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Financial Accounting Chapter 3

Accrual Accounting & Income
STUDY
PLAY
Accounting can be based on either the _____ basis or the _____ basis.
Accrual; cash
_____ _____ records the impact of a business transaction as it occurs.
Accrual accounting
_____-_____ _____ records only cash transactions - cash receipts and cash payments.
Cash-basis accounting
GAAP (Generally Accepted Accounting Principles) require _____ accounting.
Accrual
True or false: Making the sale, not collecting the cash, increases your wealth.
True
The basic defect of cash-basis accounting is that the cash basis _____ important information.
Ignores
_____ means going out of business.
Liquidation
The _____-_____ _____ concept ensures that accounting information is reported at regular intervals.
Time-period concept
The _____ year ends on a date other than December 31st.
Fiscal
The _____ _____ deals with two issues: when to record (make a journal entry); and the amount of revenue to record.
Revenue principle
The _____ _____ is the basis for recording expenses.
Matching principle
The _____ _____ includes two steps: identify all the expenses incurred during the accounting period; measure the expenses, and match expenses against the revenues earned.
Matching principle
To match expenses against revenues means to subtract _____ from _____ to compute net income or net loss.
Expenses; revenues
Trial balance means "_____".
Unadjusted
Accounting adjustments fall into three basic categories: _____, _____, and _____.
Deferrals, depreciation, and accruals
A _____ is an adjustment for an item that the business paid or received cash in advance.
Deferral
_____ allocates the cost of a plant asset to expense over the asset's useful life.
Depreciation
An _____ is the opposite of a deferral.
Accrual
An _____ revenue is a revenue that the business has earned and will collect next year.
Accrued
_____ _____ are long-lived tangible assets, such as land, buildings, furniture, and equipment.
Plant assets
The _____ _____ account shows the sum of all depreciation expense from using the asset.
Accumulated Depreciation
A _____ _____ has two distinguishing characteristics: it always has a companion account; its normal balance is opposite that of the companion account.
Contra account
The net amount of a plant asset (cost minus accumulated depreciation) is called that asset's _____ _____ (of a plant asset), or carrying amount.
Book value
The term _____ _____ refers to a liability that arises from an expense that has not yet been paid.
Accrued expense
A revenue that has been earned but not yet collected is called an _____ _____.
Accrued revenue
Some businesses collect cash from customers before earning the revenue. This creates a liability called _____ _____.
Unearned revenue
An unearned revenue is a _____, not a revenue.
Liability
Two purposes of the _____ _____ are to: measure income and update the balance sheet.
Adjusting process
_____ _____ _____ means to prepare the accounts for the next period's transactions.
Closing the books
The _____ _____ set the revenue, expense, and dividends balances back to zero at the end of the period.
Closing entries
Dividends, revenues, and expenses are _____ accounts.
Temporary
Assets, liabilities, and stockholders' equity are _____ accounts.
Permanent
_____ measures how quickly an item can be converted to cash.
Liquidity
____ is the most liquid asset.
Cash
A _____ _____ _____ separates current assets from long-term assets and current liabilities from long-term liabilities.
Classified balance sheet
The _____ _____ lists the assets at the top, followed by the liabilities and stockholders' equity below.
Report format
The _____ _____ lists the assets on the left and the liabilities and stockholders' equity on the right in the same way that a T-account appears, with assets (debits) on the left and liabilities and equity (credits) on the right.
Account format
A _____-_____ _____ _____ lists all the revenues together under a heading such as Revenues, or Revenues and Gains. The expenses are listed together in a single category titled Expenses, or Expenses and Losses.
Single-step income statement
A _____-_____ ____ _____ reports a number of subtotals to highlight important relationships between revenues and expenses.
Multi-step income statement
The _____ _____ divides total current assets by total current liabilities.
Current ratio