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INTERMEDIATE ACCOUNTING: CHAPTER #3 EXAM QUESTIONS WITH COMPLETE SOLUTIONS
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INTERMEDIATE ACCOUNTING: CHAPTER #3 EXAM QUESTIONS WITH COMPLETE SOLUTIONS
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INTERMEDIATE ACCOUNTING:CHAPTER #3 EXAM QUESTIONS WITH
COMPLETE SOLUTIONS
Accounting information system - Answer-Accounting information system - A system that
collects and processes transaction data and then disseminates the financial information
to interested parties. Accounting information systems vary widely from one business to
another, depending on the nature of the business and its transactions, the size of the
company, the volume of data to be handled, and the informational demands.
Event - Answer-Event. A happening of consequence. An event generally is the source
or cause of changes in assets, liabilities, and equity. Events may be external or internal.
Transaction - Answer-Transaction. An external event involving a transfer or exchange
between two or more entities.
Account - Answer-Account. A systematic arrangement that shows the effect of
transactions and other events on a specific element (asset, liability, and so on).
Companies keep a separate account for each asset, liability, revenue, and expense,
and for capital (owners' equity). Because the format of an account often resembles the
letter T, it is sometimes referred to as a T-account. (See Illustration 3.3, .)
Real and Nominal Accounts - Answer-Real and Nominal Accounts. Real (permanent)
accounts are asset, liability, and equity accounts; they appear on the balance sheet.
Nominal (temporary) accounts are revenue, expense, and dividend accounts; except for
dividends, they appear on the income statement. Companies periodically close nominal
accounts; they do not close real accounts.
Ledger - Answer-Ledger. The book (or computer printouts) containing the accounts. A
general ledger is a collection of all the asset, liability, owners' equity, revenue, and
expense accounts. A subsidiary ledger contains the details related to a given general
ledger account.
Journal - Answer-Journal. The "book of original entry" where the company initially
records transactions and selected other events. Various amounts are transferred from
the book of original entry, the journal, to the ledger. Entering transaction data in the
journal is known as journalizing.
Posting - Answer-Posting. The process of transferring the essential facts and figures
from the book of original entry to the ledger accounts.
Trial Balance - Answer-Trial Balance. The list of all open accounts in the ledger and
their balances. The trial balance taken immediately after all adjustments have been
, posted is called an adjusted trial balance. A trial balance taken immediately after closing
entries have been posted is called a post-closing (or after-closing) trial balance.
Companies may prepare a trial balance at any time.
Adjusting Entries - Answer-Adjusting Entries. Entries made at the end of an accounting
period to bring all accounts up to date on an accrual basis, so that the company can
prepare correct financial statements.
Financial Statements - Answer-Financial statements. Statements that reflect the
collection, tabulation, and final summarization of the accounting data. Four statements
are involved: (1) The balance sheet shows the financial condition of the enterprise at the
end of a period. (2) The income statement measures the results of operations during the
period. (3) The statement of cash flows reports the cash provided and used by
operating, investing, and financing activities during the period. (4) The statement of
retained earnings reconciles the balance of the retained earnings account from the
beginning to the end of the period.
Closing Entries - Answer-Closing Entries. The formal process by which the enterprise
reduces all nominal accounts to zero and determines and transfers the net income or
net loss to an owners' equity account. Also known as "closing the ledger," "closing the
books," or merely "closing."
Debits and Credits - Answer-The terms debit (Dr.) and credit (Cr.) mean left and right,
respectively. These terms do not mean increase or decrease, but instead describe
where a company makes entries in the recording process. That is, when a company
enters an amount on the left side of an account, it debits the account.
- When it makes an entry on the right side, it credits the account. When comparing the
totals of the two sides, an account shows a debit balance if the total of the debit
amounts exceeds the credits. An account shows a credit balance if the credit amounts
exceed the debits.
Double-entry accounting - Answer-Double-entry accounting - The universally used
accounting system in which a company records the dual (two-sided) effect of each
transaction in appropriate accounts. If a company records every transaction with equal
debits and credits, then the sum of all the debits to the accounts must equal the sum of
all the credits.
Double-entry accounting - Answer-Increases to all asset and expense accounts occur
on the left (or debit side) and decreases on the right (or credit side).
- Conversely, increases to all liability and revenue accounts occur on the right (or credit
side) and decreases on the left (or debit side).
The Accounting Equation - Answer-In a double-entry system, for every debit there must
be a credit, and vice versa. This leads us, then, to the basic equation in accounting
Assets = Liabilities + Owners Equity
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