Chapter 3

Question 1

OPERATING CYCLE

Answer 1

Operations begin with some cash on hand.

Cash is used to purchase supplies and to pay expenses.

Revenue is earned as services are completed for customers.

Cash is collected from customers.

Question 2

The process of recording revenue in the accounting period in which it was earned; this is not necessarily when cash is received.

Answer 2

REVENUE RECOGNITION

Question 3

A trial balance where the accounts have not yet been adjusted; it is used to review accounts at the end of an accounting period and before financial statements are prepared

Answer 3

UNADJUSTED TRIAL BALANCE

Question 4

Ensures both the balance sheet and the income statement faithfully represent the account balances for the accounting period.

Answer 4

ADJUSTING ENTRIES

Question 5

Revenue that has been earned but has not been collected or recorded.

Answer 5

ACCRUED REVENUE

Question 6

An expense that has been incurred but has not yet been paid or recorded.

Answer 6

ACCRUED EXPENSE

Question 7

An asset or liability account requiring adjustment at the end of an accounting period and includes both a balance sheet portion and an income statement portion. The income statement portion must be removed from the account by an adjusting entry.

Answer 7

MIXED ACCOUNT

Question 8

The process of allocating the cost of a plant and equipment asset over the period of time it is expected to be used.

Answer 8

DEPRECIATION

Question 9

An estimate of how long a plant & equipment asset will actually be used by the business regardless of how long the asset is expected to last.

Answer 9

USEFUL LIFE

Question 10

An estimate of what the plant and equipment asset will be sold for when it is no longer used by a business; can be $0.

Answer 10

RESIDUAL VALUE

Question 11

EQUATION USED TO CALCULATE DEPRECIATION

Answer 11

Cost - Estimated Residual Value / Estimated Useful Life = Depreciation Expense per year

Question 12

Name of the equation used to calculate depreciation that allocates the depreciable cost equally over the asset’s estimated useful life.

Answer 12

STRAIGHT-LINE METHOD OF DEPRECIATION

Question 13

An account that is related to another account and typically has an opposite normal balance that is subtracted from the balance of its related account on the financial statements.

Answer 13

CONTRA ACCOUNT

Question 14

Records the amount of the asset’s cost that has been expensed since it was put into use; has a normal credit balance that is subtracted from a Plant and Equipment asset account on the balance sheet.

Answer 14

ACCUMULATED DEPRECIATION

Question 15

Subtracting the accumulated depreciation account balance from the Plant and Equipment asset account balance on the balance sheet.

Answer 15

CARRYING AMOUNT/NET BOOK VALUE

Question 16

The formula for calculating interest when the term is expressed in days

Answer 16

Interest = Principal X Interest rate X Elapsed time in days / 365

Question 17

THE FIVE STEPS OF ADJUSTING ENTRIES

Answer 17

PREPAID ASSETS; UNEARNED LIABILITIES; PROPERTY, PLANT, & EQUIPMENT ASSETS; ACCRUED EXPENSES; ACCRUED REVENUES

Question 18

A financial statement that reports account balances after adjusting entries have been recorded and posted.

Answer 18

ADJUSTED TRIAL BALANCE

Question 19

SEVEN STEPS OF THE ACCOUNTING CYCLE

Answer 19

Step 1: Transactions are analyzed and recorded in the general journal
Step 2: The journal entries in the general journal are posted to accounts in the general ledger
Step 3: An unadjusted trial balance is prepared to ensure total debits equal total credits
Step 4: The unadjusted account balances are analyzed and adjusting entries are journalized in the general journal and posted to the general ledger
Step 5: An adjusted trial balance is prepared to prove the equality of debits and credits
Step 6: The adjusted trial balance is used to prepare financial statements
Step 7: Closing entries are journalized and posted
Step 8: Prepare a post-closing trial balance

Question 20

A single compound closing entry used to transfer revenue account balances

Answer 20

INCOME SUMMARY

Question 21

The process of recognizing revenues when earned and expenses when incurred regardless of when cash is exchanged

Answer 21

ACCRUAL ACCOUNTING

Question 22

Transfers each revenue and expense account balance, as well as any balance in the dividend account, into retained earnings.

Answer 22

CLOSING ENTRIES