Week 3 Chapter 3 - 3 Adjusting the Accounts Chapter STUDY...

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92 Chapter 3 Adjusting the Accounts Scan Study Objectives Read Feature Story Read Preview Read text and answer Before You Go On p. 97 p. 104 p. 109 p. 114 Work Demonstration Problem Review Summary of Study Objectives Answer Self-Study Questions Complete Assignments After studying this chapter, you should be able to: 1 Explain the time period assumption. 2 Explain the accrual basis of accounting. 3 Explain the reasons for adjusting entries. 4 Identify the major types of adjusting entries. 5 Prepare adjusting entries for deferrals. 6 Prepare adjusting entries for accruals. 7 Describe the nature and purpose of an adjusted trial balance. The Navigator STUDY OBJECTIVES Feature Story WHAT WAS YOUR PROFIT? The accuracy of the financial reporting system depends on answers to a few fundamental questions: At what point has revenue been earned? At what point is the earnings process complete? When have expenses really been incurred? During the 1990s’ boom in the stock prices of dot-com companies, many dot-coms earned most of their revenue from selling advertising space on their websites. To boost reported revenue, some dot-coms began swapping website ad space. Company A would put an ad for its website on company B’s website, and company B would put an ad for its website on company A’s website. No money changed hands, but each company recorded revenue (for the value of the space that it gave the other company on its site). This practice did little to boost net income, and it resulted in no additional cash flow—but it did boost reported revenue . Regulators eventually put an end to this misleading practice. The Navigator
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93 Another type of transgression results from companies record- ing revenues or expenses in the wrong year. In fact, shifting revenues and expenses is one of the most common abuses of financial accounting. Xerox , for example, admitted reporting billions of dollars of lease rev- enue in periods earlier than it should have been reported. And WorldCom stunned the financial markets with its admis- sion that it had boosted net income by billions of dollars by delaying the recognition of expenses until later years. Unfortunately, revelations such as these have become all too common in the corporate world. It is no wonder that a U.S. Trust survey of affluent Ameri- cans reported that 85% of respondents believed that there should be tighter regulation of financial disclosures; 66% said they did not trust the manage- ment of publicly traded companies. Why did so many companies violate basic financial reporting rules and sound ethics? Many speculate that as stock prices climbed, executives were under increasing pressure to meet higher and higher earnings expectations.
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Week 3 Chapter 3 - 3 Adjusting the Accounts Chapter STUDY...

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