EXERCISE 3.1

Accounting Terminology

Listed below are eight technical accounting terms introduced in this chapter:

Realization principle	Credit
Time period principle	Accounting period
Matching principle	Expenses
Net income	Accounting cycle

Each of the following statements may (or may not) describe one of these technical terms. For each statement, indicate the term described, or answer None if the statement does not correctly describe any of the terms.

a.The span of time covered by an income statement.

b.The sequence of accounting procedures used to record, classify, and summarize accounting information.

c.The traditional accounting practice of resolving uncertainty by choosing the solution that leads to the lowest amount of income being recognized.

d.An increase in owners equity resulting from profitable operations.

e.The underlying accounting principle that determines when revenue should be recorded in the accounting records.

f.The type of entry used to decrease an asset or increase a liability or owners equity account.

g.The underlying accounting principle of offsetting revenue earned during an accounting period with the expenses incurred in generating that revenue.

h.The costs of the goods and services used up in the process of generating revenue.

L03-6, L03-7

EXERCISE 3.2

The Matching Principle: You as a Driver

The purpose of this exercise is to demonstrate thematching principlein a familiar setting. Assume that you own a car that you drive about 15,000 miles each year.

a.List the various costs to you associated with owning and operating this car. Make an estimate of the total annual cost of owning and operating the car, as well as the average cost-per-mile that you drive.

b.Assume also that you have a part-time job. You usually do not use your car in this job, but today your employer asks you to drive 100 miles (round-trip) to deliver some important documents. Your employer offers to reimburse you for your driving expenses.

You already have a full tank of gas, so you are able to drive the whole 100 miles without stopping and you dont actually spend any money during the trip. Does this mean that you have incurred no expenses for which you should be reimbursed? Explain.

LO3-2 through LO3-5

EXERCISE 3.3

Relationship between Journal and Ledger Accounts

Transactions arefirstjournalized andthenposted to ledger accounts. In this exercise, however, your understanding of the relationship between the journal and the ledger is tested by asking you to study some ledger accounts and determine the journal entries that probably were made to produce these ledger entries. The following accounts show the first six transactions of Avenson Insurance Company. Prepare a journal entry (including a written explanation) for each transaction.

LO3-9

EXERCISE 3.4

Preparing a Trial Balance

Using the information in the ledger accounts presented in Exercise 3.3, prepare a trial balance for Avenson Insurance Company dated November 30.

LO3-6, LO3-8

EXERCISE 3.5

Relationship between Net Income and Equity

The following information came from a recent balance sheet ofApple Computer, Inc.:

a.Determine the amount of total liabilities reported inApple Computers balance sheet at the beginning of the year.

b.Determine the amount of total owners equity reported inApple Computers balance sheet at the end of the year.

c.Retained earnings was reported inApple Computers year-end balance sheet at $101.3 billion. If retained earnings was $62.8 billion at the beginning of the year, determine net income for the year if a $2.5 billion dividend was declared during the year.