Understanding Financial Statements

What is the impact of adjustments on net income?

• Adjustments only increase net income.

• Adjustments can either increase or decrease net income depending on the nature of the adjustments made.

• Adjustments have no effect on net income.

• Adjustments can only decrease net income.

How do adjustments affect the balance sheet?

• Adjustments are irrelevant to financial statements.

• Adjustments only affect cash flow statements.

• Adjustments only change revenue figures.

• Adjustments modify asset, liability, and equity values on the balance sheet.

What is the difference between accrual and cash basis accounting?

• Accrual basis accounting records transactions when they occur, while cash basis accounting records transactions when cash is exchanged.

• Accrual basis accounting focuses on cash flow, while cash basis accounting focuses on profit margins.

• Accrual basis accounting records transactions only at year-end, while cash basis accounting records transactions at the beginning of the year.

• Accrual basis accounting is used by individuals, while cash basis accounting is used by corporations.

How does accrual accounting recognize revenue?

• Revenue is recognized at the end of the fiscal year.

• Revenue is recognized when earned, not when cash is received.

• Revenue is recognized when a customer places an order.

• Revenue is recognized when cash is received.

What is an example of an adjustment in financial statements?

• Adjusting inventory valuation due to overstatement.

• Reclassifying long-term debt as current liabilities.

• Recording depreciation on a non-existent asset.

• Changing the accounting period for revenue recognition.

How does cash basis accounting recognize expenses?

• Cash basis accounting recognizes expenses when cash is paid.

• Expenses are recognized at the end of the accounting period.

• Expenses are recognized when they are incurred.

• Expenses are recognized when the invoice is received.

What are the effects of not making necessary adjustments?

• Increased collaboration and teamwork

• Negative outcomes such as decreased efficiency, increased errors, and missed opportunities.

• Enhanced decision-making capabilities

• Improved efficiency and productivity

How do adjustments impact the statement of cash flows?

• Adjustments are used to forecast future cash flows without considering current income.

• Adjustments convert net income to cash basis by accounting for non-cash items and changes in working capital.

• Adjustments increase net income by adding cash transactions.

• Adjustments only affect the balance sheet, not the cash flow statement.

What is the role of adjusting entries in accounting?

• Adjusting entries ensure accurate financial reporting by aligning revenues and expenses with the correct accounting period.

• Adjusting entries are used to prepare tax returns.

• Adjusting entries are optional and not required for financial statements.

• Adjusting entries only affect cash transactions.

How does the timing of revenue recognition differ between accrual and cash basis?

• Revenue is recognized when an invoice is issued in cash basis.

• Revenue recognition occurs upon cash receipt in cash basis, while it occurs when earned in accrual basis.

• Revenue is recognized when a sale is made in cash basis.

• Revenue is recognized at the end of the accounting period in accrual basis.