Chapter 3

Question 1

assumes business activities are sliced into small time segments and that financial statements can be prepared for specific periods, such as a month, quarter, or year.

Answer 1

time period concept

Question 2

an accounting year of any 12 consecutive months that may or may not coincide with the calendar year.

Answer 2

fiscal year

Question 3

tells accountants when to record revenue and requires companies follow a five-step process.

Answer 3

revenue recognition principle

Question 4

5 steps of the revenue recognition principle:

Answer 4

Step 1: Identify the contract with the customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
The transaction price is the amount that the entity expects to be entitled to as a result of transferring goods or services to the customer.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies each performance obligation.

Question 5

The _____ guides accounting for expenses and ensures all expenses are recorded when they are incurred during the period and that expenses are matched against the revenues of the period.

Answer 5

matching principle

Question 6

_____ lists the revenues and expenses, but these amounts are incomplete because they omit various revenue and expense transactions.

Answer 6

unadjusted trial balance

Question 7

_____ are made at the end of the accounting period to record revenues to the period in which they are earned and expenses to the period in which they occur.

Answer 7

Adjusting entries

Question 8

____ defer the recognition of revenue or expense to a date after the cash is received or paid.

Answer 8

Deferrals

Two types of deferrals:
Deferred expenses
Deferred revenues

Question 9

___ record an expense before the cash is paid, or records revenue before the cash is received

Answer 9

Accruals
Two types of accruals:
Accrued expenses
Accrued revenues

Question 10

____ are advance payments of future expenses.

Answer 10

Also called prepaid expenses
Treated as assets until used
Recognized as an expense by an adjusting journal entry when the prepayment is used

Types of deferred expenses:
Prepaid rent
Office supplies
Depreciation

Question 11

represent long-lived, tangible assets used in the operations of the business.

Answer 11

Property, plant, and equipment
Examples: Land, Buildings, Equipment

Question 12

The allocation of plant asset’s cost over its useful life is called

Answer 12

depreciation

Accounting for plant assets is similar to prepaid expenses.

Question 13

The expected value of a depreciable asset at the end of its useful life is called the

Answer 13

residual value

Question 13

The ____ allocates an equal amount of depreciation each year.

Answer 13

straight-line method

Question 14

Straight line method calculation:

Answer 14

straight line depreciation = (cost - residual value) / useful life

Question 15

The ____ account is the sum of all depreciation expense recorded for the depreciable asset to date.

Answer 15

Accumulated Depreciation

It is a contra asset.

Question 16

A ___ is paired with and is listed immediately after its related account in the chart of accounts and associated financial statement.

Answer 16

contra account

Question 17

A ____ normal balance (debit or credit) is the opposite of the normal balance of the related account.

Answer 17

contra account

Question 18

___ is a depreciable asset’s cost minus accumulated depreciation

Answer 18

Book value

Question 19

Occurs when a company receives cash before it does the work or delivers a product

Answer 19

Deferred revenue

Also called unearned revenue

Question 20

Is a liability because the business owes the customer the product, the service, or a refund

Answer 20

deferred revenue

Question 21

are expenses a business has incurred but has not yet paid.

Answer 21

Accrued expenses

Examples of accrued expenses:
Salaries Expense
Interest Expense
Utilities Expense

Question 22

Formula to compute interest:

Answer 22

amount of interest = principle * interest rate * time

Question 23

____ arise when a company performs a service but has not yet collected cash or a company delivers a product but has not yet collected cash

Answer 23

accrued revenues

Record accrued revenues with a:
Debit to Accounts Receivable
Credit to Service Revenue

Question 24

Adjusting entries never involve the ____

Answer 24

Cash account

Question 25

Adjusting entries either:

Answer 25

Increase a revenue account (credit revenue)/

Increase an expense account (debit expense)

Question 26

An _____ is a list of all the accounts with their adjusted balances.

Answer 26

adjusted trial balance

The purpose is to ensure total debits equal total credits

Question 27

Adjusting entry for deferred expense:

Answer 27

Expense DR
Asset CR

(if recorded depreciation: the contra asset, accumulated depreciation, is credited.)

Question 28

Adjusting entry for deferred revenues:

Answer 28

Liability DR
Revenue CR

Question 29

Adjusting entry for accrued expenses:

Answer 29

Expense DR
Liability CR

Question 30

Adjusting entry for accrued revenues:

Answer 30

Asset DR
Revenue CR

Question 31

A ___ is an internal document that helps summarize data for the preparation of the financial statements.

Answer 31

worksheet

Question 32

The worksheet has four sections:

Answer 32

Account names
Unadjusted trial balance
Adjustments
Adjusted trial balance