Exam (elaborations) Solution Manual for Financial Accounting

Solution Manual for
Financial Accounting

,Accelerated Depreciation Methods - CORRECT ANSWERS-Depreciation methods that
recognize more depreciation expense in the early years and less in the later years.
Double-declining balance is an example of an accelerated depreciation method.

Accounting Equation - CORRECT ANSWERS-Assets = Liabilities + Owners' Equity.
This equation is fundamental and must always be true in double entry accounting.

Accounting Period - CORRECT ANSWERS-The period of time for which the financial
results are reported; typically either a month or a quarter or a year.

Accounts Payable - CORRECT ANSWERS-Liability account used to show the
obligation to pay suppliers who have provided goods or services on credit terms.

Accounts Payable Turnover - CORRECT ANSWERS-Accounts Payable Turnover is a
ratio that is used to measure how efficiently a business is paying its vendors. It is
calculated by dividing the credit purchases for the period by the average accounts
payable balance for the period. In the absence of credit purchases information, we may
use cost of goods sold as a substitute. The ratio represents how many times the
accounts payable turned over during the period. For most ratios in this course, we use
averages when calculating ratios with balance sheet numbers, but this is not necessary
and some may choose to use beginning or ending balances.

Accounts Receivable - CORRECT ANSWERS-Asset account used to show the claim to
receive cash at some future date for goods or services that have been supplied to a
customer on credit terms.

Accounts Receivable Turnover - CORRECT ANSWERS-Accounts Receivable Turnover
is a ratio that is used to measure how efficiently a business is collecting receivables
from its customers. It is calculated by dividing the credit sales for the period by the
average accounts receivable balance for the period. In the absence of credit sales
information, we may use total sales as a substitute. The ratio represents how many
times the accounts receivable turned over during the period. For most ratios in this
course, we use averages when calculating ratios with balance sheet numbers, but this
is not necessary and some may choose to use beginning or ending balances.

Accrual - CORRECT ANSWERS-A revenue amount that is recorded after the revenue
is earned but before the payment is received or an expense amount that is recorded
after it has been incurred but before the payment has been made. In either case, for an
accrual the exchange of cash is expected at some future point after the initial revenue
or expense is recognized.

Accrual Accounting Method - CORRECT ANSWERS-This is the accounting method
taught in this course, followed by most companies, and required under US GAAP and
IFRS. The method follows the revenue recognition principle, which says that revenue
should be recognized in the period in which it is earned and realizable, not necessarily
when the cash is received and the matching principle which says that expenses should

, be recognized in the period in which the related revenue is recognized rather than when
the related cash is paid.

Accrued Expenses - CORRECT ANSWERS-Liability account used to record amounts at
the end of an accounting period to recognize expenses that were incurred in the period
but for which no invoice has yet been received nor payment has yet been made.
Examples are salaries/wages payable, accrued rent expense, accrued legal fees. When
the accrual is made, the debit is to the appropriate expense account (payroll expense,
rent expense, legal expense) and the credit is to the accrued expense account, which is
a liability because it represents an obligation which will need to be paid in the future.
Remember accrued expenses are NOT expenses.

Accrued Liability - CORRECT ANSWERS-Liability accounts that record expenses that
have been recognized on the income statement but have not yet been paid. Similar to
accrued expenses.

Accrued Payroll - CORRECT ANSWERS-An accrued expense recorded at the end of a
financial period for amounts of payroll that have been worked but not yet paid. It is a
common type of accrued expense. See also Salaries/Wages Payable.

Accrued Revenue - CORRECT ANSWERS-An asset account that records revenue that
has been earned and recognized on the income statement but not yet paid for by the
customer. At the time of the accrual, we debit the receivable account and credit the
appropriate accrued revenue account. When the cash transfer ultimately occurs, we
debit the cash account and credit the receivable account.

Accumulated Depreciation - CORRECT ANSWERS-A contra asset account that
includes the cumulative total of all depreciation expenses recorded to date for specific
assets. The credit balance in this account offsets the debit balance in the asset account
which shows the original value of the asset. When the original asset value is netted
against the accumulated depreciation for the asset you arrive at the net book value of
the asset.

Accumulated other comprehensive income - CORRECT ANSWERS-An equity account
that consists of cumulative unrealized gains or losses on line items classified under
other comprehensive income. It includes items such as unrealized gains or losses on
investments available for sale, foreign currency gains or losses, and pension plan gains
or losses.

Adjusting (Journal) Entries - CORRECT ANSWERS-Entries made to adjust the
balances of asset and liability accounts to reflect changes in their values due to the
passage of time or another implicit transaction.

Allowance for Doubtful Accounts - CORRECT ANSWERS-A contra asset account that
nets against Accounts Receivable. It is generally set up as an estimate of accounts that
will ultimately prove to be uncollectible. It is then reduced when accounts are written off.