Chapter 4 - Adjustments Flashcards Preview

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Flashcards in Chapter 4 - Adjustments Deck (21):

Deferred Revenue

When a customer pays for goods or services before the company delivers them, the company records the amount of cash recv'd as deferred revenue


Accrued Revenue

When companies perform services or provide goods (earn revenue) before customers pay, and customer has not yet been billed, this revenue is recorded as accrued revenue.


Deferred Expenses

Assets that are used over time to generate revenue.

Another explanation:
Deferred expenses previously acquired assets need to be adjusted at the of the accounting period to reflect the amount of expense incurred in using the assets to generate revenue


Accrued Expenses

Expenses that are incurred in the current period without being paid for until the next period


Examples of deferred revenues

Unearned revenue: Gift cards sold by chipotle that haven't been redeemed yet


Examples of accrued revenue

Interest on investments


What are the three steps to analyze an adjustment at the end of a period?

1. Ask: was revenue earned or an expense incurred that is not yet recorded?
2. Ask: was the related cash received or paid in the past or will it be received or paid in the future?
3. Compute the amount of revenue earned or expense incurred.


When analyzing an adjustment, what do you do if you determine that revenue has been earned or expense incurred that has not yet been recorded?

Credit the revenue account or debit the expense account in the adjusting entry


When adjusting, what do you do if you determine that unrecorded revenue exists for which cash was received in the past?

If cash was received, a deferred revenue (liability) account was recorded in the past. Now that revenue has been earned, reduce the liability account that was recorded when cash was received (usually Unearned Revenue account)

Deferred Revenue


Is cash ever included in an adjusting entry?

No, because it was recorded already in the past or will be recorded in the future.


What do you do if you determine that unrecorded revenue has been generated for which cash will be received in the future?

Increase the receivable account (I.e. interest receivable or rent receivable).

Created Accrued Revenue


What do you do if you find that cash was paid in the past for an expense that has not yet been recorded?

If cash was paid in the past, a deferred expense account was already created. Now reduce the asset account that was recorded in the past (such as supplies or prepaid expense).

Deferred Expense.


What do you do if you find unrecorded expenses incurred for which cash will be paid in the future?

Increase the payable account (such as interest payable or wages payable) to record what is owed by the company to others.

Creates accrued expense.


Examples of deferred expenses

Supplies, buildings (depreciation). Equipment (depreciation), prepaid insurance, prepaid rent, prepaid advertising.


Order in which financial statements must be prepared

(1a. Trial Balance)
1. Income Statement
2. Statement of Stockholders Equity
3. Balance Sheet


Earnings per Share ratio

Net Income
EPS =------------------------
Average # of Shares of Common Stock outstanding during the period


How to determine average number of outstanding shares for a period for EPS ratio

Number at beginning of period + number at end of period, divided by 2


Net book value

Property and equipment purchase price - accumulated depreciation.


What should current liabilities be paid with?

Current assets


Total asset turnover ratio

Net Sales (or Operating Revenues)
Average total assets*

*beginning balance + ending balance/ 2


What does Total Asset Turnover Ratio tell you?

How efficient management is in using assets to generate sales. The higher the number the better.