CHAPTER 3 - CHAPTER 3 HOMEWORK SOLUTIONS Questions 5...

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CHAPTER 3 HOMEWORK SOLUTIONS Questions: 5. Accrual accounting requires recording revenues when earned and recording expenses when incurred, regardless of the timing of cash receipts or payments. Cash basis accounting is recording revenues when cash is received and expenses when cash is paid. 6. The four criteria that must be met for revenue to be recognized under the accrual basis of accounting are (1) delivery has occurred or services have been rendered, (2) there is persuasive evidence of an arrangement for customer payment, (3) the price is fixed or determinable, and (4) collection is reasonably assured. 7. The matching principle requires that expenses be recorded when incurred in earning revenue. For example, the cost of inventory sold during a period is recorded in the same period of the sale, not when the goods are produced and held for sale. 10. Item Increase Decrease Revenues Credit Debit Losses Debit Credit Gains Credit Debit Expenses Debit Credit 11. Item Debit Credit Revenues Decrease Increase Losses Increase Decrease Gains Decrease Increase Expenses Increase Decrease 13. Asset turnover is calculated as Sales ÷ Average total assets. The asset turnover ratio measures the sales generated per dollar of assets. A high ratio suggests that the company is managing its assets (resources used to generate revenues) efficiently. Multiple Choice: 2. c) 4. a) 6. d)
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Mini-Exercises: M3–2. Cash Basis Income Statement Accrual Basis Income Statement Revenues: Cash sales Customer deposits $6,000 1,000 Revenues: Sales to customers $10,000 Expenses: Inventory purchases Wages paid 1,000 600 Expenses: Cost of sales Wages expense Utilities expense 7,000 600 200 Net Income $5,400 Net Income $2,200 M3–4. Expense Account Affected Amount of Expense Incurred in July e. Cost of goods sold $2,000 f. None No expense is incurred in July; payment related to June electricity usage. g. Wages expense $4,000 h. Insurance expense $400 incurred and expensed in July; $800 not incurred until future months i. Repairs and maintenance expense $1,000 j. Utilities expense $2,200 incurred in July
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M3–6. e. Cost of goods sold (+E, - SE). ............................................... 2,000 Inventory ( - A). .................................................................. 2,000 f. Accounts payable (–L). ......................................................... 2,000 Cash ( - A). ........................................................................ 2,000
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CHAPTER 3 - CHAPTER 3 HOMEWORK SOLUTIONS Questions 5...

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