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Question 1

1. What does accrual accounting attempt to

accomplish?

Answer 1

1. Accrual accounting attempts to record the effects of accounting events in the period when such events occur, regardless of when cash is received or paid. The goal is to match expenses with the revenues that they produce.

Question 2

2. Define recognition. How is it independent

of collecting or paying cash?

Answer 2

2. Recognition is the act of reporting an event in the financial statements. When accruals are used, events are recognized before the associated cash is paid or collected.

Question 3

4. If cash is collected in advance of performing
   services, when is the associated revenue
   recognized?

Answer 3

4. If cash is collected in advance for services, the revenue is recognized when the services are rendered.

Question 4

5. What does the term asset source transaction

mean?

Answer 4

5. An asset source transaction increases assets and increases either liabilities or equity.

Question 5

6. What effect does the issue of common

stock have on the accounting equation?

Answer 5

6. The issue of common stock, which is capital acquired from owners, increases business assets (usually cash) and equity (common stock).

Question 6

8. Give an example of an asset source transaction.
   What is the effect of this transaction
   on the accounting equation?

Answer 6

Asset Source Transaction: (1) Issue of Common Stock; (2) Revenue Earned; (3) Borrowed Funds
Effect on Accounting Equation: (1) Increases Assets, Increases Common Stock; (2) Increases Assets, Increases Retained Earnings; (3) Increases Assets, Increases Liabilities

Question 7

9. When is revenue recognized under accrual

accounting?

Answer 7

9. Revenue is recognized under accrual accounting when a revenue-producing transaction occurs, i.e., when the revenue is earned, even if no cash is collected at the time of the transaction.

Question 8

10. Give an example of an asset exchange
    transaction. What is the effect of this
    transaction on the accounting equation?

Answer 8

10. The collection of cash from accounts receivable is an asset exchange transaction. Only the asset side of the accounting equation is affected. One asset account (cash) increases and another asset account (accounts receivable) decreases. Total assets are unchanged.

Question 9

11. What is the effect on the claims side of the
    accounting equation when cash is collected
    in advance of performing services?

Answer 9

11. If cash is collected in advance for services, a liability is created (unearned revenue), increasing the claims side of the accounting equation.

Question 10

12. What does the term unearned revenue

mean?

Answer 10

12. Unearned revenue is cash that has been collected for services that have not yet been performed.

Question 11

13. What effect does expense recognition have

on the accounting equation?

Answer 11

13. The recognition of expenses affects the accounting equation by either decreasing assets or increasing liabilities (payables) and by decreasing stockholders’ equity (retained earnings).

Question 12

14. What does the term claims exchange transaction mean?

Answer 12

14. A claims exchange transaction is one where the claims of creditors (liabilities) increase and the claims of stockholders (retained earnings) decrease, or vice versa. The total amount of claims is unchanged.

Question 13

15. What type of transaction is a cash payment
    to creditors? How does this type of transaction
    affect the accounting equation?

Answer 13

15. Cash payments to creditors are asset use transactions. These transactions result in the reduction of an asset account (cash) and the reduction of the corresponding liability account (payables).

Question 14

16. When are expenses recognized under accrual

accounting?

Answer 14

16. Expenses are recognized under accrual accounting at the time expenses are incurred or resources are consumed, regardless of when cash payments are made.

Question 15

18. What is the relationship between the income
    statement and changes in assets and
    liabilities?

Answer 15

18. The operating section of the income statement reflects the change in net assets associated with operating a business, as shown by revenues and expenses. Expenses may result from a decrease in assets or an increase in liabilities. Revenues may result from an increase in assets or a decrease in liabilities.

Question 16

19. How does net income affect the stockholders’

claims on the business’s assets?

Answer 16

19. Net income increases stockholders’ claims on business assets by increasing retained earnings.

Question 17

20. What is the difference between a cost and

an expense?

Answer 17

20. A cost can be either an asset or an expense. If the item acquired has already been used in the process of earning revenue, its cost represents an expense. If the item will be used in the future to generate revenue, its cost represents an asset.

Question 18

21. When does a cost become an expense? Do

all costs become expenses?

Answer 18

21. A cost is held in the asset account until the item is used to produce revenue. When the revenue is generated, the asset is converted into an expense in order to match revenues with related expenses. Not all costs become expenses. If the value of an asset will not expire in the revenue-generating process, the asset will not become an expense. For example, the cost of land will not become an expense.

Question 19

22. How and when is the cost of the supplies

used recognized in an accounting period?

Answer 19

22. Supplies used during the accounting period are recognized in a single adjusting entry at the end of the period. The amount of supplies used is determined by subtracting the amount of supplies on hand at the end of the period from the amount of supplies that were available for use (beginning supplies balance plus supplies purchased).

Question 20

23. What does the term expense mean?

Answer 20

23. An expense is a decrease in assets or an increase in liabilities that occurs in the process of generating revenue.

Question 21

24. What does the term revenue mean?

Answer 21

24. Revenue is an increase in assets or a decrease in liabilities that results from the operating activities of the business.

Question 22

25. What is the purpose of the statement of

changes in stockholders’ equity?

Answer 22

25. The purpose of the statement of changes in stockholders’ equity is to display the effects of business operations and stock issued to owners and dividends paid to stockholders. It identifies the ways that an entity’s equity increased and decreased as a result of its operations and transactions with its stockholders.

Question 23

26. What is the main purpose of the balance

sheet?

Answer 23

26. The purpose of the balance sheet is to provide information about an entity’s assets, liabilities, and stockholders’ equity and their relationships to each other at a particular point in time. It provides a list of the economic resources that the enterprise has available for its operating activities and the claims to those resources.

Question 24

27. Why is the balance sheet dated as of a specific
    date when the income statement,
    statement of changes in stockholders’ equity,
    and statement of cash flows are dated
    with the phrase for the period ended?

Answer 24

27. The balance sheet is dated as of a specific date because it gives information about an entity’s assets, liabilities, and stockholders’ equity as of that date, not measured over a time period. Whereas, the statement of changes in stockholders’ equity, the income statement, and the cash flow statement reflect transactions that occur over a period of time. Hence, they are dated with the phrase for the period ended.

Question 25

28. In what order are assets listed on the | balance sheet?

Answer 25

28. Assets are listed on the balance sheet in accordance with their respective levels of liquidity (how rapidly they can be converted to cash).

Question 26

30. What does the term adjusting entry mean? | Give an example.

Answer 26

30. An adjusting entry is an entry that updates account balances prior to preparation of the financial statements. Example: entry to recognize accrued interest revenue.

Question 27

31. What types of accounts are closed at the end of the accounting period? Why is it necessary to close these accounts?

Answer 27

31. Temporary accounts (revenue, expense and dividends) are closed at the end of the accounting period. It is necessary to close these accounts so that all revenue, expense and dividend accounts will have a zero balance at the beginning of the next accounting period.

Question 28

32. Give several examples of period costs.

Answer 28

32. Period costs are costs that are recognized in an accounting period in which they are incurred. Examples of period costs include rent expense, utilities expense, and salaries expense.