Chapter 3

Question 1

revenue recognition principle

Answer 1

dictates when to record revenue and the amount of the revenue to record

Question 2

cash basis accounting

Answer 2

• revenue is recorded when cash is received
• expenses are recorded when cash is paid
• not allowed under GAAP

Question 3

accrual basis accoutning

Answer 3

revenue is recorded when earned

• expenses are recored when incurred
• used by most businesses

Question 4

time period concept

Answer 4

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

Question 5

deferred expenses

Answer 5

• advance payments of future expenses
• treated as assets until used
• recognized as an expense by an adjusting journal entry when the prepayment is used

Question 6

depreciation

Answer 6

is the allocation of a plant asset’s cost over its useful likfe

Question 7

residual value

Answer 7

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

Question 8

straight-line method

Answer 8

allocates an equal amount of depreciation each year

Question 9

straight line depreciation

Answer 9

(cost-residual value)/useful life

Question 10

accumulated depreciation

Answer 10

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

Question 11

book value

Answer 11

cost minus accumulated depreciation of plant asset

Question 12

deferred revenue

Answer 12

occurs when a company receives cash before does the work or delivers a product
-unearned revenue

Question 13

accrued expenses

Answer 13

are expenses a business has incurred but not yet paid

• salaries
• interest
• utilities

Question 14

accrued revenues

Answer 14

• a company performs a service but has not yet collected cash
• a company delivers a product but has not yet collected cash