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Accounting > Chapter 3 > Flashcards

Chapter 3 Flashcards

1
Q

Accounting cycle definition and what are the steps?

A

Sequence of activities to accumulate and report financial statements

Analyze-record-adjust-report-close
*steps do not occur with equal frequency

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2
Q

Close the books

A

End of adjustment process; analyze and record daily transactions throughout period but adjust and report when management requires it- monthly or quarterly but at least annual

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3
Q

Fiscal year

A

One year accounting period

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4
Q

Calendar year

A

Fiscal year end Dec 31

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5
Q

Chart of accounts

A

Titles and numbers of all accounts in general ledger

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6
Q

What are the groups in the chart of accounts?

A

Asset, liabilities, equity, revenue, expenses

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7
Q

Journal

A

journalize- record transactions- must have equal debits and credits

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8
Q

Posting

A

After journal entries are journalized, debits/credits transferred to general ledger

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9
Q

Unadjusted trial balance

A

Shows account balances before any adjustments are made

Purpose is to be sure general ledger is in balance before management adjusts

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10
Q

When do adjustments occur?

A

1) at the end of the reporting period, before financial statement construction
2) almost never involve cash

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11
Q

Adjusting entries

A

Journal entries made to reflect adjustments, usually affects a balance sheet account and income statement account

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12
Q

What are the 4 types of adjustments?

A

1) deferred revenues
2) deferred (prepaid) expenses
3) accrued revenues
4) accrued expenses

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13
Q

Deferred revenues

A

Allocate earned portion of performance obligation and contract liabilities earned in the period; companies receive fees for product/service before product/service rendered

As services are performed, revenue is earned and liability decreases

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14
Q

Examples of deferred revenues

A

Sell gift cards, rental payment rental payments in advance, insurance premium received in advance by insurance company, magazine subscription received by publishers

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15
Q

Deferred/prepaid expenses

A

Allocating assets to expenses

Added to (debited) an asset account when expenditure occurs- end of accounting period, portion that has expired transferred to expense account

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16
Q

What are examples of deferred/prepaid expenses?

A

Building, equipment, supplies, prepayments of rent and advertising, insurance premiums covering several periods

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17
Q

Prepaid insurance

A

Deferred/prepaid expense

Debit asset (payment) when insurance premium advance is paid, adjust to recognize expense

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18
Q

Depreciation

A

Deferred/prepaid expense

Process of allocating costs of equipment, vehicles, and buildings to the periods benefitting from their use; each period in which assets used must reflect a portion of cost as expense- asset helped generate revenue; period depreciation is an estimate

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19
Q

Straight line depreciation

A

Assume entire cost of asset is depreciated- zero salvage value

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20
Q

Contra asset

A

Record depreciation, asset amount not reduced directly- accumulated depreciation labeled XA in journal entries

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21
Q

Contra accounts

A

Record reductions in or offsets against account

Increase in contra asset decreases net balance of long term assets

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22
Q

Accumulated depreciation

A

Credit balance and appears in balance sheet as deduction from related asset amount

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23
Q

Book value

A

Resulting balance (Cost-accumulated depreciation) on expired asset cost to be allocated as expense in future

24
Q

Accrued revenues

A

Revenue recognized when company has transferred good/service to customers and amount to which company expects entitled from transfer

Company often provides services or earns income during period that isn’t paid for by clients or billed; properly account for entries made to reflect revenues/income earned not billed or received

25
Q

Accrued sales revenue

A

Accrued revenue

Interest income received based on average balance in checking; if accrued in Dec and paid in Jan- earned interest in Jan, interest receivable asset and interest income on income statement

26
Q

Accrued expenses

A

Incur expenses before paying (wages, interest, utilities, taxes)- made at regular intervals of time

27
Q

Accrued wages

A

Accrued expenses

Employees earn wages in Dec and are paid in Jan; wage expense recorded in income statement in Dec as wages payable; balance sheet would show wages payable liability

28
Q

Accrued interest

A

Accrued expenses

Note payable with interest over 3 years record interest expense and recognize liability

29
Q

Accrued income tax

A

Accrued expenses

pay tax based on how much it earns tax expense/taxes payable

30
Q

Adjusted trial balance

A

All ledge account balances after adjustments

31
Q

What order are the statements prepared in for the accounting cycle?

A

1) income statement
2) statement of stockholders equity
3) balance sheet
4) statement of cash flows

32
Q

What is in an income statement?

A

revenues and expenses

33
Q

What is in statement of stockholders equity?

A

Events causing equity components to change during accounting period

34
Q

What are the sources of the items in stockholders equity?

A
  • Common stock account in general ledger provides balance at the beginning and issuances over the period
  • Net income comes from income statement
  • Dividends during the period are retained earnings from adjusted trial balance
35
Q

What is in a balance sheet?

A

Assets, liabilities, equity

36
Q

What are the sources of the items in balance sheet?

A
  • Assets and liabilities come from the adjusted trial balance
  • Common stock and retained earnings come from statement of stockholders equity
37
Q

What is in the statement of cash flows?

A

Inflows and outflows of activities

38
Q

What are the 3 activities in a statement of cash flows?

A
  • Cash flows from operating activities: transactions/events for primary operating
  • Cash flows from investing activities: acquisitions of investments and long term assets
  • Cash flows from financing activities: issuance of and payments toward equity, borrowings, long term liabilities
39
Q

Are you better off if you have an increase in cash in your statement of cash flows?

A

Not necessarily- need to look at the reason for the change

40
Q

Temporary accounts

A

Set balance to zero for the next period, end of period values do not carry over

Income statement is only relevant for that period then needs to be closed

41
Q

What statement has temporary accounts?

A

Income statement (revenue/expense)

42
Q

Permanent accounts

A

End of period balance is beginning of period balance for next period

Balance sheet balances carry over for the next period

43
Q

What statement has permanent accounts?

A

Balance sheet

44
Q

Closing process

A

End of period balance in temp account moves to permanent account of retained earnings

45
Q

What account do temporary accounts move to in the permanent account?

A

Retained earnings

46
Q

What is the process for closing accounts?

A

Temp account is closed when entry is made that makes the balance zero, entry is equal in amount to account’s balance but opposite the balance as a debit or credit; transfers the balance of one account to another then temp account is ready to accumulate data again

47
Q

Close revenue accounts

A

Debit each revenue for amount equal to balance, credit retained earnings for total

48
Q

Close expense accounts

A

Credit each expense for amount equal to balance, debit retained earnings for total of expenses

49
Q

Post closing trial balance

A

Evidence that equality of debits and credits maintained in general ledger throughout adjusting/closing period, general ledger in balance for next period

  • only balance sheet accounts appear in post-closing trial balance
  • all income statement accounts have 0 balance
50
Q

What happens to balance sheet accounts in post-closing trial balance?

A

Only balance sheet accounts appear in post-closing trial balance

51
Q

What happens to income statement accounts in post-closing trial balance?

A

All accounts have 0 balance

52
Q

How is ‘analyze’ defined in the accounting cycle?

What # is it in the order of the accounting cycle?

A

Analyze transactions from source documents

Step 1

53
Q

How is ‘record’ defined in the accounting cycle?

What # is it in the order of the accounting cycle?

A

Journalize transactions and prepare unadjusted trial balance

Step 2

54
Q

How is ‘adjust’ defined in the accounting cycle?

What # is it in the order of the accounting cycle?

A

Journalize adjusting entries and prep adjusted trial balance

Step 3

55
Q

How is ‘report’ defined in the accounting cycle?

What # is it in the order of the accounting cycle?

A

Prepare financial statements

Step 4

56
Q

How is ‘close’ defined in the accounting cycle?

What # is it in the order of the accounting cycle?

A

Journalize closing entries and prepare post closing trial balance

Step 5

Accounting (9 decks)

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