Financial Accounting Chapter 3

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Questions and Answers

What does the Creative Commons License (CC BY-NC-SA) allow users to do with the text?

Reuse, revise, remix, and redistribute the text (correct)

Use the text only for educational purposes

Make modifications without attribution

Sell the text for profit

Which chapter addresses the financial accounting and adjusting entries?

Chapter 3 (correct)

Chapter 2

Chapter 4

Chapter 1

The introduction mentions that the text is designed to be:

Generic and uniform

Adaptable, accessible, and affordable (correct)

Exclusive and costly

Complicated and inaccessible

What is implied about the account balances mentioned in Chapters 1 and 2?

They may not reflect correct amounts. (C) Signup and view all the answers

Who edited the text 'Introduction to Financial Accounting'?

Athabasca University (D) Signup and view all the answers

What is encouraged by the authors for improvements or new content?

Contributing suggestions for improvements (A) Signup and view all the answers

Which option is NOT a goal stated for the Open Educational Resources (OER)?

Restricting access to users only from certain regions (A) Signup and view all the answers

Which of the following is true regarding the authors of the text?

There is a group of contributors listed for the text. (C) Signup and view all the answers

What is the primary purpose of plant and equipment assets?

To generate revenues over multiple accounting periods (B) Signup and view all the answers

Why must the cost of plant and equipment be spread over time?

To align expenses with revenues in the same period (D) Signup and view all the answers

What is depreciation?

The process of allocating the cost of an asset over its useful life (C) Signup and view all the answers

In the straight-line method of depreciation, what does the formula use?

Cost minus estimated residual value divided by useful life (D) Signup and view all the answers

What factor determines the estimated useful life of an asset?

Business policy on asset retention (A) Signup and view all the answers

What happens when recording depreciation expense?

Debit the Depreciation Expense account and credit the Plant and Equipment asset account (C) Signup and view all the answers

What is included in the total depreciable cost of an asset?

The cost and estimated residual value (A) Signup and view all the answers

What is one possible value of the residual value?

Zero, indicating no expected sale value at the end of its use (B) Signup and view all the answers

What is the primary purpose of adjusting entries?

To ensure financial statements accurately reflect account balances (D) Signup and view all the answers

Which of the following accounts is likely to require adjustment at the end of an accounting period?

Unearned revenue (C) Signup and view all the answers

What is an unadjusted trial balance?

A trial balance where accounts have not yet been adjusted (A) Signup and view all the answers

Which financial statement is NOT directly affected by adjusting entries?

Statement of Cash Flows (D) Signup and view all the answers

Where can adjustments be identified before they are recorded?

Using the unadjusted trial balance (D) Signup and view all the answers

Which of these components is typically included in adjusting entries?

Prepaid expenses (D) Signup and view all the answers

What should be the timing for making adjusting entries?

At the end of the accounting period (D) Signup and view all the answers

Which account might not require an adjusting entry?

Accounts payable (A) Signup and view all the answers

What accounting action is needed for the $400 of repair work completed on January 31?

Record an increase in Accounts Receivable and Repair Revenue (D) Signup and view all the answers

What would happen if the adjustment for accrued revenue was not recorded?

Assets would be understated and revenues would be understated by $400 (C) Signup and view all the answers

What type of account is Accounts Receivable?

Asset account (B) Signup and view all the answers

Which of the following best describes accrued expenses?

Expenses that have been incurred but not yet recorded or paid (D) Signup and view all the answers

Which journal entry reflects the adjustment for accrued expenses?

Debit an expense account and credit a payable account (C) Signup and view all the answers

How much would the Accounts Receivable balance increase after recording the adjustment for accrued revenue?

$400 (D) Signup and view all the answers

What is the primary purpose of recording adjustments for accrued revenues and expenses?

To present an accurate financial position at the end of the accounting period (D) Signup and view all the answers

What effect does recording accrued expenses have on the income statement?

Increases total expenses and decreases net income (B) Signup and view all the answers

What is the purpose of the adjusted trial balance?

To prepare financial statements. (D) Signup and view all the answers

Which accounts from the adjusted trial balance are used to prepare the balance sheet?

Asset, liability, and equity accounts. (C) Signup and view all the answers

How is net income or loss derived to prepare the statement of changes in equity?

From the income statement. (C) Signup and view all the answers

Which of the following items is a liability according to the adjusted trial balance?

Accounts payable (C) Signup and view all the answers

Which expense is associated with the truck according to the adjusted trial balance?

Depreciation expense – truck (A) Signup and view all the answers

What is the total amount of assets recorded in the adjusted trial balance?

$19,200 (B) Signup and view all the answers

Which of the following accounts is not included in the financial statements preparation?

Retained earnings (C) Signup and view all the answers

What type of expense is the insurance expense reflected as in the adjusted trial balance?

Expense (B) Signup and view all the answers

What types of accounts are present in the post-closing trial balance?

Only permanent accounts (A) Signup and view all the answers

Why are adjusting entries necessary in accounting?

To ensure revenues and expenses are reported in the correct period (B) Signup and view all the answers

What is the total amount of debits in the post-closing trial balance?

$19,300 (A) Signup and view all the answers

What financial statement must be prepared at least once per fiscal year?

Balance sheet (D) Signup and view all the answers

Which account shows accumulated depreciation for equipment in the balance?

Accumulated deprecation – equipment (A) Signup and view all the answers

What is the balance of cash listed in the post-closing trial balance?

$3,700 (A) Signup and view all the answers

What does the term 'temporary accounts' refer to in accounting?

Accounts that are reset to zero at the beginning of the new fiscal year (B) Signup and view all the answers

Which of the following is classified as a liability in the post-closing trial balance?

Interest payable (B) Signup and view all the answers

Study Notes

Introduction to Financial Accounting

A textbook, Introduction to Financial Accounting, by Henry Dauderis & David Annand, edited by Athabasca University, version 2019 – Revision A, is available under a Creative Commons License (CC BY-NC-SA).
The text is adaptable, accessible, and affordable.
This textbook introduces financial accounting concepts, including adjusting entries, the accounting cycle, and the preparation of financial statements.
The book is designed to help students understand Financial Accounting.

Contributors

The Lyryx Learning Team is credited for the textbook, composed of Bruce Bauslaugh, Peter Chow, Nathan Friess, Stephanie Keyowski, Martha Laflamme, Jennifer MacKenzie, Tamsyn Murnaghan, Bogdan Sava, and Ryan Yee.

Chapter 3 Learning Objectives

Understand the timeliness, matching, and recognition Generally Accepted Accounting Principles (GAAP) requirements for adjusting entries.
Explain and prepare adjusting entries for prepaid expenses, depreciation, unearned revenues, accrued revenues, and accrued expenses.
Prepare an adjusted trial balance and understand its use.
Use an adjusted trial balance to prepare financial statements.
Understand the steps in the accounting cycle.
Understand and prepare closing entries and a post-closing trial balance.

Concept Self-Check

GAAP principle of timeliness
GAAP principle of matching
GAAP principle of revenue recognition
Adjusting entries and when they are journalized
The five types of adjustments are described
The difference between an unadjusted and adjusted trial balance.
The four closing entries
Why the Dividends account is not closed to the income summary
The difference between a post-closing and adjusted trial balance

The Operating Cycle

Financial transactions within an accounting period are part of a sequence of operating activities.
Big Dog Carworks Corp. sequences their activities as follows:
Beginning with cash on hand
Cash is used for supplies and expenses
Revenue earned from repair services
Cash is collected from customers
This sequence is called the operating cycle
Financial statements need to be prepared at specific time intervals to meet GAAP timeliness requirements.
This means transactions related to incomplete operating cycles in an accounting year need to be recorded and reported.
Recognition and matching are two important GAAP requirements for recording incomplete operating cycles

Recognition Principle

GAAP provides guidance when an economic activity should be recognized in financial statements.
An economic activity is recorded when it meets two criteria:
It's probable that a future economic benefit will flow to the business.
The activity's value can be measured reliably.

Revenue Recognition Illustrated

Revenue is recorded in the accounting period it's earned, not necessarily when cash is received.
Common method of recognizing revenue:
When a sale invoice is sent to the customer, and the goods or service are received (possibly before cash is received)
This creates an asset called Accounts Receivable

Expense Recognition Illustrated

Costs can be assets or expenses, depending on where they fit in the accounting period
Costs are assets if they are incurred and will be used to produce revenue in the future.
Costs are expenses if they are used or consumed during the current accounting period to earn revenue.

Adjusting Entries

Adjusting entries are used at the end of an accounting period to ensure account balances accurately represent the period's financial activities.
An unadjusted trial balance shows account balances before adjustments
These adjustments help the balance and income statements have an accurate representation of the period's financial activity

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Description

This quiz focuses on Chapter 3 of the textbook 'Introduction to Financial Accounting.' Students will explore key concepts such as Generally Accepted Accounting Principles (GAAP) for adjusting entries, including the timeliness, matching, and recognition requirements. Prepare to apply your knowledge in practical scenarios!