Chapter 3

Question 1

An accounting system that recognizes revenues when goods or services are provided and expenses when incurred; the basis for GAAP.

Answer 1

Accrual basis accounting

Question 2

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

Answer 2

Accrued expenses

Question 3

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 and increasing revenues.

Answer 3

Accrued revenues

Question 4

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

Answer 4

Cash basis accounting

Question 5

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

Answer 5

Depreciation

Question 6

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

Answer 6

Matching (or expense recognition) principle

Question 7

Items paid for in advance of receiving their benefits; classified as assets.

Answer 7

Prepaid expenses

Question 8

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.

Answer 8

Profit margin

Question 9

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

Answer 9

Time period assumption

Question 10

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

Answer 10

Unearned revenue