Chapter 4:

Question 1

What is the periodicity assumption?

Answer 1

Accountants divide the economic life of a business into artificial time periods.

Question 2

What is the revenue recognition principle?

Answer 2

Companies recognize revenue (in other words record the increase in a credit) in the accounting period in which the performance obligation is satisfied.

Question 3

What is the expense recognition principle or “matching principle”?

Answer 3

• match expenses with revenues in the period when the company makes efforts to generate those revenues.

Question 4

What is Accrual-Basis accounting?

Answer 4

Transactions are recorded in the periods in which events occur.

Question 5

When is revenue recorded?

Answer 5

• when the service or obligation has been satisfied.

Question 6

T/F cash is required for revenue to be recorded?

Answer 6

False, revenue is recorded when services are performed.

Question 7

When are expenses recorded?

Answer 7

Expenses are recognized when they are incurred, even if cash was not paid.

Question 8

What is cash basis accounting?

Answer 8

Revenues and expenses are entered on a basis of when cash is recieved.

Question 9

What are the nine steps in the accounting cycle?

Answer 9

1. ) Analyze the business transaction.
2. ) Journalize the business transaction
3. ) post the journal to the LEDGER.
4. ) Prepare a trial balance.
5. ) Complete adjusting entries.
6. ) Create an adjusted trial balance.
7. ) Prepare financial statements
8. ) Closing entries
9. ) Post-Closing entries.

Question 10

What is the purpose of an adjusting entry?

Answer 10

• The purpose of the adjusting entry is to ensure that the expense and revenue recognition principles are followed.

Question 11

T/F, adjusting entries are required every time a company prepares financial statements?

Answer 11

True.

Question 12

What are the two types of adjusting entries and what is the difference between them?

Answer 12

Deferrals: cash is received prior to the service being completed or in a payable credit format

Accrual: The good, service or expense has come prior to the cash.

Question 13

What are the sub-types of deferrals?

Answer 13

• Unearned service revenue: Cash is received prior to the service being completed.
• Prepaid expenses: Expenses are paid in cash and assets before they are used or consumed.

Question 14

What are the sub-types of accruals?

Answer 14

Accrued Revenue: Revenues for services performed have not yet been received in cash or recorded.

Accrued Expenses: Expenses incurred but not yet paid for in cash or recorded.

Question 15

What are examples of Deferrals: prepaid expenses?

Answer 15

• Insurance
• Rent
• Equipment
• Supplies
• Advertising
• Buildings

Question 16

What is deaprecitation?

Answer 16

Is the process of allocating the cost of an asset to expense over its USEFUL LIFE.

Question 17

What is a contra asset?

Answer 17

It is a credited asset.

Question 18

What is book value?

Answer 18

This is the difference between the cost of any depreciable asset and its related accumulated depreciation.

Question 19

What are the temporary and permanent accounts?

Answer 19

Temporary:
- All revenue
- All expense
- Dividends
Permanent:
- All asset accounts
- All liability accounts
- Stockholders equity

Question 20

Which kinds of accounts are closed at the end of the books?

Answer 20

temporary accounts are transferred to permanent accounts.