Accounting: Chapter 3

the higher the quick ratio, the more it indicates that a company is in a ________ position

stronger liquidity

On the balance sheet, the accumulated depreciation is ______ from the cost of the _________

subtracted; fixed asset

_____ are normally the result of cash being received or paid after revenue has been earned or an expense has been incurred

accruals (see page 92, exhibit 1, for visual)

In accrual accounting, any difference between net cash flows from operating activities and net income can be reconciled by considering the effects of ______ and _______ on the _________

accruals; deferrals; income statement

_______ or _______ are expenses that have been incurred but are not recorded in accounts

accrued expenses; accrued liabilities (e.g., unpaid wages, accrued interest, utility expenses, or taxes)

______ or ______ are revenues that have been earned but are not recorded in the accounts

accrued revenues; accrued assets (e.g., revenue for patient services that have been earned but not billed at the end of the month; accrued interest on notes receivable; or accrued rent on property rented to others)

Accrual accounting requires the updating of the accounting records prior to preparing financial statements. This updating is called the ________

adjustment process

_____ adjustments affect the _____ and ________, and thus, adjusting entries are recorded in the _______ and )))))) columns.

all; balance sheet; income statement; Balance Sheet; Income Statement

________ are created by recording a transaction in a way that delays or defers the recognition of an expense or revenue

deferrals

common _____ include prepaid expenses and unearned revenues.

deferrals

Fixed assets, such as office equipment, lose their ability to provide service over time. This reduction in the ability of a fixed asset to provide service is called ________

depreciation

Under the accrual basis of accounting, once revenue has been earned and recorded, any _____ incurred in generating the revenue are _______. IN this way, the _____ are _______ against the _____ they generate.

expense; recorded; expenses; matched; revenue

_____ are assets used up or services consumed in the process of generating revenue

expenses

Unearned revenue is recorded by decreasing _______, increased in (rent for instance) revenue of the ________

liability; Income Statement

wages owed but not payed to employees increases _____ Wages Payable, decreases _________ under the ________ column, and is also reported as a negative in the __________ column

liability; retained earnings; income statement

a company's _______ is its ability to convert assets to cash. it is important for a variety of reasons, including the ability to pay ______ as they become due.

liquidity

Operating income is determined by deducting the ________ from the ________

operating expenses; fees earned

Prepaid insurance is unique in that it expires with the passage of time. For example, $100 ($2,400/ 24 months) of insurance will expire each month. such assets are called _______ or _______

prepaid expenses; deferred expenses

________ or _________ are initially recorded as assets but become expenses over time or through normal operations of the business

prepaid expenses; deferred expenses (e.g.,prepaid insurance, supplies, prepaid advertising, and prepaid interest)

The accounting records are normally updated just prior to _______

preparing the financial statements (for it is not efficient to record the daily expiration of prepaid insurance, for instance, or the daily use of supplies)

except for _____, fixed assets depreciate over time

land

______ are created when a revenue or expense has been earned or incurred but has not been recorded

accruals

Two types of accounts that require adjustments:

(1) deferrals; (2)accruals

a classified balance sheet normally reports stockholders' equity as (2):

(1)capital stock; (2)retained earnings

a classified balance sheet normally reports assets as (3):

(1)current assets; (2)fixed assets; (3)intangible assets

A classified balance sheet normally reports liabilities as (2):

(1)current liabilities; (2)long-term liabilities

the (three) basic steps of the accounting cycle are as follows:

(1)identifying, analyzing, and recording the effects of transactions on the accounting equation (financial statement elements and accounts); (2)identifying, analyzing, and recording adjustment data; (3)preparing financial statements

three measures useful in assessing liquidity and the ability of a company to pay its current liabilities are:

(1)working capital; (2)the current ratio; (3)the quick ratio

Adjustments are necessary, because, at any point in time, some accounts (______) of the accounting equation are ________

(elements); not up to date

a quick ratio less than _____ raises concerns about whether the company will be able to pay its current ______ on time

1 (one); liabilities

In addition, a quick ratio < ____ raises _____ concerns for creditors

1; liquidity

A current ratio of at least ________ is typical (format of A:B)

2:1

services provided but not billed to insurance companies are recorded by increasing the asset _______ and increasing ________ under the _______ column. In addition, Fees earned under the ________ column is recorded

Accounts Receivable (Accts. Rec.); Retained Earnings; Balance Sheet; Income Statement

The paying of dividends affects ____ and ____, more specifically, _____ and _______

Assets; stockholder's equity; cash; retained earnings

_________ are matched against their related revenues to determine the net income or net loss for a period.

Expenses

_____ arises from such factors as name recognition, location, product quality, reputation, and magerial skill.

Goodwill

_______ is recorded and reported on the balance sheet when a company purchases another company at a price above the normal market value of the purchased company's assets.

Goodwill

If no revenues or expenses are affected, there are no entries under the _______ column

Income Statement

Three other points related to depreciation are (pg. 95): (1) _____ is not depreciated, because it usually does not lose its ability to provide ______ (2) The cost of the _____ is a type of ________ that is recognized as an expense over the _______'s _______ life (3)The cost of the fixed asset less the balance of its __________ is called the asset's ________, or _________. For example, the _____ of Family Health Care's office equipment, after the preceding adjustment, is $8,340 ($8,500-$160)

Land; service; equipment; deferred expense; fixed asset; useful; accumulated depreciation; book value; carrying value; book value

expenses not related to the primary operations of the business are reported as "__________"

Other expenses

_______ are a result of providing services or selling products to customers (e.g., fees earned, fares earned, commissions revenue, interest, and rent)

Revenues

Accounts receivable also affect _______ and the ______ in the form of ____ earned

Statement of Retained Earnings; Income Statement; fees

if no cash is paid or received at the time, there are no entries under the ________ column

Statement of Cash Flows

Common _____ include accrued expenses and accrued revenues

accruals

The ________ is the process that begins with analyzing transactions and ends with preparing financial statements.

accounting cycle

Transactions that increase or decrease a financial statement are recorded, and these financial statement elements are referred to as ______

accounts

A health company has purchased and received the supplies, with a promise to pay in the near future. Such liabilities that are incurred in the normal operations are called ______

accounts payable

Amounts that are to be collected in the future and that arise from the normal operations are called ______

accounts receivable

when the services are provided even though the cash is to be received at a later time, ______ is the amount of the services recorded as a ______

accounts receivable; asset

______ and ________ are current assets because they are normally converted to cash within one year or less

accounts receivable; notes receivable

in addition to cash, the current assets normally include ______, _________, _________, and __________

accounts receivable; notes receivable; supplies; prepaid expenses

_______ is designed to avoid misleading information arising from the timing of cash receipts and payments.

accrual accounting

Under the accrual basis of accounting, a company records transactions using ______, thus, revenue is recorded as ______, regardless of whether _____ is received

accrual accounting concepts; it is earned; cash

under ________, transactions are recorded as they occur and thus affect the ______ (assets, liabilities, and stockholders' equity)

accrual accounting; accounting equation

generally accepted accounting principles (GAAP) require ________ for all but the very smallest businesses. That is, ________ is generally a better predictor of the profitability of a company than is _____ from operating activities and the ____________

accrual accounting; accrual accounting; net cash flows; cash basis of accounting

specifically, the _________ records revenue as it is earned and matches expenses against the revenue they generate

accrual basis of accounting

Companies that use accrual accounting concepts for recording transactions and preparing financial statements are said to use the ________, which is used by large companies and is required of ____ whose stock is publicly traded

accrual basis of accounting; corporations

Since a valid claim exits on future collection, accounts receivable are _____

assets

Depreciation expense is recorded in _______ under _______ column, in ______ under ______ column, and in _________ column

assets; accounts depreciation (-Accts. Depr.); stockholder's equity; retained earnings; Income Statement

purchased supplies are ____ until they are used in the generation of _____

assets; revenue

Prepaid insurance expiration decreases _____ and decreases ______

assets; stockholder's equity (specifically, retained earnings)

The use of supplies decreases _____ and decreases ______

assets; stockholder's equity (specifically, retained earnings)

______ has been invested in the company by the stockholders

capital stock

Under the cash basis of accounting, a company records only transactions involving increases or decreases of _____

cash

Companies that record transactions only when cash is received or paid are said to use the __________, which ______ and _______ often use

cash basis of accounting; individuals; small businesses

the ________ is prepared from the Statement of Cash Flows column by summarizing the _____ activity transactions

cash flows from financing; financing

The ___________ is prepared from the Statement of Cash Flows column by summarizing the ________ activity transactions.

cash flows from investing; investing

The ________ section is prepared from the Statement of Cash Flows column by summarizing the ____ activity transactions. The ________ receipts from revenue transactions are added, and the _______ for operating transactions are subtracted

cash flows from operating activities; Operating; cash; cash payments

Because a business must generate positive _______ from operating activities in the long term in order to survive, generally accepted accounting principles (GAAP) require reporting ________ from operating activities as well as _______

cash flows; net cash flows; net income

all ______ and _______ are recorded in the accounts under __________

cash receipts; payments; accrual accounting

Conversely, under accrual accounting, transactions are also recorded even though ____ is not received or _____ until a _______

cash; paid; later point

a ________ is prepared with various sections, subsections, and captions

classified balance sheet

________ are cash and other assets that are expected to be converted to cash or sold up within one year or less, through normal operations.

current assets

_______ are due within a short time (usually one year or less) and are to be paid out of current assets.

current liabilities

common _________ include accounts payable, and notes payable. other _______ include wages payable, interest payable, taxes payable, and unearned revenue.

current liabilities; current liabilities

the ______ is computed as current assets/ current liabilities

current ratio

Like working capital, the ________ measures a company's ability to pay its current liabilities. The advantage of the _______ is that it facilitates _______ across companies.

current ratio; current ratio; comparisons

______ are normally the result of cash being received or paid before the revenue is earned or the expense is incurred

deferrals

Understanding the accrual basis of accounting is crucial to assessing and interpreting the _____ of a company

financial

The cost less accumulated depreciation for each major type of __________ is normally reported on the __________

fixed asset; classified balance sheet

It is difficult to objectively determine the physical decline in a _______'s ability to provide service. For this reason, depreciation is ______ based on the asset's __________

fixed asset; estimated; useful life

_______ include machinery, buildings, and land

fixed assets

________ are physical assets of a long-term nature

fixed assets

expenses are normally listed on the _______ from ______ to ______ except for _________ expenses, which are always listed ________

income statement; largest; smallest; miscellaneous; last

Accrual accounting also recognizes liabilities at the time the business _________

incurs the obligation to pay for the services or goods purchased

_________ represent rights of a long-term nature, such as patent rights, copyrights, and goodwill.

intangible assets

inventories are not included in quick assets because

inventory must first be sold

Under accrual accounting, revenue is recognized when ______

it is earned

As _________ come due and are to be paid within one year, they are reported as current liabilities

long-term liabilities

_________ are not due for a long time (usually more than a year), and these are reported following the current liabilities

long-term liabilities

When revenues are earned and recorded, all expenses incurred in generating the revenues are also recorded. in this way revenues and expenses are ______ and the net income or net loss for the period is determined

matched

Under the cash basis, the ____ concept is not used. That is, ______ are recorded when paid in cash, not necessarily in the period when the revenue is earned. AS a result, adjusting entries to properly match revenues and expenses are _________ under the cash basis

matching; expenses; not required

when an asset is pledged as security for a long-term liability, the obligation may be called a _________ or a _______

mortgage note payable; mortgage payable

When all of a company's transactions are cash transactions, or when a company uses the cash basis of accounting, ______________________ always equals ___________________

net cash flows from operating activities; net income

One of the major differences between accrual and cash basis financial statements is the reporting of _____ and _____ from operations. Specifically, the following differences exist (2):

net income; net cash flow; (1)Under the cash basis of accounting, net income and net cash flows from operating activities are equal; (2)Under the accrual basis of accounting, net income and net cash flows from operating activities may be significantly different

In contrast, _______ adjustment affects ____ or the statement of ________, and thus, no ________ are recorded in the _______ column

no; cash; statement of cash flows; adjusting entries; Statement of Cash Flows

prepaid assets such as prepaid rent and insurance are excluded from quick assets because often times they are

nonrefundable or only partially refundable after cancellation notices are processed

Net cash flows from operating activities will normally __________ as net income under ____________

not be the same; accrual accounting

______ are written claims against debtors who promise to pay the amount of the note plus interest. From the creditor's point of view, a _____ is a ________

notes receivable; note receivable; note payable

likewise, a company may purchase supplies from a vendor, with terms that the company will pay for the supplies later. In such a case, the supplies is said to be purchased _________, and is a(n) __________ for the amount to be paid is recorded as a ________

on account; account payable; liability

the fixed assets may also be reported on the balance sheet as _____, ______, and ________, or ________

property; plant; equipment; plant assets

Inventories and prepaid assets such as prepaid rent and insurance are not included as part of _______

quick assets

_______ include cash and other current assets such as receivables and short-term investments that can be easily (and quickly) converted to cash

quick assets

The ______is computed as quick assets/ current liabilities

quick ratio

In the real world, cash may be ___ or _____ at a different time from when revenues are earned or expenses are incurred.

received; paid

In accounting, the term ____ is often used to refer to when a transaction is recorded

recognized

if a health care provider files a claim periodically with the insurance company requesting payment, revenue is recorded and referred to as _____

recognized

if long-term liabilities come due and are ______ rather than _______, they would continue to be classified as long-term liabilities

renewed; paid

______ is a net income that has been retained in the corporation

retained earnings

_______ from the primary operations of the business are reported separately from other _____

revenue; revenue (for example, if Family Health Care has two types of revenue for November--fees earned and rent revenue--since the primary operation of the business is providing services to patients, rent revenue is reported under the heading of 'other income')

the adjustment process is needed to match _____ and _____, which is an application of the ______ concept

revenues; expenses; matching

A record of the initial cost of a fixed asset must be maintained for ____ and other purposes. For this reason, the fixed asset account is _________ for depreciation. Instead, an ofsetting or ____________, called ___________, is added to the Balance Sheet column.

tax; not reduced directly; contra asset account; accumulated depreciation

________ or _______ are initially recorded as liabilities but become revenues over time or through normal operations of business

unearned revenues; deferred revenues (e..g, rent, tuition received in advance, an attorney's annual retainer fee, insurance premiums received in advance, or magazine subscriptions received in advance)

at the end of an accounting period, it is normal for businesses to owe _____ to their employees

wages

________ is current assets - current liabilities (current assets include cash and other assets that are expected to be converted to cash, sold, or used up within one year or less through normal operations.

working capital

since a company uses cash to pay its current liabilities, the larger the amount of ______, the more likely a company will be able to pay its current liabilities

working capital

While _________ measures a dollar amount, the _____ measures a relationship among amounts, and facilitates comparisons among companies of different _______

working capital; current ratio; sizes