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Exam 2: Accounting for Accruals and Deferrals

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Question 31

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Which of the following financial statement elements is closed at the end of an accounting cycle?

A) Liabilities
B) Common stock
C) Assets
D) Revenues

E) A) and C)
F) B) and D)

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Question 32

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Recognition of depreciation expense is a claims exchange transaction.

A) True
B) False

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Question 33

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Cash-basis accounting often fails to match expenses with revenues.

When is revenue recognized under accrual accounting?

Which of the following events involves a deferral?

A business's internal controls are designed to reduce the probability of occurrence of fraud.

Tell whether each of the following events are asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE) transactions. _____1) Issued common stock to investors for $8,000 cash _____2) Paid one year's rent in advance _____3) Provided services to customers and received $35,000 cash _____4) Paid creditors $10,000 _____5) Received $3,000 of revenue in advance _____6) Provided services to customers on account, $12,000 _____7) Collected $2,000 from accounts receivable _____8) Recognized accrued salary expense of $2,000 _____9) Borrowed $6,000 from creditors _____10) Adjusted the records for supplies used of $800

When a company purchases a depreciable asset, it must estimate the asset's useful life and salvage value.

Indicate whether each of the following statements about corporate governance is true or false. _____ a) The Financial Accounting Standards Board issues a code of ethical behavior by which public accountants must abide. _____ b) The Sarbanes Oxley Act created the Public Company Accounting Oversight Board (PCAOB). _____ c) Because of the Sarbanes Oxley Act, many audit firms now provide nonaudit services to audit clients. _____ d) The fraud triangle identifies opportunity, pressure, and rationalization as the three elements that are typically present when fraud is committed. _____ e) An executive found guilty of falsely certifying a company's financial statements faces up to a $5 million fine and 20 years in prison.

Describe the purpose of the closing process.

Consider the following independent scenarios: a) At January 1, 2013, accounts receivable was $22,000. Cash collected on accounts receivable during 2011 was $15,000. At December 31, 2011, accounts receivable was $30,000. What were the revenues earned on account during 2011? B) At January 1, 2013, accounts payable was $19,000. During 2013, expenses on account were $28,000. At December 31, 2013, accounts payable was $15,000. What was the amount of cash paid on accounts payable during 2013? C) At January 1, 2013, the balance in the prepaid insurance account was $480. On March 1, 2013, the company paid $2,940 for insurance coverage for the next 12 months. What was the amount of insurance expense for 2013? D) At January 1, 2013, the balance in the supplies account was $550. At December 31, 2013, the company counted $600 of supplies on hand. The company reported supplies expense in 2013 of $2,300. What was the total of supplies purchases during 2013?

The entry to recognize depreciation expense incurred on equipment involves which of the following?

Payment of interest is classified as a financing activity on the statement of cash flows.

Two of the steps in the accounting cycle are adjusting the accounts and closing the accounts.

A payment to an employee in settlement of salaries payable decreases an asset and decreases a liability.

Washington Co. began operations on January 1, 2013, by issuing $10,000 in common stock to the stockholders. On March 1, 2013, Washington accepted an advance of $18,000 to provide services for a one-year period beginning April 1. During 2013, services in the amount of $16,000 were provided to customers on account, and 80% of this amount was collected by year-end. During 2013, operating expenses incurred on account were $12,000, and 60% of this amount was paid by year-end. During the year, Washington paid $600 to purchase supplies. By year-end, $540 of the supplies had been used. Dividends to stockholders were $1,000 during the year. During 2013, Washington paid salaries of $14,000, and on December 31, 2013, the company accrued salaries of $1,400. Washington recorded all appropriate adjusting entries at year end. 1) What would Washington report for service revenue for 2013? 2) What would Washington report for salaries expense for 2013? 3) What would Washington report for supplies expense for 2013? 4) What would the amount be for net cash flows from operating activities for 2013? 5) What is the net income for 2013? 6) What would the balance in the retained earnings account be at December 31, 2013?

What effect does providing services on account have on the statement of cash flows? The balance sheet?

The amount of retained earnings appearing on Norris Company's December 31, 2013 balance sheet is:

When are expenses recognized under accrual accounting in relation to the payment of cash?

Danielle McLynn started a consulting business, McLynn Consulting, on January 1, 2013, and the business engaged in the following transactions during the year: 1. Issued $8,000 of common stock for cash 2. Provided services on account, $26,500 3. Incurred $17,500 of operating expense, but only paid $12,000 of this amount 4. Collected $19,000 of the revenue that was previously recorded on account 5. Paid a cash dividend of $4,500 to the stockholders Required: a) Show the effects of the above transactions on the accounting equation. b) Prepare an income statement and statement of cash flows for 2013.