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SM_CH04 - CHAPTER 4 4-1 Two examples of explicit...

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CHAPTER 4 4-1 Two examples of explicit transactions are a collection from a customer and a payment to a creditor. 4-2 Two examples of implicit transactions are adjustments for depreciation and for accrued wages. 4-3 Synonyms for unearned revenue are deferred revenue and revenue received in advance . Two often used but less accurate synonyms are deferred income and unearned income . 4-4 Accountants accrue wages payable when employees perform work. The cost of wages becomes an expense when they are accrued. However, payments for wages are made periodically, perhaps weekly or monthly, generally some time after the work has been performed. The payment (a decrease in cash) may or may not be in the same accounting period in which the wages expense is accrued. 4-5 Provision for income taxes is a popular synonym for income tax expense. 4-6 The amount of income taxes is based on pretax income. Consequently, companies prefer to present these two items together at the end of their income statements to emphasize this relationship. 4-7 The accrual of unbilled attorney fees by a lawyer is the mirror image of the accrual of unbilled expenses by a client. The attorney debits a receivable while the client credits a payable and the attorney credits a revenue account while the client debits an expense account. 138
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4-8 Adjusting entries made before the related cash flows include accrual of unrecorded revenues and expenses. Adjusting entries made subsequent to the related cash flows include the expiration of unexpired costs (prepaid expenses) and recognition (earning) of unearned revenues. 4-9 Financial statement users, especially short-term creditors, want information focused on the next year (or operating cycle, if longer than a year). Current assets and current liabilities provide this information, which is often useful for evaluating liquidity and assessing the management of working capital. 4-10 No. The current ratio does not give any information about profitability. It is a measure of liquidity. Measures of profitability include the gross profit percentage, return on sales, and return on common stockholders’ equity. 4-11 No. Excess working capital is not good. In the 1990s many companies made great efforts to reduce their current assets, particularly their inventories. This freed up capital to use for other investment activities. Formerly, many companies tried to keep a positive level of working capital, but today more companies are aiming at zero, or sometimes even slightly negative, working capital. 4-12 A single-step statement, unlike a multiple-step statement, does not classify expenses into various groups. Therefore, it does not have subtotals such as gross profit and operating income. 4-13 Interest expense is a cost of financing rather than a cost of operating activities.
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