Accounting Principles Chapter 3 Flashcards

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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?

In the same period in which cash is paid. Signup and view all the answers

What is recording salaries owed to employees that will not be paid until the following period an example of?

Accrued expense. Signup and view all the answers

Which of the following is an example of a prepaid expense?

Rent has been purchased in advance. Signup and view all the answers

What does the adjusting entry to record supplies used during the period include?

Debit to Supplies Expense. Signup and view all the answers

What does the adjusting entry to record interest earned during the period include?

Credit to Interest Revenue. Signup and view all the answers

Which of the following is an example of accrued revenue?

Providing services to a customer without having yet collected cash. Signup and view all the answers

Which of the following is a characteristic of adjusting entries?

Allows for proper application of the revenue recognition principle. Signup and view all the answers

Financial statements are prepared from which of the following trial balances?

Adjusted trial balance. Signup and view all the answers

What does the balance of retained earnings in the adjusted trial balance equal?

The balance of retained earnings at the beginning of the accounting period. Signup and view all the answers

Which of the following describes the information reported in the income statement?

Net income for the period is calculated by subtracting expenses from revenues. Signup and view all the answers

Which of the following describes the information reported in the balance sheet?

Total assets equal total liabilities plus stockholders' equity. Signup and view all the answers

Which of the following describes the information reported in the statement of cash flows?

Net cash flows from operating, investing, and financing activities. Signup and view all the answers

What does the entry to close the expense accounts include?

Debit to retained earnings. Signup and view all the answers

What are closing entries made for?

To transfer the balances of temporary accounts to retained earnings. Signup and view all the answers

Which of the following describes the closing process?

Transfer the balances of temporary accounts to retained earnings. Signup and view all the answers

Which of the following accounts is listed in a post-closing trial balance?

Salaries Payable. Signup and view all the answers

Which of the following accounts is not listed in a post-closing trial balance?

Service Revenue. Signup and view all the answers

After the closing entries are posted to the accounts, all temporary accounts should:

Balance to zero. Signup and view all the answers

Which of the following is not a characteristic of adjusting entries?

Reduce the balances of revenue, expense, and dividend accounts to zero. Signup and view all the answers

Which of the following describes the information reported in the statement of stockholders' equity?

Change in stockholders' equity through changes in common stock and retained earnings. Signup and view all the answers

In a classified balance sheet, liabilities are separated into two categories based on:

The length of time until the obligation is expected to be satisfied. Signup and view all the answers

In a classified balance sheet, long-term assets used in the normal course of business are known as:

Property, plant, and equipment. Signup and view all the answers

Which of the following describes the purpose(s) of closing entries?

B and C. Signup and view all the answers

Which of the following accounts is NOT listed in a post-closing trial balance?

Salaries Expense. Signup and view all the answers

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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Description

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.