Chapter 6

Question 1

What is a profit and loss statement?

Answer 1

It (P and L) is an income statement providing an accurate accumulation of profit or loss via accrual accounting.

Question 2

What is accrual basis accounting?

Answer 2

An accounting system in which income and expenses are reported when they are earned or incurred rather than when received or paid.

Question 3

What happens if revenue recorded by the accrual method proves to be uncollectable?

Answer 3

Since the accrual method means that the rent was already reported as income, an expense equal to the income should be recorded.

Question 4

What is expense accrual?

Answer 4

It is the act of recording an expense when incurred rather than when paid.

Question 5

What is matching?

Answer 5

It is the recording of expenses incurred in income revenues regardless of whether cash has been disbursed in their payment. This is another term for expense accrual.

Question 6

What are prepaid expenses?

Answer 6

They are expenses paid in one lump sum that apply to future periods up to one year.

Question 7

What is amortization?

Answer 7

The systematic allocation of the cost of an intangible asset from the balance sheet to an expense account on the cash basis income statement.

Question 8

What is inventory?

Answer 8

Recording supplies purchased in bulk for use in future periods as assets on the balance sheet.

Question 9

What is charging out?

Answer 9

It is the method used to transfer inventory from the balance sheet to the cash basis income statement.

Question 10

How is the process of inventory and charging out applied?

Answer 10

1) Supplies are added to the balance sheet
2) Supplies are used
3) The cost value of the supplies used is transfered from the balance sheet to the cash basis income statement.

Question 11

What is capitalization?

Answer 11

It is the transferring of items purchased for use over an extended period of time from the cash basis income statement and recording them as assets on the balance sheet.

Question 12

What is depreciation?

Answer 12

It is transfering the costs of long term assets to the cash basis income statement over an estimated useful life.

Question 13

What is the goal of depreciation?

Answer 13

It is to properly allocate the cost of tangible revenue generating assets to the revenue it generates.

Question 14

What is the Modified Accelerated Cost Recovery System (MACRS)?

Answer 14

It (MACRS) is a method of calculating depreciation which assumes a building useful life of 39 years. Accelerated Cost Recovery System (ACRS) assumes a useful life of 15-19 years.

Question 15

What are intangible assets?

Answer 15

Assets that have no physical exsistance but have value because of rights conferred as a result of ownership or possesion.

Question 16

How do you list early payment, security deposits, and other credits or cash that must ultimately be repaid or are not yet earned?

Answer 16

They must be held on the balance sheet as a liability until they are repaid.

Question 17

What is a mortgage?

Answer 17

A lien securing a note payable using real assets as colateral.

Question 18

What is a deed of trust?

Answer 18

An agreement between the loan issuer and holder covering assets.

Question 19

What is owner’s equity?

Answer 19

The owners contribution as either an initial investment or subsequent cash infusions.

Question 20

What is the balance sheet equation?

Answer 20

Assets=Liabilities + Owner’s Equity

Question 21

How are asets, liabilities, and owner’s equity listed on the balance sheet?

Answer 21

Assets are debit accounts.

Liabilities and Owner’s Equity are listed as credits.

Question 22

What are journal entries?

Answer 22

They are the transfers of cash transactions between the cash basis income statement and the balance sheet.

Question 23

Fill in the blanks: Prepaid expenses, such as insurance or supplies purcahsed in bulk, should be removed from the __________ statement and recorded as _________ on the balance sheet.

Answer 23

Cash basis income

assets

Question 24

Define capitalizion and depreciation.

Answer 24

Capitalization is the transfer of of long term assets from the cash basis income statement to the balance sheet as assets. Depreciation is the the transfer of the cost of assets to the cash basis income statement over an estimated useful life.

Question 25

What is an intangible asset?

Answer 25

An asset with no physical exsistance but with value because of rights conferred as a result of ownership or possesion.

Question 26

Cash contributions from the owner of a building, either initial investments or subsequent cash infusions, are recorded on the balance sheet as ________.

Answer 26

owner’s equity

Question 27

The economic resourses that are owned by an entity are known as:

a) assets
b) liabilties
c) owner’s equity
d) net income

Answer 27

a) assets

Question 28

If a six month insurance premium of $12,000 was paid in August for insurance from the current month forward, the adjustment to the cash basis income statement would be:

a) to increase expenses by $12,000
b) to decrease expenses by $12,000
c) to decrease expenses by $10,000
d) no increase in expenses

Answer 28

c) to decrease expenses by $10,000

Question 29

All of the following items are subject to cost apportionment except:

a) buildings
b) accounts payable
c) inventory
d) intangible assets

Answer 29

b) accounts payable

Question 30

The cost of an asset is transfered to the income statement by:

a) discounting
b) amortizing
c) cost apportionment
d) accrual

Answer 30

c) cost apportionment

Question 31

Assets typicall have what type of balance?

a) debit balance
b) credit balance
c) positive balance
d) negative balance

Answer 31

a) debit balance

Question 32

A statement showing revenues earned, expenses incurred, and the resulting net income or loss is known as the:

a) income statement
b) balance sheet
c) statement of changes in financial position
d) cash basis income statement

Answer 32

a) income statement

Question 33

If receivables decreased from one period to the next by $15,000, the accrual adjustment to the cash basis income statement would:

a) increase income by $15,000
b) decrease income by $15,000
c) decrease the reserve for uncollectible by $15,000
d) increase the reserve for uncollectible rent by 15%

Answer 33

b) decrease income by $15,000