Financial Accounting Chapter 3 Test Questions

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Time Period Assumption
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Presumes that an organization’s activities can be divided into specific time periods such as a month, a three-month quarter, a six month interval, or a year
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Annual Financial Statements
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Reports covering a one-year period
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Interim Financial Statements
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Reports covering one, three, or six month of activity
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Fiscal year
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Consists of any 12 consecutive months
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Natural Business Year End
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When sales activities are at their lowest level for the year
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Accrual Basis Accounting
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Uses the adjusting process to recognize revenues when earned and expenses when incurred
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Cash Basis Accounting
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Recognizes revenues when cash is received and records expenses when cash is paid
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Expense Recognition (Matching) Principle
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Aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses
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1) Determine what the current account balance equals 2) Determine what the current account balance should equal 3) Record an adjusting entry to get from step 1 to step 2
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The three step process for adjusting accounts is…
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Adjusting Entry
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Made at the end of an accounting period to reflect a transaction or even that is not yet recorded
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1) Income statements 2) Balance sheets NEVER CASH ACCOUNT
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What do adjusting entries affect?
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1) Prepaid (deferred) expenses 2) Unearned (deferred) revenues
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Paid or received cash BEFORE expense or revenue is recognized
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1) Accrued Expenses 2) Accrued Revenues
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Paid or received cash AFTER expense or revenue is recognized
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Prepaid Expenses
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Items paid for in advance of receiving their benefits
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Assets to Expenses
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What are prepaid expenses in the accounting equation? What do they become after they are used?
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Plant Assets
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Refers to long-term tangible assets used to produce and sell products and services- they are expected to provide benefits for more than one period
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Depreciation
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The process of allocating the costs of these assets over their expected useful lives
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Contra Account
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An account linked with another account, it has an opposite normal balance, and it is reported as a subtraction from that other account’s balance
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Book value (aka net amount)
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The asset’s costs minus its accumulated depreciation
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Unearned Revenues aka Deferred Revenues
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Refers to cash received in advance of providing products and services
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Liabilities to Revenue
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What happens when an unearned revenue becomes an earned revenue in the accounting equation?
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Accrued Expenses
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Refer to costs that are incurred in a period but are both unpaid and unrecorded
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Accrued Revenues
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Refers to revenues earned in a period that are both unrecorded and not yet received in cash (or other assets)
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Unadjusted Trial Balance
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A list of accounts and balances prepared before adjustments are recorded
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Adjusted Trial Balance
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A list of accounts and balances prepared after adjusting entries have been recorded and posted to the ledger
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Closing Process
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Important step at the end of an accounting period after financial statements have been completed- it prepares accounts for recording the transactions and the events of the next period
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1) Identify accounts for closing 2) Record and post the closing entries 3) Prepare a post-closing trial balance
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What are the steps in the closing process?
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Temporary (nominal) Accounts
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Accumulate data related to one accounting period
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Income Statement Accounts, Dividends Account, and the Income Summary Account (Revenues and Expenses)
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What are types of temporary accounts?
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Permanent (real) Accounts
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Report on activities related to one or more future accounting periods
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Balance Sheet Accounts and Asset, Liabilities, and Equity (common stock and retained earnings) Accounts
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What are types of permanent accounts?
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Record and Post Closing Entries
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To transfer the end-of-period balances in revenue, expense, and dividends accounts to the permanent retained earnings accounts
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Income Summary
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A temporary account that contains a credit for the sum of all revenues and a debit for the sum of all expenses (Its balance equals net income or net loss and it is transferred to retained earnings)
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1) Close income statement credit balances (revenue) 2) Close income statement debit balances (expense) 3) Close income summary account 4) Close dividends account
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What is the 4-step closing process?
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Post-Closing Trial Balance
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A list of permanent accounts and their balances from the ledger after all closing entries have been journalized and posted
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1) Total debits equal total credits for permanent accounts 2) All temporary accounts have zero balances
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What should happen in a post-closing trial balance?
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Accounting Cycle
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The steps in preparing financial statements
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Unclassified Balance Sheet
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One whose items are broadly grouped into assets, liabilities, and equity
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Classified Balance Sheet
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Organizes assets and liabilities into important subgroups that provide more information to decision makers
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Operating Cycle
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The time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services
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1) Current and noncurrent assets 2) Current and noncurrent liabilities 3) Equity
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What is on a classified balance sheet?
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Current Assets
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Cash and other resources that are expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer
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Long-Term (Noncurrent) Investments
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Assets that are expected to be held for more than the longer of one year or the operating cycle
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Intangible Assets
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Long-Term resources that benefit business operations, usually lack physical form, and have uncertain benefits (trademarks, patents, franchises, etc)
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Current Liabilities
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Obligations due to be paid or settled within one year or the operating cycle, whichever is longer
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Long-term Liabilities
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Obligations not due within one year or the operating cycle, whichever is longer
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Common stock & retained earnings
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2 main categories of equity

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