ACCT Chapter 3

On December 1, 2015, a company pays $3,600 for a 36-month insurance policy. After one month, accrual accounting requires _______(100/3,600) of insurance expense be reported on the income statement ending December 31, 2015. However, if cash basis accounting is used, _______ (100/3,600) of insurance expense would be reported at the time of purchase.

$100 $3,600

A calender-year-end reporting period is defined as a ____-month period which ends on ___31st

12 December

what defines a fiscal year for a business

It is any period which consists of 12 consecutive months.

which of the following statements best describes the expense recognition (matching) principle

Matching of expenses with revenues is a major part of the adjusting process. Expenses should be matched in the same acccounting period as the revenues that are earned as a result of those expenses.

The formula to figure out the profit margin of a company is __________ (Net income/ Accounts receivable/ Net sales) divided by ________ (Net income/ Cash/ Net sales).

Net income Net sales

Which of the following statements correctly define(s) a profit margin?

Profit margin is the ratio of a business's net income to its net sales. Profit margin is also called return on sales. Profit margin is a useful measure of a business's operating results.

Identify the statement(s) below which is (are) correct regarding the use of estimates in accounting.

When following the matching principle, sometimes estimates are used because the actual expense or revenue amount is not yet known. Matching expenses with revenues often requires us to predict certain events which we are not always able to do.

Which of the accounts below are considered accrued expenses?

a Wages expense, Interest expense

Accrual basis accounting is defined as:

an accounting system that uses the matching principle to determine when to recognize revenues and expenses. an accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred. an accounting system which is consistent with generally accepted accounting principles.

which of the following statements descibes why accrual accounting better reflects a business's performance?

comparability of financial statement is improved. Revenue are always recorded in the period in which they are earned. Expenses are always recognized in the period in which they are incurred.

Choose the formula below that is used to calculate the current ratio of a business.

current assets divided by current liabilities

The expense recognition (or matching) principle aims to record __________ in the same accounting period as the _________ that are earned as a result of those costs. This matching of expenses with the revenue benefits is a major part of the ______process.

expenses revenues adjusting

the revenue recognition principle states that revenue:

should be recorded when it is earned

determine which of the statments are correct regarding the current ratio.

the current ratio helps a supplier determine whether it wants to extend credit to a customer. The current ratio is a one measure of a company's ability to pay its short term debts. Current ratio can affect interest rates charged by creditors when lending money to a business. A current ratio of less than 1.0 would indicate that a company would have a problem paying off shert term debt.