Deck 4: Adjustments, Financial Statements, and the Quality of Earnings

Question 1

A deferred expense such as prepaid insurance is created when cash is paid in advance of the expense incurred, and is reduced when the expense is actually incurred.

Answer 1

True

Question 2

The total asset turnover ratio measures sales dollars generated per dollar of assets and is a measure of efficient management of assets.

Answer 2

True

Question 3

Deferred expenses are initially recorded as assets and when they are later used, expenses will increase and assets will decrease.

Answer 3

True

Question 4

Income taxes incurred but not yet paid at the end of the accounting period is an example of an accrued expense.

Question 5

At the time of the initial cash flow, deferred expenses are recorded as assets and then, when they are used, both expenses and liabilities will increase.

Question 6

Accrued revenues are revenues that have been earned, but the customer has not yet paid for the goods or services.

Question 7

An accrued expense is incurred and also paid for in the current period.

Question 8

Adjusting entries do not involve cash and therefore do not impact the cash flow statement.

Question 9

Rent of $4,000 collected in advance was recorded as unearned rent revenue. At the end of the accounting period, half the rent was earned. The related adjusting entry should be a credit to rent revenue for $2,000 and a debit to unearned rent revenue for $2,000.

Question 10

The journal entry to adjust the prepaid rent account for rent used during the period results in an increase in expenses and a decrease in stockholders' equity.

Question 11

The adjusting entry to record an accrued expense results in a decrease in both assets and stockholders' equity.

Question 12

Under accrual accounting, interest expense would be recognized on the income statement when the interest has accrued with the passage of time even though cash has not been paid.

Question 13

Earnings per share are calculated by dividing net income minus preferred dividends by the average number of shares of common stock outstanding.

Question 14

Depreciation expense is an estimated allocation of the cost of long-term assets and is recorded in a contra-asset called accumulated depreciation.

Question 15

The journal entry to adjust the unearned revenue account when revenues are earned results in an increase in assets and a decrease in liabilities.

Question 16

Earnings per share are calculated by dividing net income by the average number of shares of common stock outstanding.

Question 17

The adjusting entry to record accrued revenues results in an increase in assets and an increase in stockholders' equity.

Question 18

The total asset turnover ratio is computed by dividing sales revenue by average total assets.

Question 19

Cash collected from customers in advance of providing the goods or services creates a liability, which is later reduced when the goods or services are provided.

Question 20

The adjusting entry to record an accrued expense increases liabilities.

Question 21

Which is the correct order of the following steps in the accounting cycle?

A) Prepare financial statements, journalize and post adjusting entries, journalize and post the closing entries, and prepare a post-closing trial balance.
B) Prepare an unadjusted trial balance, journalize and post adjusting entries, journalize and post the closing entries, and prepare financial statements.
C)Journalize and post adjusting entries, journalize and post the closing entries, prepare financial statements, and prepare an adjusted trial balance.
D)Prepare an unadjusted trial balance, journalize and post adjusting entries, prepare financial statements, and journalize and post the closing entries.

Question 22

Which of the following journal entries is created as the result of a deferral? A. Salaries expense
$\quad$ Salaries payable
B. Interest expense
$\quad$ Interest payable
C. Cash
$\quad$ Unearned revenue
D. Accounts receivable
$\quad$ Deferred revenue

A) Option A
B) Option B
C)Option C
D)Option D

Question 23

Which of the following journal entries is created to adjust for a deferral? A. Unearned revenue
$\quad$ Revenue
B. Interest expense
$\quad$ Interest payable
C. Cash
$\quad$ Revenue
D. Accounts receivable
$\quad$ Unearned revenue

A) Option A
B) Option B
C)Option C
D)Option D

Question 24

Accounts that start a new accounting period with zero balances are referred to as temporary accounts and include both balance sheet and income statement accounts.

Question 25

Closing the revenue and gain accounts at year-end requires that these accounts be debited.

Question 26

Which of the following does not correctly describe an adjusting journal entry that debits interest expense and credits interest payable?

A) It increases expenses and decreases retained earnings.
B) It decreases net income and decreases stockholders' equity.
C)It increases expenses and increases liabilities.
D)It decreases assets and decreases stockholders' equity.

Question 27

Which of the following journal entries is created to adjust for an accrual? A. Accounts receivable
$\quad$ Revenues
B. Interest expense
$\quad$ Cash
C. Accounts receivable
$\quad$ Deferred revenue
D. Rent expense
$\quad$ Prepaid rent

A) Option A
B) Option B
C)Option C
D)Option D

Question 28

The year-end closing process transfers net income to retained earnings.

Question 29

On July 1, 2014, Allen Company signed a $100,000, one-year, 6 percent note payable. The principal and interest will be paid on June 30, 2015. How much interest expense should be reported on the income statement for the year ended December 31, 2014?

A) $6,000.
B) $3,000.
C)$1,500.
D)$0.

Question 30

Accounts that retain their balance from one period to the next are referred to as permanent accounts and include balance sheet accounts.

Question 31

At the end of the accounting period, the balances in the nominal accounts are closed while the balances in the real accounts are carried forward to the next accounting period.

Question 32

On October 1, 2014, Adams Company paid $4,800 for a two-year insurance policy with the insurance coverage beginning on that date. As of December 31, 2014, which of the following account balances are correct after adjusting entries have been made?

A) Prepaid insurance $4,800, and Insurance expense $0.
B) Prepaid insurance $0, and Insurance expense $4,800.
C)Prepaid insurance $2,400, and Insurance expense $2,400.
D)Prepaid insurance $4,200, and Insurance expense $600.

Question 33

Which of the following journal entries is created as the result of an accrual? A. Deferred revenue
$\quad$ Revenue
B. Interest expense
$\quad$ Interest payable
C. Cash
$\quad$ Deferred revenue
D. Revenue receivable
$\quad$ Unearned Revenue

A) Option A
B) Option B
C)Option C
D)Option D

Question 34

Income statement accounts are temporary accounts because their balances are closed out at the end of the accounting year.

Question 35

The CHS Company paid $30,000 cash to its landlord on November 1, 2014 for rent covering the six-month period from November 1, 2014 through April 30, 2015. The books are adjusted only at year-end. Which of the following does not correctly describe the effect on CHS Company's financial statements of the December 31, 2014 adjusting entry?

A) Net income decreases $10,000.
B) Prepaid rent decreases $10,000.
C)Rent expense increases $10,000.
D)Stockholders' equity increases $10,000.

Question 36

Morgan Company used supplies in the amount of $2,000. Due to an error in posting to the general ledger, the supplies account was credited for only $200 while supplies expense was debited for $2,000. During which phase of the accounting cycle would this error be first discovered?

A) Analysis of the supplies purchase transaction.
B) Closing the books.
C)Preparation of the adjusted trial balance.
D)Preparation of the income statement.

Question 37

Closing the expense and loss accounts at year-end requires that these accounts be debited.

Question 38

Which is the correct sequence of the following steps in the accounting cycle?

A) Prepare journal entries, analyze transactions, prepare adjusted trial balance.
B) Prepare adjusted trial balance, prepare closing entries, and prepare financial statements.
C)Post adjusting journal entries, prepare adjusted trial balance, prepare financial statements.
D)Post closing entries, prepare financial statements, prepare adjusted trial balance.

Question 39

On April 1, 2014, the premium on a one-year insurance policy was purchased for $3,000 cash with the insurance coverage beginning on that date. The books are adjusted only at year-end. Which of the following correctly describes the effect on the financial statements of the December 31, 2014 adjusting entry?

A) Prepaid insurance will decrease $750.
B) Insurance expense will increase $750.
C)Insurance expense will increase $2,250.
D)Prepaid insurance will increase $2,250.

Question 40

Which of the following is a false statement about the unadjusted trial balance?

A) It is not a financial statement for external reporting purposes.
B) It provides data in a convenient form for preparing the adjusting entries and financial statements.
C)It provides a check of the equality of the debits and credits of the ledger accounts after transactions have been journalized and posted.
D)It provides a listing of balance sheet accounts only.

Question 41

Which of the following adjusting journal entries is created as the result of an accrual? A. Salaries expense
$\quad$ Salaries payable
B. Depreciation expense
$\quad$ Accumulated depreciation
C. Prepaid Rent
$\quad$ Rent expense
D. Accounts receivable
$\quad$ Unearned revenue

A) Option A
B) Option B
C)Option C
D)Option D

Question 42

On January 1, 2014, the general ledger of Global Corporation included supplies of $1,000. During 2014, supplies purchases amounted to $5,000. A physical count of inventory on hand at December 31, 2014 determined that the amount of supplies on hand was $1,200. How much is the 2014 supplies expense?

A) $6,000.
B) $5,200.
C)$4,800.
D)$1,000.

Question 43

Which of the following does not correctly describe an adjusting journal entry that debits supplies expense and credits supplies?

A) It increases expenses and decreases assets.
B) It decreases net income and decreases assets.
C)It increases expenses and increases retained earnings.
D)It decreases net income and decreases stockholders' equity.

Question 44

Which of the following does not correctly describe an adjusting journal entry that debits rent expense and credits prepaid rent?

A) It increases expenses and decreases stockholders' equity.
B) It decreases net income and decreases assets.
C)It increases expenses and decreases current assets.
D)It decreases net income and decreases liabilities.

Question 45

Which of the following correctly describes the effects of initially recording prepaid insurance expense when cash is paid to purchase an insurance policy?

A) Total assets do not change.
B) Net income decreases.
C)Liabilities are decreased.
D)Stockholders' equity increases.

Question 46

Which of the following correctly describes the following adjusting journal entry? Accounts receivable
$\quad$ Franchise fees revenue

A) Total assets do not change.
B) The transaction is an example of an accrual.
C)Stockholders' equity decreases.
D)Net income is not affecteD.Accrued revenues are previously unrecorded revenues that need to be adjusted at the end of the accounting period to reflect the amount earned and the related receivable account.

Question 47

Which of the following does not correctly describe an adjusting journal entry that debits depreciation expense and credits accumulated depreciation?

A) It increases expenses and increases assets.
B) It decreases net income and decreases assets.
C)It increases expenses and decreases retained earnings.
D)It decreases assets and decreases net income.

Question 48

Which of the following does not correctly describe the following journal entry? Supplies
$\quad$ Cash

A) Total assets do not change.
B) The transaction is an example of a deferral.
C)Stockholders' equity decreases.
D)Net income is not affecteD.This journal entry increases and decreases two different asset accounts; there is no impact on stockholders' equity.

Question 49

Which of the following journal entries is used to record a deferral? A. Interest expense
$\quad$ Interest payable
B. Accounts receivable
$\quad$ Service revenues
$\quad$ C. Salaries expense
Salaries payable
D. Cash
$\quad$ Unearned revenue

A) Option A
B) Option B
C)Option C
D)Option D

Question 50

Which of the following correctly describes the following adjusting journal entry? Utilities expense
$\quad$ Utilities payable

A) Total assets decrease and net income decreases.
B) Stockholders' equity decreases and liabilities increase.
C)The transaction is an example of a deferral.
D)Net income decreases and stockholders' equity does not change.

Question 51

Which of the following correctly describes the effects of accruing income tax expense at year-end?

A) A cash payment is made to pay the taxes due.
B) Liabilities are not affected.
C)Retained earnings decreases.
D)Net income increases.

Question 52

Which of the following does not correctly describe the following adjusting journal entry? Salaries expense
$\quad$ Salaries payable

A) Total assets do not change.
B) The transaction is an example of an accrual.
C)Stockholders' equity decreases.
D)Net income is not affecteD.This journal entry increases expenses and liabilities; the increase in expenses decreases net income, retained earnings, and thus stockholders' equity.

Question 53

Which of the following journal entries would not be used to record a deferral? A. Prepaid rent
$\quad$ Cash
B. Cash
$\quad$ Service revenue
C. Supplies
$\quad$ Cash
D. Cash
$\quad$ Unearned revenues

A) Option A
B) Option B
C)Option C
D)Option D

Question 54

Which of the following adjusting journal entries is not created as the result of an accrual? A. Interest expense
$\quad$ Interest payable
B. Accounts receivable
$\quad$ Service revenue
C. Prepaid Rent
$\quad$ Rent expense
D. Interest receivable
$\quad$ Investment income

A) Option A
B) Option B
C)Option C
D)Option D

Question 55

Which of the following does not correctly describe the following adjusting journal entry? Interest receivable
$\quad$ Investment income

A) Total assets increase.
B) The transaction is an example of an accrual.
C)Stockholders' equity decreases.
D)Net income increases.

Question 56

Which of the following does not correctly describe the following adjusting journal entry? Rent expense
$\quad$ Prepaid rent

A) Total assets decrease.
B) Retained earnings are not affected.
C)Stockholders' equity decreases.
D)Net income decreases.

Question 57

Which of the following accounts is used to initially record a deferral?

A) Interest payable.
B) Interest revenue.
C)Supplies.
D)Supplies expense.

Question 58

Which of the following correctly describes the effects of initially recording deferred revenues when cash is received from a customer?

A) Revenues are increased.
B) Liabilities are not affected.
C)Retained earnings increases.
D)Net income is not affecteD.Deferred revenues recorded when cash is received from a customer increases the unearned revenue account and increases cash. These are balance sheet accounts that do not impact net income.

Question 59

Which of the following accounts is used to record an accrual for expenses?

A) Prepaid rent.
B) Unearned revenues.
C)Accounts receivable.
D)Interest payable.

Question 60

Which of the following correctly describes the following adjusting journal entry? Depreciation expense
$\quad$ Accumulated depreciation

A) Total assets decrease.
B) Liabilities will increase.
C)Stockholders' equity is not affected.
D)Net income increases.

Question 61

Which of the following transactions results in an increase in both net income and stockholders' equity?

A) Paying cash to acquire a six-month insurance policy.
B) Collecting cash from a customer for services to be provided in the future.
C)The accrual of interest expense year-end.
D)Adjustment of the unearned revenue account for revenue earned during the perioD.Adjusting unearned revenue for revenue earned results in a credit to revenue and a debit to unearned revenue. This decreases liabilities and increases net income and stockholders' equity.

Question 62

Which of the following transactions and events results in an increase in liabilities and a decrease in net income?

A) The accrual of salaries expense at year-end.
B) Collecting cash from a customer for services to be provided in the future.
C)The accrual of revenue earned at year-end.
D)Adjustment of the unearned revenue account for revenue earned during the perioD.The accrual of salaries expense at year-end recognizes an expense that decreases net income, and creates a salaries payable that increases liabilities.

Question 63

Which of the following best describes the difference between an unadjusted trial balance and an adjusted trial balance?

A) An unadjusted trial balance is prepared at the start of the accounting period and is not provided to external decision makers, while an adjusted trial balance is prepared at the end of the period and is provided to external decision makers.
B) An unadjusted trial balance is prepared by companies that make adjusting entries, while an adjusted trial balance is prepared by companies that do not make adjusting entries.
C)An unadjusted trial balance is prepared before the adjusting entries have been made, while an adjusted trial balance is prepared after the adjusting entries have been made.
D)An unadjusted trial balance is prepared after the post-closing trial balance.

Question 64

Which of the following is not an accrual?

A) Crediting salaries payable for salaries earned to date.
B) Debiting interest receivable for interest earned to date.
C)Debiting interest expense for interest incurred to date.
D)Debiting depreciation expense for depreciation incurred during the perioD.Depreciation expense is classified as a deferred expense; it is the amount of expense incurred in using the asset to generate revenue.

Question 65

What is the effect on the financial statements when a company fails to accrue salaries expense at year-end?

A) Net income is overstated and liabilities are understated.
B) Expenses are understated and stockholders' equity is understated.
C)Expenses and liabilities are both overstated.
D)Net income is overstated and liabilities are properly reporteD.Salary expenses that are not accrued result in expenses and liabilities being under-stated. Understated expenses result in overstated net income.

Question 66

What is the effect on the financial statements when a company fails to adjust the prepaid insurance expense account at year-end for insurance coverage that has been used?

A) Net income is overstated and stockholders' equity is understated.
B) Expenses are understated and stockholders' equity is understated.
C)Expenses are understated and net income is understated.
D)Net income is overstated and assets are overstateD.Failure to reduce prepaid insurance expense to reflect insurance coverage that has been used results in the prepaid asset account being overstated and the insurance expense account being understated. The result is that net income and assets are overstated.

Question 67

On December 31, 2014, Krug Company reported total liabilities of $110,000 prior to the following adjusting entries: Depreciation expense: $31,000.
Accrued service revenues: $29,000.
Accrued expenses: $12,000.
Used insurance: $9,000; the insurance was initially recorded as prepaid.
Rent revenue earned: $7,000; the rent was initially prepaid by the tenant and credited to unearned rent revenue.
How much are Krug's total liabilities after adjusting entries?

A) $115,000.
B) $141,000.
C)$86,000.
D)$110,000.

Question 68

Which of the following transactions and events results in a decrease in both total assets and net income?

A) The accrual of salaries expense at year-end.
B) Collecting cash from an account receivable.
C)Recognizing previously recorded deferred revenue as revenue.
D)Adjustment of the prepaid rent account for rent used during the perioD.Adjusting prepaid rent for rent used during the period reduces the prepaid rent (asset) account and recognizes a rent expense. The rent expense decreases net income.

Question 69

What is the effect on the financial statements when a company fails to adjust the unearned revenue account for revenues earned at year-end?

A) Net income is understated and assets are understated.
B) Revenues are understated and liabilities are understated.
C)Net income is understated and liabilities are overstated.
D)Revenues are understated and stockholders' equity is overstateD.Failure to recognize revenues that were previously reported as unearned results in lower revenues = lower net income figure; overstated unearned revenue = overstated liabilities.

Question 70

On December 31, Krug Company reported stockholders' equity of $280,000 prior to the following adjusting entries: Depreciation expense: $31,000.
Accrued service revenues: $29,000.
Accrued expenses: $12,000.
Used insurance: $9,000; the insurance was initially recorded as prepaid.
Rent revenue earned; $7,000; the rent was initially prepaid by the tenant and credited to unearned rent revenue.
How much is Krug's stockholders' equity after adjusting entries?

A) $280,000.
B) $262,000.
C)$295,000.
D)$264,000.

Question 71

What is the effect on the financial statements when a company fails to accrue interest expense at year-end?

A) Net income is overstated and assets are overstated.
B) Expenses are understated and liabilities are understated.
C)Expenses are understated and stockholders' equity is understated.
D)Net income is overstated and liabilities are overstateD.Failure to accrue interest expense results in expenses being understated and the resulting interest payable is not increased to reflect the obligation to pay this expense.

Question 72

Failure to make an adjusting entry to recognize rent revenue receivable would cause which of the following?

A) An understatement of assets, net income, and stockholders' equity.
B) An overstatement of assets and stockholders' equity and an understatement of net income.
C)No effect on assets, liabilities, net income, or stockholders' equity.
D)An overstatement of assets, net income, and stockholders' equity.

Question 73

Which of the following transactions does not create a deferral?

A) Paying cash to purchase a three-month insurance policy.
B) Receiving cash from a customer for services to be provided in the future.
C)Paying cash to employees for wages they have earned.
D)Paying cash to purchase a two-month supply of office supplies.

Question 74

On July 1, 2014, Goode Company borrowed $100,000. The company signed a note payable with interest at 6 percent per year. The note and interest are due on December 31, 2014. On December 31, 2014, Goode paid $103,000 to settle the debt in full. Assuming no accruals for interest have been made during the year, transaction analysis of the $103,000 cash payment on December 31, 2014 should reflect which of the following?

A) A decrease in assets of $103,000 and a decrease in liabilities of $103,000.
B) A decrease in assets of $100,000, a decrease in stockholders' equity of $3,000, and a decrease in liabilities of $103,000.
C)A decrease in stockholders' equity of $100,000, a decrease in liabilities of $3,000, and a decrease in assets of $103,000.
D)A decrease in liabilities of $100,000, a decrease in stockholders' equity of $3,000, and a decrease in assets of $103,000.

Question 75

What is the effect on the financial statements when a company fails to record depreciation expense at year-end?

A) Net income is overstated and stockholders' equity is understated.
B) Expenses are understated and stockholders' equity is understated.
C)Expenses are understated and liabilities are overstated.
D)Net income is overstated and assets are overstateD.Failure to record depreciation results in expenses being too low, net income being overstated and assets being overstated. Not recording depreciation expense fails to increase accumulated depreciation that, as a contra-asset, fails to decrease assets.

Question 76

On December 31, 2014, Krug Company reported pretax income of $120,000 prior to the following adjusting entries: Depreciation expense: $31,000.
Accrued service revenues: $29,000.
Accrued expenses: $12,000.
Used insurance: $9,000; the insurance was initially recorded as prepaid.
Rent revenue earned: $7,000; the rent was initially prepaid by the tenant and credited to unearned rent revenue.
How much is Krug's pretax income after adjusting entries?

A) $113,000.
B) $104,000.
C)$106,000.
D)$128,000.

Question 77

On January 1, 2014, Ryan Company paid the premium on a three-year insurance policy in the amount of $6,000. At that time, the full amount paid was recorded as prepaid insurance. After recording the adjusting entry for the insurance policy on December 31, 2014, what would be the balance in Ryan Company's prepaid insurance account?

A) $6,000.
B) $2,000.
C)$3,000.
D)$4,000.

Question 78

Assume Idaho Company recorded the following adjusting journal entry at year-end: If the beginning balance in prepaid insurance was $500, and $2,500 was paid for an insurance premium during the year, what is the ending balance in the prepaid insurance account after the above adjusting entry?
$$\begin{array} { | c | r | r | } \hline \text { Insurance expense } & \$ 2,000 & \\\hline \text { Prepaid insurance } & & \$ 2,000 \\\hline\end{array}$$

A) $1,200.
B) $700.
C)$2,200.
D)$1,000.

Question 79

On December 31, 2014, Krug Company reported total assets of $390,000 prior to the following adjusting entries: Depreciation expense was $31,000.
Accrued service revenues totaled $29,000.
Accrued expenses totaled $12,000.
Used insurance: $9,000; the insurance was initially recorded as prepaid.
Rent revenue earned: $7,000; the rent was initially prepaid by the tenant and credited to unearned rent revenue.
How much are Krug's total assets after adjusting entries?

A) $350,000.
B) $386,000.
C)$379,000.
D)$374,000.

Question 80

What is the effect on the financial statements when a company fails to accrue revenue earned at year-end?

A) Net income is understated and assets are understated.
B) Revenue is understated and stockholders' equity is overstated.
C)Revenue is understated and assets aren't affected.
D)Net income is understated and liabilities are overstateD.Failure to accrue earned revenue results in revenues being understated and thus net income being understated. The resulting receivable is not increased to reflect the future payment for the earned revenue.