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Flashcards in Powerpoint 5 Deck (39):
1

Revenue Recognition Principle

Requires companies to recognize revenue in the acc. period in which it's earned

Revenue is receieved when the service is provided, or goods are transferred, even if cash not received

ex. Dry Cleaning Revenues

2

Periodicity assumption

The economic life of business can be divided into artificial time periods

many transactions affect more than one

3

Expense recognition principle

States that expenses are to be matched with revenues in the period when the efforts are expended to generate these revenues

not only when expenses are paid (cash)

Ex. Salaries payable

4

Major assumption about Revenue recognition principle and Expense recognition principle

Periodicity assumption

5

Cash basis

Record events only in the periods in which cash is received or paid

6

accrual basis

Companies record, in the period in which the events occur, events that change a company's financial statements even if cash has not been exchanged

7

What basis do we follow under U.S. GAAP?

why?

Accrual basis

Cash basis does not record revenue when earned - violating the revenue recognition principle

Cash basis does not record expense when incurred - violating expense recognition principle

8

Adjusting entries?

1. Some events not recorded daily because not efficient

2. Some costs expire with passage of time

3. Some items may be unrecorded

ex. utily bill next month

9

Four types of adjusting entries

Prepaid expenses

Unearned revenues

Accrued revenues

Accrued expenses

10

Prepaid expenses

Costs that expire either with the passage of time or through use

ex. rent or supplies

11

Unearned revenues

Cash received and recorded as liabilities before revenue is actually earned

i.e.  season football tickets

12

Accrued revenues

Revenues earned but not yet received in cash or recorded

13

Accrued expenses

Expenses incurred but not yet paid in cash or recorded

14

Deferrals

1. Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed

2. Unearned revenues: Cash received and recorded as liabilities before revenue is earned

15

Accruals

1. Accrued revenues: Revenues earned but not yet received in cash or recorded

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

16

Interest information

1. Face value of note

2. Interest rate (anual)

3. Length of time note is outstanding

 

17

Formula for computing interest

Face value of note x Annual interest rate x Time in term of one year = interest

18

Adjusting entries: prepaid expenses

Assets overstated / expenses understated

Dr. Expenses / Cr. Assets

19

Adjusting entries: unearned revenues

Liabilities overstated / revenues understated

dr. liabilities / cr. revenues

20

Adjusting entries: accrued revenues

assets understated / revenues understated

dr. assets / cr. revenues

21

adjusting entries: accrued expenses

expenses understated / liabilities understated

dr. expenses / cr. liabilities

22

Financial statements are prepared from ____________

the Adjusted Trial Balance

23

Temporary accounts

Accounts related only to a given accounting period

ex. revenues, expenses, and dividends

24

Permanent accounts

accounts that are not closed

25

Closing entries

Transfer net income (or net loss) and dividends to retained earnings, resulting in a zero balance in each temporary account

26

Post-closing trial balance

A list of all permanent accounts and their balances after closing entries are journalized and posted

27

High quality of earnings

A company that provides full and transparent information

- builds confidence in the financial reporting of the company

 

28

Earnings management

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

 

29

Examples of earnings management

One time earnings

Inflate revenues

Improper adjusting entries

30

Both GAAP and IFRS use ___________

accrual accounting

31

Revenue Recognition US GAAP

> 100 rules

"realized, relizable, and earned"

32

Revenue Recognition IFRS

Single standard

Probability the economic benefits associated with the transaction will flow to the company

revenues and costs must be capable of being measured reliably

33

Reavaluation of PPE GAAP

Does not allow re-valuation

34

Revaluation of PPE - IFRS

Allows re-valuation

35

Income - GAAP

Net difference between revenues and expenses

36

Income - IFRS

Both revenues from normal operating activities, and gains, which arise from activities outside the normal sales of goods and services

37

Expenses - GAAP

Those costs incurred in the normal course of operations

38

Expenses - IFRS

Both costs incurred in the normal course of operations and losses that are not part of normal opeations

39