Deck 3: Adjusting Accounts for Financial Statements

Question 1

An adjusting entry often includes an entry to Cash.

Answer 1

False

Question 2

Each adjusting entry will affect a balance sheet account.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items.

Question 5

Adjusting entries are designed primarily to correct accounting errors.

Question 6

Adjusting entries are made after the preparation of financial statements.

Question 7

Interim financial statements report a company's business activities for a one-year period.

Question 8

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.

Question 9

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

Question 10

The cash basis of accounting commonly increases the comparability of financial statements from period to period.

Question 11

Two main accounting principles used in accrual accounting are matching and full closure.

Question 12

Adjusting entries result in a better matching of revenues and expenses for the period.

Question 13

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

Question 14

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

Question 15

Prior to recording adjusting entries at the end of an accounting period, some accounts may not show correct balances even though all transactions were properly recorded.

Question 16

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

Question 17

Accrued expenses reflect transactions where cash is paid before a related expense is recognized.

Question 18

Each adjusting entry affects one or more income statements account, one or more balance sheet account, and never cash.

Question 19

A company's fiscal year must correspond with the calendar year.

Question 20

Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account.

Question 21

Closing entries are required at the end of each accounting period to close all ledger accounts.

Question 22

If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year of rent in advance and adjusting entries are made at the end of each month, the balance remaining in Prepaid Rent on December 1 should be $1,500.

Question 23

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

Question 24

Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated.

Question 25

Depreciation expense for a period is the portion of a plant asset's cost that is allocated to that period.

Question 26

A salary owed to employees is an example of an accrued expense.

Question 27

An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded.

Question 28

Revenue and expense balances are transferred from the adjusted trial balance to the income statement.

Question 29

Income Summary is a temporary account only used for the closing process.

Question 30

Profit margin reflects the percent of profit in each dollar of revenue.

Question 31

Revenue accounts are temporary accounts that should begin each accounting period with zero balances.

Question 32

Failure to record depreciation expense will overstate assets and understate expenses.

Question 33

Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset.

Question 34

Depreciation measures the decline in market value of an asset.

Question 35

The closing process is a step in the accounting cycle that prepares accounts for the next accounting period.

Question 36

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

Question 37

The adjusted trial balance must be prepared before the adjusting entries are made.

Question 38

Before an adjusting entry is made to recognize the cost of expired insurance for the period, Prepaid Insurance and Insurance Expense are both overstated.

Question 39

A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account.

Question 40

Profit margin can also be called return on sales.

Question 41

Closing entries are necessary so that retained earnings will begin each period with a zero balance.

Question 42

Plant assets are usually listed in order from most liquid to least liquid.

Question 43

The first five steps in the accounting cycle include analyzing transactions, journalizing, posting, preparing an unadjusted trial balance, and recording adjusting entries.

Question 44

Intangible assets are long-term resources that benefit business operations that usually lack physical form and have uncertain benefits.

Question 45

Permanent accounts carry their balances into the next accounting period.

Question 46

The last four steps in the accounting cycle include preparing the adjusted trial balance, preparing financial statements, and recording closing and adjusting entries.

Question 47

A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers.

Question 48

Cash and office supplies are both classified as current assets.

Question 49

If all columns of a completed work sheet balance, you can be sure that no errors were made in its preparation.

Question 50

If a company plans to continue business into the future, closing entries are not required.

Question 51

A benefit of using a work sheet is that it aids in the preparation of the financial statements.

Question 52

On a work sheet, if the Debit total exceeds the Credit total of the Income Statement columns, a net loss is indicated.

Question 53

Flo's Flowers' current ratio is 1.3. The industry average for the current ratio is 1.2. This indicates that Flo's can cover its short term liabilities with its short term assets.

Question 54

Assets are often classified into current assets, long-term investments, plant assets, and intangible assets.

Question 55

Intangible assets are assets that are long-term, have physical form, and are used to produce or sell products and services.

Question 56

Current liabilities include accounts receivable, unearned revenues, and salaries payable.

Question 57

The work sheet is a required report made available to external decision makers.

Question 58

Normally closing entries are first entered in the general journal and then posted to the work sheet.

Question 59

Current assets and current liabilities are expected to be used up or come due within one year or the company's operating cycle whichever is longer.

Question 60

The current ratio is used to help assess a company's ability to pay its debts in the near future.

Question 61

After posting the entries to close all revenue and expense accounts, the Income Summary account of Cleaver Auto Services has a $4,000 debit balance. This result implies that Cleaver earned a net income of $4,000.

Question 62

Revenues, expenses, and dividend accounts, which are closed at the end of each accounting period are:

A)Real accounts.
B)Temporary accounts.
C)Closing accounts.
D)Permanent accounts.
E)Balance sheet accounts.

Question 63

The recurring steps performed each reporting period in preparing financial statements, starting with analyzing and recording transactions in the journal and continuing through the post-closing trial balance, is referred to as the:

A)Accounting period.
B)Operating cycle.
C)Accounting cycle.
D)Closing cycle.
E)Natural business year.

Question 64

Another name for a temporary account is a(n):

A)Real account.
B)Contra account.
C)Accrued account.
D)Balance column account.
E)Nominal account.

Question 65

On the work sheet, net income is entered in the Income Statement Credit column as well as the Balance Sheet Credit column.

Question 66

The steps in the closing process are (1) close credit balances in revenue accounts to Income Summary; (2) close debit balances in expense accounts to Income Summary; (3) close Income Summary to Retained Earnings; (4) close Dividends to Retained Earnings.

Question 67

A post-closing trial balance is a list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Question 68

The aim of a post-closing trial balance is to verify that (1) total debits equal total credits for temporary accounts, and (2) all temporary accounts have zero balances.

Question 69

Which of the following accounts are permanent (real) accounts?

A)Fees earned.
B)Office supplies expense.
C)Interest revenue.
D)Accounts payable.
E)Salaries expense.

Question 70

Journal entries recorded at the end of each accounting period to prepare the revenue, expense, and dividend accounts for the upcoming period and to update the retained earnings account for the events of the period just finished are referred to as:

A)Adjusting entries.
B)Closing entries.
C)Final entries.
D)Work sheet entries.
E)Updating entries.

Question 71

Assets, liabilities, and equity accounts are not closed; these accounts are called:

A)Nominal accounts.
B)Temporary accounts.
C)Permanent accounts.
D)Contra accounts.
E)Accrued accounts.

Question 72

When closing entries are made:

A)All ledger accounts are closed to start the new accounting period.
B)All temporary accounts are closed but permanent accounts are not closed.
C)All real accounts are closed but nominal accounts are not closed.
D)All permanent accounts are closed but nominal accounts are not closed.
E)All balance sheet accounts are closed.

Question 73

An expense account is normally closed by debiting Income Summary and crediting the expense account.

Question 74

When there is a net loss the Income Summary account would have a credit balance.

Question 75

Which of the following is the usual final step in the accounting cycle?

A)Journalizing transactions.
B)Preparing an adjusted trial balance.
C)Preparing a post-closing trial balance.
D)Preparing the financial statements.
E)Preparing a work sheet.

Question 76

A classified balance sheet:

A)Measures a company's ability to pay its bills on time.
B)Organizes assets and liabilities into important subgroups that provide more information.
C)Broadly groups items into assets, liabilities and equity.
D)Reports operating, investing, and financing activities.
E)Reports the effect of profit and dividends on retained earnings.

Question 77

Reversing entries are optional.

Question 78

Two common subgroups for liabilities on a classified balance sheet are:

A)Current liabilities and intangible liabilities.
B)Present liabilities and operating liabilities.
C)General liabilities and specific liabilities.
D)Intangible liabilities and long-term liabilities.
E)Current liabilities and long-term liabilities.

Question 79

Adjusting entries are usually entered in the work sheet before they are entered in the general journal.

Question 80

The closing process is necessary in order to:

A)Calculate net income or net loss for an accounting period.
B)Ensure that all permanent accounts are closed to zero at the end of each accounting period.
C)Ensure that the company complies with state laws.
D)Ensure that net income or net loss and dividends for the period are closed into the retained earnings account.
E)Ensure that management is aware of how well the company is operating.