Self-Test Questions 113 Eres aaa eT Comparability Ability to compare the accounting infor mation of different companies because they use the ‘same accounting principles. Consistency Use of the same accounting principles and ‘methods from year to year within a company, Cost constraint Constraint that weighs the cost that ‘companies will incur to provide the information against the benefit that financial statement users will gain from having the information available, Economic entity assumption An assumption that cevety economic entity can be separately identified and accounted for: Expense recognition principle Efforts (expenses) should be matched with results (revenues). Fair value principle Assets and liabilities should be reported at falr value (the price received to sell an asset or settle a liability). Faithful representation Information that accurately depicts what really happened, disclosure principle Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement Going concern assumption ‘The assumption that the company will continue in operation for he foreseeable Historical cost principle An accounting principle that States that companies should record assets at their cost. Materiality A company-specific aspect of relevance. An item is material when its size makes it likely to influ ence the decision of an investor or ereditor ‘Monetary unit assumption An assumption that requires that only those things that can be expressed in money are included in the accounting records Relevance The quality of information that indicates the information makes a difference in a decision, Revenue recognition principle Companies recognize revenue in the accounting period in which the perfor ‘mance obligation is satisfied. Timely Information that is available to decision-makers before it loses its capacity to influence decisions. Time period assumption An assumption that the life of| ‘a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business. Understandability Information presented in a clear and concise fashion so that users can interpret it and com prchend its meaning, Verifiable The quality of information that occurs when independent observers, using the same methods, obtain, similar results *Note: All asterisked Questions, Exercises, and Problems relate to material in the appendices to the chapter: Answers in Broadening Your Perspective. 1, The revenue recognition principle states that: (a) revenue should he recognized in the accounting period in which a performance obligation is, Satisfied (b) expenses should be matched with revenues (©) the economic life of a business can be divided into artificial time periods, (d) the Fiscal year should correspond with the calen- dar year, 2. The time period assumption states that: (a) companies must wait until the calendar year is ‘completed to prepare finaneial statements. (b) companies use the fiscal year to report financial information, (©) the economic life of a business can be divided. into artificial time periods (@) companies record information in the time period. in which the events occur 3. Which of the following statements about the accrual basis of accounting is false? (a) Exents that change 2 company financial state ments are recorded in the periods in which the ‘events occur, (b) Revenue is recognized in the period in which ser- viees are performed, (©) This basis is in accord with generally accepted. ‘accounting principles. (d) Revenue is recorded only when cash is received, and expense is recorded only when cash is paid 4. The principle or assumption dictating that efforts (expenses) be matched with accomplishments (rove ‘nues) is the: (@) expense recognition principle. (b) cost assumption. (©) time period assumption, (@) revenue recognition principle. 102) 062)0 03) 04 won 04) 04 04) 114 3 Adjusting the Accounts 55. Adjusting entries are made to ensure that: (a) expenses are recognized in the period in which they are incurred. (b) revernies are recorded in the period in which ser vices are performed. (©) balance sheet and income statement accounts have cortect balances atthe end of an accounting period. (@) All the responses above are correct. 6. Each of the following is a major type (or category) of adjusting entries except: (a) prepaid expenses, {b) accrued revenues. (©) acctued expenses (d) recognized revenues. +7. The trial balance shows Supplies $1,350 and Supplies [Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is Ga) Supplies ; | ‘Supplies Expense «0 ©) S Bilis Expense [1 | a0 to Sipps Eee eae (a supper pense | | Stopes «00 8, Adjustments for prepaid expenses: (a) decrease assets and increase revenues. (b) decrease expenses and increase assets (©) decrease assets and increase expenses. (@) decrease revenues and increase assets. 9, Accumulated Depreciation is: {@) acontra asset account. {b) an expense account. (@) increase assets and increase reverts, (@) decrease revenues and decrease asset. 12, Adjustments for accrued revenues: « (@) havea liabilities and revenues account relationship. (by have an assets and revenues account relationship. (e) decrease assets and revenus. (@) decrease linbilties and increase revenues. 13, Anika Wilson eazned a salary of $400 for the last week ‘of September. She will be paid on October 1. The ‘adjusting entry for Anika employer at September 30 (a) No entry is required. (@) Salaries and Wages Espense | 400 | Salaries and Wages Payable 400 (6) Salaries and Woges Expense | 400 | Cash 400 (4) Solaris and Wages Payable | 400 | Cash 400 14, Which of the following statements is imeorrect con- (\ cerning the adjusted trial balance? (@) An adjusted trial balance proves the equality of the total debit balances and the total credit bal- ances in the ledger afterall adjustments are made. (b) The adjusted trial balance provides the primary basis for the preparation of financial statements (©) The adjusted tial balance lists the account bal: ances segregated by assets and liabilities (a) The adjusted ‘rial balance is prepared after the ‘adjusting entries have been journalized and posted Expense $1,500. 1F$800 of supplies are on hand at the end of the period, the adjusting entry ist (a) Debit Supplies $800 and credit Supplies Expense {© an owner’ equity account 3300 2) aliability sccount (6) Debit Supplies Expense $800 and eredit Supplies 10. Rivera Company computes deprecation on delivery 800. Rimes $1000 forthe month of June. The adjust (€) Debt Supplies $700 and credit Supplies Expense fn eat to record this depreciation is 35 Follows, $700. {@) Depreciation Expense 1,000 (4) Debit Supplies Expense $700 and credit Supplies “esumulted Depreciton— | | a, ‘Rivera Compan 1,000 #16, Neutrality san ingredient of (@) Depreciation Expense 1,000 ; Equipment 1° | 1,000 Pista epresentefion) (€) Depreciation Expense 1,000, f@) ‘Yes: rcurulted Depreciation — | | ® No ‘Equipment, 1,000 fe) ‘Yes: (d) Equipment Expense 1,000 No Mme Deaton | | eco “17 ihm ana fal enti? iment 1,000 (a) Comparability (0) Cost 11, Adjustments for tnearned revenues () Matera (2) Consistency (@) decrease Liabilities and inerease revere (b) have an assets and revenues account relationship. 1. (a) How does the time period assumption affect an accountant’ analysis of business transactions? (b) Explain the terms fiscal year, calendar year, and interim periods. 2. Define two generally accepted accounting principles that relare to adjusting the accounts. 43, Susan Zupan, a lawyer, accepts a legal engagement in March, perforuns the workin April, and is paid in May. #15, The trial balance shows Supplies $O and Supplies (0 aot d2 w 1 14. 16. 17. 18, | Why may a trial balance not contain up If Zupan’ law fiem prepares monthly financial state- ‘ments, when should it recognize revenue from this ‘engagement? Why? | Why do accrual-basis financial statements provide more useful information than cash-basis statements? _ In completing the engagement in Question 3, Zupan pays no costs in March, $2,000 in April, and $2,500 in May Gneurred in April). How much expense should the firm deduct from revenues in the month when i recognizes the revenue? Why? _ "Adjusting entries are required by the historical cost principle of accounting.” Do you agree? Explain, to-date and complete Financial information? Distinguish between the two categories of adjustin tenures, and identify the types of adjustments appli table to each category . What is the debitcredit effect of a prepaid expense adjusting entry? “Depreciation is a valuation process that results in the reporting of the fair value ofthe asset.” Do you agree? Explain. . Explain the differences between depreciation expense ‘and accumulated depreciation. J Brownlee Company purchased equipment for $18,000. By the current balance sheet date, 36,000 had been depreciated, Indicate the balance sheet pre- sentation of the data. What is the debiticredit effect of an unearned revenue adjusting entry? A company fails to recognize revenue for services jerformed but not yet received in cash or recorded. Which of the following accounts are involved in the adjusting entry: (a) asset, (b) liability, (€) revenue, oF (a) expense? For the accounts selected, indicate ( hether they would be debited or credited in the entry company fails to recognize an expense incurred but thot paid. Indicate which of the following accounts is debited and which is credited in the adjusting entry: {a) asset, (b) lability () revenue, or (d) expense. ‘A company makes an accrued revenue adjusting entry for $900 and an accrued expense adjusting entry for §$700, How much was net income understated prior to ‘these entries? Explain. Om January 9, a company pays $5,000 for salaries and ‘wages of which §2,000 was reported as Salaries and Wages Payable on December 31. Give the entry to record the payment Tor cach of the following items before adjustment, indicate the type of adjusting entry (prepaid expense, 19. 20. 24, va, v3, 4, °25. $26. oan. °28, Questions 115 unearned revenue, accrued revenue, or accrued expense) that is needed to correct the misstatement. TE fan item could result in more than one type of adjust- ing entry, indicate each of the types. (@) Assets are understated. {(b) Liabilities are overstated (©) Liabilities are understated. (@) Expenses are understated. (@) Assets are overstated. (Revenue is understated. ‘One half of the adjusting entry Is given below. Indi- cate the account tlle for the other half of the entry G) Salaries and Wages Expense is debited. (b) Depreciation Expense is debited (©) Interest Payable is credited. (@) Supplies is credited, (©) Accounts Receivable is debited. (f) Uneamed Service Revenue is debited. “kn adjusting entry may affect more than one balance sheet of income statement account.” Do you agree? Wii or why not? |. Why is it possible to prepare financial statements directly from an adjusted tral balance? Dashan Company debits Supplies Expense for all purchases of supplies and credits Rent Revenue forall Rdvanced rentals. For each type of adjustment, give the adjusting entry: (a). Whatisthe primary objective offinancial reporting? (b) Ldentily the characteristics of useful accounting, information Dan Fineman, the president of King Company, is pleased. King substantially increased its net income Jn 2014 while keeping its unit inventory relatively the same. Howard Gross, chief accountant, cautions Dan, however. Gross says that since King changed its method of inventory valuation, there is a consi teney problem and it is dilficult to determine whether King is better off. Is Gross correct? Why oF why not? What is the distinction between comparability and consistency? ‘Describe the constraint inherent in the presentation of accounting information. Laurie Belk is president of Better Books. She has no fccounting background, Belk cannot understand why fair salue is not used as the basis for all accounting measurement and reporting. Discuss. What is the economic enlity assumption? Give an ¢ example ofits violation.