q

Liquidity of Long Term Assets

A

Are all assets not classified as current assets. Plant assets is the most common with property and plant, land, and buildings

36
Q

Liquidity of Current Liabilities

A

The sooner a liability must be paid l, the higher up the balance sheet it must be placed

37
Q

Liquidity of Long Term Liabilities

A

Many notes payable are long term. Placed after current liabilities on the balance sheet

38
Q

Balance Sheet Formats

A

Report format and account format

39
Q

Report Format

A

Lists the assets at the top followed by liabilities and stockholder’s equity

40
Q

Account Format

A

Lists the assets on the left and the liabilities and stockholder’s equity on the right side similar to t accounts

41
Q

Income Statement Formats

A

Single step and multi step formats

42
Q

Single Step Income Statement

A

Lists all of the revenues together under one heading and all of the expenses under another heading

43
Q

Multi Step Income Statement

A

Reports a number of subtotals to highlight important relationships between revenues and expenses

44
Q

Net Working Capital

A

Is computational data that represents operating liquidity.

45
Q

Net Working Capital Formula

A

Net Working Capital = Total Current Assets - Total Current Liabilities

46
Q

Current Ratio

A

Expressing operating data through the relationship between current assets and current liabilities

47
Q

Current Ratio Formula

A

Current Ratio = Total Current Assets/ Total Current Liabilities

48
Q

Debt Ratio

A

Includes the proportion of a company’s assets that is financed with debt. A lower debt ratio is better than a high debt ratio.

49
Q

Debt Ratio Formula

A

Debt Ratio = Total Liabilities/ Total Assets