Chapter 4 Flashcards

1
Q

Accounting time periods

A

Genearlly a month, quarter, or a year

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2
Q

Fiscal year

A

An accounting time period that is one year long

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3
Q

Revenue recognition principle

A

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

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4
Q

Expense Recognition Principle

“Matching principle”

A

Expenses matched with revenues in the period when efforts are expended to generate revenues

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5
Q

Krispy Kreme

A

Doubled number of donuts to boost quarterly sales

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6
Q

Computer Associates International

A

Accused of backdating sales

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7
Q

International note: accural basis

A

Acccrusal basis of accounting is central to all of these standards

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8
Q

Adjusting entries

A

Ensure that the revenue recognition and expense recognition principles are followed

required every time a company prepares financial statements

Every adjusting entry will include one income statement account and one balance sheet account

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9
Q

trial balance

A

the first pulling together of the transaction data

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10
Q

International note: internal controls

A

Internal controls - system of checks and balances designed to detect and prevent fraud and errors

Foreign companies dont have to follow this in SOX

Unfair advantage because developing internal controls is expensive

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11
Q

2 types of deferrals

A

Prepaid expenses

Unearned revenues

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12
Q

Prepaid expenses or Prepayments

A

Expenses that will benefit more than one accounting period as assets

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13
Q

Adjusting entry for prepaid expenses

A

An increase (debit) to a expense account

A decrease (credit) to an asset account

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14
Q

Useful life

A

The period of service of an asset

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15
Q

Depreciation

A

The process of allocating the cost of an asset to exepnse over its useful life

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16
Q

Depreciation concept

A

An allocation concept, not a valuation concept

Allocates an asset’s cost to the periods in which it is used

Does not attempt to report the actual change in the value of the asset

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17
Q

Contra asset account

A

Accmulated Depreciaition is called this

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18
Q

Helpful hint: contra assets

A

All contra accounts have increases, decreases, and normal balances opposite to the account to which they relate

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19
Q

Book value

A

The difference between the cost of any depreciable asset and its related accumulated depreciation

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20
Q

Another term for book value

A

Carrying value

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21
Q

Adjustment entry for unearned revenues

A

Results in a decrease (debit) to a liability account

Increase (credit) to a revenue account

22
Q

Accounting for prepaid expenses

A

Ex. insurance, supplies

Reason: prepaid expenses recorded in asset accounts have been used

accounts before adjustment: assets overstated/ expenses understated

Adjusting entry: dr. expenses/cr. assets

23
Q

Accounting for unearned revenues

A

Ex. rent, magazines

reason: unearned revenues recorded in liability have been earned

before adjustment: liabilities overstated/revenues understated

adjusting entry: dr. liablities/ cr revenues

24
Q

Adjustment entry for accrued revenues

A

Increase (debit) to an asset account

Increase (credit) to a revenue account

25
Q

Accounting for accrued revenues

A

Ex. rent, services performed but not collected

reason: revenues have been earned but not yet received in cash or recorded

before adjustment: assets understated/revenues understated

adjusting entry: dr. assets / cr. revenues

26
Q

accrued expenses

A

Expenses incurred but not yet paid or recorded at the statement date

27
Q

Adjusting entry for accrued expenses

A

Results in an increase (debit) to an expense

Increase (credit) to a liability

28
Q

Fannie Mae’s

A

Improper adjusting entries resulted in delayed recognition of expense caused by interest-rate changes

motivation: hit earnings estimates

29
Q

China and accrual accounting

A

switched from cash to accrual accounting to meet a projected budget deficit goal

30
Q

Accounting for acccrued expenses

A

Ex. interest, rent, salries

reason: expenses have been incurred but not yet paid in cash or recorded

before adjustment: expenses understated / liabilities understated

adjusting entry: dr. expenses / cr. liabilities

31
Q

Prepaid expenses (AE)

A

dr. expenses
cr. assets

32
Q

Unearned revenues (AE)

A

dr. liablities
cr. revenues

33
Q

accrued revenues (AE)

A

dr. assets
cr. revenues

34
Q

accrued expense (AE)

A

dr. expenses
cr. liabilties

35
Q

Adjusted trial balance

A

Purpose: prove the equality of the total debit balances and the total credit balances in the ledger after adjustments

Primary basis for the preparation of financial statements

36
Q

How do companies prepare financial statements?

A

Directly from an adjusted trial balance

37
Q

Temporary accounts

A

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period

38
Q

Permanent accounts

A

Balance sheet accounts whose balances are carried forward to the next accounting period

39
Q

Other term for temporary accounts

A

nominal accounts

40
Q

Other term for permanant accounts

A

Real accounts

41
Q

Closing entries

A

transfer net income and dividends to Retained Earnings, so the balance in Retained Earings agrees with the retained earnings statement

42
Q

Temporary

A

All revenue accounts

All expense accounts

Dividends

43
Q

Permanent

A

All asset accounts

All liability accounts

Stockholders’ equity accounts

44
Q

Post-closing trial balance

A

A list of permanent accounts and their balances after a company has journalized and posted closing entries

45
Q

Income summary

A

A temporary account used in closing revenue and expense accounts

46
Q

Reversing entry

A

An entry made at the beginning of the next accounting period

The exact opposite of the adjusting entry made in the previous period

47
Q

Earnings management

A

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

48
Q

High Quality of earnings

A

Full and transparent information that will not confus or mislead users of the financial statements

49
Q

One time items

A

Used to prop up earnings numbers

ConAgra foods did this

50
Q

Inflate revenue

A

provide larger incentives for people to buy products to meet goals

Bristol-Myers Squibb did this

51
Q

Improper adjusting entries

A

A way to manage earnings