Chapter 3 - Accrual Accounting and the Financial Statements

Question 1

Cash-basis accounting

Answer 1

Accounting that records only transactions in which cash is received or paid

Question 2

Accrual accounting

Answer 2

A basis of accounting that records transactions based on whether a business has acquired an asset, earned revenue, taken on a liability, or incurred an expense, regardless of whether cash is involved.

Question 3

3 main types of adjusting entries

Answer 3

• deferrals
• depreciation
• accruals

Question 4

Deferral

Answer 4

An adjustment related to a transaction for which a business has received or paid cash in advance of delivering or receiving goods or services

Question 5

Unearned revenue :

Answer 5

A liability that arises when a business receives cash from a customer prior to providing the related goods/services

Question 6

Depreciation

Answer 6

An expense to recognize the portion of a capital asset’s economic benefits that has been used up during an accounting period.

Question 7

Contra account :

Answer 7

An acc that always has a companion acc and whose normal balance is opposite that of the companion account.

Question 8

Accumulated Depreciation :

Answer 8

The account showing the sum of all depreciation expense from the date of acquiring a capital asset

Question 9

Carrying amount :

Answer 9

The historical cost of an asset net of its accumulated depreciation

Question 10

Accruals

Answer 10

An adjustment related to revenues earned or expenses incurred prior to any cash or invoice changing hands

Question 11

Accrued expenses :

Answer 11

Expense that has been incurred but not yet paid or invoiced

Question 12

Accrued revenues :

Answer 12

A revenue that has been earned but not yet collected or invoiced

Question 13

Adjusted trial balance :

Answer 13

A list of all the ledger accounts with their adjusted balance

Question 14

Classified balance sheet :

Answer 14

Balance sheet that shows current assets separate from long term assets

Question 15

Liability

Answer 15

Measure of how quickly an asset can be converted to cash

Question 16

Report format (balance sheet) :

Answer 16

Lists assets at the top, followed by liabilities and then shareholders’ equity

Question 17

Account format (balance sheet) :

Answer 17

Lists assets on the left side and liabilities above shareholders’ equity on the right

Question 18

Single-step income statement :

Answer 18

Lists all revenues together and all expenses together ; only 1 step in arriving at net income

Question 19

Multi-step income statement :

Answer 19

Contains subtotals to highlight important relationships between revenues & expenses

Question 20

Closing entries :

Answer 20

Entries that transfer the rev, expense, and dividend balances from these respective accounts to the Retained Earnings account

Question 21

Temporary accounts :

Answer 21

Rev, expense, and dividend accounts, which don’t have balances that carry forward to the next fiscal year

Question 22

Permanent accounts :

Answer 22

Assets, liabilities, and shareholders’ equity accounts, which all have balances that carry forward to the next fiscal year

Question 23

Net working capital :

Answer 23

Measures the ease w which a company will be able to use its current assets to pay off its current liabilities

Question 24

Current ratio :

Answer 24

Measures a company’s ability to pay current liabilities w current assets

The higher the current ratio, the better we consider the company’s liquidity

Question 25

Debt ratio

Answer 25

Ratio of total liabilities to total assets
States the proportion of a company’s assets that is financed w debt

A low debt ratio is better than a high debt ratio bc it indicates a company hasn’t used an excessive amt of debt to finance its assets