Accounting Chapter 3 Flashcards

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Questions and Answers

What is Accrual Basis Accounting?

Reports revenues and expenses clearly representing net income (correct)

Records transactions when cash changes hands

Measures cash flows only

Only applies to large corporations

What is Cash Basis Accounting?

Reporting revenues only when cash is received and expenses only when cash is paid

What is a primary purpose of adjusting entries?

To record events that have occurred but that have not yet been recorded

Prepaid Insurance is considered a liability on the balance sheet.

False Signup and view all the answers

Supplies should be and Supplies Expense should be for the cost of supplies used up during the period.

decreased, increased Signup and view all the answers

What accounting basis records revenues when goods and services are provided?

Accrual-basis accounting Signup and view all the answers

What are Adjusting Entries used for?

To update balances of assets, liabilities, revenues and expenses for changes Signup and view all the answers

When should Adam Corporation record expenses?

When they are paid Signup and view all the answers

Adjusting entries are made at the ______ of the accounting period.

End Signup and view all the answers

What are the two major categories reported in the income statement?

Expense, Revenue Signup and view all the answers

A prepayment is originally recorded as an asset. An adjusting entry at the end of the accounting period results in a(n) in the asset account and a(n) in the expense account.

Decrease, Increase Signup and view all the answers

When should supplies be recorded as an expense?

In the period the supplies are used, regardless of when they were purchased Signup and view all the answers

What do companies that utilize accrual-based accounting systems do at year-end?

Complete the measurement process through recording of adjusting entries Signup and view all the answers

Which financial statement reports beginning balances for common stock and retained earnings?

Statement of stockholders' equity Signup and view all the answers

What is Cash Basis Accounting?

Reporting revenues only when cash is received and expenses only when cash is paid Signup and view all the answers

A classified balance sheet shows subtotals for current and ______.

non-current Signup and view all the answers

Where are revenues and expenses reported?

Income statement Signup and view all the answers

How is information reported in the statement of cash flows organized?

By investing, operating, financing activities Signup and view all the answers

Prepaid rent appears in the ______ because it is an asset.

Balance sheet Signup and view all the answers

What does the adjusted balance in the Supplies Expense account represent after adjusting entries?

The cost of supplies used during the accounting period Signup and view all the answers

What are the two purposes of closing entries?

Prepare for next period measuring activity Signup and view all the answers

What amounts does the statement of stockholders' equity include?

Dividends for the period Signup and view all the answers

A classified balance sheet groups asset and liabilities into current and long-term categories.

True Signup and view all the answers

Which financial statement is typically prepared last?

Statement of cash flows Signup and view all the answers

Costs of assets acquired in one period that will be recorded as expense in a future period are referred to as __ and are initially recorded as _.

prepaid expenses; assets Signup and view all the answers

How do temporary accounts differ from permanent accounts?

Only temporary accounts are cleared out at the end of the accounting period Signup and view all the answers

Which financial statement reports beginning balances for common stock and retained earnings?

Statement of stockholders' equity Signup and view all the answers

Which statements regarding the statement of cash flows are correct?

Is the final financial statement that is typically prepared Signup and view all the answers

A prepayment that is originally recorded as an asset will be ______.

Allocated to future accounting periods based on the cost of the asset used during the period Signup and view all the answers

The post-closing trial balance checks that total equal total __ at the end of the period.

debits, credits Signup and view all the answers

What are the entries that transfer the balances of all temporary accounts to retained earnings referred to as?

Closing entries Signup and view all the answers

At the beginning of the accounting period, the balances of temporary accounts are non-zero.

False Signup and view all the answers

Which checks does the post-closing trial balance verify?

Closing entries have been prepared correctly Signup and view all the answers

Study Notes

Accounting Principles and Concepts

Accrual Basis Accounting: Measures and reports revenues and expenses to accurately reflect a company's net income.
Cash Basis Accounting: Records revenues and expenses only when cash is actually received or paid, simplifying the accounting process.

Adjusting Entries and Their Importance

Purpose of Adjusting Entries: To record events that have occurred but remain unrecorded by the end of the accounting period.
Timing of Adjusting Entries: Made at the end of the accounting period to update balances for assets, liabilities, revenues, and expenses.

Financial Statement Preparation

Income Statement: Reports two major categories: revenue and expenses, reflecting a company's financial performance.
Statement of Stockholders' Equity: Includes net income, dividends, and changes in equity positions over the period.
Statement of Cash Flows: Organized by three activities: investing, operating, and financing; typically prepared last in the financial reporting sequence.

Assets and Expenses

Prepaid Insurance and Prepaid Rent: Listed as assets on the balance sheet until they expire or are used, at which point they are recorded as expenses.
Supplies: Recorded as an expense in the period they are used, regardless of when they were purchased.

Closing Entries and Temporary Accounts

Closing Entries: Serve two purposes: transferring balances of temporary accounts to retained earnings and resetting temporary accounts to zero for the new period.
Temporary vs. Permanent Accounts: Temporary accounts are cleared at the end of the period, while permanent accounts carry their balances forward.

Balance Sheet Components

Classified Balance Sheet: Groups assets and liabilities into current and long-term categories, providing clarity on financial position.
Post-Closing Trial Balance: Verifies that total debits equal total credits at the end of the period, ensuring accuracy before starting a new accounting cycle.

Key Adjustments

Adjusting entries for prepaid items will result in a decrease in the asset account and an increase in the respective expense account.
It is crucial for companies utilizing accrual-basis accounting to record adjusting entries at the end of the period to complete the measurement process.

Financial Statements Overview

Understanding various financial statements ensures accurate representation of a company's financial health and operational performance.
Both current and long-term financial metrics are critical for stakeholders assessing company performance and making investment decisions.

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Test your knowledge of key accounting concepts with these flashcards from Chapter 3. This quiz focuses on important accounting methods like accrual and cash basis accounting, as well as the purpose of adjusting entries. Perfect for accounting students looking to reinforce their understanding of foundational terms and definitions.

Accounting Chapter 3 Flashcards

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Questions and Answers

What is Accrual Basis Accounting?

What is Cash Basis Accounting?

What is a primary purpose of adjusting entries?

Prepaid Insurance is considered a liability on the balance sheet.

Supplies should be ______ and Supplies Expense should be ______ for the cost of supplies used up during the period.

What accounting basis records revenues when goods and services are provided?

What are Adjusting Entries used for?

When should Adam Corporation record expenses?

Adjusting entries are made at the ______ of the accounting period.

What are the two major categories reported in the income statement?

A prepayment is originally recorded as an asset. An adjusting entry at the end of the accounting period results in a(n) ______ in the asset account and a(n) ______ in the expense account.

When should supplies be recorded as an expense?

What do companies that utilize accrual-based accounting systems do at year-end?

Which financial statement reports beginning balances for common stock and retained earnings?

What is Cash Basis Accounting?

A classified balance sheet shows subtotals for current and ______.

Where are revenues and expenses reported?

How is information reported in the statement of cash flows organized?

Prepaid rent appears in the ______ because it is an asset.

What does the adjusted balance in the Supplies Expense account represent after adjusting entries?

What are the two purposes of closing entries?

What amounts does the statement of stockholders' equity include?

A classified balance sheet groups asset and liabilities into current and long-term categories.

Which financial statement is typically prepared last?

Costs of assets acquired in one period that will be recorded as expense in a future period are referred to as ______ and are initially recorded as _____.

How do temporary accounts differ from permanent accounts?

Which financial statement reports beginning balances for common stock and retained earnings?

Which statements regarding the statement of cash flows are correct?

A prepayment that is originally recorded as an asset will be ______.

The post-closing trial balance checks that total ____ equal total ______ at the end of the period.

What are the entries that transfer the balances of all temporary accounts to retained earnings referred to as?

At the beginning of the accounting period, the balances of temporary accounts are non-zero.

Which checks does the post-closing trial balance verify?

Study Notes

Accounting Principles and Concepts

Adjusting Entries and Their Importance

Financial Statement Preparation

Assets and Expenses

Closing Entries and Temporary Accounts

Balance Sheet Components

Key Adjustments

Financial Statements Overview

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Supplies should be and Supplies Expense should be for the cost of supplies used up during the period.

A prepayment is originally recorded as an asset. An adjusting entry at the end of the accounting period results in a(n) in the asset account and a(n) in the expense account.

Costs of assets acquired in one period that will be recorded as expense in a future period are referred to as __ and are initially recorded as _.

The post-closing trial balance checks that total equal total __ at the end of the period.