Ch.3

Question 1

Revenue:

Answer 1

increase in net assets from day to day operations

Question 2

Gain:

Answer 2

increase in net assets from peripheral or incidental transactions

Question 3

Net assets formula:

Answer 3

Net Assets = Assets – Liabilities

Question 4

How would you get an increase in Net assets?

Answer 4

either Assets increase or Liabilities decrease

Question 5

Revenue Recognition Principle:

Answer 5

explains the timing and measurement of revenues and gains for firms

Question 6

Timing definition:

Answer 6

when to recognize the revenue

Question 7

When would you recognize revenue?

Answer 7

Recognize revenue when EARNED

Question 8

Measurement:

Answer 8

is the amount of revenue to recognize

Question 9

Realized:

Answer 9

cash has been received

Question 10

Realizable:

Answer 10

cash is expected to be received and can be measured

Question 11

Expense:

Answer 11

decrease in net assets from day to day operations

Question 12

Loss:

Answer 12

decrease in net assets from peripheral or incidental transactions

Question 13

How would you get a decrease in Net assets?

Answer 13

either Assets decrease or Liabilities increase

Question 14

Matching Principle:

Answer 14

explains the timing and measurement of expenses and losses for firms.

Question 15

Direct Matching:

Answer 15

match expenses with revenues recognized in the
same accounting period

Question 16

Indirect Matching:

Answer 16

match expenses with a particular period instead of a revenue

Question 17

Accrual basis accounting:

Answer 17

-Revenues are recognized when they meet revenue recognition principle
-Expenses are incurred when they meet matching principle.

Question 18

Cash Basis accounting:

Answer 18

-Revenues are recognized when cash is
-Expenses are incurred when cash is
-Real accounts: Cash and Equity
-Nominal Accounts: Revenue, Expense, Withdrawal by owners (all close
to equity)

Question 19

Which basis of accounting do we use most often?

Answer 19

In this class, we will ALWAYS USE ACCRUAL BASIS ACCOUNTING (which is in accordance with GAAP).

Question 20

How many steps in accounting cycle?

Answer 20

12

Question 21

What is step 5 of the accounting cycle?

Answer 21

Step 5. End of Period

Question 22

End of Period:

Answer 22

artificial time period like end of quarter or fiscal year.

Question 23

Going Concern Assumption:

Answer 23

assumes firm will have infinite life

Question 24

Periodicity Assumption:

Answer 24

breaks life of firm into artificial time periods for the
purpose of creating financial statements.

Question 25

What is step 6 of the accounting cycle?

Answer 25

Step 6. Record Adjusting Entries (AJE)

Question 26

Adjusting Journal Entries:

Answer 26

journal entries made at the end of the accounting
period to bring all accounts up to date so that financial statements can be prepared on an accrual basis.

Question 27

Rules of Adjusting Entries:

Answer 27

1. Do not include cash in adjusting entry
2. Every adjusting entry always affects:
   -at least one account PERMANENT ACCOUNT/BALANCE SHEET (asset, liability, or equity account)
   - and at least one account TEMPORARY ACCOUNT (revenue or expense account)

Question 28

What are the types of Adjusting entries ?

Answer 28

Adjusting entries are either Accruals or Deferrals

Question 29

Accruals:

Answer 29

when revenue recognized or expense incurred before cash
changes hands

Question 30

Deferrals:

Answer 30

Cash changes hands before the revenue is recognized or the expense is
incurred

Question 31

Accrued revenues (assets) definition:

Answer 31

revenue is recognized before cash is received

Question 32

Accrued revenues (assets):

Answer 32

o Happens when
1) time has passed and customer has received some service/goods and
2) the customer intends to pay in the future

o At end of period, the adjusting entry will:
1) recognize the correct amount of revenue earned and
2) adjust the firm’s assets (increase receivables) to reflect how much
the firm will receive in the future from the customer.

Question 33

Accrued expenses (liabilities) definition:

Answer 33

expenses incurred before cash is paid

Question 34

Accrued expenses (liabilities):

Answer 34

o Happens when
1) time has passed and firm has received some service or goods
and 2) firm intends to pay in the future.

o At the end of the period, the adjusting entry will
1) incur the correct amount of expense due to the passage of time
and 2) adjust (increase) the firm’s liabilities to reflect how much it owes.

Question 35

Deferred revenues (aka Unearned Revenues) definition:

Answer 35

cash is received before revenue is
recognized

Question 36

Deferred revenues (aka Unearned Revenues):

Answer 36

o Happens when
1) customer prepays the firm for service or goods; creating a liability
(Unearned Revenue) on the firm’s books
and 2) time has passed and customer has received some or all of the
prepaid service or goods thus reducing the firm’s liability.

o At end of period, the adjusting entry will
1) recognize the correct amount of revenue earned due to passage of time
and 2) adjust the firm’s obligation (decrease liabilities) to provide
goods/services in the future.

Question 37

Deferred expenses (aka Prepayments) definition:

Answer 37

cash is paid before the expense is
incurred

Question 38

Deferred expenses (aka Prepayments):

Answer 38

Happens when
1) firm prepays for future service or goods
and 2) time has passed and firm has received some or all of the prepaid
service or goods.

o At the end of the period, the adjusting entry will
1) incur the correct amount of expense due to the passage of time
and 2) adjust the unexpired costs (decrease the prepaid asset) that will be used in future periods.

Question 39

Depreciation:

Answer 39

When a fixed asset is acquired, its cost is recorded in an
asset account. As the asset helps to generate revenue, the cost is converted to an expense.

Question 40

Straight Line Depreciation expense formula:

Answer 40

=Historical Cost – Est. Salvage Value/
Est. Useful Life

Question 41

What is step 7 of accounting cycle?

Answer 41

Post AJE to the General Ledger

Question 42

What is step 8 of accounting cycle?

Answer 42

Prepare an Adjusted Trial Balance

Question 43

Adjusted Trial Balance:

Answer 43

a listing of all accounts (real and nominal) and their
balances at the end of the period after adjusting entries have been recorded.Goal is to ensure Debits = Credits

Question 44

What is step 9 of accounting cycle?

Answer 44

Prepare financial statements

Question 45

Classified Balance Sheet :

Answer 45

Splits Assets & Liabilities into Current & Long-term

Question 46

(Classified Balance Sheet) Assets order:

Answer 46

1.Current assets
2. Long term investments
3. PPE
4.Intangible assets(or other assets)

Question 47

(Classified Balance Sheet) Liabilities order:

Answer 47

1.Current Liabilities {Accounts Payable, Wages Payable, Unearned Revenues, Notes Payable}
2.Long term liabilities {Notes payable, Bonds payable}

Question 48

Stockholders Equity:

Answer 48

claims of owners against the net assets of the firm. (Assets -
Liabilities = SHE)

Question 49

What is step 10 of accounting cycle?

Answer 49

Record Closing Journal Entries (CJE)

Question 50

Closing Journal Entries:

Answer 50

reduced all nominal (temporary) accounts to zero by
closing them through Retained Earnings (or Income Summary then RE)

Question 51

Nominal (Temporary) accounts:

Answer 51

-Income Statement: all revenues, gains, expenses, losses, and their
contra and adjunct accounts
-Statement of RE: dividends declared

Question 52

Why do closing entries?

Answer 52

-In preparation for recording the transactions of the next period, all the
nominal accounts must have a balance of zero.
- Net income (loss) for the period is transferred to owner’s equity (RE) by closing all Income Statement accounts into Retained Earnings
- 3 Closing Entries:

Question 53

What is step 11 of accounting cycle?

Answer 53

Post-Closing Journal Entries to General Ledger

Question 54

What is step 12 of accounting cycle?

Answer 54

Prepare a Post-Closing Trial Balance