Revenue Recognition and Expense Recognition quiz #2 Flashcards
Revenue Recognition and Expense Recognition quiz #2
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What is the difference between revenue and gain?
Revenue comes from primary business activities, while gains result from incidental transactions, such as selling an asset not related to core operations. How does the revenue recognition principle affect sales returns?
Revenue should be adjusted for sales returns in the period they occur to reflect the actual amount earned. What is the impact of the matching principle on prepaid insurance?
Prepaid insurance is expensed over the coverage period, matching the expense to the periods benefited. How are accrued expenses recognized?
Accrued expenses are recognized when the benefit is received, even if payment will be made in the future. Why is it important to distinguish between cash and accrual accounting?
Because accrual accounting provides a more accurate picture of financial performance by recognizing revenues and expenses when earned or incurred. How does the revenue recognition principle apply to service contracts?
Revenue is recognized as the service is performed, not when payment is received. What is the effect of the matching principle on financial reporting?
It ensures expenses are reported in the same period as the related revenues, improving the accuracy of financial statements. How should a company record the cost of inventory sold during the period?
The cost of inventory sold is recorded as an expense (cost of goods sold) in the same period as the related sales revenue. What is the purpose of recognizing expenses when benefits are received?
To accurately reflect the costs associated with generating revenue in the correct period. How does the matching principle apply to interest expense?
Interest expense is recognized in the period the interest is incurred, regardless of when it is paid. What is the impact of not following the revenue recognition principle?
It can result in misstated revenues and net income, leading to inaccurate financial statements. How are expenses related to supplies recognized?
Expenses are recognized as supplies are used, not when they are purchased. What is the effect of recognizing expenses before the benefit is received?
It understates net income in the current period and does not accurately match expenses to revenues. How does the revenue recognition principle apply to installment sales?
Revenue is recognized when the goods are delivered, even if payment is received in installments. What is the role of accounts receivable in revenue recognition?
Accounts receivable is recorded when revenue is recognized but payment has not yet been received. How does the matching principle apply to warranty expenses?
Warranty expenses are estimated and recognized in the same period as the related sales revenue. What is the impact of recognizing revenue after it is earned?
It understates revenue and net income in the period the revenue was actually earned. How should a company record expenses for services received but not yet paid for?
The expense should be recognized when the service is received, and a liability should be recorded until payment is made. What is the significance of the accrual basis of accounting for revenue and expense recognition?
It ensures that revenues and expenses are recognized when earned or incurred, providing a more accurate measure of financial performance. How does the matching principle apply to depreciation of equipment?
Depreciation expense is recognized over the useful life of the equipment, matching the expense to the periods benefited. What is the effect of recognizing revenue and expenses on a cash basis?
It may not accurately reflect the company's financial performance for a specific period. How are prepaid expenses treated under the matching principle?
Prepaid expenses are initially recorded as assets and expensed as the benefit is received over time. What is the impact of the revenue recognition principle on accounts receivable?
Revenue is recognized and accounts receivable is recorded when goods or services are delivered but payment is not yet received. How does the matching principle affect the recognition of bad debt expense?
Bad debt expense is estimated and recognized in the same period as the related sales revenue. What is the relationship between the revenue recognition principle and unearned revenue?
Unearned revenue is recorded as a liability until the company delivers the goods or services, at which point it is recognized as revenue. How should a company record expenses for insurance paid in advance?
The payment is recorded as a prepaid expense and expensed over the coverage period as the benefit is received. What is the effect of recognizing expenses after the benefit is received?
It understates expenses and overstates net income in the period the benefit was received. How does the revenue recognition principle apply to long-term projects?
Revenue is recognized as the project progresses and goods or services are delivered, not necessarily when cash is received. What is the impact of the matching principle on the timing of expense recognition?
It ensures expenses are recognized in the same period as the revenues they help generate, regardless of payment timing. How are accrued revenues recognized?
Accrued revenues are recognized when goods or services are delivered, even if payment will be received in the future. What is the purpose of the revenue recognition and matching principles?
To ensure that revenues and expenses are recorded in the correct periods, providing accurate financial information. How does the matching principle apply to rent expense?
Rent expense is recognized in the period the rented space is used, matching the expense to the benefit received. What is the effect of recognizing revenue and expenses in the wrong periods?
It can distort the company's reported financial performance and mislead users of financial statements. How should a company record the cost of services received on credit?
The expense is recognized when the service is received, and a liability is recorded until payment is made. What is the impact of the revenue recognition principle on sales made with deferred payment?
Revenue is recognized when goods or services are delivered, even if payment is deferred. How does the matching principle apply to supplies expense?
Supplies expense is recognized as supplies are used, matching the expense to the period benefited. What is the effect of recognizing revenue only when cash is received?
It may delay revenue recognition and not accurately reflect the company's performance for the period. How are expenses for goods or services received but not yet paid for recorded?
They are recognized as expenses when received, with a corresponding liability until payment is made. What is the significance of recognizing expenses when benefits are received?
It ensures that expenses are matched to the revenues they help generate, providing accurate financial results. How does the revenue recognition principle apply to gift card sales?
Revenue is recognized when the gift card is redeemed and goods or services are delivered, not when the card is sold.
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