Exam 3: Adjusting Accounts and Preparing Financial Statements

Recording revenues early overstates current-period income; recording revenues late understates current period income.

Adjusting entries are designed primarily to correct accounting errors.

The time period assumption assumes that an organization's activities can be divided into specific time periods including all of the following except:

The matching principle requires that expenses get recorded in the same accounting period as the revenues that are earned as a result of the expenses, not when cash is paid.

Accrued revenues at the end of one accounting period are expected to result in cash payments in a future period.

A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters, or years is the:

Ned's net income was $780,000; its net assets were $5,200,000; and its net sales were $9,000,000. Calculate its profit margin ratio.

The cash basis of accounting is an accounting system in which revenues are recorded when cash is received and expenses are recorded when cash is paid.

In preparing statements from the adjusted trial balance, the balance sheet must be prepared first.

The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is:

Prior to recording adjusting entries on December 31, a company's Store Supplies account had an $880 debit balance. A physical count of the supplies showed $325 of unused supplies available as of December 31. Prepare the required adjusting entry.

A company had no office supplies available at the beginning of the year. During the year, the company purchased $250 worth of office supplies. On December 31, $75 worth of office supplies remained. How much should the company report as office supplies expense for the year?

What are the types of adjusting entries used for prepaid expenses, depreciation and unearned revenues?

Discuss how accrual accounting enhances the usefulness of financial statements.

Explain the purpose of adjusting entries at the end of a period.

Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly recorded.

Complete the following by filling in the blanks: (1) The Prepaid Insurance account had a $455 debit balance at the beginning of the current year; $650 of insurance premiums were paid during the year; and the year-end balance sheet showed $420 of prepaid insurance; consequently, the income statement for the year must have shown $_______________ of insurance expense. (2) The Office Supplies account began the current year with a $235 debit balance; the income statement for the year showed $475 of office supplies expense; and the year-end balance sheet showed the current asset, office supplies, at $225; consequently, if all supplies were accounted for, $_____________ of office supplies must have been purchased during the year.

The accrual basis of accounting requires adjustments to recognize revenues in the periods they are earned and to match expenses with revenues.

Show the December 31 adjusting entry to record $750 of earned but unpaid salaries of employees at the end of the current accounting period.

Financial statements can be prepared directly from the information in the adjusted trial balance.