Chapter 3 Adjusting Accounts for Financial Statements

Question 1

What is the time period assumption?

Answer 1

It is the assumption that an organization’s activities can be divide into specific time periods such as months, quarters, or years.

Question 2

What are annual financial statements?

Answer 2

They are 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 3

What are interim financial statements?

Answer 3

They are financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

Question 4

What is a fiscal year?

Answer 4

A fiscal year is a consecutive 12-month or 52 week period chose as the organization’s annual accounting period.

Question 5

What is a natural business year?

Answer 5

Natural business years are twelve-month periods that ends when a company’s sales activities are at their lowest point.

Question 6

What is accrual basis accounting?

Answer 6

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

Question 7

What is cash basis accounting?

Answer 7

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

Question 8

What is the revenue recognition principle?

Answer 8

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

Question 9

What is the expense recognition or matching principle?

Answer 9

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

Question 10

How are adjustments made?

Answer 10

Determine what the current account balance equals, determine what the current account balance should equal, and record an adjusting entry to get from current balance to what the balance should be.

Question 11

What is unearned revenue?

Answer 11

Unearned revenues are liabilities when cash is received in advance of providing products and services.

Question 12

What are accrued expense or liabilities?

Answer 12

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

Question 13

What are accrued revenues?

Answer 13

They are revenues earned in a period that are both unrecorded and not yet received in cash or other assets; adjusting entries for recoding accrued revenues involve increasing assets and increasing revenues.

Question 14

What is an unadjusted trial balance?

Answer 14

It is a list of accounts and balances before adjustments are recorded.

Question 15

What is a adjusted trial balance?

Answer 15

It is a list of accounts and balances after adjustments are recorded.

Question 16

What is the closing process?

Answer 16

The closing process is the necessary end-of-period steps to prepare the accounts for recoding the transactions of the next period.

Question 17

What are the 3 steps of the closing process?

Answer 17

Identify accounts for closing, record and post the closing entries, and prepare a post-closing trial balance.

Question 18

What are temporary accounts?

Answer 18

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

Question 19

What is an income summary?

Answer 19

It is a 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 balance is transferred to the capital account (or retained earnings for a corporation).

Question 20

What are permanent accounts?

Answer 20

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

Question 21

What are closing entries?

Answer 21

They are 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 22

What is a post-closing trial balance?

Answer 22

It is a list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Question 23

What is the accounting cycle?

Answer 23

These are the steps repeated before each reporting period. Analyze, journalize, post, prepare unadjusted trial balance, adjust and post accounts, prepare adjusted trial balance, prepare financial statements, close accounts, and prepare post-closing trial balance.

Question 24

What is a unclassified balance sheet?

Answer 24

This balance sheet broadly groups assets, liabilities, and equity accounts.

Question 25

What is a classified balance sheet?

Answer 25

This balance sheet presents assets and liabilities in relevant subgroups, including current and noncurrent classifications.

Question 26

What is the operating cycle?

Answer 26

This is the normal time between paying cash for merchandise or employee services and receiving cash from customers.

Question 27

What are current assets?

Answer 27

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

Question 28

What are long-term investments?

Answer 28

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

Question 29

What are intangible assets?

Answer 29

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

Question 30

What are current liabilities?

Answer 30

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

Question 31

What are long-term liabilities?

Answer 31

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

Question 32

What is a profit margin?

Answer 32

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. (Divide net income by net sales to get profit margin)

Question 33

What is a current ratio?

Answer 33

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