Concept explainers
These accounting concepts were discussed in this and previous chapters.
- 1. Economic entity assumption.
- 2. Expense recognition principle.
- 3. Monetary unit assumption.
- 4. Periodicity assumption.
- 5. Historical cost principle.
- 6. Materiality.
- 7. Full disclosure principle.
- 8. Going concern assumption.
- 9. Revenue recognition principle.
- 10. Cost constraint.
Instructions
Identify by number the accounting concept that describes each situation below. Do not use a number more than once.
______ (a) Is the rationale for why plant assets are not reported at liquidation value. (Do not use the historical cost principle.)
______ (b) Indicates that personal and business recordkeeping should he separately maintained.
______ (c) Ensures that all relevant financial information is reported.
______ (d) Assumes that the dollar is the “measuring slick” used to report on financial performance.
______ (e) Requires that accounting standards be followed for all items of significant size.
______ (f) Separates financial information into time periods for reporting purposes.
______ (g) Requires recognition of expenses in the same period as related revenues.
______ (h) Indicates that fair value changes subsequent to purchase are not recorded in the accounts.
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- Read each definition below and write the number of the definition in the blank beside the appropriate term. The quiz solutions appear at the end of the chapter. Recognition Historical cost Current value Cash basis Accrual basis Revenues Revenue recognition principle Matching principle Expenses Adjusting entries Straight-line method Contra account Deferral Deferred expense Deferred revenue Accrual Accrued liability Accrued asset Accounting cycle Work sheet Real accounts Nominal accounts Closing entries Interim statements A device used at the end of the period to gather the information needed to prepare financial statements without actually recording and posting adjusting entries. Inflows of assets or settlements of liabilities from delivering or producing goods, rendering services, or conducting other activities. Journal entries made at the end of a period by a company using the accrual basis of accounting. Journal entries made at the end of the period to return the balance in all nominal accounts to zero and transfer the net income or loss and the dividends to Retained Earnings. A liability resulting from the receipt of cash before the recognition of revenue. The name given to balance sheet accounts because they are permanent and are not closed at the end of the period. An asset resulting from the recognition of a revenue before the receipt of cash. The amount of cash or its equivalent that could be received by selling an asset currently. The assignment of an equal amount of depreciation to each period. Cash has been paid or received but expense or revenue has not yet been recognized. A system of accounting in which revenues are recognized when a performance obligation is satisfied and expenses are recognized when incurred. Cash has not yet been paid or received but expense has been incurred or revenue recognized. Financial statements prepared monthly, quarterly, or at other intervals less than a year in duration. Revenues are recognized in the income statement when a performance obligation is satisfied. The process of recording an item in the financial statements as an asset, a liability, a revenue, an expense, or the like. An asset resulting from the payment of cash before the incurrence of expense. The name given to revenue, expense, and dividend accounts because they are temporary and are closed at the end of the period. A system of accounting in which revenues are recognized when cash is received and expenses are recognized when cash is paid. A liability resulting from the recognition of an expense before the payment of cash. The association of revenue of a period with all of the costs necessary to generate that revenue. An account with a balance that is opposite that of a related account. The amount paid for an asset and used as a basis for recognizing it on the balance sheet and carrying it on later balance sheets. Outflows of assets or incurrences of liabilities resulting from delivering goods, rendering services, or carrying out other activities. A series of steps performed each period and culminating with the preparation of a set of financial statements.arrow_forwardIdentify whether each of the following transactions, which are related to revenue recognition, are accrual, deferral, or neither. A. earn now, collect now B. earn now, collect later C. earn later, collect nowarrow_forwardWhich of the following is the principle that a business must report any business activities that could affect what is reported on the financial statements? A. revenue recognition principle B. expense recognition (matching) principle C. cost principle D. full disclosure principlearrow_forward
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