Chapter #3

Question 1

What is the Cash Basis of Accounting?

Answer 1

Revenue is recorded once cash is received; expenses are recorded once cash is paid. Simple but does not follow GAAP.

Question 2

What is the Accrual Basis of Accounting?

Answer 2

Revenue is recorded when earned (service completed) and expenses are recognized when incurred. This method is GAAP approved.

Question 3

What is the Revenue Recognition Principle?

Answer 3

Sale revenue is recognized when the service is provided or goods are transferred to the customer, regardless of cash payment.

Question 4

What is the key difference between Cash Basis and Accrual Basis in terms of revenue recognition?

Answer 4

Cash Basis recognizes revenue when cash is received; Accrual Basis recognizes revenue when services are provided or goods are transferred.

Question 5

What are the steps in Revenue Recognition?

Answer 5

Identify the contract with the customer.
Identify the performance obligations in the contract.
Determine the transaction price.
Allocate the transaction price to performance obligations.
Recognize revenue when performance obligations are met.

Question 6

What is the Expense Matching Principle?

Answer 6

Expenses should be recognized in the same period as the revenues they help generate, regardless of when cash is paid

Question 7

What is an Unadjusted Trial Balance?

Answer 7

A list of account balances before any adjustments are made at the end of an accounting period.

Question 8

What are the two main types of adjustments

Answer 8

1. Deferrals - Adjust amounts previously recorded in a balance sheet account.
2. Accruals - Adjust amounts that have not been recorded yet.

Question 9

What are current assets? What does liquidity mean?

Answer 9

Short-term assets that are expected to be liquidated or used within one year.

–>Listed in order of expected liquidity (Ex. Cash, short-term investments, accounts receivable, inventory, other current assets)
–> Liquidity is how quickly the asset can be converted into cash, cash is always the first asset listed because it is the most liquid asset a company owns

Question 10

What are Non-current Assets?

Answer 10

Long-term assets with a useful life of more than one year.
ex: Property plant and equipment, intangible assets, and other long-term assets

Question 11

How is Depreciation calculated for Non-current Assets?

Answer 11

Depreciation is calculated based on the asset’s useful life, spreading the cost over multiple periods.

Question 12

What is a Contra Account?

Answer 12

An account that reduces the value of a related account. It has an opposite balance (e.g., Accumulated Depreciation reduces the value of assets).

Question 13

What is an Adjusted Trial Balance?

Answer 13

A list of all general ledger account balances after adjusting entries have been posted.

Question 14

What is the correct order of preparing financial statements

Answer 14

1. Income Statement
2. Statement of Stockholders’ Equity
3. Balance Sheet
4. Statement of Cash Flows

Question 15

What is used to prepare the Income Statement?

Answer 15

The adjusted trial balance provides the data for the income statement.

Question 16

What is used to prepare the Statement of Stockholders’ Equity?

Answer 16

Common stock, retained earnings, and net income from the income statement.

Question 17

What is used to prepare the Balance Sheet?

Answer 17

Information from the statement of stockholders’ equity and the income statement.

Question 18

What are Permanent Accounts?

Answer 18

Accounts that carry over their balances from one period to the next, such as assets, liabilities, and equity.

Question 19

What are Temporary Accounts?

Answer 19

Accounts that track data for a specific period and are reset to zero at the end of the period, such as revenue, expenses, and dividends

Question 20

What is the closing process of temporary accounts?

Answer 20

The process of transferring balances from temporary accounts (revenue, expenses, dividends) to Retained Earnings at the end of an accounting period.

Question 21

What are the steps for journalizing and posting closing entries for revenue?

Answer 21

Debit revenue accounts and credit Retained Earnings for the total revenue amount.

Question 22

What are the steps for journalizing and posting closing entries for expenses?

Answer 22

Credit expense accounts and debit Retained Earnings for the total expense amount.

Question 23

What are the steps for journalizing and posting closing entries for dividends?

Answer 23

A: Credit the dividends account and debit Retained Earnings for the total amount of dividends.

Question 24

What is a Post-closing Trial Balance?

Answer 24

A trial balance prepared after temporary accounts have been closed to retained earnings.

Question 25

what are the obligations or debt that a business must pay at some future time because of past transactions or events called and how they are presented?

Answer 25

liabilities on the balance sheet

Question 26

Which financial statements is net income ( revenue minus expenses ) calculated on?

Answer 26

income statement

Question 27

What are the resources of a company called ( ex: cahs, building, machinger, future, supplies)

Answer 27

Assets

Question 28

The cash T-account has a beginning of $100,000, During the year 40,00 was debited and $55,000 was credited to the account. What was the ending balance of cash?

Answer 28

$85,0000

Question 29

Recording cash paid for inventory purchases involves

Answer 29

debit inventory and credit cash

Question 30

Which account has a debit normal balance ?

Answer 30

assets, expense, and dividends

Question 31

If a company receives $200,00 dollars cash in exchange for common stock

Answer 31

assets (cash) increases and Equity ( common stock) increases

Question 32

Boas company purchased a machine for 225,000 on Jan 1 the machine has an expected useful life of 5 yrs. Which of the following would be part of the depreciation adjusting journal entry jan 31

Answer 32

A: credit accumulation depreciation $3,750

Question 33

Kittle company had the following account balance on dec 31. Which of the following would be part of the closing entries Salaries revenue= 150,000 Salaries expense : 21,000 Supplies expense = 5,000 Dividends = 7,5000

Answer 33

A: debit sale revenue $150,000

Question 34

On april 1 ward company paid 120,000 in advance for one year insurance . If ward company makes the appropriate adjusting journals entry how much insurance expense is recorded on the dec 31 income statement

Answer 34

90,0000

Question 35

current liabilities ? How are they listed?

Answer 35

Obligations that must be settled within the normal operating cycle or one year, whichever is longer --> Listed in order of maturity (Ex. Accounts payable, accrued expenses payable, short-term notes payable, other current liabilities) --> Maturity is how quickly that obligation will be required to be paid. The liabilities that you owe sooner, will be listed first. The ones you have a little longer to pay will be listed lower. Accounts payable is typically the first liability listed

Question 36

Garden company signs a contract on feb 4 with a customer to landscape their property, on march 14 garden company sends the bill to the customer to show the breakdown of cost for material and labor. On March 27 the garden company finished landscaping the property. The customer paus garden company on April 15th. What day should revenue be recognized ( accrual basis of accounting)

Answer 36

March 27th

Question 37

What are long term liabilities ?

Answer 37

Obligations that are not due to be settled within the normal operating cycle, or one year, whichever is less (Ex. Long-term notes payable, bonds payable, other long-term liabilities)

Question 38

What is income statement

Answer 38

* Reports the company’s revenues and expenses for a given period of time *Revenue - expenses = net income

Question 39

What is stockholders equity

Answer 39

Contributed capital (common stock) and retained earnings (increased by net income for the current period and decreased by dividends paid)

Question 40

What does the operating section in the income statement represent

Answer 40

(revenues and expenses related to the principal business activities of the company) --> Example if the company provides a service * Service revenue – total operating expenses = Income from operations  Example if the company sells inventory * Gross profit – total operating expenses = Income from operations

Question 41

How do you gross profit ? Where is this presented in?

Answer 41

Net sales – cost of goods sold = gross profit --> income statement

Question 42

what is the Relationship among financial statements

Answer 42

* Net income from the income statement is included on the statement of retained earnings (Current year net income is added to calculate ending retained earnings) * Ending common stock, retained earnings and total equity from the statement of stockholder’s equity is on the balance sheet * The ending cash balance on the statement of cash flows is on the balance sheet

Question 43

what is accrual basis accounting

Answer 43

* Revenue is recorded as it is earned and expenses are recognized as incurred. This is the method required by US GAAP.