chapter 4

Question 1

Hwhat is accrual accounting?

Answer 1

Involves recording transactions in the period when they occur, regardless of when cash is paid or received. Revenues are recorded when they are earned and expenses recorded when goods/services are used up or incurred.

Question 2

what is cash accounting?

Answer 2

Involves recording transactions only when cash is paid or received. Revenues are recorded when cash is received and expenses when cash is paid.

Question 3

what is revenue like for cash basis of accounting and accrual basis of accounting?

Answer 3

cash accounting= revenue is the cash being received
accrual basis of accounting= revenue is reported when it is earned not collected

Question 4

accounting standards say what about accrual accounting?

Answer 4

musyt be used to prepare financial statements, more useful for decision making purposes

Question 5

according to Aspe, how should revenues be earned?

Answer 5

1) services have been provided or the risks and rewards of ownership have been transferred to the buyer
2) the amount of revenue must be able to be reliably measured
3) collection is reasonably assured

Question 6

what is the five step process according to IRFS to measure and report revenues?

Answer 6

1. identify the contract with the client or customer.
2. identify the performance obligations in the contract
3. determine the transaction price (reflects any discounts, refunds)
4. allocate the transaction price to the performance obligations in the contract
5. recognize revenue when the company satisfies the performance obligation

Question 7

in many scenarios, a detailed analysis of revenue recognition will not be required. for simple cases, how do you recognize revenue?

Answer 7

1. for companies that provide goods, once the goods have been provided to the customer
2. for companies that provide services, once that service has been provided

Question 8

what are the two categories of adjusting entries/

Answer 8

prepayments (cash happens before )
accruals (cash happens after)

Question 9

what are prepaid expenses (prepayments)

Answer 9

wen expenses are paid in cash before they are used, initially recorded as an asset

Question 10

how are prepaid expenses initially recorded?

Answer 10

debit to an asset and credit to cash

Question 11

how are prepaid expenses adjusted?

Answer 11

debit expenses and crediting the asset

Question 12

for insurance (prepaid expense), what happens in the adjusting entry?

Answer 12

debit insurance expense and credit prepaid insurance

Question 13

what happens to supplies (prepaid expense)

Answer 13

debit supplies expense and credit supplies

Question 14

what is the useful life (depreciation)

Answer 14

the length of service of a depreciable asset

Question 15

how do you calculate straight line depreciation?

Answer 15

cost/ useful life

Question 16

how do you calculate the carrying amount?

Answer 16

cost of depreciable asset (OG amount)- accumulated depreciation

Question 17

what are deferred revenues?

Answer 17

When cash is received from customers before goods or services are provided to them (liability)

Question 18

what is the second category of adjusting entries?

Answer 18

accruals (accrued expenses and revenues)

Question 19

what are accrued expenses?

Answer 19

When expenses are incurred but not yet paid or have not yet been recorded, we need an adjusting entry to reflect that an expense has been incurred in the period. ex: interest, salaries and income tax

Question 20

what happens in the adjusting entries for accrued expenses?

Answer 20

debit the expense credit the payable

Question 21

how do you calculate interest expense?

Answer 21

(principle amount)(annual interest rate) (time in terms of one year)= interest expense

Question 22

what are accrued revenues?

Answer 22

When revenues have been earned but cash has not yet been received and revenues have not yet been recorded, we need an adjusted entry to record revenues.

Question 23

how di you adjust accrued revenues?

Answer 23

debit receivable and credit revenue

Question 24

how do you adjust unearned revenue?

Answer 24

debit unearned revenue and credit revenue

Question 25

how do you calculate the expense per year?

Answer 25

(cost- residual)/useful life

Question 26

how do you calculate accumulated depreciation?

Answer 26

(cost of asset- salabvge value)/ life fo asset times number of years