ACG 2021 Exam 2 Review Questions and Complete Solutions

Revenue Recognition Principle companies recognize revenue in the accounting period in which the performance obligation was satisfied. Expense Recognition Principle matches expenses with revenues in the period in the period when the company makes effort to generate those revenues Cash-Basis Accounting Revenues and Expenses are only recognized when cash is received Accrual - Basis Accounting Transactions recorded in the period in which the events occurred. (Revenue and Expense Principle) Adjusting Entries Entries made at the end of an accounting period to ensure that the revenue and expense recognition principles are followed. (Will always include one income statement account and one balance sheet account.) (Never include cash) Two types of adjusting entries Accruals and Deferrals Accruals Revenues or expenses incurred but not yet received or paid in cash (increases both a balance sheet and income statement account) Deferrals Expenses paid or cash received before the expense or revenue were incurred. (prepaid expenses or unearned revenues) Prepaid Expenses Asset! Not Expense!!! useful life the length of use of a productive asset Depreciation The process of allocating the cost of an asset to as expense over its useful life (does not attempt to report the actual change in value of the asset) Accumulated Depreciation An anti-asset account to account for depreciation of an asset while still being able to see how much the asset was originally purchased for. This account keeps track of total depreciation of the asset Book Value (Carrying Value) The difference between the cost of a depreciable asset and its related accumulated depreciation Earnings Management The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income Quality of Earnings Indicates the level of full and transparent information that a company provides to users of its financial statements Temporary Accounts (nominal accounts) Revenue, expense, and dividend accounts whose balances a company transfers to retained earnings at the end of an accounting period Permanent Accounts (real accounts) Balance sheet accounts that are transferred to the next accounting period (all asset accounts, liability accounts, and stockholder equity accounts)