Accounting Chapter 4

Front 1

a. Revenue Recognition Principle

Back 1

i. Requires that revenue be recognized in the accounting period in which it is earned
1. A service company recognizes (records) revenue when the services are PERFORMED

Front 2

ii. Matching Principle

Back 2

1. Requires that efforts (expenses) be matched with accomplishments (revenues)
a. The critical issue is determining when the expense makes its contribution to revenue
b. A expense should be recorded in the same period as the revenue recieved

Front 3

b. Focus on the two factors necessary to recognize revenue

Back 3

i. Realizable
1. Are you going to get cash for what you did or accounts receivable

ii. Being earned
1. Provided a service or product

Front 4

2. What is the purpose of adjusting entries and what are the two types?

Back 4

Adjusting entries ensure that the revenue recognition and matching principles are followed

a. Deferrals
i. Prepaid expenses
ii. Unearned Revenues

b. Accruals
i. Accrued revenues
ii. Accrued expenses

Front 5

relationships: Prepaid expenses

Back 5

1. Assets overstated
2. Expenses understated
3. Dr. expenses
4. Cr. Assets

Front 6

relationships: Unearned Revenues

Back 6

1. Liabilities overstated
2. Revenues understated
3. Dr. Liabilities
4. Cr. Revenues

Front 7

relationships: Accrued revenues

Back 7

1. Assets understated
2. Revenues understated
3. Dr. Assets
4. Cr. Revenues

Front 8

relationships: Accrued expenses

Back 8

1. Expenses understated
2. Liabilities understated
3. Dr. Expenses
4. Cr. Liabilities

Front 9

3. Why is the closing process necessary?

Back 9

a. Transfer net income and dividends to Retained earnings
i. Zero balance in each temporary account (revenues, expenses, and dividends)
ii. Permanent accounts (assets, liabilities, common stock and retained earnings) are not closed

b. The post-closing trial balance shows the balances of all of the permanent accounts
c. The permanent account balances are carried forward to the next accounting period

Front 10

a. Earnings management

Back 10

i. Planned timing of revenues, expenses, gains, and losses to smooth out bumps in the net income

Front 11

how does earnings management impact transparency and quality of earnings?

Back 11

ii. Quality of earnings is greatly affected when a company manages earnings up or down to meet some targeted earnings number
1. A company that has high quality of earnings provides full and transparent information that will not confuse or mislead users of the financial statements
2. A company with questionable quality of earnings may mislead investors and creditors, who believe they are relying on relevant and reliable information