Friedlan 4e Accounting Chapter 3 Solution

Topics: Generally Accepted Accounting Principles, Balance sheet, Liability Pages: 121 (28380 words) Published: September 27, 2014
CHAPTER 3
The Accounting Cycle

QUESTIONS

Q3-1.
Much more judgement is required for accrual accounting than for cash accounting because there is greater uncertainty at the time events are recorded in the accounting system. There is no uncertainty around the point in time when the cash is paid or collected. Accrual accounting records economic events, not cash flows. When an economic event occurs can be ambiguous. It’s less certain when revenue has been earned than when cash is received. It can also be unclear what expenses were incurred to earn revenue (matching) whereas the amount of cash expended is rarely ambiguous.

Q3-2.
Closing entries are made to reset balances in the temporary (income statement) accounts to zero so that the entity can record the transactions and accumulate information pertaining only to the following period. The effect of the closing entry is to transfer balances in the temporary accounts to retained earnings (in a corporation) or owner’s equity (proprietorship). Closing entries are made after the end of the reporting period, when financial statements are prepared.

Q3-3.
If the temporary accounts were not closed on December 31, 2017, retained earnings would be understated by $100,000 on the 2017balance sheet and income would be overstated by $100,000 in 2018. The individual accounts on the income statements would be misstated by the amount in those accounts at the end of the previous period.

Q3-4.
Adjusting entries are necessary in accrual accounting because recognition of revenues and expenses does not always correspond with cash flows. Some economic changes may occur that should be reflected under accrual accounting but that are not triggered by exchanges with external parties. As a result adjusting entries are needed to reflect these changes. Adjusting entries are not required in a cash accounting system because recording is triggered only by the exchange of cash, and so revenues and expenses always correspond with cash flows.

Q3-5.
Transactional journal entries are triggered by exchanges between an entity and an external party. Adjusting entries are necessary to reflect economic changes that are not triggered by an exchange with an external party but that should be captured by the accounting system.

Q3-6.
The four types are:
Deferred expense/prepaid expense:
Needed to ensure that expenses that are paid before the benefits are received are recognized as expenses when the benefits are received. Deferred revenue:
Needed to ensure that revenues that are collected before they are earned are recognized when they are earned. Accrued Expense/Accrued liability:
Needed to ensure that expenses that are incurred before they are paid are recognized in the period when they are incurred. Accrued Revenue/Accrued asset:
Needed to ensure that revenues that are earned before they are collected are recognized in the period when they are earned.

Q3-7.
The following table indicates the impacts if the particular entry was not made:

Deferred expense/prepaid expense:
Deferred revenue
Accrued Expense/Accrued liability:
Accrued Revenue/Accrued asset:
Assets
Overstated
No effect
No effect
Understated
Liabilities
No effect
Overstated
Understated
No effect
Owners’ equity
Overstated
Understated
Overstated
Understated
Revenue
No effect
Understated
No effect
Understated
Expenses
Understated
No effect
Understated
No effect
Net income
Overstated
Understated
Overstated
Understated

Q3-8.
Adjusting entries have to be made when the financial statements are prepared to ensure that all appropriate economic events are properly reflected in the financial statements. Even though many of the economic changes reflected by adjusting entries (depreciation, earning of interest, etc.) happen throughout the accounting period, there is no need to record these changes until the financial statements are actually prepared.

Q3-9.
The terms simply refer to whether the...
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