Chapter 4

Question 1

What is the time period assumption?

Answer 1

Assumes that the economic life of a business can be divided into artificial time periods

Question 2

What is the revenue recognition principle?

Answer 2

This dictates that revenue will be recognized in the accounting period in which it is earned

Question 3

What is the matching principle?

Answer 3

This dictates that expenses are matched with revenues. Meaning, revenues earned in a month are offset against expenses incurred in that same month

Question 4

What is accrual basis accounting?

Answer 4

Transactions that change a companies financial statements are recorded in the periods in which the events occur

Question 5

What principles are under the accrual method?

Answer 5

Revenue recognition and matching principle

Question 6

What is cash basis accounting?

Answer 6

Revenue is recorded when cash is received, and expenses are recorded when cash is paid

Question 7

What are adjusting entries?

Answer 7

Are entries for which there may or may not be “source documents” such as invoices or sales receipts

Question 8

What is classified under deferrals?

Answer 8

Prepaid expenses or unearned revenues

Question 9

What is classified under accruals?

Answer 9

Accrued revenues or accrued expenses

Question 10

What is depreciation?

Answer 10

The allocation of the cost of an asset to expense over its useful life in a rational and systematic manner

Question 11

What are prepaid expenses?

Answer 11

Expenses paid in cash and received and recorded as assets before they are used or consumed

Question 12

What are Unearned revenues?

Answer 12

Revenues received in cash and recorded as liabilities before service are performed

Question 13

What are accrued revenues?

Answer 13

revenues for services performed but not yet recorded at the statement date

Question 14

What are accrued expenses?

Answer 14

expenses incurred but not yet paid or recorded at the statement date

Question 15

Prior to adjustment, how are prepaid expense accounts stated?

Answer 15

• Assets are over stated

- Expenses are understated

Question 16

Where do the adjusting entries go for prepaid expenses?

Answer 16

• Debit to an expense account

- Credit to an asset account

Question 17

Where do adjusting entries go for recording depreciation?

Answer 17

• Debit depreciation expense

- Credit accumulated depreciation (which is a contra asset account)

Question 18

What is the book value of an asset?

Answer 18

The difference between the cost of any depreciable asset and its related accumulated depreciation

Question 19

Prior to adjustment, how are unearned revenue accounts stated?

Answer 19

• Liabilities are overstated

- Revenues are understated

Question 20

Where do adjusting entries go for unearned revenue accounts?

Answer 20

• Debit to a liability account

- Credit to a revenue account

Question 21

What will an adjusting entry to accrual accounts do?

Answer 21

It will increase both a balance sheet and income statement account

Question 22

Prior to adjustment, how are accrued revenues stated?

Answer 22

They are both understated

Question 23

Where do adjusting entries go for accrued revenues?

Answer 23

• Debit to an asset account

- Credit to a revenue account

Question 24

Prior to adjustment, how are accrued expenses stated?

Answer 24

Both are understated

Question 25

Where do adjusting entries go for accrued expenses?

Answer 25

• Debit to an expense account

- Credit to a liability account

Question 26

What is the purpose of the adjusted trial balance?

Answer 26

To prove the equality of the total debit and credit balances in the ledger after all adjustments have been made

Question 27

Where is the income statement prepared from?

Answer 27

The revenue and expense accounts

Question 28

Where is the retained earnings statement derived from?

Answer 28

Retained earnings account, dividends account, and net income

Question 29

Where is the balance sheet prepared from?

Answer 29

From the asset, liability, and equity accounts

Question 30

What is the order for financial statements?

Answer 30

1) Income statements
2) Retained earnings Statement
3) Balance Sheet

Question 31

What do closing entries do?

Answer 31

They transfer the temporary or nominal account balances to the permanent stockholder’s equity account (retained earnings)

Question 32

What do temporary accounts consist of?

Answer 32

• Revenue, expenses, and dividends

Question 33

What do permanent accounts consist of?

Answer 33

• Assets, liabilities, and stockholder’s equity

Question 34

What is the closing process?

Answer 34

1) Revenue and expense accounts are closed to the income summary
2) Income summary and dividends are closed to the retained earnings

Question 35

What are the 9 steps to the accounting cycle?

Answer 35

1) Analyze business transactions
2) Journalize 3) Ledger accounts 4) Trial balance 5) Adjusting entries 6) Adjusted trial balance 7) Financial statements 8) Closing entries 9) Post-closing trial balance