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

Question 1

A legal firm received $2,000 cash for legal services to be rendered in the future. The full amount was credited to Unearned Service Revenue. If the legal services have been provided at the end of the accounting period and no adjusting entry is made, this would cause

A) expenses to be overstated.
B) revenues to be understated.
C) profit to be overstated.
D) liabilities to be understated.

Answer 1

B

Question 2

The difference between the equipment account balance and the accumulated amortization equipment account balance is called which of the following?

A) net book value
B) acquisition cost
C) net realizable value
D) market value

Answer 2

A

Question 3

Which one of the following accounts would not be closed at the end of the accounting year?

A) Dividends payable.
B) Sales revenue.
C) Salaries expense.
D) Rent expense.

Answer 3

A

Question 4

The balance in the Prepaid Rent account before adjustment at the end of the year is $12,000 and represents three months rent starting on November 1. The adjusting entry required on December 31 is

A) debit Prepaid Rent, $4,000; credit Rent Expense $4,000.
B) debit Rent Expense, $12,000; credit Prepaid Rent, $12,000.
C) debit Rent Expense, $8,000; credit Prepaid Rent, $8,000.
D) debit Prepaid Rent, $8,000; credit Rent Expense, $8,000.

Question 5

On March 1, 20A, the premium on a two-year insurance policy on equipment was paid amounting to $1,800. At the end of 20A (end of the accounting period), the financial statements for 20A, would report which of the following?

A) Insurance expense, $1,800; Prepaid insurance $0.
B) Insurance expense, $900; Prepaid insurance $900.
C) Insurance expense, $0; Prepaid insurance $1,800.
D) Insurance expense, $750; Prepaid insurance $1,050.

Question 6

For the year 20A, Tally Corporation reported $50,000 pre-tax profit (average annual income tax rate of 40%). What was the after tax profit?

A) $10,000.
B) $15,000.
C) $30,000.
D) $20,000.

Question 7

Select the statement that best describes the primary purpose of preparing closing entries.

A) To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period.
B) To complete the recording of various transactions which are begun in one period and concluded in a later period.
C) To determine the amount of profit or loss for the period.
D) To facilitate adjusting entries.

Question 8

A post-closing trial balance will show account balances for which of the following?

A) income statement accounts only.
B) permanent and temporary accounts.
C) permanent accounts only.
D) temporary accounts only.

Question 9

Because of its complexity and susceptibility to errors, which step in the process do independent auditors examine most closely?

A) financial statement preparation
B) deferred and accrued adjustments
C) closing entries
D) tax reports

Question 10

The primary purpose of the statement of cash flows is to report which of the following?

A) liability changes made by the financial department of the company during the period.
B) profit earned and dividends paid during the period.
C) all inflows and outflows of cash during the period.
D) assets owned and claims against those assets at the end of the period.

Question 11

On July 1, Rawling Store paid $6,000 to Iceberg Realty for six months rent, starting July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by Rawling Store is

A) debit Prepaid Rent, $6,000; credit Rent Expense, $6,000.
B) debit Rent Expense, $6,000; credit Prepaid Rent, $6,000.
C) debit Rent Expense, $1,000; credit Prepaid Rent, $1,000.
D) debit Prepaid Rent, $1,000; credit Rent Expense, $1,000.

Question 12

A calendar year reporting company preparing its annual financial statements should use the phrase "At December 31, 20XX" in the heading of which of the following?

A) The income statement, but neither the statement of financial position nor the statement of cash flows.
B) The statement of financial position only.
C) The income statement and statement of financial position, but not the statement of cash flows.
D) All of the required financial statements it prepares.

Question 13

The basic financial statements prepared for external users do not include which of the following?

A) The statement of cash flows.
B) The income statement.
C) The statement of financial position.
D) The revenue statement.

Question 14

On January 1, 20A, Thomas Company paid $1,000 for a two-year insurance policy on the building. The accounting period ends December 31. At the end of 20A, the financial statements should report which of the following?

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 15

Time Corporation reported the following for 20A: What was the amount of earnings per share?

A) $19.00.
B) $20.00.
C) $2.00.
D) $1.00.

Question 16

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

A) An overstatement of assets and shareholders' equity and an understatement of profit.
B) No effect on assets, liabilities, profit, nor shareholders' equity.
C) An understatement of assets, profit, and shareholders' equity.
D) An overstatement of assets, profit, and shareholders' equity.

Question 17

On October 1, 20A, Ethan Company borrowed $10,000 on a 4-month note with an annual interest rate of 9 percent. How much interest expense should be reported for 20A, assuming that the note is paid on time and Ethan Company's accounting year coincides with the calendar year?

A) $300.
B) $225.
C) $900.
D) $-0-.

Question 18

Which of the following statements best describes the relationship between profit for the period and the ending balance in retained earnings?

A) Retained earnings at the end of the period increases the amount of profit.
B) Profit for the period increases the ending balance of retained earnings.
C) Profit for the period has no effect on the ending balance of retained earnings.
D) Profit for the period reduces the ending balance of retained earnings.

Question 19

The statement of changes in equity would not include which of the following?

A) The closing balance in the relevant accounts from the previous year.
B) Dividends declared.
C) Profit.
D) Net sales.

Question 20

Which of the following statements is true about earnings per share?

A) It represents the profit available to the preferred shareholders.
B) It evaluates the efficiency with which the company uses their assets to generate sales revenue.
C) It is the only ratio required to be disclosed on the statement of earnings.
D) It assesses the ability of the firm to pay their bills as they come due.

Question 21

An adjusted trial balance shows that

A) all journal entries have been made.
B) no posting errors have been made.
C) debits equal credits in the ledger accounts after the adjusting entries have been made.
D) all accounts have the correct balance.

Question 22

Prepaid expenses are

A) paid and recorded in an asset account after they are used or consumed.
B) incurred but not yet paid or recorded.
C) paid and recorded in an asset account before they are used or consumed.
D) incurred and already paid or recorded.

Question 23

A trial balance prepared after the closing entries have been posted would exclude which one of the following accounts?

A) Inventory.
B) Accumulated depreciation.
C) Service revenue.
D) Trade receivables.

Question 24

If a business declared and paid a $500 dividend, it would appear on which of the following?

A) Income statement only.
B) Statement of changes in equity only.
C) Statement of changes in equity and the statement of cash flows.
D) Statement of financial position only.

Question 25

The Pitter Corporation purchased a notebook computer for $3,000 on December 1. The useful life of the notebook computer is estimated to be 5 years. If financial statements are to be prepared on December 31, the company should make the following adjusting entry:

A) debit Depreciation Expense, $50; credit Accumulated Depreciation, $50.
B) debit Office Equipment, $50; credit Accumulated Depreciation, $50.
C) debit Depreciation Expense, $2,400; credit Accumulated Depreciation, $2,400.
D) debit Depreciation Expense, $600; credit Accumulated Depreciation, $600.

Question 26

Which of the following is the essential difference between an unadjusted trial balance and an adjusted trial balance?

A) An unadjusted trial balance is prepared at the start of the accounting year, while an adjusted trial balance is prepared at the end of the year.
B) An unadjusted trial balance is prepared after the post-closing trial balance.
C) An unadjusted trial balance is prepared by companies which make adjusting entries, while an adjusted trial balance is prepared by companies that do not make adjusting entries.
D) An unadjusted trial balance is prepared before the adjusting entries are reflected, while an adjusted trial balance is prepared after the adjusting entries are reflected.

Question 27

Which of the following is one of the sections on the statement of cash flows?

A) Inventing activities.
B) Cycling activities.
C) Borrowing activities.
D) Operating activities.

Question 28

At the end of its accounting period, December 31, 20B, May Corporation owed $1,000 for property taxes which had not been recorded nor paid. Therefore, the 20B adjusting entry should be which of the following?

A) $1,000 credited to a liability account and debited to an expense account.
B) $1,000 debited to a liability account and credited to an asset account.
C) $1,000 credited to an expense account and debited to a liability account.
D) $1,000 debited to an expense account and credited to an asset account.

Question 29

Which is the correct order of the steps in the accounting cycle during the accounting period?

A) Transaction analysis, journal entries, trial balance
B) Transaction analysis, posting to the accounts, journal entries
C) Transaction analysis, journal entries, posting to the accounts
D) Transaction analysis, posting to the accounts, adjusting the accounts

Question 30

The income statement is prepared by using the revenue and expense account balances from the

A) journal.
B) trial balance.
C) ledgers.
D) adjusted trial balance.

Question 31

Which of the following would most likely lead to an accrued adjustment?

A) Interest revenue earned but not yet collected.
B) Prepaid wages.
C) Prepaid insurance
D) Rent received in advance.

Question 32

At the end of 20C, Libby Company reported an ending balance for retained earnings of $50,000. During 20D, the company reported the following amounts: Dividends declared and paid, $30,000 and profit, $40,000. The 20D statement of Retained Earnings should report an ending balance for retained earnings of which of the following?

A) $90,000.
B) $60,000.
C) $100,000.
D) $80,000.

Question 33

Closing entries

A) cause the revenue and expense accounts to have zero balances.
B) reduce the number of permanent accounts.
C) are prepared before the financial statements.
D) summarize the activity in every account.

Question 34

On January 1, 20B, the ledger of Global Corporation correctly showed supplies inventory of $500. During 20B, supplies purchases amounted to $700. A count (inventory) of supplies on hand at December 31, 20B, showed $400. The 20B income statement should report supplies expense amounting to which of the following?

A) $1,100.
B) $1,200.
C) $700.
D) $800.

Question 35

The process that begins with analyzing transactions and ends with the preparation of a post-closing trial balance is called

A) the fiscal period.
B) the accounting cycle.
C) the accounting period.
D) the business cycle.

Question 36

At the end of 20D, Dallas Company made the following adjusting entry to record $10,000 accrued (unpaid) wages:

A) $30,000 debit to wages expense and a $10,000 debit to wages payable.
B) $10,000 debit to wages expense and a $30,000 debit to wages payable.
C) $50,000 debit to wages expense and a $10,000 debit to wages payable.
D) $40,000 debit to wages expense and a $10,000 debit to wages payable.

Question 37

The changes in revenues and expenses caused by accruals and deferrals are classified as which of the following?

A) operating activities
B) financing activities
C) non-operating activities
D) investing activities

Question 38

Before the closing entries were made at the end of 20B, the following data were taken from the accounts of Joe Corporation: What is the amount of shareholders' equity that should appear on Joe Corporation's statement of financial position dated December 31, 20B?

A) $270,000.
B) $300,000.
C) $230,000.
D) $110,000.

Question 39

An income statement reports which of the following?

A) profit of a business at a point in time.
B) resources, liabilities, and shareholders' equity of a business at a point in time.
C) profit of a business for a period of time.
D) revenues, expenses, assets, and liabilities during an accounting period.

Question 40

Which of the following is true about closing the books of a corporation?

A) Expenses are closed to the Expense Summary account.
B) Revenues and expenses are closed to the Income Summary account.
C) Only revenues are closed to the Income Summary account.
D) Revenues, expenses, and the Dividends account are closed to the Income Summary account.

Question 41

A post-closing trial balance will show

A) zero balances for statement of financial position accounts.
B) only income statement accounts.
C) zero balances for all accounts.
D) only statement of financial position accounts.

Question 42

Which of the following statements about a high net profit margin is FALSE?

A) It may mean that you are keeping your operating expenses under control to earn an acceptable profit.
B) It may mean that your business might need to take on debt to pay its expenses.
C) It demonstrates how effective your business is at converting sales into profit.
D) It may mean that you are capitalizing on some competitive advantage that can provide your business with extra capacity and flexibility during the hard times.

Question 43

Joe Company purchased supplies inventory for $5,000. Due to an error in posting, the inventory account was debited for only $500 when trade payables were credited for $5,000. During which phase of the accounting information cycle, would this error be discovered?

A) Preparation of the financial statements.
B) Recording transaction in the journal.
C) Analysis of each transaction.
D) Preparation of the trial balance.

Question 44

Return on equity is a ratio that:

A) is calculated by dividing profit plus preferred dividends by average common shareholders' equity and shows the relationship between profit available for common shareholders and average common shareholders' equity.
B) shows the relationship between net earnings and average shareholders' equity.
C) cannot be calculated if the company has preferred shares in addition to common shares.
D) is calculated by dividing profit plus preferred dividends by average common shareholders' equity.

Question 45

Which of the following errors would most likely lead to an overstatement of income?

A) Failure to adjust prepaid expenses account for the portion of insurance expired this year.
B) Failure to adjust deferred rent revenue account for the portion of rent earned this year.
C) Recording revenue in the next period when the cash is collected although it is earned in the current year.
D) Recording an expense incurred in this year when the cash is paid next year.

Question 46

An adjusted trial balance

A) is prepared after the financial statements are completed.
B) cannot be used to prepare financial statements.
C) proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made.
D) is a required financial statement under international financial reporting standards.

Question 47

The Town Laundry purchased $5,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $3,000 on hand. The adjusting entry that should be made by the company on June 30 is

A) debit Laundry Supplies Expense, $3,000; credit Laundry Supplies, $3,000.
B) debit Laundry Supplies, $2,500; credit Laundry Supplies Expense, $2,500.
C) debit Laundry Supplies Expense, $2,500; credit Laundry Supplies, $2,500.
D) debit Laundry Supplies, $3,000; credit Laundry Supplies Expense, $3,000.

Question 48

Which of the following accounts would most likely lead to a deferred adjustment?

A) Prepaid expenses
B) Rent receivable
C) Subscriptions revenue receivable
D) Wages payable

Question 49

On April 1, 20A, Allen Company signed a $12,000, one-year, 10 percent note payable. At due date, April 1, 20B, the principal and interest will be paid. Interest expense should be reported on the income statement (for the year ended December 31, 20A) as which of the following?

A) $1,200.
B) $900.
C) $700.
D) $800.

Question 50

The primary difference between prepaid and accrued expenses is that prepaid expenses have

A) not been recorded and accrued expenses have been recorded.
B) not been paid and accrued expenses have been paid.
C) been paid and accrued expenses have not been paid.
D) been incurred and accrued expenses have not incurred.

Question 51

Ultra Realty received a cheque for $21,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rental Revenue was credited for the full $21,000. Financial statements will be prepared on July 31. Ultra Realty should make the following adjusting entry on July 31:

A) debit Cash, $3,500; credit Rental Revenue, $3,500.
B) debit Rental Revenue, $3,500; credit Unearned Rental Revenue, $3,500.
C) debit Unearned Rental Revenue, $21,000; credit Rental Revenue, $21,000.
D) debit Unearned Rental Revenue, $3,500; credit Rental Revenue, $3,500.

Question 52

The statement of cash flows does which of the following?

A) Identifies all assets held at the end of the accounting period by type and amount.
B) Explains what caused profit during the accounting period.
C) Explains that the trial balance is in balance.
D) Explains all of the sources and uses of cash during the accounting period.

Question 53

An accountant has billed her clients for services performed in October. In November, she receives payments from her clients. What entry will she make upon receipt of the payments?

A) Debit Unearned Revenue and credit Service Revenue.
B) Debit Cash and credit Service Revenue.
C) Debit Cash and credit Accounts Receivable.
D) Debit Accounts Receivable and credit Service Revenue.

Question 54

This question focuses on the accounting cycle and the accounting model. For each item listed, indicate the best description by entering a capital letter in the space provided.
Description
A. End-of-period entries to transfer balances of temporary accounts to another account.
B. Income statement accounts.
C. Revenues collected but not earned.
D. Revenues minus expenses.
E. An expense incurred but not recorded nor paid.
F. Ending retained earnings.
G. Statement of financial position accounts.
H. Entries at the end of the period necessary to measure income.
Item
____ 1. Accrued expense
____ 2. Temporary accounts
____ 3. Closing entries
____ 4. Permanent accounts
____ 5. Adjusting entries
6. Deferred revenues

Question 55

Profit would appear on which of the following?

A) Income statement and statement of financial position.
B) Statement of changes in equity and income statement.
C) Statement of financial position only.
D) Income statement only.

Question 56

Which of the following applies to both the depreciation expense account and the accumulated depreciation account at the end of the first year of operations?

A) They are closed.
B) They appear in a trial balance prepared after the adjusting entries but before the closing entries.
C) They appear in a trial balance prepared prior to the adjusting and closing entries.
D) They are not closed at the end of the accounting period.

Question 57

At the end of 20D, the following data were taken from the accounts of Timberline Company: The 20D closing entries would include which of the following?

A) $190,000 debit to retained earnings.
B) $10,000 net credit to retained earnings.
C) $10,000 net debit to retained earnings.
D) $180,000 credit to retained earnings.

Question 58

The purpose of preparing the post-closing trial balance is to

A) list all the statement of financial position accounts in alphabetical order for easy reference.
B) prove the equality of the temporary account balances that are carried forward into the next accounting period.
C) prove that no mistakes were made.
D) prove the equality of the permanent account balances that are carried forward into the next accounting period.

Question 59

All of the accounts in an accounting system can be classified broadly as either:
A. Income statement accounts.
B. Statement of financial position accounts.
Below are listed some other classifications of accounts. You are to identify them with the above classifications by entering either A or B to the left of each.
1. Temporary accounts.
____ 2. Not closed at the end of the accounting period.
____ 3. Permanent accounts.
____ 4. Closed at the end of the accounting period.

Question 60

Assume Minor Company recorded the following adjusting entry at year-end:

A) $1,500 debit.
B) $100 debit.
C) $2,200 debit.
D) $1,400 debit.

Question 61

Closing entries result in the transfer of net profit or loss into the Retained Earnings account.

Question 62

When preparing the statement of financial position, the balance of Retained Earnings is taken from the Adjusted Trial Balance.

Question 63

The Income Summary account is a permanent account.

Question 64

Temporary accounts are closed to a zero balance at the end of the accounting period to allow for the accumulation of profit items in the following period.

Question 65

During the accounting period, an expense paid in advance and debited to prepaid expense was $180; therefore, the adjusting entry for the expiration of this item should be to debit an expense account for $180 and credit a prepaid expense account for $180.

Question 66

The statement of cash flows shows the cash inflows, cash outflows, and change in cash for a period.

Question 67

Closing entries are prepared before adjusting entries.

Question 68

An expense incurred, but not yet recorded nor paid, creates a liability until the payment is made.

Question 69

Financial statements are generally prepared before the closing entries are posted.

Question 70

Earnings per share is widely used in evaluating the operating performance and profitability of a company and is the only ratio required to be disclosed on the statement of earnings or in the notes to the financial statements.

Question 71

Each adjusting entry affects at least one income statement account and at least one statement of financial position account.

Question 72

Rent of $150 collected in advance was credited to rent revenue. At the end of the accounting period, it was still unearned. The related adjusting entry should be: Debit-- Rent revenue, $150; Credit--Unearned rent revenue, $150.

Question 73

Service revenue earned but not yet collected by the end of the period was $200; therefore, the adjusting entry should be: Debit--Service revenue receivable, $200; Credit--Unearned service revenue, $200.

Question 74

The accounting cycle begins with the journalizing of the transactions.

Question 75

External auditors closely examine the adjustment process of a company because adjustments are the most complex part of the accounting process and therefore the most error prone.

Question 76

To compute depreciation expense using the straight-line formula, the cost of a depreciable asset (i.e., equipment) must be reduced by any estimated residual or salvage value.

Question 77

Amortization expense is an example of the need for accountants to make estimates in order to record adjustments.

Question 78

Match the following entry descriptions with the accounting entries to which they relate by placing the appropriate letter to the left. A letter may be used more than once.
A. Adjusting entries.
B. Closing entries.
C. All of the entries listed above.
D. None of the entries listed above.
1. May be initially recorded in the general ledger.
2. They must be determined before the financial statements for the period ar prepared.
____ 3. Clears the temporary account balances at the end of the period.
____ 4. Clears the permanent account balances at the end of the period.
____ 5. They affect both temporary and nominal accounts.

Question 79

Earnings per share (EPS) amounts must be reported on the statement of financial position of corporations.

Question 80

On September 1, 20A, RF Corporation collected rent of $2,400 for one year in advance. The three possible ways in which RF Corporation could have recorded the transaction on September 1, 20A, (i.e., the original journal entry) are listed below. Also listed are three different adjusting entries that could be made on December 31, 20A (the end of the accounting year). Match each journal entry with the appropriate adjusting entry.
Journal Entry, Sept. 1, 20A.
A. B. C. Adjusting Entry, Dec 31, 20A
1. 2. 3. No adjusting entry needed