financial accounting chapter 3

33. What is the difference between current and long-term

- current assets are cash and other resources that are expected to be sold, collected, or used within one year or the company's operating cycle. Long-term investments are notes receivable and investments in stocks and bonds are long-term assets when they are expected to be held for more than the longer of one year or the operating cycle.

35. What is the formula for the current ratio

- current ratio= current assets/current liabilities

26. What are permanent (real) accounts and why are they called permanent

- Account that reflect activities related to one or more future periods; balances sheet accounts whose balances are not closed. Balance sheets are permanent.

25. What are temporary (nominal) accounts and why are they temporary

- Accounts used to record revenues, expenses, and withdrawals; they are close to the end of each period. The are temporary because the accounts are opened at the beginning of a period, used to record transactions and events for that period, and then closed at the end of the period.

5. What is the difference between accrual basis accounting and cash basis accounting

- Accrual Basis accounting recognizes revenues when earned and expenses when incurred. Whereas, cash basis accounting recognizes when cash is received and records expenses when cash is paid.

9. What is the difference between deferrals and accruals

- Deferrals reflect transaction when cash is paid or received before a related expense or revenue is recognized. Deferrals are also called that because the recognition of an expense is deferred until after the related cash is paid. Accruals reflect transactions when cash is paid or received after a related expense or revenue is recognized. So, deferred is before and accrual is after.

13. What is depreciation

- Expense created by allocating the cost of plant and equipment to periods in which they are used; represents the expense of using the asset,

28. What is a post-closing trial balance

- It is a list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

24. Why does one prepare closing entries

- One reason is it resets revenue, expense, and dividend account balances to zero at the end of each period. It is done because accounts can properly measure income and dividends for the next period. The second reason is it helps in summarizing a period's revenues and expenses.

20. What are accrued revenues

- Revenues earned in a period that are both unrecorded and not yet received in cash; adjusting entries for recording accrued revenues involve increasing assets and increasing revenues.

30. What are the 10 steps of the accounting cycle

- analyze transactions, journalize, post, prpare unadjusted trial balance, adjust, prepare adjusted trial balance, prepare statements, close, prepare post-closing trial balance, and reverse (optional).

3. What is the difference between the annual financial statements and the interim financial statements

- annual statements cover a one-year periods, usually a calendar year. Interim statements cover periods less than one year, usually one-, three-, or six- month periods.

2. What is the time period assumption (periodicity)

- assumptions that an organization's activities can be divided into specific time periods such as months, quarters, or years.

4. What is a fiscal year

- consecutive 12- months period chosen as the organization's annual accounting period.

18. What are accrued expenses

- costs incurred in a period that are both unpaid and unrecorded; adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.

37. What are the benefits of a work sheet

- it aids the preparations of financial statements, reduces the possibility of errors when working with many account sand adjustments, links accounts and adjustment s to their impacts in financial statements, assists in planning and organizing an audit of financial statements -as it can be used to reflect any adjustments necessary, helps in preparing interim financial statements when the journalizing and posting of adjusting entries are postponed until year-end, and shows the effects of proposed or "what-if" transactions.

29. What is(are) the purpose(s) of the post-closing trial balance

- it aims to verify total debits equal total credits for permanent accounts, and all temporary accounts have zero balances.

36. What is a worksheet

- it is a spreadsheet to draft an unadjusted trial balance, adjusting entries, adjusting trial balance, and financial statements.

15. What kind of account is accumulated depreciation and what is its normal balance

- it is kept in a separate contra account which means it is linked with another account and has an opposite normal balance, and is reported as a subtraction from the other account's balance.

11. When are adjusting entries made

- it is made at the end of an accounting period.

14. What is the entry to record depreciation

- it is recorded with an adjusting entry similar to that for other prepaid expenses.

10. What are prepaid expenses and what kind of accounts are they

- items paid for in advance of receiving their benefits; classified as assets.

17. What are unearned revenues and what kind of account are they

- liabilities created when customers pay in advance for products or services; earned when the products or services are later delivered. They are liabilities.

23. What is the closing process

- necessary end-of-period steps to prepare the account for recording the transactions of the next period. The process is to Identify accounts for closing, then record and post the closing entries, and then prepare a post-closing trial balance.

32. What is the operating cycle

- normal time between paying cash for merchandise or employee services and receiving cash from customers.

27. What is the four-step closing process

- one, close income statement credit balances in revenue accounts to income statements. Two, close income statement debit balances in expense accounts to income summary. Three, close income summary account to retained earnings. Four, close dividends account to retained earnings.

19. What is the formula to calculate interest

- principle amount owed X annual interest rate X fraction of year since last payment date.

34. What is the formula for profit margin

- profit margin = net income/net sales

8. What is the three-step process in adjusting accounts

- step one is to determine what the current account balance equals. Then step 2 is to determine what the current account balance should equal. Finally, step 3 is to record an adjusting entry to get from step one to step two.

12. What are plant assets

- tangible long-lived assets used to produce or sell products and services.

6. Which method of accounting is consistent with generally accepted accounting principles (GAAP)

- the accrual basis accounting system is consistent with GAAP.

16. How do you calculate book value

- the difference between two balances is the cost of the asset that has not yet been depreciated, that difference is known as book value. Book values equals the asset's costs less its accumulated depreciation.

38. What are the steps to prepare a worksheet

- the steps are to enter unadjusted trial balance; enter adjustments; prepare adjusted trial balance; sort adjusted trial balance amounts to financial statements; and total statement columns, compute income or loss, and balance columns.

21. What is the difference between the unadjusted trial balance and the adjusted trial balance

- unadjusted is a list of accounts and balances prepared before accounting adjustments are recorded and posted. Whereas, adjusted is a list of accounts and balances prepared after period-end adjustments are recorded and posted.

31. What is the difference between an unclassified and a classified balance sheet

- unclassified is a balance sheet that broadly group assets, liabilities, and equity accounts. Classified is a balance sheet that presents assets and liabilities in relevant subgroup, including current and noncurrent classifications.

1. Why is getting timely information important

- useful information must reach decision makers frequently and promptly. To provide timely information, accounting systems prepare reports at regular intervals.

22. What are the steps to prepare financial statements

- we prepare financial statements with income statement, statement of retained earnings, and balance sheet. Step four prepares the statement of cash flows from changes in cash flow for the period.