Accounting 211 Exam 1 Fundamental Accounting Principles Wild Shaw Chiapetta Ch3

Front 1

what to know about ch 3

Back 1

3
Accounting principles
Cash vs Accrual basis accounting
Adjusting entries – reasons why, types of

Front 2

When a company uses the accrual method of accounting and fails to record an expense that should be accrued, the effect on net income for that period is to understate net income.

Back 2

False

Feedback: When an expense is not recorded, the total expenses are understated which overstates net income. C2

Front 3

The cash basis of accounting is not consistent with generally accepted accounting principles because it violates the matching principle.

Back 3

True

Feedback: The cash basis of accounting is not consistent with generally accepted accounting principles because it violates the matching principle. C2

Front 4

A company uses a calendar year accounting period and the accrual basis of accounting. On February 1 of the current year, the company pays $3,600 to rent a warehouse for a three-year time period. The correct balance in the Prepaid Insurance account at December 31 of the same year would be zero.

Back 4

False

Feedback:
If the company uses the accrual basis of accounting, the $3,600 must be allocated to the accounting periods that are benefited. The balance in the Prepaid Insurance account on December 31st of the current year would be $2,500. C2

Front 5

Under the accrual basis of accounting, if a transaction originates in one accounting period but the effects of the transaction are to be spread over one or more future accounting periods, adjusting entries will be necessary.

Back 5

True

Feedback: Under the accrual basis of accounting, adjusting entries will be needed whenever the effects of a transaction, as reflected in the ledger accounts, affect more than the current accounting period. C2

Front 6

The purpose of making an adjusting entry to record depreciation expense is to measure the actual wear and tear of the asset being depreciated.

Back 6

False

Feedback: The recording of depreciation expense spreads the depreciable cost of the asset across the current and future accounting periods that will be benefited by the asset being depreciated. P1

Front 7

The revenue recognition principle assumes that an organization's activities can be divided into specific time periods such as months, quarters, or years.

Back 7

False

Feedback: The time period principle, not the matching principle, assumes that an organization's activities can be divided into specific time periods such as months, quarters, or years. Adhering to the time period principle requires an end-of-period adjusting process. C1

Front 8

An accounting period may refer to any length of time but the most common time periods covered include one-month, three-month, six-month, and twelve-month periods.

Back 8

True:

Feedback: The length of time covered by an accounting period is not limited to only one length of time but rather can be a variety of lengths of time. C1

Front 9

The matching principle requires that expenses be recorded in the same time period as when the expense actually makes its contribution to revenue. In other words, expense recognition is tied to revenue recognition.

Back 9

True

Feedback: The principle that requires expenses to be reported in the same period as the revenues were earned is called the matching principle. C2

Front 10

The revenue recognition principle and the monetary unit principle are two of the main assumptions or principles of accrual basis accounting.

Back 10

False

Feedback: Accrual accounting makes every attempt to match the revenues of the period against the expenses and costs of the period. The two principles most associated with the accrual basis of accounting are the revenue recognition principle and the matching principle. C2

Front 11

Most businesses maintain their accounting records using the accrual basis of accounting because it provides a better measure of net income than does the cash basis.

Back 11

True

Feedback: Most businesses maintain their accounting records using the accrual basis of accounting. For those businesses where prepaid, unearned, and accrued items are immaterial, the cash basis is acceptable. C2

Front 12

Unearned revenues are also called deferred revenues.

Back 12

True

Feedback: Cash received in advance is usually recorded as a liability. Cash received in advance for services to be completed in the future is an example of an unearned revenue or deferred revenue. P1

Front 13

Cash basis accounting does not attempt to match revenues and expenses and, therefore, it is not consistent with generally accepted accounting principles.

Back 13

True

Feedback: Cash basis accounting makes no attempt to match revenues and expenses. It matches only cash receipts and cash disbursements. Cash basis is not consistent with generally accepted accounting principles. C2

Front 14

When adjustments are made for prepaid items, assets will be affected in the Balance Sheet and expenses will be affected in the Income Statement.

Back 14

True

Feedback: The adjusting entry for prepaid expenses affects assets and expenses. Because these accounts are used in the adjusting entry, they will change the related balances to be reported in the Balance Sheet and Income Statement. P1

Front 15

For every existing accrued expense there is an offsetting and equal amount of liability.

Back 15

True

Feedback: Accrued expenses are expenses incurred (they have happened) but not yet paid. Recognition of the expense requires the creation of a current liability. The expense is satisfied later with the payment of the liability. P1

Front 16

The profit margin is calculated by dividing the net income of the business by the net revenues for the period.

Back 16

True

Feedback: The profit margin is calculated by dividing the net income for the period by the net revenues of the period. This ratio reports what percentage of net sales is income for the company. A 10% profit margin means that 10 cents of each net sales dollar is profit and 90 cents of each net sales dollar has been used to cover all of the costs of earning the dollar. A2