Chapter 3

Question 1

How do accountants divide up a business?

Answer 1

into artificial time periods

Question 2

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

Answer 2

time period assumption

Question 3

what are typical accounting periods

Answer 3

a month, quarter or year

Question 4

Monthly or quarterly accounting time periods.

Answer 4

interim periods

Question 5

An accounting period that is one year in length.

Answer 5

fiscal year

Question 6

An accounting period that extends from January 1 to December 31

Answer 6

calendar year

Question 7

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

Answer 7

accrual basis accounting

Question 8

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

Answer 8

cash basis accounting

Question 9

When a company agrees to perform a service or sell a product to a customer, they have what?

Answer 9

performance obligation

Question 10

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

Answer 10

revenue recognition principle

Question 11

The principles that companies match efforts (expenses) with accomplishments (revenues)

Answer 11

Expense recognition principle (matching principle)

Question 12

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

Answer 12

adjusting entries

Question 13

the first pulling together of the transaction data

Answer 13

trial balance

Question 14

what are some reasons that a trial balance may not contain up to date and complete data

Answer 14

• Some events are not recorded daily because it is not efficient to do so
• Some costs are not recorded daily because these costs expire with the passage of time rather than as a result of recurring daily transactions
• Some items may be unrecorded

Question 15

Adjusting entries for either prepaid expenses or unearned revenues. (postpone or delay)

Answer 15

deferrals

Question 16

expenses paid in cash before they are used or consumed

Answer 16

prepaid expenses (prepayments)

Question 17

prior to adjustments, how can assets and and expenses be explained?

Answer 17

Assets are overstated and expenses are understated

Question 18

The length of service of a long-lived asset.

Answer 18

useful life

Question 19

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

Answer 19

depreciation

Question 20

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

Answer 20

contra asset account

Question 21

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

Answer 21

book value

Question 22

A liability recorded for cash received before services are performed

Answer 22

unearned revenue

Question 23

prior to adjustments how can liabilities and revenues be explained?

Answer 23

liabilities are overstated and revenues are understated

Question 24

Adjusting entries for either accrued revenues or accrued expenses.

Answer 24

accruals

Question 25

Revenues for service performed but not yet received in cash or recorded

Answer 25

accrued revenues

Question 26

Expenses incurred but not yet paid in cash or recorded

Answer 26

accrued expenses

Question 27

how is interest determined?

Answer 27

- The face value of the note - The interest rate which is expressed as an annual rate - The length of time the note is outstanding

Question 28

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

Answer 28

adjusted trial balance

Question 29

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

Answer 29

relevance

Question 30

what makes information considered relevant?

Answer 30

if it has predictive value or confirmatory value

Question 31

helps provide accurate expectations about the future

Answer 31

predictive value

Question 32

confirms or corrects prior expectations

Answer 32

confirmatory value

Question 33

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.

Answer 33

materiality

Question 34

Information that accurately depicts what really happened. | Information must be complete, neutral and free from error.

Answer 34

faithful representation

Question 35

What does the FASB also consider useful information?

Answer 35

comparability, consistency, verifiability, timeliness, and understandability

Question 36

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

Answer 36

comparability

Question 37

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

Answer 37

consistency

Question 38

The quality of information that occurs when independent observers, using the same methods, obtain similar results

Answer 38

verifiable

Question 39

Information that is available to decision-makers before it loses its capacity to influence decisions

Answer 39

timely

Question 40

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

Answer 40

understandability

Question 41

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

Answer 41

monetary unit assumption

Question 42

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

Answer 42

economic entity assumption

Question 43

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

Answer 43

time period assumption

Question 44

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

Answer 44

going concern assumption

Question 45

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

Answer 45

historical cost principle

Question 46

Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability)

Answer 46

fair value principle

Question 47

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

Answer 47

revenue recognition principle

Question 48

the principle that companies match efforts (expenses) with accomplishments (revenues)

Answer 48

Expense Recognition Principle (matching principle)

Question 49

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users

Answer 49

full disclosure principle

Question 50

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

Answer 50

cost constraint

Question 51

what is always the adjusting entry for depreciation

Answer 51

depreciation expense Accumulated Depreciation (account being depreciated)

Question 52

what is always the adjusting entry for interest?

Answer 52

Interest expense | interest payable

Question 53

what is always the adjusting entry for unearned revenue?

Answer 53

unearned revenue | Service revenue

Question 54

what is always the adjusting entry for supplies

Answer 54

supplies expense | supplies

Question 55

what is always the adjusting entry for insurance

Answer 55

``` insurance expense insurance prepaid (payable) ```

Question 56

what is always the adjusting entry for performed services that were not recorded?

Answer 56

Accounts Receivable | Service Revenue

Question 57

what type of accounting are we learning?

Answer 57

accrual basis accounting

Question 58

what do adjusting entries ensure?

Answer 58

that the revenue recognition and expense recognition principles are followed

Question 59

When do adjusting entries happen and what do they include (in a business setting)

Answer 59

every time a company prepares a financial statement. | it includes one income statement account and one balance sheet account

Question 60

what are the two different types of adjusting entries

Answer 60

deferrals and accruals

Question 61

what are the subcategories of deferrals?

Answer 61

Prepaid expenses and unearned revenue

Question 62

what are the subcategories of accruals?

Answer 62

Accrued revenues and accrued expenses

Question 63

when expenses are prepaid, what happens to the asset account?

Answer 63

it increases

Question 64

what are costs that expire with the passage of time or through use?

Answer 64

prepaid expenses

Question 65

what is an accumulated depreciation account?

Answer 65

an account that keeps track of the total amount of depreciation expense taken over the life of the asset

Question 66

is the normal balance of a contra account a debit or credit?

Answer 66

credit

Question 67

why is using a contra account preferable?

Answer 67

it discloses both the original cost of the equipment and the total cost that has been expensed to date

Question 68

what are the two qualities that useful information should possess?

Answer 68

relevance and faithful representation