Chapter 3

Question 1

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or reversing entries).

Answer 1

ACCOUNTING CYCLE

Question 2

Length of time covered by financial statements.

Answer 2

ACCOUNTING PERIODS or REPORTING PERIODS

Question 3

Accounting system that recognizes revenues when earned and expenses when incurred; basis for GAAP.

Answer 3

ACCRUAL BASIS ACCOUNTING

Question 4

Costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.

Answer 4

ACCRUED EXPENSES

Question 5

List of accounts and balances prepared after period-end adjustments are recorded and posted.

Answer 5

ADJUSTED TRIAL BALANCE

Question 6

Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account.

Answer 6

ADJUSTING ENTRY

Question 7

Financial statements covering a one-year period; often based on a calendar year, but any consecutive 12-month (or 52-week) period is acceptable.

Answer 7

ANNUAL FINANCIAL STATEMENTS

Question 8

Asset’s acquisition costs less its accumulated depreciation (or depletion or amortization); also sometimes used synonymously as the carrying value of an account.

Answer 8

BOOK VALUE

Question 9

Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.

Answer 9

CASH BASIS ACCOUNTING

Question 10

Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications.

Answer 10

CLASSIFIED BALANCE SHEET

Question 11

Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawal (dividend for a corporation) accounts to the capital account (to retained earnings for a corporation).

Answer 11

CLOSING ENTRIES

Question 12

Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period.

Answer 12

CLOSING PROCESS

Question 13

Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account’s balance.

Answer 13

CONTRA ACCOUNT

Question 14

Cash and other assets expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer.

Answer 14

CURRENT ASSETS

Question 15

Obligations due to be paid or settled within one year or the company’s operating cycle, whichever is longer.

Answer 15

CURRENT LIABILITIES

Question 16

Ratio used to evaluate a company’s ability to pay its short-term obligations, calculated by dividing current assets by current liabilities.

Answer 16

CURRENT RATIO

= current assets / current liabilities

Question 17

Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset.

Answer 17

DEPRECIATION

Question 18

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expense.

Answer 18

EXPENSE RECOGNITION (or MATCHING) PRINCIPLE

Question 19

Consecutive 12-month (or 52-week) period chosen as the organization’s annual accounting period.

Answer 19

FISCAL YEAR

Question 20

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation).

Answer 20

INCOME SUMMARY

Question 21

Long-term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits.

Answer 21

INTANGIBLE ASSETS

Question 22

Financial statements covering periods of less than one year; usually based on one, three or six month periods.

Answer 22

INTERIM FINANCIAL STATEMENTS

Question 23

Long-term assets not used in operating activities such as notes receivable and investments in stocks & bonds.

Answer 23

LONG-TERM INVESTMENTS

Question 24

Obligations not due to be paid within one year or the operating cycle, whichever is longer.

Answer 24

LONG-TERM LIABILITIES

Question 25

Twelve-month period that ends when a company’s sales activities are at their lowest point.

Answer 25

NATURAL BUSINESS YEAR

Question 26

Normal time between paying cash for merchandise or employee services and receiving cash from customers.

Answer 26

OPERATING CYCLE

Question 27

Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed; also called REAL ACCOUNTS.

Answer 27

PERMANENT ACCOUNTS

Question 28

Tangible long-lived assets used to produce or sell products and services; also called PROPERTY, PLANT AND EQUIPMENT (PP&E) or FIXED ASSETS.

Answer 28

PLANT ASSETS

Question 29

List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Answer 29

POST-CLOSING TRIAL BALANCE

Question 30

Items paid for in advance of receiving their benefits; classified as assets

Answer 30

PREPAID EXPENSES

Question 31

Ratio of a company’s net income to its net sales; the percent of income in each dollar of revenue; also called NET PROFIT MARGIN.

Answer 31

PROFIT MARGIN

= current assets / current liabilities

Question 32

Statements that show the effects of proposed transactions and events as if they had occurred.

Answer 32

PRO-FORMA FINANCIAL STATEMENTS

Question 33

Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period.

Answer 33

REVERSING ENTRIES

Question 34

Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

Answer 34

STRAIGHT-LINE DEPRECIATION METHOD

Question 35

Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period; also called NOMINAL ACCOUNTS.

Answer 35

TEMPORARY ACCOUNTS

Question 36

Assumption that an organization’s activities can be divided into specific time periods such as months, quarters, or years.

Answer 36

TIME PERIOD ASSUMPTIONS

Question 37

List of accounts and balances prepared before accounting adjustments are recorded and posted.

Answer 37

UNADJUSTED TRIAL BALANCE

Question 38

Balance sheet that broadly groups assets, liabilities and equity accounts.

Answer 38

UNCLASSIFIED BALANCE SHEET

Question 39

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

Answer 39

UNEARNED REVENUES

Question 40

Analyses and other informal reports prepared by accountants and managers when organizing information for formal reports and financial statements.

Answer 40

WORKING PAPERS

Question 41

Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements.

Answer 41

WORK SHEET

Question 42

First step in closing

Answer 42

REVENUES Dr

INCOME SUMMARY Cr

Question 43

Second step in closing

Answer 43

INCOME SUMMARY Dr

EXPENSES Cr

Question 44

Third step in closing process

Answer 44

for net income
INCOME SUMMARY Dr
RETAINED EARNINGS Cr

Question 45

Fourth step in closing process

Answer 45

RETAINED EARNINGS Dr

DIVIDENDS Cr