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Unformatted text preview: CHAPTER 4 COVERAGE OF LEARNING OBJECTIVES Chapter 4 Accrual Accounting and Financial Statements LEARNING OBJECTIVES QUESTIONS EXERCISES PROBLEMS OTHER LO1: Understand the role of adjustments in accrual accounting. 1,2,8 28,34 LO2: Make adjustments for the expiration or consumption of assets. 17 22,23,29,30, 31 35,37,38,39,44, 46,47,55 56 LO3: Make adjustments for the earning of unearned revenues. 3,18 23,29,30,31 35,37,38,39,41, 44,46,55 56 LO4: Make adjustments for the accrual of unrecorded expenses. 4,20 24,25,27,29, 30,31 35,37,38,39,44, 45,46, 47,55 56 LO5: Make adjustments for the accrual of unrecorded revenues. 7 27,29,30,31 35,37,38,39,41, 42,44,45, 46,48,49,55 LO6: Describe the sequence of steps in the recording process and relate cash flows to adjusting entries. LO7: Prepare a classified balance sheet and use it to assess short-term liquidity. 9,11 21,32 43,50,54,54 57,58,59 LO8: Prepare single- and multiple-step income statements. 5,6,12,13,14, 19 26 36,40,43,51,52, 53,54 58 LO9: Use ratios to assess profitability. 10,15,16 33 40,52,53 57,58,59 109 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 the wages 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 wage expense is accrued. 4-5 Provision for income taxes is a popular synonym for income tax expense. 4-6 The amount of income tax expense 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. 4-8 Adjusting entries made prior to 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....
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- Spring '11