Accrued revenue distortion, plant assets, adjusting entries
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1. How does failure to record accrued revenue distort the financial reports? If an annual financial report is in error (distorted) what action should be taken?
2. What are the major characteristics of plant assets? Are plant assets necessarily confined to a manufacturing plant?
3. Why is it necessary to make adjusting entries? In your experience what is the most common type of error?
4. Has there ever been a President who was a CPA? What financial background is most common among our Presidents? Would it be helpful if our Presidents had a working knowledge of accounting and the principles therein?
5. Of what significance is inventory turnover to a retail store? Are different kinds of inventory subject to different turnover rates? Please cite some examples.
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6.Problem: I am tired of being an accountant and want to become a real estate mogul like "the Donald". I will buy a piece of land and build a 60 story office building on the site. Several ...there is moreshow problemI am tired of being an accountant and want to become a real estate mogul like "the Donald". I will buy a piece of land and build a 60 story office building on the site. Several problems arise. First there is an old gas station on the site which has to be removed. Second, I don't have the cash to purchase so I will borrow during the construction phase and when the complex is complete turn the construction loan into a first mortgage.
You are now my accountant. I want to write off as an expense all the costs associated with this project. This includes the cost of the land, the demolition of the gas station, the payments on the construction loan (both principle and interest) and any real estate taxes incurred during construction.
Please discuss each of the above and tell me why I can or cannot expense all of the above. If I cannot expense some of them today, when can I do so?
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The 870 word cited solution gives a full paragraph in explanation of each of the questions. Examples are included as appropriate
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1. Failure to record accrued revenues will cause the financial statement for show less profit than it should show. The issue is that costs continue to be recorded, and those costs relate to the revenue which has been earned but not yet collected. For the matching principle to be applied, revenues must match costs. In this case, they will not. The distortion will have to be corrected by reissuing the financial statements, or restating a prior year's financial statements, depending upon the materiality of the unrecorded revenues.
2. The major characteristics of fixed assets are that they are used in production, but not consumed in production. They will last for more than one year and they are not liquid, but they are required to product the product for sale. No, plant assets are not the only types of fixed assets in a manufacturing company, if I understand the question properly. The building itself is a plant asset but not equipment as one would normally think of plant assets.
3. Adjusting entries are necessary to comply with the matching principle: to match revenue to expense within an accounting period. Correcting entries are one type of adjusting entry, but not the most common. Typical adjustments include depreciation, write-off of prepaid expenses, accrual of earned but unpaid revenue, and bad debt allowances or write-offs, to name a few. Depreciation may be the ...
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