Chapter 3

Question 1

Accounting cycle definition and what are the steps?

Answer 1

Sequence of activities to accumulate and report financial statements

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

Question 2

Close the books

Answer 2

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

Question 3

Fiscal year

Answer 3

One year accounting period

Question 4

Calendar year

Answer 4

Fiscal year end Dec 31

Question 5

Chart of accounts

Answer 5

Titles and numbers of all accounts in general ledger

Question 6

What are the groups in the chart of accounts?

Answer 6

Asset, liabilities, equity, revenue, expenses

Question 7

Journal

Answer 7

journalize- record transactions- must have equal debits and credits

Question 8

Posting

Answer 8

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

Question 9

Unadjusted trial balance

Answer 9

Shows account balances before any adjustments are made

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

Question 10

When do adjustments occur?

Answer 10

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

Question 11

Adjusting entries

Answer 11

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

Question 12

What are the 4 types of adjustments?

Answer 12

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

Question 13

Deferred revenues

Answer 13

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

Question 14

Examples of deferred revenues

Answer 14

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

Question 15

Deferred/prepaid expenses

Answer 15

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

Question 16

What are examples of deferred/prepaid expenses?

Answer 16

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

Question 17

Prepaid insurance

Answer 17

Deferred/prepaid expense

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

Question 18

Depreciation

Answer 18

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

Question 19

Straight line depreciation

Answer 19

Assume entire cost of asset is depreciated- zero salvage value

Question 20

Contra asset

Answer 20

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

Question 21

Contra accounts

Answer 21

Record reductions in or offsets against account

Increase in contra asset decreases net balance of long term assets

Question 22

Accumulated depreciation

Answer 22

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

Question 23

Book value

Answer 23

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

Question 24

Accrued revenues

Answer 24

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

Question 25

Accrued sales revenue

Answer 25

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

Question 26

Accrued expenses

Answer 26

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

Question 27

Accrued wages

Answer 27

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

Question 28

Accrued interest

Answer 28

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

Question 29

Accrued income tax

Answer 29

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

Question 30

Adjusted trial balance

Answer 30

All ledge account balances after adjustments

Question 31

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

Answer 31

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

Question 32

What is in an income statement?

Answer 32

revenues and expenses

Question 33

What is in statement of stockholders equity?

Answer 33

Events causing equity components to change during accounting period

Question 34

What are the sources of the items in stockholders equity?

Answer 34

- 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

Question 35

What is in a balance sheet?

Answer 35

Assets, liabilities, equity

Question 36

What are the sources of the items in balance sheet?

Answer 36

- Assets and liabilities come from the adjusted trial balance - Common stock and retained earnings come from statement of stockholders equity

Question 37

What is in the statement of cash flows?

Answer 37

Inflows and outflows of activities

Question 38

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

Answer 38

- 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

Question 39

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

Answer 39

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

Question 40

Temporary accounts

Answer 40

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

Question 41

What statement has temporary accounts?

Answer 41

Income statement (revenue/expense)

Question 42

Permanent accounts

Answer 42

End of period balance is beginning of period balance for next period Balance sheet balances carry over for the next period

Question 43

What statement has permanent accounts?

Answer 43

Balance sheet

Question 44

Closing process

Answer 44

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

Question 45

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

Answer 45

Retained earnings

Question 46

What is the process for closing accounts?

Answer 46

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

Question 47

Close revenue accounts

Answer 47

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

Question 48

Close expense accounts

Answer 48

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

Question 49

Post closing trial balance

Answer 49

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

Question 50

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

Answer 50

Only balance sheet accounts appear in post-closing trial balance

Question 51

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

Answer 51

All accounts have 0 balance

Question 52

How is 'analyze' defined in the accounting cycle? What # is it in the order of the accounting cycle?

Answer 52

Analyze transactions from source documents Step 1

Question 53

How is 'record' defined in the accounting cycle? What # is it in the order of the accounting cycle?

Answer 53

Journalize transactions and prepare unadjusted trial balance Step 2

Question 54

How is 'adjust' defined in the accounting cycle? What # is it in the order of the accounting cycle?

Answer 54

Journalize adjusting entries and prep adjusted trial balance Step 3

Question 55

How is 'report' defined in the accounting cycle? What # is it in the order of the accounting cycle?

Answer 55

Prepare financial statements Step 4

Question 56

How is 'close' defined in the accounting cycle? What # is it in the order of the accounting cycle?

Answer 56

Journalize closing entries and prepare post closing trial balance Step 5