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MyAccountingLab CH 3 Direct Reading Worksheet

This document provides an overview of accrual accounting concepts including: 1) Accrual accounting records revenue when it is earned and expenses when they are incurred, differing from cash basis accounting. 2) Adjusting entries are made at the end of each accounting period to record revenues and expenses that have been earned or incurred but not yet recorded. 3) Financial statements are prepared in a specific order - balance sheet, income statement, statement of retained earnings - with the balance sheet providing a snapshot of assets, liabilities and equity on a given date.

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Osiris Hernandez
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174 views

MyAccountingLab CH 3 Direct Reading Worksheet

This document provides an overview of accrual accounting concepts including: 1) Accrual accounting records revenue when it is earned and expenses when they are incurred, differing from cash basis accounting. 2) Adjusting entries are made at the end of each accounting period to record revenues and expenses that have been earned or incurred but not yet recorded. 3) Financial statements are prepared in a specific order - balance sheet, income statement, statement of retained earnings - with the balance sheet providing a snapshot of assets, liabilities and equity on a given date.

Uploaded by

Osiris Hernandez
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Chapter 3 - Accrual Accounting & Income

Directed Reading Worksheet

Part I: Explain how accrual accounting differs from cash-basis accounting


1. What two methods may be used in accounting? Which one is required by Generally Accepted
Accounting Principles (GAAP)?
1.
2.

2. Under accrual accounting, a business records revenue when _____________________ and


expenses when ________________________.

3. What cash transactions does accrual accounting record?

4. Which of the following noncash transactions does accrual accounting record?


A. Sales and purchases on account
B. Usage of prepaid rent, insurance, and supplies
C. Earning of revenue prior to cash collection
D. Accrual of expenses incurred but not yet paid
E. All of the above

5. In your own words, describe the time-period concept.

6. How long is the basic accounting period?


7. Virtually all companies prepare annual financial statements. At what other interim periods do
companies often prepare financial statements for?

Part II: Apply the revenue and expense recognition principles


8. What two issues does the revenue principle deal with?
1.
2.

9. What is the general rule for when revenue should be recognized?

10. What amount of revenue should be recorded?

11. In your own words, describe the expense recognition principle.

12. List the two steps of the expense recognition principle.


1.
2.
13. What is another name for the expense recognition principle?
A. Expense rule
B. Matching principle
C. Time-period concept
D. Revenue principle

Part III: Adjust the accounts


14. What are the three categories of accounting adjusting entries?
1.
2.
3.

15. What is the definition of a deferral?

16. What is the definition of depreciation?

17. What is the definition of an accrual?

18. (a) What accounts would be debited and credited to record the prepayment of three months’
rent? (b) What accounts would be debited and credited to make the adjustment after the
prepaid rent has been used up?
a.
b.

19. What would the journal entry to record $500 worth of depreciation be?
20. What type of account is Accumulated depreciation? What is its normal balance?

21. What two distinguishing characteristics do contra accounts have?


1.
2.

22. How is the book value of a plant asset calculated?

23. Which of the following would be an accrual adjustment?


A. Salary expense
B. Unearned revenue
C. Service Revenue
D. All of the above

24. What is a revenue that has been earned but not yet collected called?

25. All accrued revenues are accounted for similarly – debit a _______________________ and
credit a ______________________________.

26. What type of account is unearned revenue?


A. Revenue
B. Asset
C. Liability
D. Equity

27. When would a company record unearned revenue?


28. Two purposes of the adjusting process are to

A. _______________________________________________________, and

B. _______________________________________________________
Therefore, every adjusting entry affects both of the following:

C. _______________________________________________________

D. _______________________________________________________

29. What is typically a company’s final adjusting entry of the period?

30. What is the document that lists all the accounts and their final adjusted balances in a single
place called?

Part IV: Construct the financial statements


31. What order must the financial statements be prepared in? Explain why the statements must be
prepared in this order.
Part V: Close the books
32. What three types of accounts require closing entries?
1.
2.
3.

33. Are temporary or permanent accounts closed each period?

34. List the three types of permanent accounts.


1.
2.
3.

35. Put the following steps to close a company’s books in the correct order.
A. Credit the Dividends account for its debit balance. Debit Retained Earnings.
B. Debit each revenue account for its credit balance. Credit Retained Earnings for the sum
of the revenues.
C. Credit each expense account for its debit balance. Debit Retained Earnings for the sum
of the expenses.

36. Dividends is an expense account. True or False?

37. What is the most liquid asset?

38. Are current or long-term assets more liquid?


39. List five examples of current assets. (Student answers can vary.)
1.
2.
3.
4.
5.

40. List five examples of long-term assets. (Student answers can vary.)
1.
2.
3.
4.
5.

41. What is the definition of current liabilities?

42. What is an example of a long-term liability? (Student answers can vary.)

43. What are the two basic formats of the balance sheet?
1.
2.

44. What are the two basic formats of the income statement?
1.
2.
Part VI: Analyze and evaluation a company’s debt-paying ability
45. Which of the following is the equation for calculating net working capital?
A. Total current assets – Total current liabilities
B. Net income – Liabilities
C. Total current assets / Total current liabilities
D. Net income / Liabilities

46. What is the formula to calculate the current ratio? What does the current ratio measure?

47. What is typically considered a strong current ratio?

48. What is the formula to calculate the debt ratio?

49. What does the debt ratio measure?

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