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Unformatted text preview: CHAPTER 4 DISCUSSION QUESTIONS 1. Accountants prepare financial reports on a periodic basis in order to furnish decision makers with timely information. Investors, creditors, management, and others cannot wait until the results of operations are known at the termination of business. They must have periodic and timely information, even if the information must be based on estimates and the results are somewhat tentative. 2. A 12-month accounting period is known as a company's fiscal year. Only when a company closes its books on December 31 is it said to be reporting on a calendar-year basis. 3. Revenues generally are recognized (re- corded) when (a) the earnings process is complete or nearly so, and (b) cash collectibility is reasonably assured. Usually, these conditions are satisfied when a sale is made. 4. The matching principle states that all costs and expenses incurred during a period to generate recognized revenues should be associated with those revenues in determining income (or loss) for the period. 5. Accrual-basis accounting recognizes revenues and expenses as they are earned and incurred, which is not necessarily in the same period as when cash is received or paid. For most businesses, this provides a more realistic measurement of income or loss. Accrual-basis accounting also provides a more correct financial picture of an entity's resources and obligations. 6. Accrual-based financial statements are considered somewhat tentative because the accounting measurements include amounts based on estimates and judgments. The exact results of business activity can be known only when activity has ceased and all resource flows can be accurately quantified. 7. Adjusting entries are needed for two reasons: (a) to recognize the proper amounts of revenues earned and expenses incurred during a period of time and (b) to report the appropriate balances in the asset, liability, and owners' equity accounts at a particular date. 8. An accountant generally is not able to depend on source documents as the basis for adjusting entries. Instead, accountants must analyze the accounts at the end of the accounting period, prior to preparing the financial statements, to see which accounts need to be recorded (for unrecorded receivables and liabilities) and which accounts need to be adjusted and brought current (for prepaid expenses and unearned revenues). The amount of the adjusting entry depends on the original entry, if any, that has been made and what the updated balance in the account should be. The adjusting entries bring the accounts to their updated balances at the end of the period so proper results are reported in the financial statements. 9. The two basic steps involved in preparing adjusting entries are: (1) fix the balance sheet by making sure all asset, liability, and owners' equity amounts are recorded correctly and (2) fix the income statement by making sure all revenues and expenses for the period are properly recorded....
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- Spring '09