Chapter 4 - Adjustments

What is the revenue recognition principle?

• Companies recognize revenue in the accounting period in which the performance obligation is satisfied

• Companies recognize revenue in the accounting period in which the payment is received

• Companies recognize revenue in the accounting period in which the service is performed

• Companies recognize revenue in the accounting period in which the expense is incurred

When does a company satisfy its performance obligation?

• By performing a service or providing a good to a customer

• By receiving payment from the customer

• By incurring an expense

• By recognizing revenue

What is the expense recognition principle?

• Expenses should be recognized in the period in which they are paid

• Expenses should be recognized in the period in which they are incurred

• Expenses should be recognized in the period in which they are received

What is the accrual basis of accounting?

• Recording transactions when cash is exchanged

• Recording transactions when revenue is recognized

• Recording transactions when expenses are recognized

• Recording transactions when the events occur

What is the cash basis of accounting?

• Recording transactions when cash is exchanged

• Recording transactions when revenue is recognized

• Recording transactions when expenses are recognized

• Recording transactions when events occur

Why are adjusting entries necessary?

• To ensure that revenue is recognized in the period in which it is earned

• To ensure that expenses are recognized in the period in which they are incurred

• To ensure that financial statements are up-to-date and complete

• All of the above

What are deferrals?

• Expenses paid in cash before they are used or consumed

• Cash received before services are performed

• Revenues for services performed but not yet received in cash or recorded

• Expenses incurred but not yet paid in cash or recorded

What are accruals?

• Expenses paid in cash before they are used or consumed

• Cash received before services are performed

• Revenues for services performed but not yet received in cash or recorded

• Expenses incurred but not yet paid in cash or recorded

What is an example of an account used to defer an expense?

• Rent expense

• Insurance expense

• Prepaid rent

• Accrued rent

What is an example of an account used to accrue revenue?

• Accounts Receivable

• Insurance expense

• Prepaid rent

• Inventory