Deck 3: Adjusting the Accounts

Question 1

Accumulated Depreciation is a liability account and has a credit normal account balance.

Answer 1

False

Question 2

A company's calendar year and fiscal year are always the same.

Answer 2

False

Question 3

The time period assumption is often referred to as the matching principle.

Answer 3

False

Question 4

An adjusting entry always involves two balance sheet accounts.

Question 5

Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

Question 6

The cash basis of accounting is not in accordance with generally accepted accounting principles.

Question 7

Accounting time periods that are one year in length are referred to as interim periods.

Question 8

A liability-revenue account relationship exists with an unearned rent revenue adjusting entry.

Question 9

Accrued revenues are revenues which have been received but not yet earned.

Question 10

Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.

Question 11

Adjusting entries are often made because some business events are not recorded as they occur.

Question 12

Many business transactions affect more than one time period.

Question 13

The revenue recognition principle dictates that revenue be recognized in the accounting period in which cash is received.

Question 14

Revenue received before it is earned and expenses paid before being used or consumed are both initially recorded as liabilities.

Question 15

The matching principle requires that efforts be matched with accomplishments.

Question 16

The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

Question 17

Expense recognition is tied to revenue recognition.

Question 18

The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

Question 19

The time period assumption states that the economic life of a business entity can be divided into artificial time periods.

Question 20

Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

Question 21

Accrued revenues are amounts recorded and received but not yet earned.

Question 22

The adjusting entry at the end of the period to record an expired cost may be different depending on whether the cost was initially recorded as an asset or an expense.

Question 23

The matching principle requires that expenses be matched with revenues.

Question 24

Every adjusting entry affects one balance sheet account and one income statement account.

Question 25

Asset prepayments become expenses when they expire.

Question 26

The time period assumption states that

A) a transaction can only affect one period of time.
B) estimates should not be made if a transaction affects more than one time period.
C) adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations.
D) the economic life of a business can be divided into artificial time periods.

Question 27

Rent received in advance and credited to a rent revenue account which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned.

Question 28

In general, adjusting entries are required each time financial statements are prepared.

Question 29

The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

Question 30

When a prepaid expense is initially debited to an expense account, expenses and assets are both overstated prior to adjustment.

Question 31

If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

Question 32

Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

Question 33

Monthly and quarterly time periods are called

A) calendar periods.
B) fiscal periods.
C) interim periods.
D) quarterly periods.

Question 34

Financial statements can be prepared from the information provided by an adjusted trial balance.

Question 35

The Accumulated Depreciation account is a contra asset account that is reported on the balance sheet.

Question 36

An adjusted trial balance should be prepared before the adjusting entries are made.

Question 37

Accrued revenues are revenues that have been earned and received before financial statements have been prepared.

Question 38

An adjusting entry requiring a credit to Insurance Expense indicates that the initial transaction was charged to an asset account.

Question 39

A contra asset account is subtracted from a related account in the balance sheet.

Question 40

An accounting time period that is one year in length, but does not begin on January 1, is referred to as

A) a fiscal year.
B) an interim period.
C) the time period assumption.
D) a reporting period.

Question 41

Expenses sometimes make their contribution to revenue in a different period than when the expense is paid. When wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the time period?

A) Due from Employees
B) Due to Employer
C) Wages Payable
D) Wages Expense

Question 42

A candy factory's employees work overtime to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime wages should be expensed in

A) February.
B) March.
C) the period when the workers receive their checks.
D) either in February or March depending on when the pay period ends.

Question 43

Management usually desires ________ financial statements and the IRS requires all businesses to file _________ tax returns.

A) annual, annual
B) monthly, annual
C) quarterly, monthly
D) monthly, monthly

Question 44

Which of the following time periods would not be referred to as an interim period?

A) Monthly
B) Quarterly
C) Semi-annually
D) Annually

Question 45

The fiscal year of a business is usually determined by

A) the IRS.
B) a lottery.
C) the business.
D) the SEC.

Question 46

Adjusting entries are required

A) yearly.
B) quarterly.
C) monthly.
D) every time financial statements are prepared.

Question 47

In general, the shorter the time period, the difficulty of making the proper adjustments to accounts

A) is increased.
B) is decreased.
C) is unaffected.
D) depends on if there is a profit or loss.

Question 48

A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be earned?

A) December 5
B) December 10
C) November 30
D) December 1

Question 49

Which is not an application of revenue recognition?

A) Recording revenue as an adjusting entry on the last day of the accounting period.
B) Accepting cash from an established customer for services to be performed over the next three months.
C) Billing customers on June 30 for services completed during June.
D) Receiving cash for services performed.

Question 50

Ron's Hot Rod Shop follows the revenue recognition principle. Ron services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Ron on August 5. Ron receives the check in the mail on August 6. When should Ron show that the revenue was earned?

A) July 31
B) August 1
C) August 5
D) August 6

Question 51

Which of the following are in accordance with generally accepted accounting principles?

A) Accrual basis accounting
B) Cash basis accounting
C) Both accrual basis and cash basis accounting
D) Neither accrual basis nor cash basis accounting

Question 52

The revenue recognition principle dictates that revenue should be recognized in the accounting records

A) when cash is received.
B) when it is earned.
C) at the end of the month.
D) in the period that income taxes are paid.

Question 53

The matching principle matches

A) customers with businesses.
B) expenses with revenues.
C) assets with liabilities.
D) creditors with businesses.

Question 54

The time period assumption is also referred to as the

A) calendar assumption.
B) cyclicity assumption.
C) periodicity assumption.
D) fiscal assumption.

Question 55

A company spends $10 million dollars for an office building. Over what period should the cost be written off?

A) When the $10 million is expended in cash
B) All in the first year
C) Over the useful life of the building
D) After $10 million in revenue is earned

Question 56

Under accrual-basis accounting

A) cash must be received before revenue is recognized.
B) net income is calculated by matching cash outflows against cash inflows.
C) events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
D) the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

Question 57

The matching principle states that expenses should be matched with revenues. Another way of stating the principle is to say that

A) assets should be matched with liabilities.
B) efforts should be matched with accomplishments.
C) owner withdrawals should be matched with owner contributions.
D) cash payments should be matched with cash receipts.

Question 58

In a service-type business, revenue is considered earned

A) at the end of the month.
B) at the end of the year.
C) when the service is performed.
D) when cash is received.

Question 59

Adjustments would not be necessary if financial statements were prepared to reflect net income from

A) monthly operations.
B) fiscal year operations.
C) interim operations.
D) lifetime operations.

Question 60

Which of the following is not a common time period chosen by businesses as their accounting period?

A) Daily
B) Monthly
C) Quarterly
D) Annually

Question 61

Unearned revenues are

A) received and recorded as liabilities before they are earned.
B) earned and recorded as liabilities before they are received.
C) earned but not yet received or recorded.
D) earned and already received and recorded.

Question 62

Use the following information for questions 63-64.
Lamb Company had the following transactions during 2010.
$\bullet$ Sales of $4,500 on account
$\bullet$ Collected $2,000 for services to be performed in 2011
$\bullet$ Paid $625 cash in salaries
$\bullet$ Purchased airline tickets for $250 in December for a trip to take place in 2011


-What is Lamb's 2010 net income using cash basis accounting?

A) $5,875
B) $1,375
C) $5,625
D) $1,125

Question 63

Adjusting entries can be classified as

A) postponements and advances.
B) accruals and deferrals.
C) deferrals and postponements.
D) accruals and advances.

Question 64

Adjusting entries are

A) not necessary if the accounting system is operating properly.
B) usually required before financial statements are prepared.
C) made whenever management desires to change an account balance.
D) made to balance sheet accounts only.

Question 65

An adjusting entry

A) affects two balance sheet accounts.
B) affects two income statement accounts.
C) affects a balance sheet account and an income statement account.
D) is always a compound entry.

Question 66

Accrued expenses are

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

Question 67

The following is selected information from Alpha-Beta-Gamma Corporation for the fiscal year ending October 31, 2010. Based on the accrual basis of accounting, what is Alpha-Beta-Gamma Corporation's net income for the year ending October 31, 2010?

A) $114,000
B) $134,000
C) $82,000
D) $150,000

Question 68

Adjusting entries are required

A) because some costs expire with the passage of time and have not yet been journalized.
B) when the company's profits are below the budget.
C) when expenses are recorded in the period in which they are incurred.
D) when revenues are recorded in the period in which they are earned.

Question 69

A small company may be able to justify using a cash basis of accounting if they have

A) sales under $1,000,000.
B) no accountants on staff.
C) few receivables and payables.
D) all sales and purchases on account.

Question 70

Accounts often need to be adjusted because

A) there are never enough accounts to record all the transactions.
B) many transactions affect more than one time period.
C) there are always errors made in recording transactions.
D) management can't decide what they want to report.

Question 71

If a resource has been consumed but a bill has not been received at the end of the accounting period, then

A) an expense should be recorded when the bill is received.
B) an expense should be recorded when the cash is paid out.
C) an adjusting entry should be made recognizing the expense.
D) it is optional whether to record the expense before the bill is received.

Question 72

Use the following information for questions 63-64.
Lamb Company had the following transactions during 2010.
$\bullet$ Sales of $4,500 on account
$\bullet$ Collected $2,000 for services to be performed in 2011
$\bullet$ Paid $625 cash in salaries
$\bullet$ Purchased airline tickets for $250 in December for a trip to take place in 2011


-What is Lamb's 2010 net income using accrual accounting?

A) $3,875
B) $5,875
C) $5,625
D) $3,625

Question 73

Which one of the following is not a justification for adjusting entries?

A) Adjusting entries are necessary to ensure that revenue recognition principles are followed.
B) Adjusting entries are necessary to ensure that the matching principle is followed.
C) Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.
D) Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Question 74

Which statement is correct?

A) As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.
B) The use of the cash basis of accounting violates both the revenue recognition and matching principles.
C) The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.
D) As long as management is ethical, there are no problems with using the cash basis of accounting.

Question 75

Prepaid expenses are

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

Question 76

Accrued revenues are

A) received and recorded as liabilities before they are earned.
B) earned and recorded as liabilities before they are received.
C) earned but not yet received or recorded.
D) earned and already received and recorded.

Question 77

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

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

Question 78

Expenses incurred but not yet paid or recorded are called

A) prepaid expenses.
B) accrued expenses.
C) interim expenses.
D) unearned expenses.

Question 79

The preparation of adjusting entries is

A) straight forward because the accounts that need adjustment will be out of balance.
B) often an involved process requiring the skills of a professional.
C) only required for accounts that do not have a normal balance.
D) optional when financial statements are prepared.

Question 80

A liability-revenue relationship exists with

A) prepaid expense adjusting entries.
B) accrued expense adjusting entries.
C) unearned revenue adjusting entries.
D) accrued revenue adjusting entries.