Chapter 3 Discussion Q's

Question 1

Explain the sequence of financial transactions that occur continuously during an accounting time period. What is this sequence of activities called?

Answer 1

Analyzing transactions, journalizing them, posting to the ledger, preparing trial balances, making adjustments, and creating financial statements. It’s called the accounting cycle.

Question 2

Do you have to wait until the operating cycle is complete before you can measure income using the accrual basis of accounting?

Answer 2

No, you don’t have to wait. Income is measured continuously using the accrual basis of accounting.

Question 3

What is the relationship between the matching concept and accrual accounting? Are revenues matched to expenses, or are expenses matched to revenues? Does it matter one way or the other?

Answer 3

Accrual accounting matches expenses to revenues during the period they’re earned. This method adjusts accounts to reflect this. Revenues are recognized first, so expenses are matched to revenues. This ensures accurate financial reporting.

Question 4

What is the impact of the going concern concept on accrual accounting?

Answer 4

It assumes the business will continue operating, allowing accrual accounting to plan for the future.

Question 5

Identify three different categories of expenses.

Answer 5

They are operating expenses, non-operating expenses, and income taxes.

Question 6

What are adjusting entries and why are they required?

Answer 6

Adjusting entries at the end of a cycle ensures that financial records accurately show economic activity during the period. They are needed to update accounts to match the accrual basis of accounting.

Question 7

Why are asset accounts like Prepaid Insurance adjusted? How are they adjusted?

Answer 7

It’s adjusted to reflect the portion of the insurance used up during the period. Decrease in Prepaid Insurance and increase in Insurance Expense

Question 8

How are plant and equipment asset accounts adjusted? Is the procedure similar to the adjustment of other asset and liability accounts at the end of an accounting period?

Answer 8

They are adjusted for depreciation, similar to other asset and liability accounts.

Question 9

What is a contra account and why is it used?

Answer 9

An asset account that is kept at either a negative or zero balance. It is used to offset the balance of another account.

Question 10

How are liability accounts like Unearned Repair Revenue adjusted?

Answer 10

They are adjusted to recognize revenue as services are performed.

Question 11

Explain the term accruals. Give examples of items that accrue.

Answer 11

They are items that are earned or incurred but not yet recorded. Rent Expense, and Wages expense.

Question 12

Why is an adjusted trial balance prepared?

Answer 12

It’s prepared to ensure the debits and credits still balance after adjusting entries.

Question 13

How is the adjusted trial balance used to prepare financial statements?

Answer 13

It provides a summarized view of all account balances after adjusting entries have been made.

Question 14

List the eight steps in the accounting cycle.

Answer 14

They are: analyze transactions, journalize, post to ledger, prepare unadjusted trial balance, adjust, prepare adjusted trial balance, prepare financial statements, and close the accounts.

Question 15

Which steps in the accounting cycle occur continuously throughout the accounting period?

Answer 15

Analyzing transactions, journalizing, posting to the ledger, and preparing unadjusted trial balance.

Question 16

Which steps in the accounting cycle occur only at the end of the accounting period? Explain how they differ from the other steps.

Answer 16

Adjusting, preparing adjusted trial balance, preparing financial statements, and closing accounts.

Question 17

Give examples of revenue, expense, asset, and liability adjustments.

Answer 17

Revenue - accrued revenue, Expense - prepaid expenses, Asset - depreciation, Liability - accrued expenses.

Question 18

In general, income statement accounts accumulate amounts for a time period not exceeding one year. Why is this done?

Answer 18

They cover a period of one year to show a company’s performance.

Question 19

Identify which types of general ledger accounts are temporary and which are permanent.

Answer 19

Temporary accounts are revenue, expense, and dividend accounts. Permanent accounts are asset, liability, and equity accounts.

Question 20

What is the income summary account and what is its purpose?

Answer 20

It’s a temporary account used to close revenue and expense accounts.

Question 21

What is a post-closing trial balance and why is it prepared?

Answer 21

A post-closing trial balance is a list of all accounts and their balances after the closing entries have been made at the end of the accounting period. It’s prepared to ensure the books are balanced after closing entries.