Chapter 3 Key Terms and Definitions

Question 1

What is the accounting cycle?

Answer 1

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post closing trial balance( or reversing entries).

Question 2

What is the accounting period?

Answer 2

Length of time covered by financial statements; also called reporting period..

Question 3

What is Accrual basis Accounting?

Answer 3

Accounting system that recognizes revenues when earned and expenses when incurred; the basis for GAAP

Question 4

What is accrued Expenses?

Answer 4

Cost incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.

Question 5

What is accrued revenues?

Answer 5

Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for recording accrued revenues involve increasing assets aand increasing revenues.

Question 6

What is an adjusted trial balance?

Answer 6

List of accounts and balances prepared after period end adjustments are recorded and posted.

Question 7

What is an adjusted entry?

Answer 7

Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account.

Question 8

What is a annual financial statement?

Answer 8

Financial statements covering a one year period; oftern based on a calendar year, but any consecutive 1 month or 52 week period is acceptable.

Question 9

What is book value?

Answer 9

Asset’s acquisition costs less its accumulated depreciation ( or depletion, or amortization); also sometimes used synonymously as the carrying value of an account.

Question 10

What is cash basis Accounting?

Answer 10

Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.

Question 11

What is a classified balance sheet?

Answer 11

Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications.

Question 12

What are closing entries?

Answer 12

Entries recorded at the end of each accounting period to transfer end of period balances in revenue, gain, expense, loss, and withdrawal. (dividend for a corp.accounts to the capital account, to retained earnings for a corportation.)

Question 13

What is the Closing process?

Answer 13

Necessary end of period steps to prepare the accounts for recording the transactions of the next period.

Question 14

What is a contra account?

Answer 14

An account linked with another account and having an opposite normal balance; reported as a subtraction from the other accounts balance.

Question 15

What are current assets?

Answer 15

Cash and oter assets expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer.

Question 16

What are current liabilities?

Answer 16

Obligations due to be paid or settled within one year or the company’s operating cycle, whichever is longer.

Question 17

What is current ratio?

Answer 17

Ratio used to evaluate a companys ability to pay its short term -term obligations, calculated by divinding current assets by current liabilities.

Question 18

What is depreciation?

Answer 18

Expnese created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset.

Question 19

What is a fiscal year?

Answer 19

Consecutive 12 month period chosen as the organization’s annual accounting period.

Question 20

What is an income summary?

Answer 20

Temporary account used only in the closing process to which the balances of revenue and expense accounts(including gains or losses) are transferred to the capital account( or retained earnings for a corporation.)

Question 21

What are intangible assets?

Answer 21

Long term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits.

Question 22

What is an interim financial statement?

Answer 22

Financial statements covering periods of less than one year, usually basedon one, three, or six month periods.

Question 23

What is a long term investment?

Answer 23

Long term assests not used in operationg activities such as notes receivable and investment in stocks and bonds.

Question 24

What is long term liabilities?

Answer 24

Obligations not due to be paid within one year or the operation cycle, whichever is longer.

Question 25

What is a natural business year?

Answer 25

Twelve month period that ends when a company’s sales activities are at their lowest point.

Question 26

What is an operating cycle?

Answer 26

Normal time between paying cash for merchndise or employee services and receiving cash from customers.

Question 27

What is a Permanent account?

Answer 27

Accounts that reflect activities relatedd to one or more future periods; balance sheet accounts whose balance are not closed; also called real accounts.

Question 28

What are Plant assets?

Answer 28

An estimate of the age of a company’s plant assets, computed by dividing accumulateddepreciation by depreciation expense.

Question 29

What is a post closing rial balance?

Answer 29

A list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Question 30

What are prepaid expenses?

Answer 30

Items paid for in advance of recieving their benefits; clasified as assets.

Question 31

What are pro forma financial statements?

Answer 31

Statements that show the effects of proposed transactions and events asif they had occurred.

Question 32

What is a profit margin?

Answer 32

Ratio of a company’s net income to its net sales; the percent of income in each dollar of revenue; also called net profit margin.

Question 33

What are reversing entries?

Answer 33

Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period.

Question 34

What is the Straight line depreciation method?

Answer 34

Method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life.

Question 35

What are temporary accounts?

Answer 35

Accounts used to recordrevenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period; also called nominal accounts.

Question 36

What is the time period assumption?

Answer 36

Assumption that an organization’s activiities can be divided into specific time periods such as months, quarter, or years.

Question 37

What is an unadjusted trial balance?

Answer 37

List of accounts and balances prepared before accounting adjustments are recorded and posted.

Question 38

What is an unclassified balance sheet?

Answer 38

A balance sheet that broadly groups assets, liabilities, and equity accounts.

Question 39

What is unearned revenue?

Answer 39

Liability created when customers pay in advance for products or services; earned when the products or services are later delivered.

Question 40

What are working papers?

Answer 40

Analyses and other informal reports prepared by accountants and managers when organizing information for formal reports and financial statements.

Question 41

What is a work sheet?

Answer 41

Spreadsheet used to draft an unadjusted trial balnce, adjusting entries, adjusted trial balnce, and financial statements.