Deck 3: Measuring Business Income: The Adjusting Process

Question 1

The time-period assumption ensures that accounting information is reported at regular intervals.

Answer 1

True

Question 2

Under accrual accounting receivables and payables are not recorded.

Answer 2

False

Question 3

The two most widely used methods of accounting are:

A)financial and managerial.
B)cash-basis and financial.
C)accrual and managerial.
D)accrual and cash-basis.

Answer 3

D

Question 4

Robert Rogers, a professional accountant, performed accounting services for a client in December. A bill was mailed to the client on December 30. Robert received a cheque in the mail on January 5. The recognition criteria for revenues requires that which of the following accounts appears on the balance sheet at December 31?

A)Prepaid expense
B)Accounts receivable
C)Unearned revenue
D)Accounts payable

Question 5

Accrual accounting provides several opportunities for unethical accounting.

Question 6

The concept that assists accountants in determining when to recognize revenue in the accounts is the:

A)Cost principle.
B)Time-period assumption.
C)Recognition criteria for revenue.
D)Matching objective.

Question 7

The recognition criteria for revenues tell accountants when to record revenue by making a journal entry and the amount of revenue to record.

Question 8

The concept that requires that accountants accrue wage expense at the end of the accounting period for unpaid wages is the:

A)Cost principle.
B)Time-period assumption.
C)Recognition criteria for revenue.
D)Matching objective.

Question 9

Cash accounting records the effect of every business transaction as it occurs.

Question 10

Sally Lee, a professional accountant, owns a computer used for the company's business. The matching objective requires that which of the following accounts appears on the income statement for the year ended December 31?

A)Amortization expense, computer
B)Accumulated amortization, computer
C)Depreciation receivable, computer
D)Depreciation payable, computer

Question 11

An important fact related to accrual accounting is that:

A)adjusting entries are not required.
B)revenue is recorded when cash is received.
C)expenses are recorded when incurred.
D)revenue is recorded when cash is received and expenses are recorded when incurred.

Question 12

The matching objective is the basis for recording:

A)revenues.
B)expenses.
C)assets.
D)liabilities.

Question 13

Jas Singh owns a construction business. Which of the following principles/objectives/assumptions requires the equipment used in the business to be amortized?

A)revenue recognition principle
B)the reliability characteristic
C)stable-monetary unit assumption
D)matching objective

Question 14

The matching objective directs accountants to measure expenses.

Question 15

For each of the following, state whether you agree or disagree with the accounting treatment. What concepts support your view?
a)A company records all revenue when earned, whether it has been collected or not.
b)Payment of a three-year insurance policy is charged to insurance expense and not adjusted.
c)Because the December telephone bill did not arrive until January, no telephone expense was recorded for December.
d)Management of Classic Cars requires the accountants to prepare monthly financial statements.

Question 16

Accrual accounting records the effect of every business transaction as it occurs.

Question 17

The matching objective directs accountants as to when to record expenses on the income statement to be matched against liabilities on the balance sheet.

Question 18

The concept that requires that accountants accrue revenue at the end of the accounting period for work performed but not yet billed is the:

A)Cost principle.
B)Time-period assumption.
C)Recognition criteria for revenue.
D)Matching objective.

Question 19

The concept that assists accountants in determining how often to prepare financial reports is the:

A)Cost principle.
B)Time-period assumption.
C)Recognition criteria for revenue.
D)Matching objective.

Question 20

The concept that requires that accountants record amortization expense on equipment is the:

A)Cost principle.
B)Time-period assumption.
C)Recognition criteria for revenue.
D)Matching objective.

Question 21

Every adjusting entry affects an account on the income statement and an account on the balance sheet.

Question 22

Adjusting entries assign revenues to the period in which they are earned and expenses to the period in which they are incurred.

Question 23

Under the cash basis of accounting, the receipt of cash from a customer in advance of performing the service would be credited to a(n):

A)prepaid asset account.
B)deferred asset account.
C)unearned revenue account.
D)revenue account.

Question 24

The cost of a property, plant, and equipment asset less its accumulated amortization is referred to as historical cost.

Question 25

An accountant records revenue when earned under which basis of accounting?

A)cash-basis
B)accrual
C)tax
D)financial

Question 26

Adjusting entries only involve income statement accounts.

Question 27

The adjusting entry to record $500 of expired insurance would include a debit to insurance expense.

Question 28

An accountant recognizes the impact of a business event when cash is received or paid in which basis of accounting?

A)accrual
B)managerial
C)cash-basis
D)financial

Question 29

Accruals involve the recording of an expense or a revenue account:

A)either before or at the same time the cash is paid or received.
B)after the cash is paid or received.
C)at the same time the cash is paid or received.
D)before the cash is paid or received.

Question 30

Revenue that has been earned but not yet collected is called an accrued revenue.

Question 31

The process of allocating the cost of property, plant and equipment to expense over their useful lives is called amortization.

Question 32

Which of the following accounts is not used in cash-basis accounting?

A)payables
B)revenue
C)equity
D)expenses

Question 33

Accrued expenses are expenses that have been:

A)paid but not incurred.
B)not paid but incurred.
C)not paid and not incurred.
D)paid and incurred.

Question 34

The adjusting entry to record accrued salaries includes a debit to salary expense.

Question 35

Which of the following accounts would be used under the accrual basis of accounting, but not under the cash-basis of accounting?

A)cash
B)unearned revenue
C)equipment
D)salary expense

Question 36

Which of the following situations would result in an increase in income under the accrual basis of accounting, but would not result in an increase in income under the cash-basis of accounting?

A)cash received from a customer in advance of the service being performed
B)writing off an uncollectible account receivable
C)receipt of cash for services that were performed earlier on account
D)performance of services on account

Question 37

Storemount Delivery reports the following transactions for May 2019:
May 1 Purchased a two-year insurance policy for cash, $1,800.
9 Performed a service on account, $800.
16 Paid wages to employees, $950.
18 Completed a job for a customer and collected $600 cash.
23 Collected $500 of the amount owed from May 9.
30 Accrued wages of $650.
Show the amount of revenue and expense recognized for each transaction during May 2019 under both the cash basis and the accrual basis of accounting by completing the following chart.
Cash-Basis Accounting Accrual Accounting

Question 38

Explain the difference between cash-basis and accrual accounting. Are adjusting entries necessary in both methods? Explain.

Question 39

Failure to adjust for accrued revenue results in net income being understated and assets being understated.

Question 40

Failure to adjust for an accrued expense will overstate expenses and understate net income.

Question 41

Accrued revenue has:

A)not been earned nor received.
B)been earned but not received.
C)not been earned but has been received.
D)been earned and received.

Question 42

Adjusting journal entries impact both the income statement and the balance sheet.

Question 43

On November 1, 2019, Two Sisters Company pays $36,000 cash for six months rent and debits prepaid rent at the time of the payment. The amount of the adjusting entry on December 31, 2019, would be:

A)$12,000.
B)$24,000.
C)$6,000.
D)$0.

Question 44

Stanley Fuel Services records $8,000 of service revenue being received in advance and $4,500 of service revenue being accrued. Unearned revenue has a year-end balance of $4,900. The effect of these entries on total service revenue for the year is an increase of:

A)$7,600.
B)$12,900.
C)$9,400.
D)$4,900.

Question 45

Unearned revenue recorded initially as unearned revenue is adjusted by debiting a liability account.

Question 46

The supplies account shows a beginning balance of $3,000. Assume the supplies account shows an entry as a debit for $5,500 representing supplies purchased during the period and the supplies inventory at year end is $1,700. The adjusting entry involves a:

A)debit to supplies expense for $6,800.
B)debit to supplies for $6,800.
C)debit to supplies expense for $1,700.
D)debit to supplies for $1,700.

Question 47

Deferrals involve the recording of an expense or a revenue account:

A)either before or after the cash is paid or received.
B)after the cash is paid or received.
C)before the cash is paid or received.
D)either before or at the same time the cash is paid or received.

Question 48

Sabrina's Fabric Land bought $5,000 of equipment at the beginning of 2019. Amortization expense on the 2019 income statement is $400. What is the balance in accumulated amortization on December 31, 2019?

A)$5,000
B)$400
C)$4,600
D)$0

Question 49

A business pays weekly salaries on Friday of $25,000 for a five-day week ending on Friday. Assuming the fiscal period ends on a Wednesday, the adjusting entry for accrued salaries would involve a:

A)debit to salary payable for $10,000.
B)debit to salary expense for $15,000.
C)credit to salary payable for $10,000.
D)credit to salary expense for $15,000.

Question 50

The concept underlying accounting for property, plant and equipment and amortization expense is the same as for prepaid expenses.

Question 51

Failure to record an accrued expense:

A)overstates expenses.
B)overstates liabilities.
C)understates liabilities.
D)overstates assets.

Question 52

Under accrual accounting, the receipt of cash from a customer in advance of performing the service would be credited to a(n):

A)unearned revenue account.
B)prepaid asset account.
C)accrued revenue account.
D)deferred asset account.

Question 53

Unearned revenue has:

A)been earned but the cash has not been received.
B)not been earned nor has the cash been received.
C)been earned and the cash has been received.
D)not been earned but the cash has been received.

Question 54

On September 1, 2019, Two Sisters Company pays $36,000 cash for six months rent. The balance in prepaid rent on December 31, 2019, after adjustment, would be:

A)$6,000.
B)$24,000.
C)$12,000.
D)$0.

Question 55

Failure to record the adjusting entry for amortization:

A)overstates assets and overstates equity.
B)understates assets and overstates equity.
C)overstates assets and understates equity.
D)understates assets and understates equity.

Question 56

The financial statements will contain errors if they are prepared before the adjusting entries are completed.

Question 57

When a prepaid expense is recorded initially as an asset, the adjusting entry transfers the used portion of the asset to the expense account.

Question 58

The primary difference between deferred and accrued expenses is that accrued expenses:

A)have been paid but deferred expenses haven't.
B)have not been paid but deferred expenses have.
C)involve assets instead of liabilities.
D)There is no difference between deferred and accrued expenses.

Question 59

Failure to record an accrued revenue:

A)overstates liabilities.
B)overstates revenue.
C)overstates assets.
D)understates assets.

Question 60

Accountants use the Accumulated Amortization account to show the cumulative sum of all amortization expense from the date of acquiring the asset.

Question 61

If an adjustment for prepaid insurance is not made at year end, net income will be:

A)unaffected.
B)understated.
C)overstated.
D)correct this year but incorrect next year.

Question 62

At the end of the fiscal period, Wilf Carter Services omitted the adjusting entry for accrued salaries. The effect of this error on the financial statements is to:

A)overstate net income.
B)understate assets.
C)understate net income.
D)overstate liabilities.

Question 63

On September 1, 2019, a company paid $8,400 in advance for two years insurance and debited prepaid insurance. The December 31, 2019, adjusting entry should include a debit to:

A)insurance expense for $1,400.
B)insurance expense for $7,000.
C)prepaid insurance for $2,800.
D)prepaid insurance for $1,400.

Question 64

Nuyen Services Company records the payment of $500 cash for a previously accrued expense and the accrual of $325 for another expense. The impact of these two entries on total expenses and net income is:

A) $$\begin{array} { | l | l | } \hline \text { Total Expenses } & \text { Net Income } \\\hline \text { increase by } \$ 825 & \text { decrease by } \$ 325 \\\hline\end{array}$$
B) $$\begin{array} { | l | l | } \hline \text { Total Expenses } & \text { Net Income } \\\hline \text { increase by } \$ 825 & \text { decrease by } \$ 825 \\\hline\end{array}$$
C) $$\begin{array} { | l | l | } \hline \text { Total Expenses } & \text { Net Income } \\\hline \text { increase by } \$ 325 & \text { decrease by } \$ 325 \\\hline\end{array}$$
D) $$\begin{array} { | l | l | } \hline \text { Total Expenses } & \text { Net Income } \\\hline \text { increase by } \$ 325 & \text { decrease by } \$ 825 \\\hline\end{array}$$

Question 65

A company began operations and purchased $5,000 of supplies. By year end, $2,700 was still on hand. The adjusting entry at year end would include a:

A)debit to supplies of $5,000.
B)credit to supplies for $2,700.
C)credit to supplies for $2,300.
D)debit to supplies expense for $2,700.

Question 66

If the adjusting entry to record the current periods prepaid rent expired is omitted:

A)current assets will be overstated.
B)current assets will be understated.
C)current liabilities will be overstated.
D)current liabilities will be understated.

Question 67

Unearned revenue shows a beginning balance of $4,700 and an ending balance of $3,400. The adjusting entry shows a credit to service revenue for $10,200. How much cash was received in advance during the year?

A)$8,900
B)$10,200
C)$14,900
D)$13,600

Question 68

Equipment with a cost of $103,000 has a useful life of four years. Using straight-line amortization, what is the book value after three years?

A)$77,250
B)$103,000
C)$25,750
D)$51,500

Question 69

Prepaid rent shows a beginning balance of $500 and an ending balance of $600. During the year, prepaid rent was debited for $2,200. What is the amount of rent expense shown on the current year's income statement?

A)$2,100
B)$1,700
C)$1,600
D)$2,700

Question 70

Accumulated amortization shows a beginning balance of $9,300 and an ending balance of $10,700. How much amortization expense was reported on the current year's income statement?

A)$9,300
B)$1,200
C)$1,400
D)$10,700

Question 71

If a required accrued expense adjustment had not been made, the financial statements would have been affected as follows:

A)net income understated, assets overstated, liabilities unaffected, and owner's equity understated.
B)net income overstated, assets unaffected, liabilities understated, and owner's equity overstated.
C)net income understated, assets overstated, liabilities understated, and owner's equity unaffected.
D)net income overstated, assets overstated, liabilities understated, and owner's equity overstated.

Question 72

Prepaid insurance shows a beginning balance of $500 and an ending balance of $2,800. The insurance expense account was debited during the adjusting process for $1,800. How much cash was spent for insurance?

A)$1,500
B)$4,100
C)$1,000
D)$3,300

Question 73

At the end of the fiscal period, Wilf Carter Services omitted the adjusting entry for amortization on equipment. The effect of this error on the financial statements is to:

A)understate liabilities.
B)understate owner's equity.
C)overstate expenses.
D)overstate assets.

Question 74

An accrued expense adjustment entry has the following effect on the balance sheet:

A)decreases liabilities.
B)increases assets.
C)increases liabilities.
D)correct this year but incorrect next year.

Question 75

If a required unearned revenue adjustment had not been made, the financial statements would have been affected as follows:

A)net income understated, assets overstated, liabilities unaffected, and owner's equity overstated.
B)net income overstated, assets unaffected, liabilities understated, and owner's equity unaffected.
C)net income understated, assets unaffected, liabilities overstated, and owner's equity understated.
D)net income overstated, assets overstated, liabilities overstated, and owner's equity unaffected.

Question 76

Prepaid rent shows a beginning balance of $3,600 and an ending balance of $2,900. The income statement for the current period reports rent expense of $3,200. What was the amount of rent purchased during the year?

A)$6,100
B)$6,800
C)$2,500
D)$400

Question 77

Accumulated amortization on an asset plus its book value equals:

A)amortization expense for the current year.
B)amortization expense to be recorded in future years.
C)amortization expense recorded in past years.
D)the cost of the equipment.

Question 78

Stan's Shoe Repairs recorded $2,000 of unearned service revenue being earned and the collection of $4,000 cash for service revenue previously accrued. The impact of these two entries on total service revenue is:

A)a decrease of $2,000.
B)an increase of $4,000.
C)an increase of $6,000.
D)an increase of $2,000.

Question 79

If a required prepaid adjustment had not been made, the financial statements would have been affected as follows:

A)net income overstated, assets overstated, liabilities unaffected, and owner's equity overstated.
B)net income understated, assets unaffected, liabilities overstated, and owner's equity understated.
C)net income overstated, assets understated, liabilities understated, and owner's equity unaffected.
D)net income understated, assets understated, liabilities understated, and owner's equity unaffected.

Question 80

The entry for amortization has what effect on the financial statements?

A)increases assets and decreases liabilities
B)decreases net income and increases assets
C)increases expenses and decreases assets
D)decreases assets and increases liabilities