ACCT 1208 Lecture Notes - Lecture 2: Deferral, Revenue Recognition, Matching Principle

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ivorygoat610

14 Dec 2019

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Financial statements must be presented at least once a year; Revenue recognition we recognize when we did the work; if the work is going to be done next year (we don"t record expanse); Accounts that need to be adjusted have t be adjusted at the end of the period; Prepaid expenses (prepaid insurance is an asset until we use it); how do we indicate that we used it on income statement. Unearned revenue (is a liability, because we have been paid for work, we have not done); We have to adjust insurance for next month; By the end of the month it will be expired; Matching principle spread out over three months; Prepaid insurance (because we are buying) and cash; initial transaction will show that we are trading two assets; we debit prepaid insurance and we credit cash; Now one month goes by so we have to account for this adjustment; On january 1st we bought 3-month worth prepaid insurance.

Related Questions

1. Which of the following identifies the proper order of theaccounting cycle?

A. Analyze, Journalize, Unadjusted Trial Balance

B. Analyze, Post, Unadjusted Trial Balance

C. Journalize, Post, Adjusted Trial Balance

D. Unadjusted Trial Balance, Adjusted Trial Balance, Close

E. Adjusted Trial Balance, Adjustments, Financial Statements

2. Interim financial statements refer to financial reports:

A. That cover less than one year, usually spanning one, three orsix-month periods

B. That are prepared before any adjustments have beenrecorded

C. That show the assets above the liabilities and theliabilities above the equity

D. Where revenues are reported on the income statement when cashis received and expenses are reported when cash is paid

E. Where the adjustment process is used to assign revenues tothe periods in which they are earned and to match expenses withrevenues

3. The accounting principle that requires revenue to be reportedwhen earned is the:

A. Matching principle

B. Revenue recognition principle

C. Time period principle

D. Accrual reporting principle

E. Going-concern principle

4. Adjusting entries:

A. Affect only income statement accounts

B. Affect only balance sheet accounts

C. Affect both income statement and balance sheet accounts

D. Affect only cash flow statement accounts

E. Affect only equity accounts

5. The system of preparing financial statements based onrecognizing revenues when the cash is received and reportingexpenses when the cash is paid is called:

A. Accrual basis accounting

B. Operating cycle accounting

C. Cash basis accounting

D. Revenue recognition accounting

E. Current basis accounting

6. If throughout an accounting period the fees for legalservices paid in advance by clients are recorded in an accountcalled Unearned Legal Fees, the end-of-period adjusting entry torecord the portion of those fees that has been earned is:

A. Debit Cash and credit Legal Fees Earned

B. Debit Cash and credit Unearned Legal Fees

C. Debit Unearned Legal Fees and credit Legal Fees Earned

D. Debit Legal Fees Earned and credit Unearned Legal Fees

E. Debit Unearned Legal Fees and credit Accounts Receivable

7. A company had no office supplies available at the beginningof the year. During the year, the company purchased $250 worth ofoffice supplies. On December 31, $75 worth of office suppliesremained. How much should the company report as office suppliesexpense for the year? A. $75 B. $125 C. $175 D. $250 E. $325 8. OnJanuary 1 a company purchased a five-year insurance policy for$1,800 with coverage starting immediately. If the purchase wasrecorded in the Prepaid Insurance account and the company recordsadjustments only at year-end, the adjusting entry at the end of thefirst year is:

A. Debit Prepaid Insurance, $1,800; credit Cash, $1,800

B. Debit Prepaid Insurance, $1,440; credit Insurance Expense,$1,440

C. Debit Prepaid Insurance, $360; credit Insurance Expense,$360

D. Debit Insurance Expense, $360; credit Prepaid Insurance,$360

E. Debit Insurance Expense, $360; credit Prepaid Insurance,$1,440

9. Unearned revenue is reported on the financial statementsas:

A. A revenue on the balance sheet

B. A liability on the balance sheet

C. An unearned revenue on the income statement

D. An asset on the balance sheet

E. An operating activity on the statement of cash flows

10. Which of the following assets is not depreciated?

A. Store fixtures

B. Computers

C. Land

D. Buildings

E. Vehicles

11. On April 30, 2011, a three-year insurance policy waspurchased for $18,000 with coverage to begin immediately. What isthe amount of insurance expense that would appear on the company'sincome statement for the year ended December 31, 2011? A. $500 B.$4,000 C. $6,000 D. $14,000 E. $18,000 12. Expenses incurred butunpaid that are recorded during the adjusting process with a debitto an expense and a credit to a liability are:

A. Intangible expenses

B. Prepaid expenses

C. Unearned expenses

D. Net expenses

E. Accrued expenses

13 The difference between the cost of an asset and theaccumulated depreciation for that asset is called

A. Depreciation Expense

B. Unearned Depreciation

C. Prepaid Depreciation

D. Depreciation Value

E. Book Value

14. A company purchased a new truck at a cost of $42,000 on July1, 2011. The truck is estimated to have a useful life of 6 yearsand a salvage value of $3,000. How much depreciation expense willbe recorded for the truck for the year ended December 31, 2011?

A. $3,250

B. $3,500

C. $4,000

D. $6,500

E. $7,000

15. A company's Office Supplies account shows a beginningbalance of $600 and an ending balance of $400. If office suppliesexpense for the year is $3,100, what amount of office supplies waspurchased during the period?

A. $2,700

B. $2,900

C. $3,300

D. $3,500

E. $3,700

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AECO 3430 Lab Work #5 Understanding Morgan Cattle's FinancialStatements 1 (20pts) How does opening a $125,000 line of creditwith Farm Credit immediately affect the Balance Sheet? Specificallydemonstrate (with hypothetical numbers) how the relevant sectionsof the balance sheet demonstrate this. 2 (20pts) How can a businessfail while showing accrual profits? Which financial statement(s)are needed to demonstrate the answer? Specifically demonstrate(with hypothetical numbers) how the relevant sections demonstratethis. 3 (20pts) What does it mean for a business to show a decreasein Retained Earnings? Which financial statement(s) are needed todemonstrate the answer? Specifically demonstrate (with hypotheticalnumbers) how the relevant sections demonstrate this. 4 (20pts) Howdoes buying more assets immediately affect equity? Which financialstatement(s) are needed to demonstrate the answer? Specificallydemonstrate (with hypothetical numbers) how the relevant sectionsdemonstrate this. 5 (20pts) How does making a final payment of$45,000 with 5% interest on an equipment loan affect equity? Whichfinancial statement(s) are needed to demonstrate the answer?Specifically demonstrate (with hypothetical numbers) how therelevant sections demonstrate this. 6 (10pts) What did you learnfrom this lab exercise?

1.) If you were to take a $150,000 line of credit through FarmCredit your liabilities and cash would automatically increase onthe balance sheet. Hypothetically speaking if your cash account had$100,000 and your total assets were $1,000,000 prior to taking outthe line of credit, your total assets would increase to $1,150,000and your cash account would increase to $250,000. If you alreadyhad $100,000 in notes payable, after accepting the line of creditthat account would increase to $250,000. With these increases thebalance sheet should still balance out if done correctly.

2.) An income statement could show a net profit but still notreflect the actual financial soundness of a business. Incomestatements show revenue and expenses but do not show the amount ofcash on hand and/or other liquid assets. Making it where it couldnot accurately represent the businesses ability to pay a loan back.It could read a net income of $450,000 but the balance sheet couldread that there is only $100,000 in cash and $250,000 inliabilities. To get an adequate representation of the businessesactual financial standing multiple financial statements must beused.

3.) Retained earnings show the relation between the balancesheet and income statement, events that cause net loss in cash flowwill decrease retained earnings. This is usually the result ofoperating costs/expenses. A decrease in retained earnings representa decrease in owners equity on the balance sheet, this is a resultfrom an increase in expenses. These relates to problem 1 somewhat.If you were to take out a loan of $200,000 and your cash was at$300,000 it would increase to $500,000. Subsequently your notespayable would increase by $200,000 as well. The accounts wouldbalance out in the end the same because they increased the same.However the interest expense would increase causing net farmincrease to decrease. The retained earnings would decrease as aresult of notes payable increasing.

4.) If the assets were purchased using cash your current assetswould increase and cash account would decrease because it waspurchased immediately with cash. If a new truck was purchased for$65,000 dollars your cash would decrease by that amount and yourcurrent assets account would increase by the same amount. If theasset was purchased at market value it doesnât affect your equity,because nothing was gained or loss in the acquisition of thetruck.

5.) A final payment of $35,000 with 5% interest would decreasecash on the balance sheet and also decrease liabilities. Theinterest payments would increase and the farms net income woulddecrease on income statement. Statement of owners equity would showan increase on retained earnings amount.

6.) On this lab exercise I learned to show with words the thingswe have learned in class. I learned how to put into words thechanges we see in financial statements and how they affect theoutlook on a business. To me it makes more sense to see it in aword explanation than it does to look at it on paper. I feel like Ihave a better understanding of what is going on when it is inwritten form as opposed to when it is on a spreadsheet surroundedby other numbers where I get lost in it all. When it is in words Ithink it is easier to take that and go back to the financialstatement and really see it. I think this is an important part offinancial management whether you are the accountant or the businessowner. It is important to be able to understand financial recordsand how they affect your business or the person you are workingfor. Either way it is necessary to know somewhat of both sides tounderstand it fully.

I just need these answers worded different.

Take a look at Case 8.1 and answer the following questions:

Case 8.1 Audit Adjustments:

You are a CPA on the audit staff of a multinational publicaccounting firm. You are the senior auditor on an annual audit of amanufacturing company that is a small subsidiary of a largercompany that is a significant client of your firm. In addition to asizable fee for the annual audit, the parent company pays your firmadditional fees each year for tax consultation and returnpreparation as well as other management consulting services. Withthis particular audit, as with many parent-subsidiaryrelationships, you are aware that there is a tremendous amount ofpressure on the subsidiary companyâs management to reach certainprojected sales goals for the year. Because of this, the climate atthe subsidiary is tense as you begin your annual examination of theyear-end financial statements. During the course of the audit, youperform a sales cutoff test to ensure that all sales transactionsat year-end were recorded in the proper period. Since title to thecompanyâs products passes when they are shipped to customers,shipments are required in order for a sale to be properly recorded.Accordingly, a standard audit procedure is to cross-reference salesrecorded prior to year-end to related shipping records to salesjournals. The sales cutoff test revealed that numerous shipmentsmade after the companyâs year-end were recorded as sales prior toyear-end, which resulted in significantly higher revenue during theyear you are auditing. You are aware that as an independentauditor, you have a responsibility to your clients and to those whomight make decisions based on the companyâs financial statement,such as investors and lenders. When you inform the subsidiaryâscontroller of the results of your sales cutoff test and that anadjustment to annual revenues and profits would likely bewarranted, he takes the matter to the president of the subsidiary.During a follow-up meeting with the controller and president, thepresident attempts to get you to reconsider your proposedadjustment with the following arguments.

1) The amount of the adjustment you were proposing was notmaterial to the parent companyâs financial statement.

2) All of the subsidiaryâs competitors did the same thing inrecording shipments just after year-end as sales in the previousyear.

3) It really didnât matter in the long run if sales were movedfrom the current year to the next year, since sales and profits forthe next year would be greater> At the end of the meeting, thepresident drops a not-so-subtle reminder that his company is asubstantial client of the firm. You call the partner from your firmwho is in charge of the audit for advice, and he tells you tohandle the situation on your own. After considering all factors,you continue to feel that an adjustment to the companyâs financialstatements is warranted, but after a meeting with the clientattended by your senior partner on the audit (and not attended byyou) you are instructed by the senior partner not to make theadjustment.

How should you react?

Question answer should address these issues â This calls for ananalysis that appreciates the complexity of the auditorâs role.

The well written answer will address the following points: Theauditor and the auditorâs firm has to recognize that its ownfinancial survival may be dependent in part on continuedsatisfactory work in the eyes of the client/subsidiary as well asthat of the subsidiaryâs parent corporation.

The auditor will have to reconcile professional and satisfactoryservice with the responsibility of the auditor to report accuratelyand to attest to proper accounting standards within the reportingsystem of the subsidiary.

The auditor will be subject to professional discipline and civilliability if the auditor fails to honor professional standards ofconduct and of fiduciary duties.

As a practical matter, and as an interpretive artist, theauditor need not either comply with the senior partner or quitâ¦

Information can be honestly presented in a fashion that iscandid, such as through footnoting, while still presenting apicture that might me closer to the expectations of the client. Ofcourse, there is a large potential for disingenuousness in such anapproach.

ACCT 1208 Lecture Notes - Lecture 2: Deferral, Revenue Recognition, Matching Principle

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