Albrecht Ch 4 SM 2PP.docx
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Albrecht Ch 4 SM 2PP.docx
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AlbrechtCh4SM2PP
CHAPTER4
DISCUSSIONQUESTIONS
1.Accountantspreparefinancialreportsonaperiodicbasisinordertofurnishdecisionmakerswithtimelyinformation.Investors,creditors,management,andotherscannotwaituntiltheresultsofoperationsareknownattheterminationofbusiness.Theymusthaveperiodicandtimelyinformation,eveniftheinformationmustbebasedonestimatesandtheresultsaresomewhattentative.
2.A12-monthaccountingperiodisknownasacompany'sfiscalyear.OnlywhenacompanyclosesitsbooksonDecember31isitsaidtobereportingonacalendar-yearbasis.
3.Revenuesgenerallyarerecognized(re-corded)when(a)theearningsprocessiscompleteornearlyso,and(b)cashcollectibilityisreasonablyassured.Usually,theseconditionsaresatisfiedwhenasaleismade.
4.Thematchingprinciplestatesthatallcostsandexpensesincurredduringaperiodtogeneraterecognizedrevenuesshouldbeassociatedwiththoserevenuesindeterminingincome(orloss)fortheperiod.
5.Accrual-basisaccountingrecognizesrevenuesandexpensesastheyareearnedandincurred,whichisnotnecessarilyinthesameperiodaswhencashisreceivedorpaid.Formostbusinesses,thisprovidesamorerealisticmeasurementofincomeorloss.Accrual-basisaccountingalsoprovidesamorecorrectfinancialpictureofanentity'sresourcesandobligations.
6.Accrual-basedfinancialstatementsare
consideredsomewhattentativebecausetheaccountingmeasurementsincludeamountsbasedonestimatesandjudgments.Theexactresultsofbusinessactivitycanbeknownonlywhenactivityhasceasedandall
resourceflowscanbeaccuratelyquantified.
7.Adjustingentriesareneededfortworeasons:
(a)torecognizetheproperamountsofrevenuesearnedandexpensesincurredduringaperiodoftimeand(b)toreporttheappropriatebalancesintheasset,liability,andowners'equityaccountsataparticulardate.
8.Anaccountantgenerallyisnotabletodependonsourcedocumentsasthebasisforadjustingentries.Instead,accountantsmustanalyzetheaccountsattheendoftheaccountingperiod,priortopreparingthefinancialstatements,toseewhichaccountsneedtoberecorded(forunrecordedreceivablesandliabilities)andwhichaccountsneedtobeadjustedandbroughtcurrent(forprepaidexpensesandunearnedrevenues).Theamountoftheadjustingentrydependsontheoriginalentry,ifany,thathasbeenmadeandwhattheupdatedbalanceintheaccountshouldbe.Theadjustingentriesbringtheaccountstotheirupdatedbalancesattheendoftheperiodsoproperresultsarereportedinthefinancialstatements.
9.Thetwobasicstepsinvolvedinpreparingadjustingentriesare:
(1)fixthebalancesheetbymakingsureallasset,liability,andowners'equityamountsarerecordedcorrectlyand
(2)fixtheincomestatementbymakingsureallrevenuesandexpensesfortheperiodareproperlyrecorded.
Bothstepsarenecessaryforthecorrectamountstobereportedonthebalancesheet(thefinancialpositionoftheentityattheendoftheperiod)andtheincomestatement(theresultsofoperationsfortheperiod).
10.Suppliesarenotconsideredinventorybecausetheyarenotheldforresale.Bydefinition,inventorymeansgoodsheldforresaletothecompany'scustomers.Suppliesarematerials,suchaswrappingpaperorpaperbags,usedinprovidinggoodsandservices.
SuppliesonHandisanassetaccount.Assuppliesareusedup,theybecomeexpenses(SuppliesExpense)incurredaspartofthesellingprocess.
11.Thecashaccountisnotincreasedordecreasedasaresultofadjustingentriesbecause,ascashisreceivedorpaid,theoriginalentriescorrectlyreflectincreasesordecreasesinthataccount.Cashisadjustedattheendofaperiodonlywhentherehasbeenanerrorinrecordingpastcashtransactions.
Theprimarypurposeofadjustingentries,however,isnottocorrecterrors.Themainobjectiveistorecordpreviouslyunrecordeditemsandtoadjustthebalancesinaccounts,sotheappropriateamountsofrevenuesandexpensesarerecognizedontheincomestatementandtheupdatedbalancesarereportedonthebalancesheet.
12.Financialstatementsareusuallypreparedaftertheaccountsarebroughtcurrentthroughtheadjustingprocess.Anyomissionorerrordiscoveredduringfinancialstatementpreparationcanthenbecorrected,oftenwithanotheradjustingentry.
13.Thenotestothefinancialstatementsdescribetheassumptionsandmethodsusedinpreparingthefinancialstatements.Theyalsogivemoredetailaboutspecificitemsonthefinancialstatements.
Theauditreportprovidesassurancethatqualified,independentCPAshavereviewedthefinancialstatementsandunderlyingrecordsinsufficientdetailtoofferanopinionthatthestatementspresenttheresultsfairlyandinconformitywithgenerallyacceptedaccountingprinciples.
14.Nominal,ortemporary,accountsare
reducedtoazerobalancethroughtheclosingprocessattheendofeachaccountingperiod.Sincetheseaccountsbegineach
periodwithazerobalance,theyshowtheresultsofoperationsforthecurrentaccountingperiodonly.WiththeexceptionofDividends,nominalaccountsappearonthe
incomestatement.
Real,orpermanent,accountsappearonthebalancesheetandarenotclosedtoazerobalanceattheendofanaccountingperiod.Thebalancesinrealaccountsarecarriedforwardtothenextaccountingperiod.
15.Closingentriesprovideanorderlyprocessoftransferringthebalancesofalltemporaryaccounts(revenues,expenses,anddividends)toowners'equity.Withzerobalances,thesenominalaccountsarethenreadyforthenextaccountingcycleofthebusiness.
16.Thepost-closingtrialbalanceliststhebalancesofallrealaccountsaftertheclosingprocesshasbeencompleted.Itprovidesameansoftestingwhethertotaldebitsequaltotalcreditsforallrealaccountspriortobeginninganewaccountingcycle.
Theinformationforthepost-closingtrialbalancecomesfromtheaccountbalancesofthegeneralledger,butonlyaftertheclosingentrieshavebeenrecordedandpostedtothegeneralledger.
PRACTICEEXERCISES
PE4–1(LO1)PeriodicReporting
ThecorrectanswerisD.
a.False.Abouttwo-thirdsofU.S.companieschooseDecember31astheendofthefiscalyear,butthereisnorequirementtodoso.
b.False.Morefrequentreportingincreasestheneedforaccountantstomakeestimatesandjudgments.
c.False.Mostbusinesses,largeandsmall,prepareperiodicfinancialreports.Allpublicly-tradedcompaniesarerequiredbytheSECtofilequarterlyfinancialreports;publicly-tradedcompaniesdonotnecessarilyhaveassetsinexcessof$650million.
d.True.Managementisfreetoarrangeforthepreparationofanyusefulperiodicfinancialreports.Forexample,salesreportsmightbepreparedonadaily,orevenhourly,basis.
e.False.TheSECrequiresallpublicly-tradedcompaniesintheUnitedStatestofilequarterlyfinancialstatements.
PE4–2(LO1)RevenueRecognition
ThecorrectanswerisE.Inorderforrevenuetoberecognized,theearningsprocessmustbesubstantiallycompleteandcashcollectibilitymustbereasonablyassured.
PE4–3(LO1)Matching
ThecorrectanswerisB.Expensesshouldbematchedandrecognizedinthesameperiodastherelatedrevenue.
PE4–4(LO1)Cash-BasisAccounting
For2009
Cashreceipts$61,000
Cashdisbursements58,000
Cash-basisincome$3,000
PE4–5(LO1)Accrual-BasisAccounting
For2009
Revenuesearned$85,000
Expensesincurred($58,000+$29,000)87,000
Accrual-basisincome$(2,000)
PE4–6(LO2)UnrecordedReceivable:
OriginalEntry
Dec.10Cash12,300
DeliveryRevenue12,300
PE4–7(LO2)UnrecordedReceivable:
AdjustingEntry
1.Dec.31AccountsReceivable13,700
DeliveryRevenue13,700
2.Jan.10Cash13,700
AccountsReceivable13,700
NotethatnorevenueisrecognizedonJanuary10.BecausetherevenuewasearnedinDecember,itwasrecognizedthroughtheadjustingentrymadeonDecember31.
PE4–8(LO2)UnrecordedLiability:
OriginalEntry
May1Cash75,000
LoanPayable75,000
PE4–9(LO2)UnrecordedLiability:
AdjustingEntry
1.Dec.31InterestExpense4,500
InterestPayable4,500
$75,0000.098/12=$4,500;8monthselapsefromMay1
throughDecember31.
2.Apr.30InterestExpense2,250
InterestPayable4,500
Cash6,750
$75,0000.0912/12=$6,750;12monthsofinterestfrom
May1throughthefollowingApril30.
$75,0000.094/12=$2,250;4monthselapsefromJanuary1
throughApril30.
PE4–10(LO2)PrepaidExpense:
OriginalEntry
Aug.1PrepaidInsurance72,000
Cash72,000
PE4–11(LO2)PrepaidExpense:
AdjustingEntry
1.Dec.31InsuranceExpense7,500
PrepaidInsurance7,500
$72,000÷48months=$1,500permonth.
$1,5005months=$7,500insuranceusedup;
5monthsfromAugust1throughDecember31.
2.
PrepaidInsurance
Debit(+)
Credit(–)
Beg.bal.
0
Aug.1
72,000
Dec.31Adj.
7,500
End.bal.
64,500
The$64,500endingbalancerepresentsanother43monthsofinsurancecoverage(43$1,500=$64,500).
PE4–12(LO2)UnearnedRevenue:
OriginalEntry
Apr.1Cash270,000
UnearnedSecurityRevenue270,000
PE4–13(LO2)UnearnedRevenue:
AdjustingEntry
1.Dec.31UnearnedSecurityRevenue67,500
SecurityRevenue67,500
$270,000÷36months=$7,500permonth.
$7,5009months=$67,500securityrevenueearned;
9monthsfromApril1throughDecember31.
2.
UnearnedSecurityRevenue
Debit(–)
Credit(+)
Beg.bal.
0
Mar.1
270,000
Dec.31Adj.
67,500
End.bal.
202,500
The$202,500endingbala
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