study guide test 1

study guide test 1 - Chapter 3 USING ACCRUAL ACCOUNTING TO...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
Chapter 3 USING ACCRUAL ACCOUNTING TO MEASURE INCOME CHAPTER OBJECTIVES The learning objectives for this chapter are as follows: 1. Relate accrual accounting and cash flows 2. Apply the revenue and matching principles 3. Update the financial statements by adjusting the accounts 4. Prepare the financial statements 5. Close the books 6. Use the current ratio and the debt ratio to evaluate a business CHAPTER OVERVIEW This chapter shows how investors and creditors use accrual accounting to evaluate a company’s operating performance. The two basic accounting methods are the cash basis and the accrual basis. A company that uses accrual accounting records the effect of every transaction when it occurs. In cash-basis accounting, a company records transactions only when it receives cash or pays cash. Generally accepted accounting principles (GAAP) require companies to use accrual accounting because it provides more complete information than cash-basis accounting. Better information enables investors, creditors, and managers to make better financial decisions. CHAPTER REVIEW Objective 1—Relate accrual accounting and cash flows Cash-basis accounting records only transactions that include the receipt of cash or the payment of cash. For example, cash-basis accounting would record sales for cash, collections from customers from credit sales, and the payment of operating expenses. Accrual accounting also records transactions involving cash. In addition, accrual accounting records transactions that do not involve the receipt or payment of cash. For example, accrual accounting records sales on account, purchases on account, and expenses incurred but not yet paid. The time-period concept requires a company to prepare financial statements at regular intervals. The basic accounting period is one year. Many companies use the calendar year as their accounting year. Some companies use a fiscal year for their accounting period. A fiscal year is a year that ends on a date other than December 31. The users of a company’s financial statements cannot wait until the end of the year to evaluate a company’s performance. Managers, investors, and creditors also need accounting information on an interim basis, such as monthly or quarterly. 51
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Chapter 3: Using Accrual Accounting to Measure Income Objective 2—Apply the revenue and matching principles The basic difference between cash-basis accounting and accrual accounting is when to record revenues and expenses. In cash-basis accounting, a company records revenue when it receives cash from the sale of its products and services. Cash-basis accounting distorts the reported amounts on the income statement and the balance sheet. In accrual accounting, the revenue principle governs when to record revenue and how much revenue to record. The matching principle controls the recording of expenses. A company should record revenue when it earns it.
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 04/25/2008 for the course C 001 taught by Professor Staff during the Fall '08 term at NYU.

Page1 / 35

study guide test 1 - Chapter 3 USING ACCRUAL ACCOUNTING TO...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online