Chapter 3

Question 1

Accrual-Basis Accounting

Answer 1

Accounting basis in which companies record transactions that change a company’s financial statements in the periods in which the events occur.

Question 2

Accruals

Answer 2

Adjusting entries for either accrued revenues or accrued expenses.

Question 3

Accrued Expenses

Answer 3

Expenses incurred but not yet paid in cash or recorded.

Question 4

Accrued Revenues

Answer 4

Revenues for services performed but not yet received in cash or recorded.

Question 5

Adjusted Trial Balance

Answer 5

A list of accounts and their balances after the company has made all adjustments.

Question 6

Adjusting Entries

Answer 6

Entries made at the end of an accounting period to ensure that companies follow the revenue recognition and expense recognition principles.

Question 7

Book Value

Answer 7

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

Question 8

Calendar Year

Answer 8

An accounting period that extends from January 1 to December 31.

Question 9

Cash-Basis Accounting

Answer 9

Accounting basis in which companies record revenue when they receive cash and an expense when they pay out cash.

Question 10

Comparability

Answer 10

Ability to compare the accounting information of different companies because they use the same accounting principles.

Question 11

Consistency

Answer 11

Use of the same accounting principles and methods from year to year within a company.

Question 12

Contra Asset Account

Answer 12

An account offset against an asset account on the balance sheet.

Question 13

Cost Constraint

Answer 13

Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Question 14

Deferrals

Answer 14

Adjusting entries for either prepaid expenses or unearned revenues.

Question 15

Depreciation

Answer 15

The process of allocating the cost of an asset to expense over its useful life.

Question 16

Economic Entity Assumption

Answer 16

An assumption that every economic entity can be separately identified and accounted for.

Question 17

Fair Value Principle

Answer 17

An accounting principle that assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Question 18

Expense Recognition Principle

Answer 18

The principle that companies recognize expense in the period in which the companies make efforts (consume assets or incur liabilities) to generate revenue.

Question 19

Faithful Representation

Answer 19

Information that accurately depicts what really happened.

Question 20

Fiscal Year

Answer 20

An accounting period that is one year in length.

Question 21

Full Disclosure Principle

Answer 21

An accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Question 22

Going Concern Assumption

Answer 22

The assumption that the company will continue in operation for the foreseeable future.

Question 23

Historical Cost Principle

Answer 23

An accounting principle that states that companies should record assets at their cost.

Question 24

Interim Periods

Answer 24

Monthly or quarterly accounting time periods.

Question 25

Materiality

Answer 25

A company-specific aspect of relevance. An item is material when its size makes it likely to influence the decision of an investor or creditor.

Question 26

Monetary Unit Assumption

Answer 26

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Question 27

Prepaid Expenses

Answer 27

Future expenses paid in cash before they are used or consumed.

Question 28

Relevance

Answer 28

The quality of information that indicates the information makes a difference in a decision.

Question 29

Revenue Recognition Principle

Answer 29

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Question 30

Timely

Answer 30

Describes information that is available to decision-makers before it loses its capacity to influence decisions.

Question 31

Time Period Assumption

Answer 31

An assumption that accountants can divide the economic life of a business into artificial time periods.

Question 32

Understandability

Answer 32

Describes information that is presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

Question 33

Unearned Revenues

Answer 33

A liability recorded for cash received before services are performed.

Question 34

Useful Life

Answer 34

The length of service of a long-lived asset.

Question 35

Verifiable

Answer 35

Describes information that occurs when independent observers, using the same methods, obtain similar results.

Question 36

Performance Obligation

Answer 36

When a company agrees to perform a service or sell a product to a customer.