Questions and Answers
What does the revenue recognition principle state?
Companies typically record revenue in the period in which we provide goods and services to customers.
Under accrual-basis accounting, when do companies typically report expenses?
In the same period as the revenue they help to generate.
Under cash-basis accounting, when do companies typically record revenue?
In the period in which we received cash from customers for goods and services.
Under cash-basis accounting, when are expenses typically reported?
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What is recording salaries owed to employees that will not be paid until the following period an example of?
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Which of the following is an example of a prepaid expense?
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What does the adjusting entry to record supplies used during the period include?
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What does the adjusting entry to record interest earned during the period include?
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Which of the following is an example of accrued revenue?
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Which of the following is a characteristic of adjusting entries?
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Financial statements are prepared from which of the following trial balances?
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What does the balance of retained earnings in the adjusted trial balance equal?
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Which of the following describes the information reported in the income statement?
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Which of the following describes the information reported in the balance sheet?
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Which of the following describes the information reported in the statement of cash flows?
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What does the entry to close the expense accounts include?
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What are closing entries made for?
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Which of the following describes the closing process?
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Which of the following accounts is listed in a post-closing trial balance?
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Which of the following accounts is not listed in a post-closing trial balance?
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After the closing entries are posted to the accounts, all temporary accounts should:
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Which of the following is not a characteristic of adjusting entries?
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Which of the following describes the information reported in the statement of stockholders' equity?
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In a classified balance sheet, liabilities are separated into two categories based on:
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In a classified balance sheet, long-term assets used in the normal course of business are known as:
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Which of the following describes the purpose(s) of closing entries?
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Which of the following accounts is NOT listed in a post-closing trial balance?
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Study Notes
Revenue Recognition and Accounting Principles
- Revenue recognition principle: Record revenue in the period goods/services are provided to customers.
- Accrual-basis accounting: Reports expenses in the same period as the revenue they generate.
- Cash-basis accounting: Records revenue in the period cash is received from customers.
- Cash-basis accounting for expenses: Reports expenses in the period cash is paid.
Accrued and Prepaid Expenses
- Accrued expense: Salaries owed but not yet paid in the current accounting period.
- Prepaid expense example: Rent purchased in advance.
Adjusting Entries
- Adjusting entry for supplies used: Debit to Supplies Expense.
- Adjusting entry for interest earned: Credit to Interest Revenue.
- Accrued revenue example: Services provided without cash collection.
Financial Statements
- Financial statements are prepared from the adjusted trial balance.
- Retained earnings balance in adjusted trial balance reflects the starting balance at the period's beginning.
- Income statement displays net income calculated as revenues minus expenses.
- Balance sheet reflects total assets equal to total liabilities plus stockholders' equity.
- Statement of cash flows summarizes net cash flows from operating, investing, and financing activities.
Closing Entries
- Closing entries include a debit to retained earnings to close expense accounts.
- Closing entries transfer balances of temporary accounts (revenues, expenses, dividends) to retained earnings.
- All temporary accounts must balance to zero post-closing entries.
- Characteristics of adjusting entries: They do not reduce revenue, expense, or dividend accounts to zero.
Stockholders' Equity and Balance Sheet
- Statement of stockholders' equity shows changes in stockholders' equity, including common stock and retained earnings.
- Classified balance sheet separates liabilities into two categories based on time until obligations are satisfied.
- Long-term assets in classified balance sheets are referred to as property, plant, and equipment.
Post-Closing Trial Balance
- Accounts listed in post-closing trial balance include liabilities, like Salaries Payable.
- Service Revenue and Salaries Expense are not listed in post-closing trial balance.
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Test your knowledge of key accounting principles with these flashcards from Chapter 3. Focus on revenue recognition and accrual vs. cash-basis accounting. Perfect for students looking to reinforce their understanding of basic accounting concepts.