ADM 1340 Lecture Notes - Lecture 4: Retained Earnings, Accrual, Matching Principle

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Revenues are recognized when they are earned; and expenses are recognized when they are incurred; regardless of when they are paid or received. Revenues are recognized when the following three conditions are met: the sales or performance is substantially complete, the revenue amount is determinable (measurable) and, the collection of revenues is reasonably assured. Expenses should be recorded in the same period as the revenues to which they relate, regardless of when cash is paid. Expenses are incurred when resources are consumed to earn revenues for a given period. The matching principle is an essential and mandatory practice of financial accounting: cost of goods sold, utility expense, salary expense. Adjusting entries are required at the end of each fiscal period to get the revenues and expenses into the right period: some events are not recorded daily. (wages, depreciation, some items may be unrecorded. Acc(cid:396)ued e(cid:454)pe(cid:374)ses (cid:894)ha(cid:448)e(cid:374)"t paid cash fo(cid:396) (cid:449)hat (cid:455)ou a(cid:396)e adjusti(cid:374)g fo(cid:396)(cid:895).

Related Questions

10 Which of the following criteria is not a condition for the revenue recognition principle? a. The accounting entity receives the customer's payment in cash before revenue can be recognized b. The accounting entity has performed or substantially performed by providing goods or services to the customer c. In exchange for the accounting entity's performance the customer has promised to pay in cash or in a form and an amount that is measurable d. Where the accounting entity has received a promise to pay from its customer, collection is reasonably assured e. None of the above The correct answer is 'a'.

SECTION II: MATCHING (10 possible points)
Please match the numbered terms with their definitions by placingthe letter that identifies the best definition in the blank spacenext to the term. The value of each correct answer is 1point.

____ 1. Accrual Basis

____ 2. Cost Principle

____ 3. Credit

____ 4. Debit

____ 5. Generally Accepted Accounting Principles(GAAP)

____ 6. General Ledger

____ 7. Journal

____ 8. Liquidity

____ 9. Matching Principle

____ 10. Materiality

A. The various methods, rules, practices, and other proceduresthat have evolved over time in response to the need
to regulate the preparation offinancial statements.
B. The magnitude of an omission or misstatement in accountinginformation that will affect the judgment of
someone relying on theinformation.

C. A book, file, hard drive, or other devices containing all ofa companyâs accounts.

D. An entry on the left side of an account.

E. An entry on the right side of an account.

F. A chronological record of transactions, also known as thebook of original entry.

G. The association of revenue ofa period with all of the costs necessary to generate thatrevenue.

H. Assets are recorded at the cost to acquire them.

I. The ability of a company to pay the debts as they comedue.

J. A system of accounting in which revenues are recognized whenearned and expenses are recognized when
incurred.

SECTION III. SHORT ANSWER

1. Explain the difference between internal andexternal users of a corporationâs financial information. Give twoexamples of
internal users and two ofexternal users.

2. How do financial accounting andmanagement accounting differ?

3. What does relevance mean with regard to theuse of accounting information?

4. Briefly explain the purpose of a TrialBalance.

5. Explain briefly the Revenue RecognitionPrinciple. When should a publisher of magazines recognizerevenue?

questions:

1. Generally, revenue from sales should be recognized at a pointwhen

Answer

management decides it is appropriate to do so.

the product is available for sale to the ultimate consumer.

the entire amount receivable has been collected from thecustomer and there remains no further warranty liability.

none of these.

2. What is the general approach as to when product costs arerecognized as expenses?

Answer

In the period when the expenses are paid.

In the period when the expenses are incurred.

In the period when the vendor invoice is received.

In the period when the related revenue is recognized.

3. Recognition of expense related to amortization of anintangible asset illustrates which principle of accounting?

Answer

Expense recognition.

Full disclosure.

Revenue recognition.

Historical cost.

4. Which accounting assumption or principle is being violated ifa company is a party to major litigation that it may lose anddecides not to include the information in the financial statementsbecause it may have a negative impact on the company's stockprice?

Answer

Full disclosure.

Going concern.

Historical cost.

Expense recognition.

5. Where is materiality not used in providingfinancial information?

Answer

Applying the revenue recognition principle.

Determining what items to include in the financialstatements.

Applying the going concern assumption.

Determining the level of disclosure.

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ADM 1340 Lecture Notes - Lecture 4: Retained Earnings, Accrual, Matching Principle

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