Unadjusted Financial Statements income Statement For the Year Ended December 31, 2017 Service revenue $70,600.00 Wages expense 44,300.00 Net income $26,300.00 Cole Designs Inc. Balance Sheet December 31, 2017 Assets Cash $5,000.00 Accounts receivable 32,600.00 Supplies 3,650.00 5 Prepaid insurance 4,000.00 6 Office equipment 11,000.00 Total assets $56,250.00 Liabilities Unearned revenue $9,500.00 Stockholders' Equity Common stock $12,000.00 12 Retained earnings 34,750.00 46,750.00 13 Total liabilities and stockholders'equity $56,250.00 Cole Designs Inc. Income Statement For the Year Ended December 31, 2017 Service revenue $76,800.00 2 Expenses: 3 Wages expense $46,150.00 Supplies expense 3,530.00 Insurance expense 2,700.00 Depreciation expense 1,700.00 Total expenses 54,080.00 8 Net income $22,720.00 Cole Designs Inc. Balance Sheet December 31, 2017 Assets 2 Cash $5,000.00 3 Accounts receivable 33,250.00 Supplies 120.00 1,300.00 Prepaid insurance 6 Office equipment $11,000.00 Accumulated depreciation office equipment (1,700.00) 9,300.00 8 Total assets $48,970.00 Liabilities 10 Wages payable $1,850.00 11 Unearned revenue 3,950.00 12 Total Liabilities $5,800.00 $12,000.00 Stockholders' Equity 14 Common stock 15 Retained eamings 16 Total Liabilities and stockholders' equity 31,170.00 43,170.00 $48,970.00 Accounting Bases Under which basis of accounting would adjusting entries never be recorded? Accrual basis of accounting O Cash basis of accounting Which accounts would most likely not be used under the cash basis of accounting? Check all that apply. Cash Unearned Revenue Accounts Payable Accounts Receivable Revenue Supplies Expense Revenue and Expense Recognition Principles Under the accrual basis of accounting, many of the account balances in the ledger at the end of the accounting period are reported in the financial statements without change. Some accounts require updating, though. When preparing financial statements, the economic life of the business is divided into time periods. The expense recognition principle states that Expenses are recorded based on objective evidence. O Expenses are recorded in the same period as the revenue that it helped to generate O Personal expenses of a stockholder are recorded as expenses of the business An expense, such as a purchase made by business, is recorded at the actual cost of the item. Under the accrual basis of accounting, the revenue recognition principle states that Revenues are recognized when services have been performed or products have been delivered to customers O Revenues are recognized when a contract is signed with the customer. O Revenues are recognized when the cash is received. Revenues may not be recognized until the company is deemed to be profitable. Review the following selected transaction data of a business for July. Keeping the expense recognition principle in mind, indicate which of the following would be used to compute net income for the month of July. Check all that apply. Services provided to customers on account during July Cash paid in July for expenses incurred in July. Cash received in July from customers for services performed in June. Cash received from cash customers for services performed in July Expenses incurred in July but not paid until August. Cash paid in July for expenses incurred in June. Overstated, Understated Assume that the Cole Designs Inc. financial statements in the Unadjusted Financial Statements panel were prepared from the unadjusted trial balance and the financial statements in the Adjusted Financial Statements panel were prepared from the adjusted trial balance. For the following financial statement items, indicate if the item was overstated, understated or neither in the financial statements prepared using the unadjusted trial balance. Overstated Understated Neither Net income Stockholders' equity 0 0 0 Revenues OO Total assets Total assets Total expenses 0 0 0 0 Total liabilities