Friedlan 4e Accounting Chapter 3 Solution
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
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