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Financial Accounting ch 3

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Chapter 3 Adjusting Accounts and Preparing Financial Statements QUESTIONS  ! The cash "asis o# accounti ng rep orts re$enues %hen cash is recei$ed %hil e the accrua l "asis repor ts re$enues %hen the& are earned! The cash "as is repor ts e'penses %hen cash is paid %hile the accrual "asis reports e'penses %hen the& are incurred and matched %ith re$enues the& generated!  ( ! The accrual "asi s o# accou nti ng genera ll& pr o$ides a "etter indi cat ion o# compa n& per#o rmance and #ina ncial condition than does the cash "asis! Al so) the accrual "asis increases the compara"ilit& o# #inancial statements #rom one period to the ne't! Thus) "usiness decisio n ma*ers generall& pr e#er the accrual "asis!  3! +usinesses that ha$e major season al $ar iations in sales are mo st li *el& t o sel ect the natural "usiness &ear as the #iscal &ear!  ,! A p repaid e'pe nse is a n item paid #or i n ad$ance o# recei$ing its "ene#its! As such) it is reported as an asset on the "alance sheet!  -! .ong/ ter m tangi"le plant ass ets suc h as e0uipment) "uildings) and machiner& lead to adjustments #or depreciation! 1enerall&) land is the onl& long/term tangi"le plant asset that does not re0uire depreciation!  2! The Accumulated e pre ciation contra account is used #or d epr eci ati on! It pr o$i des #inancial statement users %ith additional in#ormation a"out the relati$e age o# the assets! 4ithout the contra account in#ormation) the reader %ould not "e a"le to tell %hether the assets are ne% or in need o# replacement!  5! Unearned re$e nue re #er s to cash recei$ed in ad$ance o# pro$i di ng products and ser$ices! Another name #or an unearned re$enue is de#erred re$ enue! It is reported as a lia"ilit& on the "alance sheet!  6! An accru ed re$ enu e is re$enu e that i s earn ed "u t is not & et recei$ed in ca sh 7an d8or other assets9 and the customer has not "een "illed prior to the end o# the period! Th ere#or e) end/o# /period ad justments are made to record accr ued re$enue! E'amples are interest income that has "een earned "ut not collected and re$enues #rom ser$ices per#ormed that are neither collected nor "illed!  :! A I# prepaid e'penses are initiall& recorded %ith de"its to e'pense accounts) then the prepaid e'penses asset accounts are de"ited in the adjusting entries! ©McGraw-Hill Companies, 2007 Solutions Manual, Chapter 3 119
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