ANSWERS TO QUESTIONS – CHAPTER 2
1. Accrual accounting attempts to record the effects of accounting events in the period
2. Recognition is the act of recording an event in the financial statements. When
3. Deferral is the recognition of revenue or expenses in a period after the cash
4. If cash is collected in advance for services, the revenue is recognized when the
services are rendered.
6. The issue of common stock, which is capital acquired from owners, increases
7. The recognition of revenue on account increases the corresponding revenue account
flow statement is affected when the account is collected.
8. Asset Source Transaction Effect on Accounting Equation
Issue of Common Stock Increases Assets
Increases Common Stock
9. Revenue is recognized under accrual accounting when a revenue-producing event
10. The collection of cash for accounts receivable is an asset exchange transaction. Only
11. If cash is collected in advance for services, a liability is created (unearned revenue),
increasing the claims side of the accounting equation.
13. The recognition of expenses affects the accounting equation by either decreasing
14. A claims exchange transaction is one where the claims of creditors (liabilities)
The total amount of claims is unchanged.
15. Cash payments to creditors are asset use transactions. These transactions result in
16. Expenses are recognized under accrual accounting at the time the expense is
incurred or resources are consumed, regardless of when cash payment is made.
17. Net cash flows from operations on the cash flow statement may be different from net
18. The income statement reflects the change in net assets associated with operating a
19. Net income increases stockholders’ claims on business assets by increasing retained
earnings.
20. A cost can be either an asset or an expense. If the item acquired has already been
21. A cost is held in the asset account until the item is used to produce revenue. When
the revenue is generated, the asset is converted into an expense in order to match
22. Supplies used during the accounting period are recognized in a single adjusting
supplies purchased).
23. An expense is a decrease in assets or an increase in liabilities that occurs in the
process of generating revenue.
25. The purpose of the statement of changes in stockholders’ equity is to display the
as a result of its operations and transactions with its stockholders.
26. The purpose of the balance sheet is to provide information about an entity’s assets,
27. The balance sheet is dated as of a specific date because it shows information about
an entity’s assets, liabilities, and stockholders’ equity as of that date, not measured
28. Assets are listed on the balance sheet in accordance with their respective levels of
liquidity (how rapidly they can be converted to cash).
29. The statement of cash flows explains the change in cash from one accounting period
30. An adjusting entry is an entry that updates account balances prior to preparation of
the financial statements. The entry means that there is an item that needs proper
31. Temporary accounts (revenue, expense and dividends) are closed at the end of the
32. Period costs are costs that are recognized in an accounting period. Examples of
period costs include rent expense, utilities expense, and salaries expense.
produces.
34. The four stages of the accounting cycle: Record transactions; adjust the accounts;
prepare statements; and close the temporary accounts. The adjustment and closing
SOLUTIONS TO EXERCISES – CHAPTER 2
EXERCISE 2-1
Burke Company
Effect of Events on the 2014 Accounting Equation
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
+
Accounts
Rec.
=
+
Common
Stock
+
Retained
Earnings
Earned Revenue
+
12,000
=
+
+
12,000
Coll. Acct. Rec.
9,800
+
(9,800)
=
+
+
Ending Balance
9,800
+
2,200
=
-0-
+
-0-
+
12,000
a. Accounts Receivable: $12,000 – $9,800 = $2,200
c. $9,800 cash collected from accounts receivable.
e. $12,000 of revenue was earned but only $9,800 of it was collected. EXERCISE 2-2
a.
Crest Corporation Accounting Equation – 2014
Event
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
=
Salaries
Payable
+
Common
Stock
+
Retained
Earnings
Earned Rev.
5,000
5,000
Accrued Sal.
(3,000)
(3,000)
Crest Corporation
Balance Sheet
As of December 31, 2014
Assets
Cash
$5,000
Total Assets
$5,000
Liabilities
Salaries Payable
$3,000
Total Liabilities
$3,000
Stockholders’ Equity
Retained Earnings
$2,000
Total Stockholders’ Equity
2,000
Total Liab. and Stockholders’ Equity
$5,000
b.
Computation of Net Income
Revenue
$5,000
Less: Expenses
(3,000)
Net Income
$2,000
EXERCISE 2-2 (cont.)
c.
Cash Flow from Operating Activities
Cash from Revenue
$5,000
Net Cash Flow from Operating Act.
$5,000
d. The salary expense is deducted from revenue in computing net income, but it has
EXERCISE 2-3
a.
Coates, Inc.
General Ledger Accounts for the Year Ended December 31, 2014
Assets
=
Liabilities
+
Stockholders’ Equity
Event
Cash
Accts. Rec.
=
Salaries Pay.
+
Common
Stock
Retained
Earnings
Acct. Title
for RE
1.
20,000
20,000
2.
38,000
38,000
Revenue
3.
(2,500)
(2,500)
Util. Exp.
4.
21,000
(21,000)
5.
15,000
(15,000)
Sal. Exp.
6.
(2,000)
(2,000)
Dividends
Totals
36,500
17,000
=
15,000
+
20,000
18,500
b.
Coates, Inc.
Income Statement
For the Year Ended December 31, 2014
Revenue
$38,000
Expenses
Utilities Expense
$ 2,500
Salaries Expense
15,000
Total Expenses
(17,500)
Net Income
$20,500