Chapter 3 review

Chapter 3 review - Chapter 3 Adjusting Accounts and...

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Chapter 3 Adjusting Accounts and Preparing Financial Statements 1. Timing and Reporting 1. The Accounting Period 1. Time period assumption : presumes that an organization’s activities can be divided into specific time periods such as a month, a three-month quarter, a six-month interval, or a year 2. Accounting periods : 3. Annual financial statements : reports covering a one-year period 4. Interim financial statements : reports covering one, three, or six months of activity 5. Fiscal year : any 12 months 6. Natural business year : when sales activities are at their lowest level for the year 2. Accounting Basis Versus Cash Basis 1. Accrual basis accounting : uses the adjusting process to recognize revenues when earned and expenses when incurred 1. Also increases the comparability of financial statements from one period to another 2. Cash basis accounting : recognizes revenues when cash is received and records expenses when cash is paid 1. Cash basis net income for a period is the difference between cash receipts and cash payments 3. Recognizing Revenues and Expenses 1. Revenue recognition principle requires that revenue be recorded when earned, not before and not after 2. Expense recognition principle aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses 1. Describe a company’s annual reporting period. 2. Why do companies prepare interim financial statements? 3. What two accounting principles most directly drive the adjusting process? 4. Is cash basis accounting consistent with the matching principle? Why or why not? 5. If your company pays a $4,800 premium on April 1, 2011, for two years’ insurance coverage, how much insurance expense is reported in 2012 using cash basis accounting? 1. Adjusting Accounts 1. Step 1: determine what the current account balance equals 2. Step 2: determine what the current account balance should equal 3. Step 3: record an adjusting entry to get from step 1 to step 2 4. Framework for Adjustments 1. Adjustments 1. Paid (or received) cash before expense (or revenue) recognized 1. Prepaid (Deferred) expenses 2. Unearned (Deferred) revenues 2. Paid (or received) cash after expense (or revenue) recognized 1. Accrued expenses 2. Accrued revenues 2. Adjusting entry : made at the end of an accounting period to reflect a transaction or event that is not yet recorded 5. Prepaid (Deferred) Expenses : items paid for in advance of receiving their benefits 1. Depreciation 1. Plant assets : long-term tangible assets used to produce and sell products and services 2. Depreciation : the process of allocating the costs of these assets over their expected useful lives
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This note was uploaded on 02/09/2012 for the course ACCT 1310 taught by Professor Staff during the Fall '10 term at Texas State.

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Chapter 3 review - Chapter 3 Adjusting Accounts and...

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