Chapter 3, Problem 1EA

Carlos Company’s accountant makes the assumptions or performs the activities listed below. Tell which of the following concepts of accrual accounting most directly relates to each assumption or action: (a) periodicity, (b) continuity, (c) accrual accounting, (d) revenue recognition, (e) deferral, and (f) accrual.

1. 1. Recognizes the usefulness of financial statements prepared on a monthly basis even though they are based on estimates.
2. 2. Prepares an income statement that shows the revenues earned and the expenses incurred during the accounting period.
3. 3. In estimating the life of a building, assumes that the business will last indefinitely.
4. 4. Postpones the recognition of a one-year insurance policy as an expense by initially recording the expenditure as an asset.
5. 5. Records a sale when the customer is billed.
6. 6. Recognizes, by making an adjusting entry, wages expense that has been incurred but not yet recorded.