Chapter 3

Question 1

Accounting cycle

Answer 1

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or optional reversing entries)

Question 2

Accounting period

Answer 2

Length of time covered by financial statements; also called reporting period

Question 3

Accrual basis accounting

Answer 3

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

Question 4

Accrued expenses

Answer 4

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

Question 5

Accrued revenues

Answer 5

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

Question 6

Accumulated depreciation

Answer 6

Cumulative sum of all depreciation expense recorded for an asset

Question 7

Adjusted trial balance

Answer 7

List of accounts and balances prepared after period-end adjustments are recorded and posted

Question 8

Adjusting entry

Answer 8

Journal entry at the end of an accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account

Question 9

Annual financial statements

Answer 9

Financial statements covering a one-year period; often based on a calendar year, but any consecutive 12-month (or 52-week) period is acceptable

Question 10

Book value

Answer 10

Asset’s acquisition costs less its accumulated depreciation (or depletion, or amortization); also sometimes used synonymously as the carrying value of an account; also called asset book value

Question 11

Cash basis accounting

Answer 11

Accounting system that recognizes revenues when cash is received and records expenses when cash is paid

Question 12

Classified balance sheet

Answer 12

Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications

Question 13

Closing entries

Answer 13

Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawals (dividends for a corporation) accounts to the capital account (or retained earnings for a corporation)

Question 14

Closing process

Answer 14

Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period

Question 15

Contra account

Answer 15

Account linked with another account and having an opposite normal balance; reported as a subtraction from the other account’s balance

Question 16

Current assets

Answer 16

Cash and other assets expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer

Question 17

Current liabilities

Answer 17

Obligations due to be paid or settled within one year or the company’s operating cycle, whichever is longer

Question 18

Current ratio

Answer 18

Ratio used to evaluate a company’s ability to pay its short-term obligations, calculated by dividing current assets by current liabilities

Question 19

Depreciation

Answer 19

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

Question 20

Expense recognition (or matching) principle

Answer 20

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

Question 21

Fiscal year

Answer 21

Consecutive 12-month (or 52-week) period chosen as the organization’s annual accounting period

Question 22

Income summary

Answer 22

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balances is transferred to the capital account (or retained earnings for a corporation

Question 23

Intangible assets

Answer 23

Long-term assets (resources) used to produces or sell products or services; usually lack physical form and have uncertain benefits

Question 24

Interim financial statements

Answer 24

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods

Question 25

Long-term investments

Answer 25

Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds

Question 26

Long-term liabilities

Answer 26

Obligations not due to be paid within one year of the operating cycle, whichever is longer

Question 27

Natural business year

Answer 27

Twelve-month period that ends when a company's sales activities are at their lowest point

Question 28

Operating cycle

Answer 28

Normal time between paying cash for merchandise or employee services and receiving cash from customers

Question 29

Permanent accounts

Answer 29

Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed

Question 30

Plant assets

Answer 30

Tangible long-lived assets used to produce or sell products and services; also called property, plant and equipment (PP&E) or fixed assets

Question 31

Post-closing trial balance

Answer 31

List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted

Question 32

Prepaid expenses

Answer 32

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

Question 33

Pro forma financial statements

Answer 33

Statements that show the effects of proposed transactions and events as if they had occurred

Question 34

Profit margin

Answer 34

Ration of a company's net income to its net sales; the percent of income in each dollar of revenue; also called net-profit margin

Question 35

Revenue recognition principle

Answer 35

The principle that revenue is recognized when goods or services are delivered to customers

Question 36

Reversing entries

Answer 36

Optional entries recorded at the beginning of a period that prepare the accounts for the usual journal entries as if adjusting entries had not occurred in the prior period

Question 37

Straight-line depreciation

Answer 37

method that allocates an equal portion of the depreciable cost of plant asset (cost minus salvage) to each accounting period in its useful life

Question 38

Temporary accounts

Answer 38

Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period

Question 39

Time period assumption

Answer 39

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

Question 40

Unadjusted trial balance

Answer 40

List of accounts and balances prepared before accounting adjustments are recorded and posted

Question 41

Unclassified balance sheet

Answer 41

Balance sheet the broadly groups assets, liabilities, and equity accounts

Question 42

Unearned revenue

Answer 42

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

Question 43

Work sheet

Answer 43

Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements