Term
| Why are revenue and expense accounts called temporary or nominal accounts? |
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Definition
| Revenue and expense accounts are referred to as temporary or nominal accounts b/c each period they are closed out to income summary in the closing process. their balances are reduced to zero at the end of the accounting period; therefore, the term temporary or nominal is given to these accounts |
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Term
| What is double entry system? |
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Definition
| The double-enty system means that for every debit amount there must be a credit amount and vice-versa. at least two accounts are affected. does not mean that each transaction must be recorded twice |
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Term
| Is it necessary that a trial balance be taken periodically? What purpose does it serve? |
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Definition
although it is not absolutely necessary that a trial balance be taken periodically, it is customary and desirable. the trial balance accomplishes two principal purposes:
1) it tests the accuracy of the entries in that it proves that debits and credits of an equal amount are in the ledger
2) it provides a list of ledger accounts and their balances which may be used in preparing the financial statements and in supplying financial data about the concern. |
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Term
Indicate whether each of the items below is a real or nominal account and whther it appears in the balance sheet or the income statement
a) prepaid rent
b) salaries and wages payable
c) merchandise inventory
d) accumulated depreciation
e) office equipment
f) service revenue
g) office salaries expense
h) supplies on hand |
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Definition
a) prepaid rent
real, balance sheet
b) salaries and wages payable
real, balance sheet
c) merchandise inventory
real, balance sheet
d) accumulated depreciation
real, balance sheet
e) office equipment
real, balance sheet
f) service revenue
nominal, income statement
g) office salaries expense
nominal, income statement
h) supplies on hand
real, balance sheet |
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Term
| employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday, December 31, what does the amount of wages earned during the first three days of the week (12/29, 12/30, 12/31) represent? Explain. |
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Definition
| at December 31, the three days' wages due to the employees represent a current liability. the related expense must be recorded in this period to properly reflect the expense incurred. |
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Term
a)how do the components of revenues and expenses differ bt. a merchandising company and a service enterprise?
b) explain the income measurement process of a merchandising company |
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Definition
a) in a service company, revenues are service revenues and expenses are operating expenses. in a merchandising company, revenue are sales revenue and expenses consist of cost of goods sold plus operating expense
b) the measurement process in a merchandising company consists of comparing the sales price of the merchandise inventory to the cost of goods sold and operating expenses |
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Term
what differences are there bt. the trial balance before closing and the trial balance after closing with respect to the following accounts?
a) accounts payable
b) expense accounts
c) revenue accounts
d) retained earnings account
e) cash |
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Definition
a) accounts payable
no change
b) expense accounts
before closing, balances exist in these accounts, after closing, no balances exist
c) revenue accounts
before closing, balances exist in these accounts, after closing, no balances exist
d) retained earnings account
before closing, a balance exists in this account exclusive of any dividends or the net income or net loss for the period, after closing, the balance increased/decreased by the amount of net income or net loss, and decreased by dividends declared
e) cash
no change |
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Term
| what are adjusting entries and why are they necessary? |
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Definition
adjusting entries are prepared prior tot he preparation of financial statements in order to bring the accounts up to date and are necessary
1) to achieve a proper matching of revenues and expenses in measuring income and
2) to achieve an accurate presentation of assets, liabilities and stockholders' equity |
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Term
| what are closing entries and why are they necessary? |
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Definition
| closing entries are prepared to transfer the balances of nominal accounts to capital (retained earnings) after the adjusting entries have been recorded and the financial statements prepared. Closing entries are necessary to reduce the balances in nominal accounts to zero in order to prepare the accounts for the next period's transactions |
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Term
| are all international companies subject to the same internal control standards? explain |
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Definition
| No, all international companies are not subject to the same internal control standards. all public companies that list their securities on US stock exchanges are subject to the internal control testing and assurance provisions of the Sarbanes-Oxley Act of 2002. international companies that list their securities on non-US exchanges are not subject to these rules and there is debate as to whether they should have to comply. |
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Term
| what are some of the consequences of international differences in internal control standards? |
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Definition
| there is a concern that the cost of comply with the higher internal control provisions is making US markets less competitive as a place to list securities. this in turn could give US investors less investment opportunities. ont he other hand, some argue that the enhanced internal control requirements int he US increase the perceived reliability of companies' financial statements and helps reduce their cost of capital. furthermore, the decline in public listings int he US are more likely due to other factors, such as growth in non-US markets and general globalization. thus, the jury is still out on the net cost/benefit of Sarbanes-Oxley and its impact on international competitiveness. |
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Term
cash-basis accounting vs. accrual-basis accounting
why is accrual-basis accounting acceptable for most business enterprises and the cash-basis unacceptable in the preparation of an income statement and a balance sheet? |
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Definition
under the cash basis of accounting, revenue is recorded only when cash is received and expenses are recorded only when paid. under the accrual basis of accounting, revenue is recognized when it is earned and expenses are recognized when incurred, w/o regard to the time of the receipt or payment of cash
A cash-basis balance sheet and income statement are incomplete and inaccurate in comparison to accrual-basis financial statements. the accrual basis matches effort (expenses) with accomplishment (revenues) in the income statement while the cash basis only presents cash receipts and cash disbursements. the accrual basis balance sheet contains receivables, payables, accruals, prepayments, and deferrals while a cash basis balance sheet shows none of these |
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Term
| briefly describe the key elements of international auditing convergence |
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Definition
| as with accounting standards, there are differences in auditing standards across international jurisdictions. in the US, auditors of public companies are regulated by the Public Company Accounting Oversight Board (PCAOB). the PCAOB enforces the provisions of the Sarbanes-Oxley Act through its various auditing standards. In the international domain, the auditing standards board is the International Auditing and Assurance Standards Board (IAASB). The IAASB is working on a broad set of international auditing standards but to date does not have a law like Sarbanes-Oxley to guide its work. |
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Term
| when wages expense for the year is computed, why are beginning accrued wages subtracted from, and ending accrued wages added to, wages paid during the year? |
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Definition
| wages paid during the year will include the payment of any wages attributable to the prior year but unpaid at the end of the prior year. this amount is an expense of the prior year and not of the current year, and thus should be subtracted in determining wages expense. similarly, wages paid during the year will not include any wages attributable to hours worked during the current year but not actually paid until the following year. this should be added in determining wages expense. |
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Term
list two types of transactions that would receive different accounting treatment using
a) strict cash-basis accounting
b) a modified cash basis |
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Definition
| although similar to the strict cash basis, the modified cash basis of accounting requires that expenditures for captial items be charged against income over all the periods to be benefited. this is done through conventional accounting methods, such as depreciation and amortization. under the strict cash basis, expenditures would be recognized as expenses in the period in which the corresponding cash disbursements are made |
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Term
| what are reversing entries, and why are they used? |
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Definition
| reversing entries are made at the beginning of the period to reverse accruals and some deferrals. reversing entries are not required. they are made to simplify the recording of certain transactions that will occur later in the period. the same results will be attained whether or not reversing entries are recorded. |
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Term
| Is a worksheet a permanent accounting record, and its use is required in the accounting cycle? |
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Definition
| a worksheet is not a permanent accounting record and its use is not required int he accounting cycle. the worksheet is an informal device for accumulating and sorting information needed for the financial statements. its use is optional in helping to prepare financial statements |
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Term
| what kinds of questions about future cash flows do investors and creditors attempt to answer with information in the income statement |
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Definition
- income statement is important b/c it provides investors and creditors with information that helps them predict the amount, timing, and uncertainty of future cash flows. helps investors and creditors predict future cash flows in a number of different ways.
1. evaluate past performance of the enterprise
2. determine risk (level of uncertainty) of income- revenues, expenses, gains, and losses- and highlights the relationship among these various components |
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