Insurance Expense Recognition for Prepaid Policy

Chapter 2:  On October 1 year 1 a company paid 1,200 cash in exchange for an insurance policy that protects the company from loss due to fire for a one-year term. Based solely on the information the amount of insurance expenses recognized in year 2 is(assume that the company’s accounting period ends of 31st December every year) $900(1,200 cost /12 = $100 per month x 9 months = $900 expense.  Assuming a company purchases prepaid rent during an accounting period the year end adjusting entry to recognize rent expense will affect which of the following statements? Statement of change in stockholder’s equity, income statement, balance sheet. On august 1 year 1 a company paid 1,200 cash in exchange for an insurance policy that protects the company from loss due to fire for a one-year term. Based solely on the information the amount of insurance expenses recognized in year 2 is(assume that the company’s accounting period ends of 31st December every year) The balance sheet would show $700 of prepaid insurance, in the income statement would show $500 on insurance expense (1200 x 5 months / total months, the statement pf cash flows would show $1,200 outflow from operating activates   Which of the following general ledger accounts appear on the balance sheet? Unearned revenue and prepaid rent  When a company purchases supplies on account the balance is the accounts payable account increases, cash account is not affected, supplies account increase  When a company pays cash to purchase supplies the total amount of: assets and liabilities are not affected  Purchasing supplies on account is an asset source transaction  An account payable is an obligation to pay cash in the future  Supplies account appears on which of the following financial statements? Balance Sheet  On may 1 of year 1 a company paid cash to purchase prepaid rent. Based on this information the year end adjusting entry required to recognize rent expense would: decrease the balances in the prepaid rent account and increase the balance in the rent expense account  Unearned revenue account is an liability account  On august year 1 a company paid cash to purchase prepaid rent. Based on this information the year end adjusting entry required to recognize rent expenses would: decrease the balance in the prepaid rent account, not affect the balance in the cash account, increase the balance in the rent expense account.  What does accrual accounting attempt to accomplish? Accrual accounting attempts to record the effects of accounting events in the period when such events occur, regardless of when cash is received or paid. The goal is to match expenses with the revenues that they produce.  Define recognition. How is it independent of collecting or paying cash? Recognition is the act of recording an event in the financial statements. When accruals are used, events are recognized before the associated cash is paid or collected. How does the recognition of revenue on account receivable affect the income statement compared to its effect on the statement of cash flows? Recognizing revenue on account causes the accounts receivable and revenue accounts to increase. When a company earns revenue on account, cash is not collected at the time of recognition therefore the statement of cash flows is not affected. The income statement is also not affected because the revenue was recognized when the receivable was created. The increase in cash is an operating activity.  What does accural mean? accrual describes a revenue or an expense event that is recognized before cash is exchange. ex: recognition of revenue in 2016 related to cash realized in 2017.  What does the term deferral mean? Deferral describes a revenue or an expense event that is recognized before cash is exchange. ex: a cash payment occurs in 2016 but the expense is recognize in 2017.  If cash is collected in advance of performing services, when is the associated revenue recognized? If cash is collected in advance for services, the revenue is recognized when the services are rendered.  What effect does the issue of common stock have on the accounting equation? The issue of common stock, which is capital acquired from owners, increases business assets (usually cash) and equity (common stock).  When is revenue recognized under accrual accounting? Revenue is recognized under accrual accounting when a revenue-producing event occurs, i.e., when the revenue is earned, even if no cash is collected at the time of the transaction.  What is the effect on the right side of the accounting equation when cash is collected in advance of performing services? If cash is collected in advance for services, a liability is created (unearned revenue), increasing the claims side of the accounting equation  What does the term unearned revenue mean? Unearned revenue is cash that has been collected for services that have not yet been performed.  What effect does expense recognition have on the accounting equation? The recognition of expenses affects the accounting equation by either decreasing assets or increasing liabilities (payables) and by decreasing stockholders' equity (retained earnings).  What type of transaction is a cash payment to creditors? How does this type of transaction affect the accounting equation? Cash payments to creditors are asset use transactions. These transactions result in the reduction of an asset account (cash) and the reduction of the corresponding liability account (payables).  When are expenses recognized under accrual accounting? Expenses are recognized under accrual accounting at the time the expense is incurred or resources are consumed, regardless of when cash payment is made.  What is the relationship between the income statement and changes in assets and liabilities? The income statement reflects the change in net assets associated with operating a business, as shown by revenues and expenses. Expenses may result from a decrease in assets or an increase in liabilities. Revenues may result from an increase in assets or a decrease in liabilities.  How does net income affect the stockholder's claims on the business's assets? Net income increases stockholders' claims on business assets by increasing retained earnings  What is the difference between a cost and an expense? A cost can be either an asset or an expense. If the item acquired has already been used in the process of earning revenue, its cost represents an expense. If the item will be used in the future to generate revenue, its cost represents an asset.  When does a cost become an expense? Do all costs become expenses? 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 revenues with related expenses. Not all costs become expenses. If the value of an asset will not expire in the revenue-generating process, the asset will not become an expense. For example, the cost of land will not become an expense because land does not depreciate.  How and when is the cost of the supplies used recognized in an accounting period? Supplies used during the accounting period are recognized in a single adjusting entry at the end of the period. The amount of supplies used is determined by subtracting the amount of supplies on hand at the end of the period from the amount of supplies that were available for use (beginning supplies balance plus supplies purchased).  What does the term expense mean? An expense is a decrease in assets or an increase in liabilities that occurs in the process of generating revenue.  What does the term revenue mean? Revenue is an increase in assets or a decrease in liabilities that results from the operating activities of the business.  What is the purpose of the statement of changes in stockholders' equity? The purpose of the statement of changes in stockholders' equity is to display the effects of business operations and stock issued to owners and dividends paid to stockholders. It identifies the ways that an entity's equity increased and decreased as a result of its operations and transactions with its stockholders.  What is the main purpose of the balance sheet? The purpose of the balance sheet is to provide information about an entity's assets, liabilities, and stockholders' equity and their relationships to each other at a particular point in time. It provides a list of the economic resources that the enterprise has available for its operating activities and the claims to those resources.  Why is the balance sheet dated as of a specific date when the income statement, statement of stockholder's equity, and statement of cash flows are dated with the phrase for the period ended? 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 over a time period. The statement of changes in stockholders' equity, the income statement, and the statement of cash flows reflect transactions that occur over a period of time.  In what order are assets listed on the balance sheet? Assets are listed on the balance sheet in accordance with their respective levels of liquidity (how rapidly they can be converted to cash).  What does the term adjusting entry mean? Give an example. 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 measurement on the income statement and an adjustment will reflect the correct time period of earning or usage. Example: entry to recognize accrued interest revenue where the revenue has been earned but not yet collected and therefore revenue had not yet been recorded for the time period.  What types of accounts are closed at the end of the accounting period? Why is it necessary to close these accounts? Temporary accounts (revenue, expense and dividends) are closed at the end of the accounting period. It is necessary to close these accounts so that revenue, expense and dividends can be accumulated from a beginning balance of zero for the next period.  Give several examples of period costs? Period costs are costs that are recognized in an accounting period. Examples of period costs include rent expense, utilities expense, and salaries expense.