Exam 3: Accrual Accounting

Describe why the accrual basis of accounting is preferred for financial reporting over the cash basis.

The ____________________ basis of accounting requires that revenues be recorded in the period they are earned rather than in the period they are received.

A cost can be an asset or expense depending on whether or not the future economic benefits have expired.

A company forgot to record four adjustments during the current year. Which one of the following omissions of adjustments will understate assets?

Given below are the accounts from the ledger AFTER adjustments have been posted at December 31. ​ A)Identify which adjustments were likely made that are: 1.Accrued revenues 2.Accrued expenses B)Which accounts listed above would not be used in a cash-basis system?

Select the correct revenue recognition principle for each of the following. (Choices may be used more than once.) -Inventory

A ____________________ results when cash is paid before the related amount is reported on the income statement.

Once adjustments have been made, an ____________________ is prepared to ensure the accounting equation is still in balance and to facilitate preparation of the financial statements.

Match each statement to the item listed below -Allows companies to artificially divide their operations into periods for ease of communication

The first step in the accounting cycle is to ________________ transactions.

Which of the following situations violates the matching principle during 2019 for a real estate company that pays its agents on commission?

The accounting records of Cary's Magic Shows reflect the following account balances at January 1, 2019: During 2019, the following transactions occurred: 1.On February 1, rented a small office for a one year period of time. Paid $12,000 cash. 2.On November 1, received $3,600 cash for magic lessons to be provided evenly over November, December, and January. 3.By December 31, used 6,000 of the supplies. 4.At December 31, accrued $5,000 in wages and salaries. 5.During the year, paid cash for $25,000 in wages and salaries. 6.During the year, earned $65,000 cash in magic lesson revenue. Required: A)Determine the effect on financial statement accounts of the preceding transactions. Hint: It may be helpful to create a table to reflect the increases and decreases in account. B)Prepare an income statement for 2019 ignoring income taxes. C)Prepare a classified balance sheet at December 31, 2019.

A calendar year company paid $24,000 on October 1, 2019 to purchase two years of insurance coverage for its retail shop. The prepayment was initially recorded as an asset. A)What adjusting journal entry is necessary at December 31, 2019? B)How much will be reported on the balance sheet at December 31, 2019, for prepaid insurance? C)How much will be reported on the income statement for the year ended December 31, 2019, for insurance expense? D)If the adjustment in part A is not recorded, by what amount will net income be over or understated at December 31, 2019? E)What adjusting journal entry is necessary at December 31, 2020? F)How much will be reported on the balance sheet at December 31, 2020, for prepaid insurance? G)How much will be reported on the income statement for the year ended December 31, 2020, for insurance expense?

Match each statement to the item listed below -States that revenues should be recorded in the period in which it is earned

Match the following types of adjusting entries to the listed situation. (Choices may be used more than once.) -Amounts are earned, but not yet received from customers

You are the owner and operator of a catering business. In addition to catering a wide variety of functions such as business meetings, weddings, birthday parties, etc., you sell decorated cakes in your store. A particular business customer has signed a $12,000 contract with you to provide refreshments for its monthly business meetings with the total contract amount due at the contract signing. Describe the rules you will follow in booking (i.e., recording) the cake sales revenues and catering contracts such as the one described here.

Every adjustment involves at least one income statement and one balance sheet account.

The difference between accrual-based revenue and accrual-based expenses in the period the activity occurred is called ____________________.

Can We Help?, a local walk-in medical practice, had the following account balances at December 31, 2019: During 2020, the following transactions occurred: 1.On March 1, purchased a one-year mal-practice insurance policy for $12,000 cash. 2.On July 1, borrowed $50,000 cash from First American Bank. The interest rate on the note payable is 8%. Principal and interest is due in cash in one year. 3.Employee salaries in the amount of $23,000 were paid in cash. 4.At the end of the year, $1,000 of the supplies remained on hand. 5.Provided $100,000 in consulting services for cash during 2013 in cash. 6.At December 31, $6,000 in employee salaries were accrued. 7.On December 31, received $10,000 in cash representing advance payment for services to be provided in February 2021. 8.Annual depreciation on the building is based on a useful life of 20 years and no salvage value. Required: A)Determine the effect on the accounting equation of the preceding transactions including any related year-end adjusting entries that may be required. Hint: It may be helpful to create a table to reflect the increases and decreases in accounts. B)Prepare an income statement for 2020 ignoring income taxes. C)Prepare a statement of retained earnings for 2020 assuming no dividends were paid. D)Prepare a classified balance sheet at December 31, 2020.

Income statement accounts are also known as which of the following?