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Flashcards in Chapter 4 Deck (51):
1

Accounting time periods

Genearlly a month, quarter, or a year

2

Fiscal year

An accounting time period that is one year long

3

Revenue recognition principle

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

4

Expense Recognition Principle

"Matching principle"

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

5

Krispy Kreme

Doubled number of donuts to boost quarterly sales

6

Computer Associates International

Accused of backdating sales

7

International note: accural basis

Acccrusal basis of accounting is central to all of these standards

8

Adjusting entries

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

9

trial balance

the first pulling together of the transaction data

10

International note: internal controls

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

11

2 types of deferrals

Prepaid expenses

Unearned revenues

12

Prepaid expenses or Prepayments

Expenses that will benefit more than one accounting period as assets

13

Adjusting entry for prepaid expenses

An increase (debit) to a expense account

A decrease (credit) to an asset account

14

Useful life

The period of service of an asset

15

Depreciation

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

16

Depreciation concept

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

17

Contra asset account

Accmulated Depreciaition is called this

18

Helpful hint: contra assets

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

19

Book value

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

20

Another term for book value

Carrying value

21

Adjustment entry for unearned revenues

Results in a decrease (debit) to a liability account

Increase (credit) to a revenue account

22

Accounting for prepaid expenses

 

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

Accounting for unearned revenues

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

Adjustment entry for accrued revenues

Increase (debit) to an asset account

Increase (credit) to a revenue account

25

Accounting for accrued revenues

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

accrued expenses

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

27

Adjusting entry for accrued expenses

Results in an increase (debit) to an expense

Increase (credit) to a liability 

28

Fannie Mae's

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

motivation: hit earnings estimates

29

China and accrual accounting

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

30

Accounting for acccrued expenses

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

Prepaid expenses (AE)

dr. expenses

cr. assets

32

Unearned revenues (AE)

dr. liablities

cr. revenues

33

accrued revenues (AE)

dr. assets

cr. revenues

34

accrued expense (AE)

dr. expenses

cr. liabilties

35

Adjusted trial balance

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

How do companies prepare financial statements?

Directly from an adjusted trial balance

37

Temporary accounts

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

38

Permanent accounts

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

39

Other term for temporary accounts

nominal accounts

40

Other term for permanant accounts

Real accounts

41

Closing entries

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

42

Temporary

All revenue accounts

All expense accounts

Dividends

43

Permanent

All asset accounts

All liability accounts

Stockholders' equity accounts

44

Post-closing trial balance

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

45

Income summary

A temporary account used in closing revenue and expense accounts

46

Reversing entry

An entry made at the beginning of the next accounting period

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

47

Earnings management

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

48

High Quality of earnings

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

49

One time items

Used to prop up earnings numbers

ConAgra foods did this

50

Inflate revenue

provide larger incentives for people to buy products to meet goals

Bristol-Myers Squibb did this

51

Improper adjusting entries

A way to manage earnings