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Chapter 02 - Understanding the Accounting Cycle 2-1 -Chapter 02 Accounting for Accruals and Deferrals Answer Key
Short Answer Questions
Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.
- Banks Co. performed $5,000 of services for customers on account.
Answer: (I) (N) (I) (I) (N) (I) (N)
Learning Objective: 02-01
Topic Area: Accounting for accounts receivable
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: Performing services on account increases assets (accounts receivable) and increases revenue, which increases net income and equity (retained earnings). It does not affect the statement of cash flows, as it does not affect cash.
Fundamental Financial Accounting Concepts 9th Edition Edmonds Test Bank Visit TestBankDeal.com to get complete for all chapters
Chapter 02 - Understanding the Accounting Cycle 2-2
- Todd Co. collected $2,000 cash from accounts receivable.
Answer: (N) (N) (N) (N) (N) (N) (I)
Learning Objective: 02-01
Topic Area: Accounting for accounts receivable
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: Collecting on accounts receivable increases one asset (cash) and decreases another asset (accounts receivable). It does not affect the income statement, but is reported as a cash inflow for operating activities on the statement of cash flows.
- Ingstrom Co. provided $2,600 of services for a customer who paid $1,000 cash immediately
and promised to pay an additional $1,600 one month later.
Answer: (I) (N) (I) (I) (N) (I) (I)
Learning Objective: 02-01
Topic Area: Accounting for accounts receivable
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 2 Medium
Feedback: This event increases revenue, net income and equity (retained earnings) by $2,600. Cash increases by $1,000 and accounts receivable increases by $1,600, which result in an increase in assets of $2,600. It is reported as a $1,000 cash inflow for operating activities on the statement of cash flows.
Chapter 02 - Understanding the Accounting Cycle 2-3
- Amity Co. signed contracts for $25,000 of services to be performed in the future.
Answer: (N) (N) (N) (N) (N) (N) (N)
Learning Objective: 02-01
Topic Area: Accounting for accounts receivable
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Understand
Level of Difficulty: 3 Hard
Feedback: This event does not affect the financial statements at all. Revenue is recorded when services are performed, not when the contract is signed.
- At the end of the accounting period, Signet Co. recognized accrued salaries.
Answer: (N) (I) (D) (N) (I) (D) (N)
Learning Objective: 02-02
Topic Area: Accounting for accrued expense
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: Accruing salaries expense increases liabilities (salaries payable) and it increases expenses, which decreases net income and equity (retained earnings). It does not affect the statement of cash flows.
Chapter 02 - Understanding the Accounting Cycle 2-4
- Calloway Company received $750 from a customer for services to be performed at a future
date.
Answer: (I) (I) (N) (N) (N) (N) (I)
Learning Objective: 02-07
Topic Area: Accounting for unearned revenues
AACSB: Analytical Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Analyze
Level of Difficulty: 1 Easy
Feedback: Collecting a payment in advance from a customer increases assets (cash) and increases liabilities (unearned revenue). It does not affect the income statement. Revenue will not be recognized until the services are provided. It will be reported as a cash inflow from operating activities on the statement of cash flows.
- When is revenue recognized under accrual accounting?
Answer: Revenue is recognized when it is earned; i.e. when the services are performed.
Learning Objective: 02-01
Topic Area: Accounting for accounts receivable
AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Measurement
Blooms: Remember
Level of Difficulty: 1 Easy
Feedback: Accrual accounting requires that companies recognize revenue when work is done regardless of when cash is collected.
- What does the balance in accounts receivable represent?
Answer: The balance in accounts receivable represents the amount of future cash receipts that are due from customers. In other words, it is the amount to be collected from customers who previously received goods or services on account.
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