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All rights reserved, Omega Omega Ferformance 8701 Red Oak Boulevard, Suite 450 Charlotte, NC 28217-3972 USA www.omega-performance.con 704-672-1400 [email protected] 2300-C01882 + 0103-2 oe s om, my pa Aa s u iy Start-—- Unit 4: Accounting for Business Activities —~ ‘Unit2; Accrual Accounting Basies--—-——e———-— 341 Unit 3: Understanding Business Cash Flow —~ Unit 4; Connecting the Statements-— Unit 5: The Accounting Process and Journal Entries Jod Aid: Formulas and Facts | Job Aid: Phe Accounting Cycle ~ | ‘Transaction Worksheet: 1 = 165 | | Table of Contents tii i i i i i i ‘Accrual accounting is the language used to translate business activities into standard financial reports. Aa important past of both financial statement analysis and cash Low analysis is getting behind the numbers to understand ‘what is really hppening in the business, what actions management is taking, ‘or not taking, and what external circurnstances may be affecting che business. Understanding how the financial statement eumbers come to be what they are, and how they reflect business activity and results, will strengthen and speed your financial analysis. Understanding accrual accounting will help you get behind the numbers of the financial statements you need to analyze. You Will Be Able To... When you complete Units 1 through 4 of this module, you will be able to: © Apply accrual accounting to construct a simple balance sheet aad income statement that reflect business activities. * Apply the correct criteria to determine the point at which a business may recognize income in accordance with GAAP * Explain three different ways the matching principle guides the timing of recognizing expenses in accordance witt, GAAP + Use important connections between the financial statements to uncover the cash flowing through che business ‘When you complete Unit 5, you will be able co: + Describe the process accountants use to keep accrual accounting records and construct financial statements and other financial recozds © Use debits and credits to record the accounting for business activities ‘Unit 1, Accounting for Business Activities, concenteates on the construction of the balance sheet and income statement. You will see the result of each business activity on the financial starements of a start-up business. If you have studied accounting, you should feel free to skip or skim this unit and to continue your study with Unit 2, Uni 2, Accrual Accounting Basics, discusses cxiteria used to decide the point at which sales and expenses should be included (that is, secognized) on cheincome statement, You will see how timing differences herween actual cash flow and the recognition of tevenue and expenses can affect both income statement and balance sheet accounts. In Unit 3, Understanding Business Cash Flow, you will learn to use balance sheet and income statement information to sce through the effects of accrual accounting to the underlying movements of cash, You will learn to calculate cash collected from customers, paid to suppliers, and spent to acquire fixed assets. Unit 4, Connecting the Statements, introduces the transaction worksheet, a format for visualizing the effect of business activities on financial statements including the statement of sharehoiders’ equity as well as the balance sheet and income statement. Unit 5, The Accounting Process aad Journal Entries, is optional and meant for those of you who have never taken accounting courses, Although not necessary for analyzing financial statements, the basic concepts and terminology aze essential in understanding accountants’ explanations of how your borrowers’ financial statements were prepared, It describes the accounting process accountants use to translate business activities into financial statements. It explains debits and credits and introduces journal entries, the basic accounting notations from which all financial statements are drawn. You Need To Know.. To study this module, you need to understand the concepts and terminology presented in the module Financial Reporting, especially: * Purpose and content of each of che fonr primary financial statements: balance sheet, income statement, statement of shareholders’ equity, and statement of cash flows * Foundation principles of generally accepted accounting principles (GAAP) including recognition, measurement, and accrual You also need to be familiar with the fo terms: ‘© Holding priad: The peziod of time between the purchase of inventory and the sale of that inveatory t0 a customer © Payment period: The petiod of time between the purchase of inventory on credit and the zequired payment to the supplier * Collection peried: The period of time berween the sale to a customer ca credit and the collection of cash from the customerae Be Aware That... ‘The following conventions are used in this module: © Practice opportunites: Some paragraphs are marked with a questica icon (Q) and followed by questions and blank spaces. These are learning and practice opportunities to help you understand and apply the material in this module. Please write your answers in the spaces below the questions, and thes compare your responses 10 the answers that follow the spaces, which are marked with an answer ieon (A), * Sidebar: Special boxes offer additional details, background information, and focused examples for those who want more detail than is available in the mainstream content, The information contained ia the sidebar will not be inclucled on progress check or posttest questions. * Formulas: All formulas are set apart with a calculator icon. This will snake it easy for you co find and review formulas when you need to use them, Point of emphasis: Essential information is emphasized with the arrow icon. © Under the Glass Scenarios: When you see these, marked by the reagnifying lass, you will find examples of acraal financial reporting that illustrate some of the latitude within GAAP or aggressive interpretations by ‘management and the accountants that others might disagree with, © Numbers in paretirses: Parentheses around a figare generally indicate a ‘negative number. On cash low formats, parentheses around a figure indicate a use of cash, + Pheancial statement presentation: Financial stacement data are generally presented ia order of ascending dates, * Rounding: When calculations are performed in this module, numbers are rounded to the nearest significant digit. For example, if @ ealcslation yields a value of 95,4567: > Round the value at rwo decimal places to show dollars and cents. Since the third decimal place is greater than of equal to 5, you would round the second decinnal place up to 6, yielding a value of $95.46. » Round the valte at no decimal places to show whole dollars. Since the first decimal place is less than 5, ignore everything to the right of the decimal and round down to $95. ‘On the job, you will use your judgment or bank policy to guide you in determining the significant digit for rounding purposes. Significancedepends on what you ate calculating and how you will use the number In this module, we will use the following rounding conventions: + Dollars are counded ro the neatest whole dolar. If the amounts are expressed in $000s, Egures are rounsle to dhe nearest thousand. Be Sure To Have... Before you begin this module, be sure you have the following items on hand: © Pencil Highlighter if you lke wo use one to mati key ideas as you read * Calculator “4 Introduction to Accrual Accounting mee pe fi ™ an pn i i i i i i | \ | “| | orouw ow Accounting for Business Activities As used here, actvtir means intercal events (such as running mackinery to ‘make a product) and external transactions (with customers, suppliers, employees, creditors, and shareholdess), In this unit, we will look at some activities that require relatively simple accounting and affect the balance sheer, income statement and statement of sharcholders’ equity. Later in Unit 4 we wil work with activities that require moze sophisticated accounting, ‘When you complete Unie 1, you will be able to: + Create financial statements for a business from information abour financial transactions Determine which balance sheet and income statement accounts are affected by common financial transactions Throughout this uait, we use the example of the fortnation of a new small business. Suppose you wanted to starta business selling scented candles to your ftiends. The purpose of the business is to increase yout savings (now 2,000) so that you can purchase an airtine ticket for 2 vacation tip. You plan to operate the business from your home, and you want to keep some records to show how your savings are growing and how the business is perforrning In the following pages, we describe and illustrate the accounting for a series of transactions over three weeks, At the end of each week, we prepare the financial statements that reflect those transactions, New Candle Business _ Forming the Business One of the basic principles of accounting is to separate a business fiom the pezsonal affairs of its owner. So we'll set up zecords for the business that will show all aspects of the business that can be measured in monetary terms. ‘Accounting for Business Activities 5The Accounting Identity ‘Accrual accounting works on a principle called the accounting equation, which states that the total amount of the reporting entity’s assets must always equal the combined amount ofits liabilities and equity. The balance sheet expresses this equation. Assets = Liabilities + Owners’ Equity Transaction 1 Investment by Owner When you invest your $2,000 savings in the venture, you “contribute” the money to the business. The business now owns $2,000 in cashy the amount owned equals the contribution. We show this in the records of the company as follows: © introduction to Accrual Accounting, Pa A090 092.78 oe Balance Sheet At Start of Business = couiry $2,000 Paidin caphal This officially sets off the company from your personal affairs, us a balanced entity, Cash of the business increased by $2,000 and your equity in the business increased by $2,000. The equation is in balance, Uses of invested funds equals fands invested, In a sense, your equity is your clira against the assets of the business. Transaction 2 Buy candles (inventory), supplles, and shelving (fixed assets) ‘You purchase 350 caadles for $2.00 each, for a eotal of $700. The supplies cost $100, and the shelves $200. In this case, as in the first, the amount that your comparty owns must just equal the amount of your comtribation 20 it ‘The equation must stay in balance. i iy my fey Ca ee el ame‘The purchase of the candles for inventory marks the beginning of the holding period—che period of time between the purchase of inventory and. the sale of that inventory to a customer. Following GAAP, we record your purchases on the balance sheet at cost—the price you paid for them: Balance Sheet After Transaction 2 ' ASSETS eguiry € 4,000 ' Inventory (candles) 700 Other (supplies) 100 ' Fixed assets (shelves} 200 Paid-in capital Total $2,900 Total Cash has gone down by $1,000 and the three new asset account halances : have gone up by $1,000. ‘Total assets still equal the total on the sight hand Side of the balance shect. This view of che company shows your allocation of the cash you invested to : the different items, At this point, with nothing yet in accounts receivable, your company’s proportions are as follows: Distribution of Investment ‘Amount Cash $1,000 ‘Accounts recewvable 0 Inventory 700 . Other 200 Fixed assets 200 Total £2,000 ‘Now we've reached the end of the formation stage. Your candle business is ead to begin selling, and we'ze ready to show you the effecis of your business activities on the accounting records, ‘Accounting for Business Activities 7Transaction 3 Sell 50 candles for $250 in cash To update your financial statements after this transaction at the end of weels 1, you need to account for the increase in cash, the decrease in inventory, and de sure to hegp the eguation in balance Cash: Since you have received $250 in cash, it seems clear that dhe balance in your cash account is now $250 higher—$1,250. Taventory: It’s also clear that you have fewer candles than you used to bave. You can remove the ect of the candles sold from the inventory account. The $700 listed for candles at the end of the formation stage represents the cost of al the candles purchased. The cost of candles sold was $100 (50 candles x $2.00 per candle), Candle ‘aventory falls to $6000, which is the cost of the candles remaining on your shelves. ‘After those two changes, the balance sheet at the end of the Gist week (after transaction 3) would show: Balance Sheet (Draft) End of Week 1 cs goury Cash FHOGO 4,250 (up $250) Inventory 00 600 (down $100) Other 100 Fixed assets 200 Paic-in capital $2,000 Tota, s3000 sae Total 32.000 Now we have an imbalance that dozen’: make sense, The amount of property owned by the business, §2,150, is larger than yout initial $2,000 investment. ‘Yer you stil own 100 percent of the candle business, and we know that the Ye allocation of investment can’t be larger than the investment itself. It also ~ seems logical that your equity in the business might have increased by the fead of the first week. Afterall, you sold the candles for a profit of $150; you collected $250 and they cost you $100. 8 Introductionrr Caa you suggest what change to make on the balance sheet to keep the equation in balance? Somehow we need 10 increase the ownets’ equity account by $150, so that the ‘otal ammount on the right hand side of the balance sheet equation will be $2,150 and will equal the total assets of $2,150, To increase the owners’ equity account and balance the equation, we aced to use aecounts on another of the primary financial statements, the income statement, ‘The income statement reports revenues and expenses and aaltulates the inereast Tnuvet the risk of doing business in 20X1, 20%2, and 2083. “The balance sheet ont very diffeal either, The left side of the balance sheet srihe only one affeered. The cash account would decline $600 because of sour cash payment 10 the insurance company. Tes, ‘keep the balance toa ci Buiance, you would create a new accoune an zsset called “prepaid insurance,” It will have a beginning balance of $600. Took atthe following example. The numbers here ate nOF intended to mesh with any of our previous examples. We've chosen them juss to demonstrate the point mom om me ee rr mm rem i mee mm fon mBALANCE SHEET Cash $2,000 opesex $1,400 Inventory 600 600 Supplies 100 100 Prepaid insurance ___O iw #800 __G00, —400, 200, —2 $2,700 $2,700 INCOME STATEMENTS Operating expenses. “200 $200 S200 Printing Insurance Net Income Candle Company Financial Statement Excerpts Before 42/31/x0 After Aay/3ayxd 12/31/xX2 12/34/x3 Payment Payment: The example shows that you are recognizing insurance expease when the benefit is received. The benefit received in this case is insurance protection— the security to do business. You should masch the premium expense with fevenve generated during the period of time the insurance coverage is in effect So rather than treating the $600 premium payment as you did the printing, expense, you treat it more like a fixed asset——you record the cost of the insurance on the balsace sheet, like the cost of shelving, You match the expense with the passage of the time period in which the benefit is received, The balance in the prepaid insurance account declines as the expense is recognized, When does the cash outflow occur—in the petiod in which the prepaid expense is recognized as an asset on the balance sheer, of in the periods when the cost is matched to revenues? Accrual Accounting BasicsA 46 introduction to Acerual Accounting “The cash outflow occurs in the period when the prepaid expense is recognized as ac asset. When prepaid expenses increase on the balaace sheet, the increase is a cash ourflow, Accrued Expenses ‘An acerued expense s one that you have already reported in the income sratersent, matching ito revenwe, but which you have ot yer paid for. Cer use a (clephone bill example. Tin your candle business, suppose you do some of your business by telephone. ‘You call suppliers and potential custonmers—ihese telephove calls area't Fe. The cost of the calls should be included in your calculation of net income, the inerease in your investment, You want to include all expenses in your ‘alenlation, regardless of whether cash has been paid out, so that net income rellects the total cost of selling candles. ‘To dentify the telephone expenses you should report in your income sterement before you feceive the telephone bill, you estimate therm. Your tenimate might be very accurate if you have wacked the cost of eat’ long SJetance eal and you profate yout monchly service bill over the number of ‘las inthe accounting pesiod. Or, it might be less accurate if you estimate that your telephoning activity has been about the same a was lst mose- “You report the estimated expense inthe income statement, Pleasing the enpunting equation (A = L.+ OF), this wil cquse ewes equity to drop by ‘the amount: of the expense. How will you pus the accounting equation back into balance? “You increase lbilides by the amount of the estimated expense, You a5 secognizing that you have an obligation o pay that amount when ihe bill Joes come because you have sed the telephone, incurring the telephone rf the actual bili less than you estimated, you will zeduce the expense and the lability. Ifthe Bilis more, you willinczease the expense and the Sabi. expense during the period. : oe J rrr opaomm opp fom pope 1 oR F q ie Th tamale Ld Wal a‘Your accrued expense liability reflects the expense you have already incurred bur aot yet paid. The following table uses two situations, Case A and Case B, to ilustrate the point. Notice that the top partis the income statement; the bottom part is the balance sheet. Then notice that we list three balance sheets. The starting balance sheer is dated November 30, 20X0. Then we kave two balance sheets for December 31, 20X0, The first (Case A) assumes that you used a pay phone in December. The second (Cas B) assumes thar vou did not use a pay phone and were billed in January. The income statements associated with the two December balance sheets are the same, Revenue is $1,000 paid in cash. ‘The telephone expense is che same; the increase in retained earnings is the same, Look at the table far a moment to notice these items. Then continue reading. ‘Candle Company Financial Statement Excerpts—Accrued Expenses 21/30/X0 ——A2sixo _ INCOME STATEMENTS Gosek Use mene, Case arse Phere Pay Cash Pay Later Revenue (iow (ET o0o) Cost of candles sold Son | exe fo Gross profit 800 500 Operating expenses Telephone expence Dacre (RD), tere Net income wh fs 400 #400 ope BALANCE SHEETS cash $3,000 $3,000 $4,000 inventory —1.009 800 ——s00 Total assets $4,000 S4doo $4509 Accrued expenses ° ° 100 Owners’ equity — 4.909 4.400 4,400 Total Habllities and equity $4,000 $4,400 34.509 Now, notice that the $1,000 in cash sales increases the cash account in both cases from November 30 to December 31. The difference berween Case A and Case B is the timing of the cash payment to che telephone company. Ia Case A, you paid cash therefore, the cash account went up $1,000 for sales and down $100 for the payment of telephone calls, Net change is $900; the new cash balance is $3,900, Accrual Accounting Basics 47‘48 introduction to Accrual Accounting Tn Case B, the cash account went up $1,000 for cash sales. Since you have not paid cash to the telephone company yet, the phone ealls do not affect the cash account; the new cash balasice is $4,000, Instead, the accountant zecords the obligation co pay the telephone company for services in December with Liability~-accraed expenses. Thus, accrued expenses go up $100. The balance besween assets and liabilities and equity is maintained. ‘he recognition of the expense on the income statement creates a liability or fususe payment. \Whea you pay the telephone bill, the cash payment reduces the eash account, and the accrued expense is removed fom the balance sheet. Both sides of the balnace sheet decline by §100. When you see the accrued expenses account increase, you'll know that the company bas matched expenses with revenues on the income statement ‘withous paying out cash for the expenses. Summary Revenue recognition and the matching principle are two core principles of accrual zecounting, Together, they result in che caleulation of accreal profit (0: loss), which is important co lenders as an indicator of the economic viability of a business and the effectiveness of its management. However, accrual accounting obscutes cash inflows and outflows, which are also very important in lending decisions “The revenues and expenses appearing on the income statement do not necessarily imply that a company paid our cash for the expenses or received cash for the revenues in the period covered by the financial statements: © Reveaues could have been all JOU sales. © Expenses could be the result of cash payments in she past (for exaenple, depreciation) or the obligation to pay cash in the farare (for example, accrued telephone expense). To make the best use of accrual profit information and to uncover cash inflows and outilows, lenders necd to understand the revenue recognition criteria and the uses of the expense matching principle. ¢ Revenue: Revense is recognized on the income stazement when the following conditions have been sec > You and the customer have ageeed on terms of a sale. > You have performed as agreed (ownership passes to the buyer). > The customer has performed as agreed, delivering either cash or an JOU for paymear at a later dere, (Receipt of cash is not required for recognition of revenue) ~Inventory and cost of goods sold: The cost of inventory is matched with revenue when the goods ate sold; the expense is called “cost of goods sold.” The period in which cost of inventory is moved from the balance sheet to the income statement as cost of goods sold is not necessarily the same period jn which the company pays out cash for the inventory. Fixed assets and depreciation: The cost of long lived assets that support the operating cycle is matched with revenue duting the financial reporting periods in which the asser supporss the operating cycle. The depreciation expease is a noncash expense. Prepaid expenses: When prepaying an expense that will be maiched ‘with farare eeverses oz time periods, the amount of the prepayment is recorded as an asset on the left side of the balance sheet. As the expense is matched with revenue, the asset “prepaid expense" is reduced by the amount of expense matched with revenue on the income statement, Accrued expenses: When you match an expense with revenue in the cutrent income statement and you will not pay the expense until after the period covered by the income statement and balance sheet, the aomounc ‘of the expense appears as a liability—an accrued expense—which shows future obligation to pay for the service, When you pay the obligation, the accrued expense is temoved from the balance sheet. ‘Accrual Accounting Basics 49fea dah a) al day Lad Ud) aa a 50 introduction to Accrual Accountingwow Ww li 3 3 a 3 a a a 2 ed Practice Exercise, Part A Dito: Read the following ease material ahout Louis Deleo's Feesh Fig, Wholesalers, and answer the questions that appear below. DeLeo delivers fresh and foowen fish to his customers on a dally oF weehiy basis according to orders received and accepted, Almost al the customary purchase fish on account, paying their bills either weekly or monthly sy the terms provided by DeLeo. His accountant recognizes revenue when, are mailed to the customers who pay oa accouat ot when fish ate delive, to customers who pay in cash. in Is ned, Dees this revenue recognition policy meet our criteria for revere reengnition? ‘Yes. When DeLeo delivets fish to his customers, he recognizes revenge ‘because he has performed his service, To an accountant, the fact that cagh not received until later does not affect recognition of revenue. ‘s + Te DelLeo purchases the fish on 30-day terms from his supplier, should eh. accountant delay recognition of the cost of fish sold until payment is radep i) ‘Accrual Accounting Basicg ar'52 Introduction te Accrual Accounting . Even if DeLeo purchases fish on account, his aecountent should recognize the cost of the fish as an expense when the fish are sold, ‘The fact that DeL.eo may pay for the fish 30 days after he buys them makes no difference, The expense (cost of goods sold) is recognized at the time zevenue is recognized in order to obtain an accurate profit figure, Revenue is recognized at the time a service is pexformed. ‘When DeLeo purchases the new freezer he’s been calking about for vears, ‘will his accountant match the fall cost of the freezer with revenues in the period dusing which the freezer was purchased? [f not, how will che accountant match the cost of the fteezer with revenues? When DeLeo purchases a new freezer, the accountant will not recognize the outilow of cash as an expense. The machine will enable DeLco to earn revenues over many years; as a tesult, the accountant will allocate a portion of the freezer cost to each of the future years in which it will help DeLeo carn revenue, The recognition of depreciation expense matches expenses with revenues to produce an accurate profit figure in these future petiods. Delco uses electricity during eack month of operations to run his fteezers, lights, and other equipment. The electric company bills him every 20 months, Should the accountaat match the electricity expense to revenues only evesy second moath, when the bills are paid? If nor, how should the accountant treat the electricity expense in the months whea the bills are aot paid? Which ficarcial statement accounts would be affected? =| Fe mT Ty moony eem mm aaa His accountant should recognize the use of electricity as an expense evezy month, even though Deleo has not paid cash to the electric company, because the electricity enables DeLeo to earn revenue during the period. The secountant will zecord “electricity expense” on the income statement and “accrued expense-—clectticity” on the balance shect as a liability to indicate that cash has nat yet been paid out. The eesult is an accurate profit figuce for the period, Suppose the electric company sends DeL.eo his bill. When DeLeo pays the bill, will the accountant recognize the payment to the electric company as an expense? No expense will be recognized for the account “accrued expense— eleccricity”” because the accountant already recognized the expense on the income statement, “Accrued expense” indicates that an expense has been matched wich ceveaue on the income staretnent without cash outflow. To recognize the expense on the income starement again at the time payment is made would be dontsle counting Suppose some of DeLeo’s customers pay their bills 30 days after he delivers fish to ther. When Delco teceives cash, should bis accountant recognize revenue? No sevenue should be secognized. The revenue should have been recognized when the services leading to the bills were performed—when the fish were delivered. To count the payment of bills as revenue when cash is received ‘woul! be double counting. Accrual Accounting Basics 53a Now, suppose DeL2o pays our $9,000 of. January 2 to iasare some of his premises against fire darnage Zor the following thzee-yeass. The insurance Company requires fll payment when the policy is purchased. Should DeLeo’s accountant recognize the $9,000 cash outflow to the insurance ‘company 2s art expense in this petiod? No, because the cash has been paid out fora policy thet produces benefits (enables Del co to extn revenues) for three years. Therefore, the accountant should record the $9,000 as a prepaid expense on January 2 and plan to allocate $3,000 to each of the next three years as insurance expense. cutrent period, where will the remaining $6,000 show up in the financial Q ‘After the accountaat recognizes the first $3,000 as insurance expense for the statements? L w Te-will stil show up on the balance sheet as an asset—prepaid insurance— because the $6,000 will produce benefits in farare petiods. The $6,000 will be ‘recognized as an expense in those future periods. i a When DeLeo purchases fish to sell ata later dase, should his accountant + match the cost of the purchased fish with reveaue on the income statement when they are purchased? . nr “B4 Introduction to Accrual Accounting asa uit ot Ame eked 3 A Q No. The timing of the expense recognition is based solely on the timing of revenue recognition, which occurs when the fish are sold, No, The expense of the fish should be recognized when the fish are sold and zevenue is recognized. The cost should be included in inventory until the fish ate sold. Would the fact that DeLeo eid not pay cash for the fish when he purchased them make any difference in the timing of expense vecagnition? ‘Accrual Accounting Basics 55weal daha) dd as ktm ee ae 2 : a. 3 a g 2 5 i 8‘Practice Exercise, Part B_ 1. The term prepaid expense describes situations in which a company hes recognized an expense prior to making a payment of cash related to the expense, a. Truc b, False 2. Suppose Jones Cornpany recognizes its use of electricity ducing July as an expense on the July income statement; it generally pays the electric bill fot July on August 20. The company’s accountant indicates that che cost of electricity used in July was $500. In the absence of other transactions, this would: a, Cause the account “accrued expense—eleciticity” to fall $500 duting July b. Cause the account “acerued expense electricity” to rise $500 duting July ¢. Cause 19 changes on the July income statement 4. Cause no changes on the July balance sheet 3, Which of the following best describes an accrued expense? a, Buy now for best selection b, Pay now for benefits in the future c. Use benefits now—pay later d. Pay now for benefits now ‘Accrual Accounting Basics 57Dinesions Questions 47 ate based! on the following information: The Municipal Water Department bills the Black Company for water every three months. Bills aze dated March 31, June 30, September 30, and December 31, Each covers the 90 days preceding the billing date, During the frst four months of the calendar year, the actual costs of water used by the company for general drinking and sanitacon purposes were as follows: January $400 February 650 March 00 March 31 bill: $1,650 Apzil 550 “The Black Company pays the department approximately 10 days after seceiving the bill I: prepates financial statements monthly. 4. How much water expense would the Black Company match with revenue during January? 5, What would you expect the balance in the account “accrued expense— water” to be on March 31? 6. What amount sould you expect to see on the April income statement for water expense? “SB Introduction to Acenu Ai ™ rem m nm c rem met10, . Depreciation is called a noncash expense because: a. Depreciation is an allocation of funds to be paid out in the future, b. Depreciation is « cost allocation technique used to match the expense ofa fixed asset, ¢. Depreciation is a technique for matching the cast of « xed asset with revenues produced during its useful life 4. Depreciation matches the cost ofa machine with specific revenues produced by the machine. Tn some circumstances, cost of goods sold can be a noncash expense because the cash payments to parbase the inventory can occur either before or after the sale of inventory. a. True b. False When accountants match depteciation expense with revenue, they reduce the value of fixed assets on the bslance sheet to show the result of allocating the asset costs to the income statement. a. True , False Op-to-mists Company carries several insurance policies covering fire, Aloed and mud damage, earthquakes, and other disasters. On December 10, 200, the company purchased s new compreheasive policy for its plant; it paid $12,000 for a one-year policy that would provide protection from January 1, 20X1, until December 31, 20X1, The December payment was made by check (that is, in cash) at the time the arrangement ‘was completed Given this information, which accounts on the balance sheet would you expect o change on Decembes 10, ce day che polley wae purchased? In what amounts would they change? ‘Accrual Accounting Basics 59