Chapter 3 - Adjusting Accounts for Financial Statements

Question 1

________ basis accounting records revenues when services and products are delivered and records expenses when incurred

Answer 1

Accrual

Question 2

________ basis accounting records revenues when cash is received and records expenses when cash is paid.

Answer 2

Cash

Question 3

________ basis accounting increases the comparability of financial statements from period to period.

Answer 3

Accrual

Question 4

Four types of adjustments for transactions and events that extend over more than one period

Answer 4

1- Deferral of expense
2- Deferral of revenue
3- Accrued expense
4- Accrued revenue

Question 5

Prepaid expenses

Answer 5

assets paid for in advance of receiving their benefit

Question 6

Prepaid insurance

Answer 6

expires with time. As time passes, the benefits of the insurance gradually expire and a portion of the Prepaid insurance asset becomes expense.

Question 7

Depreciation

Answer 7

the allocation of the costs of assets over their expected useful lives

Question 8

4 types of deferrals of expense

Answer 8

1- Prepaid Insurance
2- Prepaid Rent
3- Depreciation
4- Supplies

Question 9

Unearned revenue

Answer 9

LIABILITY

cash received in advance of providing products and services.

Question 10

Accrued expenses

Answer 10

costs that are incurred in a period that are both unpaid and unrecorded.

Ex: Accrued salary expense

Question 11

Adjusted trial balance

Answer 11

a list of accounts and balances after adjusting entries have been recorded and posted to the ledger.

Question 12

Accrued revenue

Answer 12

revenues earned in a period that are both unrecorded and not yet received

Ex: A technician who bills customers after a job is done. If one-third of a job is complete by the end of a period, then the technician must record one-third of the expected billing as revenue.

Question 13

In what order are financial statements prepared?

Answer 13

1- Income Statement
2- Statement of Retained Earnings
3- Balance Sheet

Question 14

What are the temporary accounts?

Answer 14

Accounts relating to one accounting period and closed at the end of the period:

• revenues
• expenses
• dividends
• income summary

Question 15

What are the permanent accounts?

Answer 15

Accounts that report on activities related to one or more future accounting periods:

• assets
• liabilities
• common stock
• retained earnings

Question 16

Closing entries

Answer 16

entries that transfer the end-of-period balances in revenue, expenses, and dividends accounts to the permanent Retained Earnings account

Question 17

Accounting Cycle

Answer 17

1- Analyze transactions
2- Journal
3- Post
4- Prepare unadjusted trial balance
5. Adjust and post accounts
6- Prepare adjusted trial balance
7- Prepare financial statements
8- Close accounts
9- Prepare post-closing trial balance

Question 18

___________ organizes assets and liabilities into subgroups.

Answer 18

Classified balance sheet

Question 19

Operating Cycle

Answer 19

the time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services

Question 20

Categories in a classified balance sheet

Answer 20

Assets: Current, Noncurrent (Long-term investments, plant assets, intangible assets)

Liabilities and Equity: Current, Noncurrent, Equity

Question 21

Current ratio

Answer 21

a measure of a company’s ability to pay its short-term obligations.

Current ratio = Current Assets / Current Liabilities

Question 22

Post-closing trial balance

Answer 22

a list of permanent accounts and their balances after all closing entries.

It verifies that

1) total debits equal total credits for permanent accounts and
2) all temporary accounts have zero balances