BUS FPX 2061 Assessment 3 Completing the Accounting Cycle

BUS FPX 2061 Assessment 3 Completing the Accounting Cycle

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Capella University

BUS-FPX2061 Accounting Fundamentals

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Date

Assessment 3: Completing the Accounting Cycle

1. How are revenues and expenses reported on the income statement under the cash basis of accounting? How are they reported on the accrual basis of accounting? What are the key differences between these two methods? In what situations would you use one of these approaches versus the other?

Under the cash basis of accounting, revenues are recorded when cash is received, and expenses are recognized only when cash payments are made. This approach tracks actual cash flow, providing a simple picture of liquidity but not a comprehensive view of financial performance.

In contrast, the accrual basis of accounting records revenues when sales are made or services are performed, regardless of when cash is received. Expenses are recognized when they are incurred, even if payment has not yet been made.

The key difference between these two methods lies in timing. Cash basis focuses on real-time cash movements, whereas accrual basis focuses on when economic events actually occur.

Basis of Accounting	Revenue Recognition	Expense Recognition	Typical Users
Cash Basis	When cash is received	When cash is paid	Small businesses, individuals
Accrual Basis	When earned (sales/service performed)	When incurred	Most businesses, corporations

Generally, the accrual method is preferred and theoretically acceptable because it provides a more accurate representation of financial performance. The cash basis is typically used by small businesses or individuals with simple financial activities.

2. Which events during an accounting period trigger the recording of normal journal entries? Which event triggers the making of adjusting entries? Please explain why adjusting entries are necessary at the end of an accounting period. What ethical considerations are there when making adjusting entries?

Normal journal entries are triggered by routine business transactions such as sales, purchases, payments, or receipts. These are day-to-day financial activities that directly affect the accounting records.

Adjusting entries, however, are triggered at the end of an accounting period. Their purpose is to ensure that revenues and expenses are properly matched within the same period, in accordance with the matching principle. Adjusting entries ensure that financial statements accurately reflect the company’s financial position.

From an ethical standpoint, accountants must ensure that adjustments are accurate, transparent, and based on factual data. Misstating adjustments can lead to financial misrepresentation and violate ethical accounting standards.

3. Give an example of an adjusting journal entry for each of the following transactions.

Transaction Type	Example Scenario	Adjusting Entry
Equal growth of an expense and a liability	Final pay date occurs before period-end, but employees are owed wages for remaining days.	Debit Payroll Expense, Credit Salaries Payable
Earning of revenue that was previously recorded as unearned revenue	Customer prepaid for a service not yet delivered; portion completed by period-end.	Debit Unearned Revenue, Credit Service Revenue
Equal growth of an asset and revenue	Product sold but payment due in next period.	Debit Accounts Receivable, Credit Sales Revenue
Increase in an expense and decrease in an asset	Portion of prepaid insurance used during the period.	Debit Insurance Expense, Credit Prepaid Insurance

These adjustments ensure accurate recognition of income and expenses according to the accrual concept.

4. The balance in the equipment account is $4,689,000, and the balance in the accumulated depreciation equipment account is $949,000. What is the book value of the equipment and does that amount mean that the equipment has a loss in real value of $949,000? Explain your response.

The book value of the equipment is calculated as follows:

Account	Amount ($)
Equipment (Cost)	4,689,000
Less: Accumulated Depreciation	949,000
Book Value	3,740,000

This depreciation does not necessarily represent an actual loss in real value. It reflects the allocation of the equipment’s cost over its estimated useful life. The depreciation rate depends on how long the company expects to use the equipment. For example, a shorter useful life results in a higher annual depreciation expense, while a longer life spreads it over more years.

5. After the Adjusted Trial Balance columns of a work sheet have been totaled, which account balances are extended to the Income Statement columns, the Statement of Retained Earnings columns, and the Balance Sheet columns?

The following extensions occur after totaling the adjusted trial balance:

Financial Statement	Accounts Extended From Adjusted Trial Balance	Purpose
Income Statement	Revenue and Expense Accounts	Shows company’s profit or loss for the period
Statement of Retained Earnings	Retained Earnings and Dividends Accounts	Displays changes in retained earnings and shareholder value
Balance Sheet	Asset, Liability, and Capital Stock Accounts	Reflects company’s financial position at period-end

This classification helps ensure that all elements of financial performance and position are accurately presented.

6. Current assets and current liabilities for a company are:

• Current assets: 2020—$387,000; 2021—$435,000

• Current liabilities: 2020—$275,000; 2021—$297,500

Determine the current ratio for 2020 and 2021. Does the change in the current ratio from 2020 to 2021 indicate a favorable or unfavorable trend? Explain your response.

The current ratio is calculated as follows:

Year	Current Assets ($)	Current Liabilities ($)	Current Ratio (Assets ÷ Liabilities)
2020	387,000	275,000	1.41
2021	435,000	297,500	1.46

The ratio increased from 1.41 in 2020 to 1.46 in 2021, indicating a favorable trend. The company’s short-term liquidity has slightly improved, showing that its ability to meet current obligations has strengthened.

However, it should also be noted that both assets and liabilities increased, suggesting that some of the asset growth might be financed through additional liabilities.

7. Rearrange the following steps in the accounting cycle in proper order.

Order	Step
1	Transactions are analyzed and recorded in the general journal
2	Transactions are posted to the ledger
3	An unadjusted trial balance is prepared
4	An optional end-of-period work sheet is prepared
5	Adjustment data are assembled and analyzed
6	Adjusting entries are journalized
7	An adjusted trial balance is prepared
8	Financial statements are prepared
9	Closing entries are journalized and posted to the ledger
10	A post-closing trial balance is prepared

This order ensures the proper flow of financial data from initial transaction recording to the preparation of final statements and post-closing review.

References

Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2022). Intermediate Accounting (18th ed.). Wiley.

Warren, C. S., Reeve, J. M., & Duchac, J. E. (2021). Financial & Managerial Accounting (15th ed.). Cengage Learning.

BUS FPX 2061 Assessment 3 Completing the Accounting Cycle

Libby, R., Libby, P. A., & Hodge, F. (2022). Financial Accounting (11th ed.). McGraw-Hill Education.