Financial Accounting: An Integrated Statements Approach, 2nd Edition

Chapter 3 Accrual Accounting Concepts 129

4. December’s Reconciliation of Net Income with Net Cash Flows from Operations

Net income $10,825

Add:

Depreciation expense $ 160

Increase in accounts payable 90

Increase in wages payable 120

Decrease in prepaid insurance 1,100 1,470

Deduct:

Increase in accounts receivable $(3,050)

Increase in supplies (125)

Decrease in unearned revenue (360) (3,535)

Net cash flows from operating activities $ 8,760

SELF-STUDY QUESTIONS Answers at end of chapter

1. Assume that a lawyer bills her clients $15,000 on
   June 30, 2007, for services rendered during June. The
   lawyer collects $8,500 of the billings during July and the
   remainder in August. Under the accrual basis of
   accounting, when would the lawyer record the revenue
   for the fees?
   A. June, $15,000; July, $0; and August, $0
   B. June, $0; July, $6,500; and August, $8,500
   C. June, $8,500; July, $6,500; and August, $0
   D. June, $0; July, $8,500; and August, $6,500


2. On January 24, 2007, Niche Consulting collected
   $5,700 it had billed its clients for services rendered
   on December 31, 2006. How would you record
   the January 24 transaction, using the accrual basis?
   A. Increase Cash, $5,700; decrease Fees Earned, $5,700
   B. Increase Accounts Receivable, $5,700; increase Fees
   Earned, $5,700
   C. Increase Cash, $5,700; decrease Accounts
   Receivable, $5,700
   D. Increase Cash, $5,700; increase Fees Earned, $5,700


3. Which of the following items represents a deferral?
   A. Prepaid insurance
   B. Wages payable
   C. Fees earned
   D. Accumulated depreciation
   4. If the supplies account indicated a balance of
   $2,250 before adjustment on May 31 and supplies
   on hand at May 31 totaled $950, the adjustment
   would be:
   A. increase Supplies, $950; decrease Supplies Expense,
   $950.
   B. increase Supplies, $1,300; decrease Supplies
   Expense, $1,300.
   C. increase Supplies Expense, $950; decrease Supplies,
   $950.
   D. increase Supplies Expense, $1,300; decrease
   Supplies, $1,300.
   5. The balance in the unearned rent account for Jones Co.
   as of December 31 is $1,200. If Jones Co. failed to record
   the adjusting entry for $600 of rent earned during
   December, the effect on the balance sheet and income
   statement for December would be:
   A. assets understated by $600; net income overstated
   by $600.
   B. liabilities understated by $600; net income
   understated by $600.
   C. liabilities overstated by $600; net income
   understated by $600.
   D. liabilities overstated by $600; net income overstated
   by $600.

DISCUSSION QUESTIONS

1. WouldGeneral ElectricandXeroxuse the cash basis or
   the accrual basis of accounting? Explain.


2. How are revenues and expenses reported on the income
   statement under (a) the cash basis of accounting and (b)
   the accrual basis of accounting?
   3. Fees for services provided are billed to a customer
   during 2006. The customer remits the amount owed in
   2007. During which year would the revenues be
   reported on the income statement under (a) the cash
   basis? (b) the accrual basis?