1. Three more of the nine basic accounting concepts.{s}
- Conservatism concept.
- Materiality concept.
- Realization concept. {d}
2. The idea of accruals.
3. The ways that revenue items are measured.
4. The ways that monetary assets are measured.
5. The days' receivable ratio.
@
5.1
We shall start this part by describing two more of the nine concepts
that govern accounting: {u}conservatism{n} and {u}materiality{n}.
@
5.2 Conservatism
Suppose that in January, Lynn Jones agrees to buy an automobile from
the Ace Automobile Company; the automobile is to be delivered to Jones
in March. Since Ace Automobile Company is in the business of selling auto-
mobiles, it {1,9} be happy that Jones has agreed to buy one.
(A) would
(B) would not
*1
- POST - {b}{a,10,13}{r}
WOULD - OK - Absolutely!
A - OK - Absolutely!
WOULD NOT - QUIT - No, Ace is in business to sell!
B - QUIT - No, Ace is in business to sell!
@
5.3
Jones agrees in January to buy an automobile for delivery in March.
Although Jones is likely to take delivery in March, it is possible that
Jones will change her mind. The sale of this automobile therefore is
{1,18}.
(A) absolutely certain (B) uncertain
*1
- POST - {b}{a,8,41}{r}
UNCERTAIN - OK - Correct.
B - OK - Correct.
A - QUIT - No, not until money is exchanged for keys!
ABSOLUTELY CERTAIN - QUIT - No, not until money is exchanged for keys!
@
5.4
Jones agrees in January to buy an automobile for delivery in March.
Because in January the sale of this automobile is uncertain, accounting
{1,8} recognize the revenue in January. Instead, accounting recognizes the
(A) does (B) does not
revenue in March, when Jones takes delivery. This is a {2,12}
way to record the transaction.
(C) conservative (D) liberal
*1
- POST - {b}{a,8,29}{r}
DOES NOT - OK - Correct.
B - OK - Correct.
DOES - QUIT - No, revenue is recognized when delivery has taken place.
A - QUIT - No, revenue is recognized when delivery has taken place.
*2
- POST - {b}{a,14,13}conservative
CONSERVATIVE - OK - Correct.
C - OK - Correct.
LIBERAL - QUIT - No, it is conservative to wait until the delivery occurs.
D - QUIT - No, it is conservative to wait until the delivery occurs.
@
5.5
Revenue is an increase in owners' equity. The conservatism
concept requires that such increases not be recognized until they are
{b}reasonably{n} C{1,7,2}.
*1
ERTAIN - OK - Good.
CERTAIN - OK - Good.
@
5.6
Increases in owners' equity are recognized only when they are reasonably
certain. To be conservative, decreases in owners' equity should be recognized
as soon as they have occurred. Suppose an automobile is stolen from Ace
Automobile Company in January, and the company waits until March to decide
that the automobile is gone for good. Conservatism requires that the decrease
in owners' equity be recognized when it is {b}reasonably possible{n}; that is,
in {1,7}.
(A) January (B) March
*1
- POST - {b}{a,16,13}January
JANUARY - OK - Correct.
A - OK - Correct.
MARCH - QUIT - No, it is conservative NOT to count on its return.
B - QUIT - No, it is conservative NOT to count on its return.
@
5.7
The conservatism concept therefore has two parts:
(1) Recognize {b}increases{n} in owners' equity only when they are
{b}reasonably certain{n}.
(2) Recognize {b}decreases{n} in owners' equity as soon as they are
{b}reasonably possible{n}. {s}
{d}
These are general ideas only. Specifics will be given in later parts
of the program.
@
5.8 Materiality
A brand new pencil is a(n) {1,9} of the entity that owns it.
(A) asset (B) liability
*1
- POST - {b}{a,4,13}asset
ASSET - OK - Correct.
A - OK - Correct.
LIABILITY - QUIT - No, anything of value is an asset.
B - QUIT - No, anything of value is an asset.
@
5.9
Every time an employee writes with a pencil, part of
the asset's value {1,9}, and
(A) increases (B) decreases
the owners' equity also {2,9}.
(A) increases (B) decreases
*1
- POST - {b}{a,6,31}{r}
DECREASES - OK - Correct.
B - OK - Correct.
INCREASES - QUIT - No. The change is small, but the value does decrease.
A - QUIT - No. The change is small, but the value does decrease.
*2
- POST - {b}{a,10,31}{r}
DECREASES - OK - Correct.
B - OK - Correct.
INCREASES - QUIT - No, the change is small, but the owners' equity does decrease.
A - QUIT - No, the change is small, but the owners' equity does decrease.
@
5.10
Would it be {u}possible{n}, theoretically, to find out each day the
number of partly used pencils that are owned by the entity and to make a
journal entry showing the amount of assets that have been used up and the
corresponding "pencil expense" of that day? {1,-3,1} (Yes or No?) {s}
{d}
Would it be {u}practical{n}? {2,-3,1}
*1
YES - OK - Yes, it is POSSIBLE ...
NO - QUIT - Well, it IS possible.
N - QUIT - Well, it IS possible.
*2
NO - OK - Certainly not!
YES - QUIT - No, not really.
Y - QUIT - No, not really.
@
5.11
Instead of being theoretically correct, the accountant considers
that the asset value of the pencils was entirely used up at the time they
were purchased. This solution is simple and {1,11},
(A) impractical (B) practical
but {2,4} exact than the theoretically correct treatment.
(C) more (D) less
*1
- POST - {b}{a,8,33}{r}
PRACTICAL - OK - Correct.
B - OK - Correct.
IMPRACTICAL - QUIT - No, it is practical.
A - QUIT - No, it is practical.
*2
- POST - {b}{a,12,27}{r}
LESS - OK - Correct.
D - OK - Correct.
MORE - QUIT - No, a used pencil is theoretically worth something.
C - QUIT - No, a used pencil is theoretically worth something.
@
5.12
The treatment of pencils is an example of the {b}materiality{n} concept.
The materiality concept is that the accountant may omit IM{1,8,3} events.
When accountants consider the asset value of pencils to be entirely used up
at the time of purchase, they are applying the materiality concept.
*1
MATERIAL - OK - Right.
ATERIAL - OK - Right.
@
5.13
The other side of the coin is that the financial statements must
disclose all material facts. For example, if a large fraction of a company's
inventory is found to be worthless, the M{1,10,3} concept requires
that this fact be disclosed.
*1
ATERIALITY - OK - Correct.
MATERIALIT - OK - Correct.
- HINT - This is the concept that was discussed a moment ago.
@
5.14
Thus the materiality concept has two sides: (1) {1,9 }
(A) disregard (B) disclose
trivial (i.e., unimportant) matters, and (2) {2,9 } all important
(A) disregard (B) disclose
matters.
*1
- POST - {b}{a,4,21}disregard
DISREGARD - OK - Correct.
A - OK - Correct.
DISCLOSE - QUIT - No.
B - QUIT - No.
*2
- POST - {b}{a,8,39}{r}
DISCLOSE - OK - Correct.
B - OK - Correct.
DISREGARD - QUIT - No.
A - QUIT - No.
@
5.15
To review, the conservatism concept is: recognize increases in owners'
equity only when they are {b}reasonably certain{n}, but recognize decreases as
soon as they are {b}reasonably possible{n}.
The materiality concept is: {b}disregard{n} trivial matters, but {b}disclose{n} all
important matters.
@
5.16 Accrual Accounting
On January 3, Glendale Market borrowed $5,000 from the bank.
As a result of this transaction, its cash {1,14}, but its
(A) increased (B) decreased (C) did not change
owner's equity {2,14}. Increases in owner's equity are {b}revenues{n}.
(A) increased (B) decreased (C) did not change
Therefore, the receipt of cash on January 3 was NOT associated with revenues.
*1
- POST - {b}{a,6,13}increased
INCREASED - OK - Correct.
A - OK - Correct.
- HINT - The $5,000 loan gave Glendale MORE cash.
*2
- POST - {b}{a,10,49}{r}
DID NOT CHANGE - OK - Correct.
C - OK - Correct.
- HINT - {a,21,1}Owner's equity did NOT change. The $5,000 increase in cash was exactly{a,22,1}equalled by the $5,000 increase in a liability.
@
5.17
On January 4, Glendale Market purchased $2,000 of inventory,
paying cash. Since owner's equity was unchanged, the payment of cash
on January 4 {1,7} associated with an expense.
(A) was (B) was not
*1
- POST - {b}{a,8,25}{r}
WAS NOT - OK - Correct.
B - OK - Correct.
WAS - QUIT - {a,21,1}No, because owner's equity did not change. The increase of $2,000 in one asset{a,22,1}was exactly offset by the decrease of $2,000 in another asset.
A - QUIT - {a,21,1}No, because owner's equity did not change. The increase of $2,000 in one asset{a,22,1}was exactly offset by the decrease of $2,000 in another asset.
@
5.18
On January 8, Glendale Market sold for $900 merchandise costing
$600, the customer agreeing to pay $900 within 30 days. This transaction
resulted in {1,11} in cash.
(A) an increase (B) no change (C) a decrease {s}
{d}
Revenue was ${2,-3} [how much?]. This revenue {u}was not{n} associated
with an increase in cash on January 8.
*1
- POST - {b}{a,8,33}no change
NO CHANGE - OK - Correct.
B - OK - Correct.
AN INCREASE - QUIT - There was an increase in accounts rec. but not in cash.
A - QUIT - There was an increase in accounts rec. but not in cash.
A DECREASE - QUIT - There was an increase in accounts rec. but not in cash.
C - QUIT - There was an increase in accounts rec. but not in cash.
*2
900 - OK - Correct.
600 - NO - No, the revenue was $900.
@
5.19
Evidently, revenues and expenses {1,7} always accompanied,
(A) are (B) are not
at the same time, by increases or decreases of an equal amount of cash.
Moreover, an increase or decrease in cash {2,6} always associated
(C) is (D) is not
with an equal amount of revenues or expenses.
*1
- POST - {b}{a,4,25}{r}
ARE NOT - OK - Correct.
B - OK - Correct.
ARE - QUIT - No. {a,21,1}Review the previous examples if you are uncertain. This point is VERY {a,22,1}important.
A - QUIT - No. {a,21,1}Review the previous examples if you are uncertain. This point is VERY {a,22,1}important.
*2
- POST - {b}{a,10,25}{r}
IS NOT - OK - Correct.
D - OK - Correct.
IS - QUIT - No. Think of the previous example.
C - QUIT - No. Think of the previous example.
@
5.20
Increases or decreases in cash are changes in an {1,8}
(A) equity (B) asset
account. Revenues or expenses are changes in an {2,8} account.
(A) equity (B) asset
*1
- POST - {b}{a,4,29}{r}
ASSET - OK - Correct.
B - OK - Correct.
EQUITY - QUIT - No, cash is associated with ASSETS.
A - QUIT - No, cash is associated with ASSETS.
*2
- POST - {b}{a,8,13}equity
EQUITY - OK - Correct.
A - OK - Correct.
ASSET - QUIT - No, expenses and revenues are associated with owners' equity.
B - QUIT - No, expenses and revenues are associated with owners' equity.
@
5.21
Income is measured by the difference between {1,-1}
(A) cash increases and cash decreases.
(B) revenues and expenses.
*1
- POST - {b}{a,6,14}{r}
B - OK - Correct.
A - QUIT - No.
@
5.22
{b}Income{n} measures the increase in O{1,7,2} equity during an
accounting period associated with the entity's operations.
*1
WNERS' - OK - Right.
OWNERS - OK - Right.
WNERS - OK - Right.
OWNERS' - OK - Right.
@
5.23
Many individuals and some small businesses keep track only
of {b}cash{n} receipts and {b}cash{n} payments. This type of accounting is
called cash accounting. If you keep a record of your deposits, the checks you
write, and your balance in a bank account, you are doing cash accounting.
Cash accounting {1,8} measure changes in owners' equity.
(A) does (B) does not
*1
- POST - {b}{a,12,25}{r}
DOES NOT - OK - Correct.
B - OK - Correct.
DOES - QUIT - {a,21,1}No, there is no necessary connection between changes in cash and changes in {a,22,1}owners' equity.
A - QUIT - {a,21,1}No, there is no necessary connection between changes in cash and changes in {a,22,1}owners' equity.
@
5.24
Most entities, however, account for revenues and expenses, as well as
cash receipts and cash payments. This type of accounting is called {b}accrual
accounting. Accrual accounting is more complicated than cash accounting, but
does measure changes in owners' equity. Since it is easy to account for cash
receipts and cash payments, nearly all the difficult problems in accounting
are problems of {1,7} accounting.
(A) cash (B) accrual
*1
- POST - {b}{a,14,26}{r}
ACCRUAL - OK - Yes.
B - OK - Yes.
CASH - QUIT - No, accrual accounting.
A - QUIT - No, accrual accounting.
@
5.25
In order to measure the income of a period, we must measure revenues
and expenses, and this requires the use of {1,7,2} accounting.
*1
ACCRUAL - OK - Right.
@
5.26 Accounting Period
An {u}income statement{n} reports the amount of income {1,-1}
(A) at a moment in time.
(B) over a period of time. {s}
{d}
The period of time covered by one income statement is called the {b}accounting
{b}period{n}.
*1
- POST - {b}{a,6,14}{r}
B - OK - Correct.
A - QUIT - No, that would be the BALANCE SHEET.
@
5.27
For most entities, the official accounting period is one year.
However, income statements, called {b}interim statements{n}, usually are prepared
for shorter periods. Earlier you prepared an income statement for Glendale
Market for the period January 2 through January 8. This was an example of
an interim statement, and the accounting period was one {1,5}.
(A) week (B) day (C) year
*1
- POST - {b}{a,12,13}week
WEEK - OK - Correct.
A - OK - Correct.
@
5.28
For most entities, the accounting period is the {b}calendar year{n},
that is, the year that ends on the last day of the calendar, which is
{1,11} [what date?].
*1
DECEMBER 31 - OK - That's right.
DEC. 31 - OK - That's right.
DEC 31 - OK - That's right.
DECEMBER 30 - QUIT - No, December 31.
- HINT - Write out a month and day.
@
5.29
Some entities, however, end their year when activities are at
a relatively low level. For example, a school might end its year on
June 30, when students have left for the summer. The accounting period
for such entities is the {1,-1}
(A) calendar year.
(B) natural business year.
*1
- POST - {b}{a,12,13}{r}
B - OK - Correct.
A - QUIT - No.
@
5.30
The income statement that describes changes in owners' equity
for the period January 1, 19x2, through December 31, 19x2, is an income
statement for the accounting P{1,5,2} 19x2.
*1
ERIOD - OK - Correct.
PERIO - OK - Correct.
@
5.31
Entities don't fire their employees and cease operations at the end
of an accounting period. They continue from one accounting period to the
next. The fact that accounting chops the stream of events into accounting
periods makes the problem of measuring revenues and expenses in an
accounting period {1,18} problem in accounting.
(A) an easy
(B) the most difficult
*1
- POST - {b}{a,14,13}{r}
THE MOST DIFFICULT - OK - Correct.
B - OK - Correct.
AN EASY - QUIT - No, because business continues without a break.
A - QUIT - No, because business continues without a break.
@
5.32{s} The Realization Concept
Consider the case of a company that manufactures goods and sells them.
In accounting, revenue from these goods is recognized at the time they are
delivered to the customer, NOT at the time they are manufactured.
Suppose that in 19x2 a company delivers to a customer an item that it
manufactured in 19x1. The revenue is recognized in {1,4} [what year?].
*1
- POST - {a,13,16}19x1 19x2 19x3{a,14,9}┌{c,196,50}┐
- POST -{a,15,9}│ Goods │ Goods │ Cash │
- POST -{a,16,9}│ manufactured │ delivered │ received │
- POST - {a,17,9}└{c,196,50}┘{a,18,34}{c,024}{a,19,30}Revenue is{a,20,30}recognized
19X2 - OK - Correct.
19X1 - QUIT - No, revenue is counted when the item is delivered.
@
5.33
If a company sells services rather than goods, revenue is recognized
at the time the services are {1,14}.
(A) contracted for
(B) performed
*1
- POST - {b}{a,8,13}{r}
PERFORMED - OK - Correct.
B - OK - Correct.
CONTRACTED FOR - QUIT - No, revenue is realized upon DELIVERY of these services.
A - QUIT - No, revenue is realized upon DELIVERY of these services.
@
5.34
Revenue is recognized when it is {b}realized{n}, that is, when goods are
delivered or services are performed. This is the R{1,6,3}TION concept.
*1
EALIZA - OK - Right.
REALIZ - OK - Right.
@
5.35
In January, Smith Company contracts to paint the Joneses' house.
The house is painted in February. Jones does not pay the bill until March.
Smith Company would recognize revenue in {1,8}.
(A) January (B) February (C) March
{s}
┌{c,196,50}┐
│ │ │ │
│ │ │ │
└{c,196,50}┘
*1
- POST - {a,12,14}January February March{a,14,14}Services{a,14,31}Services{a,14,50}Cash{a,15,15}ordered{a,15,31}performed
- POST - {a,15,48}received{a,17,35}{c,024}{a,18,30}Revenue is{a,19,30}recognized
FEBRUARY - OK - Correct.
B - OK - Correct.
JANUARY - NO - Revenue is recognized when services are PERFORMED.
A - NO - Revenue is recognized when services are PERFORMED.
MARCH - NO - Revenue is recognized when services are PERFORMED.
C - NO - Revenue is recognized when services are PERFORMED.
@
5.36
Gordon Company manufactures some imitation carrots in May.
In June it receives an order from Peter Rabbitt, Esq., for one carrot.
Gordon Company delivers the carrot in July. Peter Rabbitt pays the
bill in August and eats the carrot in September. Gordon Company would
recognize revenue in {1,9,4}. [what month?]
*1
JULY - OK - Correct.
JUNE - NO - No, revenue is recognized upon DELIVERY.
- HINT - No, the product was DELIVERED in July.
@
5.37
Revenue is realized when a {u}sale{n} is completed by the delivery
of goods or services. Because of this, the word "sales" is sometimes used
along with revenue, and often you will see the phrase "sales revenue."
We shall use this term in the following frames.
@
5.38
Which of the following events determines when sales revenue
from goods is realized? [choose one event] {1,-1}
(A) When the goods are manufactured.
(B) When the goods are ordered by the customer.
(C) When the goods are delivered.
(D) When the customer pays for the goods.
*1
- POST - {b}{a,10,13}{r}
C - OK - Correct.
- HINT - {a,21,1}The realization concept says that revenue is realized when goods are DELIVERED.
@
5.39{s}
Revenues may be recognized: (1) before, (2) during, or (3) after
the period in which cash from the sale is received. To begin with, let us
consider a case in which revenue is recognized during the same period as
when the cash is received.
In January, Mugar TV Company repaired the Joneses' television set, and Jones
paid $50 cash. In keeping with the dual-aspect concept, this transaction
has two effects on the accounts of Mugar TV Company. It increases Cash,
and it increases Sales Revenue. Complete the journal entry for this
transaction by putting in the proper account titles.
{d}
Dr. {1,-13 } ................................ 50 {s}
{d}
Cr. {2,-13 } ............................ 50
{s}
Type the letter of the appropriate answer as each blank highlights:
(A) Sales Revenue (B) Cash
*1
CASH - OK - Correct.
B - OK - Correct.
SALES REVENUE - QUIT - No, Cash is an asset, and increases in assets are debits.
A - QUIT - No, Cash is an asset, and increases in assets are debits.
*2
SALES REVENUE - OK - Correct.
A - OK - Correct.
CASH - QUIT - No, an increase in SALES REVENUE is always a CREDIT entry.
B - QUIT - No, an increase in SALES REVENUE is always a CREDIT entry.
@
5.40
In January, Loren Company sold and delivered a motorcycle to
Jerry Paynter, who paid $1,800 cash. {s}
{d}
In this example, revenue is recognized in the {1,13} the
related cash receipt.
(A) month before
(B) same month as
(C) month after
*1
- POST - {b}{a,13,13}{r}
SAME MONTH AS - OK - Correct.
B - OK - Correct.
- HINT - {a,21,1}No, both the sale and the receipt of cash occurred during January.
@
5.41
On January 5, Loren Company sold a motorcycle on credit to Jean Matthews
for $1,800. Matthews rode the motorcycle home and agreed to pay for
it in 30 days.
In this case, revenue is recognized in the {1,13} the related cash
receipt.
(A) month before
(B) same month as
(C) month after
*1
- POST - {b}{a,12,13}{r}
MONTH BEFORE - OK - Correct.
A - OK - Correct.
- HINT - The motorcycle was sold in Jan. but the cash would not be received {a,22,1}until Feb.
@
5.42{s}
When revenue is recognized before the related cash receipt, as in
the preceding transaction, the revenue is accompanied by the right to collect
the cash, which is an {b}Account Receivable{n}. Thus the entry for the sale
of the motorcycle on credit in January would be as follows.
{d}
Dr. {1,-19 } ........................ 1,800 {s}
{d}
Cr. {2,-19 } .................... 1,800
{s}
Type the letter of the appropriate answer as each blank highlights:
(A) Accounts Receivable
(B) Sales Revenue
*1
ACCOUNTS RECEIVABLE - OK - Correct.
A - OK - Correct.
SALES REVENUE - QUIT - No, the debit entry is an Account Receivable.
B - QUIT - No, the debit entry is an Account Receivable.
*2
SALES REVENUE - OK - Correct.
B - OK - Correct.
ACCOUNTS RECEIVABLE - QUIT - No, the credit entry is to Sales Revenue.
A - QUIT - No, the credit entry is to Sales Revenue.
@
5.43{s}
Brown Company sold and delivered a desk on credit to Black Company
in December and billed Black Company for the $200 sales price. In December,
{u}Brown Company{n} would make the following entry.
{d}
Dr. {1,-19 } ........................ 200 {s}
{d}
Cr. {2,-19 } .................... 200
{s}
Type the letter of the appropriate answer as each blank highlights:
(A) Accounts Receivable
(B) Sales Revenue
*1
ACCOUNTS RECEIVABLE - OK - Correct.
A - OK - Correct.
SALES REVENUE - QUIT - No, the debit entry is to Account Receivable.
B - QUIT - No, the debit entry is to Account Receivable.
*2
SALES REVENUE - OK - Correct.
B - OK - Correct.
ACCOUNTS RECEIVABLE - QUIT - No, the credit entry is to Sales Revenue.
A - QUIT - No, the credit entry is to Sales Revenue.
@
5.44 {s}
When a customer pays an entity for a credit purchase, the entity records
an increase in Cash and a corresponding decrease in Accounts Receivable. Thus,
when Brown Company receives a check for $200 from Black Company, Brown Company
makes the following entry.
{d}
Dr. {1,-19 } ........................ 200 {s}
{d}
Cr. {2,-19 } .................... 200
{s}
Type the letter of the appropriate answer as each blank highlights:
(A) Accounts Receivable
(B) Cash
*1
CASH - OK - Correct.
B - OK - Correct.
ACCOUNTS RECEIVABLE - QUIT - No.
A - QUIT - No.
*2
ACCOUNTS RECEIVABLE - OK - Correct.
A - OK - Correct.
CASH - QUIT - No.
B - QUIT - No.
@
5.45
So far we have treated the cases in which
(1) revenue is recognized {u}in the same period{n} as the associated
cash receipt;
(2) revenue is recognized {u}before{n} the associated receipt of cash.{s}
{d}
There remains the case in which
(3) revenue is recognized {1,6,2} the associated receipt of cash.
*1
AFTER - OK - Sure.
@
5.46
When a customer pays an entity in advance of delivery of goods or
services, the entity has an obligation to deliver the goods or services.
This obligation, like any obligation, is a(n) {1,9}.
(A) asset (B) liability
It is listed on the {2,5}-hand side of the balance sheet with the
title {b}Advances from Customers{n}.
(C) left (D) right
*1
- POST - {b}{a,8,29}{r}
LIABILITY - OK - Correct.
B - OK - Correct.
ASSET - QUIT - No, an obligation is a LIABILITY.
A - QUIT - No, an obligation is a LIABILITY.
*2
- POST - {b}{a,16,29}{r}
RIGHT - OK - Correct.
D - OK - Correct.
LEFT - QUIT - No, liabilities are listed on the RIGHT.
C - QUIT - No, liabilities are listed on the RIGHT.
@
5.47{s}
Thus, when an entity receives cash in advance of delivery, it
records a debit to Cash and a corresponding increase in the liability,
Advances from Customers.
In March, Maypo Company received $3,000 cash in advance from a firm to
prepare an advertising brochure. Complete the journal entry that should be
made in March to record this transaction in the accounts of Maypo Company.
{d}
Dr. {1,-23 } ...................... 3,000 {s}
{d}
Cr. {2,-23 } .................. 3,000
{s}
Type the letter of the appropriate response as each blank highlights:
(A) Sales Revenue
(B) Cash
(C) Advances from Customers
*1
CASH - OK - Correct.
B - OK - Correct.
SALES REVENUE - NO - No, Maypo has not delivered the goods yet.
A - NO - No, Maypo has not delivered the goods yet.
ADVANCES FROM CUSTOMERS - NO - No, the debit entry is CASH.
C - NO - No, the debit entry is CASH.
*2
ADVANCES FROM CUSTOMERS - OK - Correct.
C - OK - Correct.
SALES REVENUE - NO - No, Maypo has not delivered the goods yet.
A - NO - No, Maypo has not delivered the goods yet.
CASH - NO - No, the credit entry is ADVANCES FROM CUSTOMERS.
B - NO - No, the credit entry is ADVANCES FROM CUSTOMERS.
@
5.48{s}
In March, Maypo Company received $3,000 in advance from a firm
to prepare an advertising brochure. It delivered the brochure in June.
It therefore no longer had the liability, Advances from Customers.
Complete the journal entry that should be made in {u}June{n}.
{d}
Dr. {1,-23 } ...................... 3,000 {s}
{d}
Cr. {2,-23 } .................. 3,000
{s}
Type the letter of the appropriate response as each blank highlights:
(A) Cash
(B) Advances from Customers
(C) Sales Revenue
*1
ADVANCES FROM CUSTOMERS - OK - Correct.
B - OK - Correct.
CASH - NO - This entry is for JUNE. Advances from Customers are debited.
A - NO - This entry is for JUNE. Advances from Customers are debited.
SALES REVENUE - NO - No, the debit entry is Advances from Customers.
C - NO - No, the debit entry is Advances from Customers.
*2
SALES REVENUE - OK - Correct.
C - OK - Correct.
- HINT - No, the credit entry in June is Sales Revenue.
@
5.49{s}
A magazine publisher receives a check for $25 in 19x1 for a
magazine subscription. The magazines will be delivered in 19x2.
Complete the journal entry that the publisher should make in {u}19x1{n}.
{d}
Dr. {1,-23 } ...................... 25 {s}
{d}
Cr. {2,-23 } .................. 25
{s}
Type the letter of the appropriate response as each blank highlights:
(A) Sales Revenue
(B) Cash
(C) Advances from Customers
*1
CASH - OK - Correct.
B - OK - Correct.
SALES REVENUE - NO - No, there was no Sales Revenue in 19x1.
A - NO - No, there was no Sales Revenue in 19x1.
ADVANCES FROM CUSTOMERS - NO - No, this is a liability, so the increase is a credit.
C - NO - No, this is a liability, so the increase is a credit.
*2
ADVANCES FROM CUSTOMERS - OK - Correct.
C - OK - Correct.
SALES REVENUE - NO - No, Sales Revenue will not come in {u}19x1{n}.
A - NO - No, Sales Revenue will not come in {u}19x1{n}.
CASH - NO - No, the credit entry is Advances from Customers.
B - NO - No, the credit entry is Advances from Customers.
@
5.50{s}
A publisher received $25 for a magazine subscription in 19x1.
In 19x2, when the magazines are delivered, the publisher will recognize the
$25 revenue and will record a corresponding decrease in the liability,
Advances from Customers. Choose the names of the accounts for the journal
entry that should be made in 19x2.
{d}
Dr. {1,-23 } ...................... 25 {s}
{d}
Cr. {2,-23 } .................. 25
{s}
Type the letter of the appropriate response as each blank highlights:
(A) Sales Revenue
(B) Advances from Customers
*1
ADVANCES FROM CUSTOMERS - OK - Correct.
B - OK - Correct.
SALES REVENUE - QUIT - No, the debit is to the LIABILITY.
A - QUIT - No, the debit is to the LIABILITY.
*2
SALES REVENUE - OK - Correct.
A - OK - Correct.
ADVANCES FROM CUSTOMERS - QUIT - No, the credit is to Sales Revenue in {u}19x2{n}.
B - QUIT - No, the credit is to Sales Revenue in {u}19x2{n}.
@
5.51{s}
The customer's advance may cover revenue to be earned over
several accounting periods. Suppose in 19x1 a publisher received $40
for a magazine subscription, with the magazines to be delivered in 19x2
and 19x3. The entry for {u}19x1{n} should be:
{d}
Dr. {1,-23 } ...................... 40 {s}
{d}
Cr. {2,-23 } .................. 40
{s}
Type the letter of the appropriate response as each blank highlights:
(A) Cash
(B) Advances from Customers
*1
CASH - OK - Correct.
A - OK - Correct.
ADVANCES FROM CUSTOMERS - QUIT - {a,21,1}A debit to a liability account means that the liability DECREASED, which is {a,22,1}not the case here.
B - QUIT - {a,21,1}A debit to a liability account means that the liability DECREASED, which is {a,22,1}not the case here.
*2
ADVANCES FROM CUSTOMERS - OK - Correct.
B - OK - Correct.
CASH - QUIT - No, a credit to Cash means that Cash decreased, which is not the case here.
A - QUIT - No, a credit to Cash means that Cash decreased, which is not the case here.
@
5.52{s}
In 19x1, a publisher received $40 for a magazine subscription,
with the magazines to be delivered in 19x2 and 19x3. The entry for
{u}19x2{n} should be:
{d}
Dr. {1,-23} ...................... 20 {s}
{d}
Cr. {2,-23} .................. 20
{s}
Type the letter of the appropriate response as each blank highlights:
(A) Cash (B) Sales Revenue (C) Advances from Customers
{d}
At the end of 19x2 ${3,-2} would be reported as a liability on the {s}
balance sheet.
(D) $40 (E) $20 (F) $0
*1
ADVANCES FROM CUSTOMERS - OK - Correct.
C - OK - Correct.
CASH - QUIT - Assuming half are to be delivered each year, $20 is a DEBIT entry for Advances.
A - QUIT - Assuming half are to be delivered each year, $20 is a DEBIT entry for Advances.
SALES REVENUE - QUIT - Assuming half are to be delivered each year, $20 is a DEBIT entry for Advances.
B - QUIT - Assuming half are to be delivered each year, $20 is a DEBIT entry for Advances.
*2
SALES REVENUE - OK - Correct.
B - OK - Correct.
- HINT - $20 is a CREDIT entry for Sales Revenue.
*3
20 - OK - Correct.
E - OK - Correct.
- HINT - $20 is delayed revenue until 19x3 and therefore a liability in {u}19x2{n}.
@
5.53{s}
In 19x1 a publisher received $40 for a magazine subscription, with
the magazines to be delivered in 19x2 and 19x3. The entry for {u}19x3{n} should
be:{s}
{d}
Dr. {1,-23 } ...................... 20 {s}
{d}
Cr. {2,-23 } .................. 20
{s}
Type the letter of the appropriate response as each blank highlights:
(A) Sales Revenue (B) Advances from Customers
{d}
At the end of 19x3 ${3,-2} would be reported as a liability on the{s}
balance sheet.
(C) $40 (D) $20 (E) $0
*1
ADVANCES FROM CUSTOMERS - OK - Right.
B - OK - Right.
SALES REVENUE - QUIT - No, in 19x3 the advances are debited.
A - QUIT - No, in 19x3 the advances are debited.
*2
SALES REVENUE - OK - Yes.
A - OK - Yes.
ADVANCES FROM CUSTOMERS - QUIT - No, in 19x3 Sales Revenue is credited.
B - QUIT - No, in 19x3 Sales Revenue is credited.
*3
0 - OK - That's right.
0 - OK - That's right.
00 - OK - That's right.
E - OK - That's right.
- HINT - In 19x3 the liability is zero.
@
5.54 Service Revenue
Revenue is recognized in the period in which services are performed.
If a landlord receives cash from a tenant in January and in return permits
the tenant to use an apartment in February, March, and April, the landlord
recognizes revenue in {1,-1}
(A) January.
(B) February, March, and April.
*1
- POST - {b}{a,12,13}{r}
B - OK - Correct.
A - QUIT - No, the services were not performed in January.
@
5.55{s}
In January a tenant pays the landlord $1,200 cash covering rent for
February, March, and April. This type of revenue is called {b}rental
revenue{n}.
How much revenue would the landlord recognize each month, and how much
liability would be reported at the end of each month?
Rental Revenue Liability at the
for the month end of month {d}
January ${1,-5 } ${2,-5 } {s}
{d}
February ${3,-5 } ${4,-5 } {s}
{d}
March ${5,-5 } ${6,-5 } {s}
{d}
April ${7,-5 } ${8,-5 } {s}
*1
0 - OK - Correct.
0 - OK - Correct.
- HINT - The revenue was NOT for January service.
*2
1,200 - OK - Correct.
1200 - OK - Correct.
- HINT - No, the $1,200 is a liability at the end of January.
*3
400 - OK - Correct.
400 - OK - Correct.
- HINT - No, $400 is revenue for February.
*4
800 - OK - Correct.
800 - OK - Correct.
- HINT - No, $800 remains as a liability at the end of February.
*5
400 - OK - Correct.
400 - OK - Correct.
- HINT - No, $400 is revenue for March.
*6
400 - OK - Correct.
400 - OK - Correct.
- HINT - No, $400 remains as a liability in March.
*7
400 - OK - Correct.
400 - OK - Correct.
- HINT - No, $400 is revenue for April.
*8
0 - OK - Correct.
0 - OK - Correct.
- HINT - No, nothing remains as a liability in April.
@
5.56
When a bank lends money, it provides a service; that is, the bank
provides the borrower with the use of the money for a specified period.
The bank earns revenue for the service it performs during this period.
This type of revenue is called {b}interest revenue{n}. In accordance with the
realization concept, interest revenue is recognized in the period(s) {1,-1}
(A) in which the interest is received.
(B) in which the borrower has the use of the money.
*1
- POST - {b}{a,14,13}{r}{n}{a,14,61}[in this example]{a,20,1}(Note: The term "interest income" is often used instead of "interest revenue.")
B - OK - Correct.
A - QUIT - No, revenue is recognized in the period when service is performed.
@
5.57
Interest revenue is similar to rental revenue. Banks perform a service
when they "rent" money; landlords perform a service when they rent apartments.
In both cases, revenue is realized in the period(s) in which the service is
P{1,9,2}.
*1
ERFORMED - OK - Correct.
PERFORMED - OK - Correct.
@
5.58
To summarize, an accountant recognizes revenue {u}before{n} the related
cash receipt by crediting Revenues and debiting a(n) {1,9} account
(A) asset (B) liability
entitled A{2,19,10} [two words].
*1
- POST - {b}{a,6,13}asset
ASSET - OK - Correct.
A - OK - Correct.
LIABILITY - QUIT - No, the asset account is debited.
B - QUIT - No, the asset account is debited.
*2
CCOUNTS RECEIVABLE - OK - Yes.
ACCOUNTS RECEIVABL - OK - Yes.
@
5.59
The accountant recognizes revenue {u}after{n} the related cash receipt
by debiting Cash and crediting a(n) {1,9} account when the cash
is received.
(A) asset
(B) liability
*1
- POST - {b}{a,10,13}{r}
LIABILITY - OK - Correct.
B - OK - Correct.
ASSET - QUIT - No, the liability account is credited.
A - QUIT - No, the liability account is credited.
@
5.60
The asset or liability amounts initially recorded must later be
{b}adjusted{n} in order to report revenue in the period in which it is realized.
The entries made to record these adjustments are called {1,6,2}ING entries.
*1
ADJUST - OK - Right.
@
5.61 Amount of Revenue
The realization concept describes {u}when{n} revenue is recognized.
The conservatism concept governs {u}how much{n} revenue is recognized.
@
5.62
Loren Company sold a motorcycle to Jean Matthews for $1,800 on credit,
but Matthews never paid the $1,800. Since Loren Company's assets decreased
by one motorcycle but there was no real increase in another asset, Loren
Company's owners' equity has actually {1,15} as a result of this
(A) increased (B) stayed the same (C) decreased
transaction. Loren Company {2,7} realize revenue from this transaction.
(D) did (E) did not
*1
- POST - {b}{a,10,55}{r}
DECREASED - OK - Correct.
C - OK - Correct.
INCREASED - QUIT - No, remember that assets = equities, so if assets decrease, equities do also.
A - QUIT - No, remember that assets = equities, so if assets decrease, equities do also.
STAYED THE SAME - QUIT - No, remember that assets = equities, so if assets decrease, equities do also.
B - QUIT - No, remember that assets = equities, so if assets decrease, equities do also.
*2
- POST - {b}{a,14,25}{r}
DID NOT - OK - Correct.
E - OK - Correct.
DID - QUIT - The $1,800 revenue was never realized.
D - QUIT - The $1,800 revenue was never realized.
@
5.63
Obviously, if Loren Company knew that Matthews would not pay for
the motorcycle, Loren would not have sold it. Although Loren would not
knowingly sell a motorcycle to someone who is not going to pay, experience
indicates that some customers do not pay. Loren {1,8 } take this fact
(A) must (B) must not
into account in measuring its income. It does this by estimating the amount
of revenue that it is {b}reasonably certain{n} to receive from all its sales
during the accounting period.
*1
- POST - {b}{a,10,13}must
MUST - OK - Sure.
A - OK - Sure.
MUST NOT - QUIT - As a business, it must.
B - QUIT - As a business, it must.
@
5.64
In 19x1 Loren Company sold $500,000 of motorcycles to customers on
credit. It estimated that 2 percent of credit sales would never be collected;
that is, they would become {b}bad debts{n}. Its estimate of bad debts for
19x1 was ${1,-6}, and its revenues in 19x1 were therefore only ${2,-7}.
*1
10,000 - OK - Correct.
10000 - OK - Correct.
- HINT - The estimate was $10,000 (equals .02 x $500,000).
*2
490,000 - OK - Correct.
490000 - OK - Correct.
- HINT - Revenues were $490,000 (equals $500,000 minus $10,000).
@
5.65
Loren Company recorded each sale as revenue at the time the
motorcycles were delivered. In order to measure its revenues properly,
it must {1,8} the amount of recorded revenue by $10,000.
(A) increase
(B) decrease
*1
- POST - {b}{a,10,13}{r}
DECREASE - OK - Correct.
B - OK - Correct.
INCREASE - QUIT - {a,20,1}No, the $10,000 probably will not be received so the amount of recorded {a,21,1}revenue must be decreased.
A - QUIT - {a,20,1}No, the $10,000 probably will not be received so the amount of recorded {a,21,1}revenue must be decreased.
@
5.66
After this change, the amount recognized as revenue is $490,000.
This is the amount that is R{1,10,3} certain to be realized.
*1
EASONABLY - OK - Correct.
REASONABLY - OK - Correct.
@
5.67
This is the {u}conservatism concept{n}, namely, that the amount of revenue
is the amount that is {1,18,6} [two words] to be realized.
*1
REASONABLY CERTAIN - OK - Good.
@
5.68
If the Accounts Receivable account includes amounts from customers
who will never pay their bills, it overstates the real {u}asset{n} value.
Thus, if the Loren Company decreases its Sales Revenue account by $10,000,
it must also {1,8} its Accounts Receivable account by $10,000.
(A) increase
(B) decrease
*1
- POST - {b}{a,12,13}{r}
DECREASE - OK - Correct.
B - OK - Correct.
INCREASE - QUIT - {a,21,1}No, the $10,000 is not expected to be received, so Accounts Receivable {a,22,1}will also decrease.
A - QUIT - {a,21,1}No, the $10,000 is not expected to be received, so Accounts Receivable {a,22,1}will also decrease.
@
5.69
However, instead of decreasing the Accounts Receivable account directly,
accountants usually set up a separate account, called {b}Allowance for Doubtful
{b}Accounts{n}, and show the decrease in this account. Accounts Receivable,
like all asset accounts, has a {1,6} balance.
(A) debit (B) credit
Allowance for Doubtful Accounts, which is subtracted from Accounts Receivable,
therefore must have the opposite balance, that is, a {2,6} balance.
(A) debit (B) credit
*1
- POST - {b}{a,10,13}debit
DEBIT - OK - Correct.
A - OK - Correct.
CREDIT - QUIT - No, an Account Receivable is an asset and thus has a DEBIT balance.
B - QUIT - No, an Account Receivable is an asset and thus has a DEBIT balance.
*2
- POST - {b}{a,16,27}credit
CREDIT - OK - Correct.
B - OK - Correct.
DEBIT - QUIT - No, CREDIT is opposite debit.
A - QUIT - No, CREDIT is opposite debit.
@
5.70{s}
The entry to record Loren Company's estimate that Sales Revenue
should be decreased by $10,000 and an Allowance for Doubtful Accounts
of $10,000 should be established is as follows.
{d}
Dr. {1,-31} .......... 10,000 {s}
{d}
Cr. {2,-31} ...... 10,000
{s}
Type the letter of the appropriate response as each blank highlights:
(A) Sales Revenue
(B) Allowance for Doubtful Accounts
*1
SALES REVENUE - OK - Correct.
A - OK - Correct.
ALLOWANCE FOR DOUBTFUL ACCOUNTS - QUIT - No, the debit entry is to Sales Revenue.
B - QUIT - No, the debit entry is to Sales Revenue.
*2
ALLOWANCE FOR DOUBTFUL ACCOUNTS - OK - Correct.
B - OK - Correct.
SALES REVENUE - QUIT - No, the credit entry is to Allowance for Doubtful Accounts.
A - QUIT - No, the credit entry is to Allowance for Doubtful Accounts.
@
5.71
On December 31, 19x1, Loren Company had $125,000 of Accounts Receivable
before subtracting the Allowance for Doubtful Accounts. Fill in the amounts
that would be reported on Loren Company's December 31, 19x1 balance sheet.{s}
