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

Question 1

Prepaid expenses are reported as assets at the time of the initial cash flow and when they are consumed in the future,both expenses and liabilities increase.

Answer 1

False
Explanation: Prepaid expenses are initially recorded as assets. When they are consumed in the future, expenses increase and assets decrease.

Question 2

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

Answer 2

True
Explanation: The statement of cash flows is unaffected by adjusting entries because the adjusting entries do not involve the cash account.

Question 3

The trial balance is a listing of account balances that are found in the general ledger.

Answer 3

True
Explanation: A trial balance is a list of all accounts with their balances to provide a check on the equality of the debits and credits.

Question 4

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

Question 5

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

Question 6

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 7

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

Question 8

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

Question 9

An accrued expense has been both incurred and paid for using cash.

Question 10

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

Question 11

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

Question 12

The adjusting entry to record an accrued expense increases liabilities.

Question 13

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

Question 14

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

Question 15

An objective of preparing the trial balance is to test the equality of debits and credits.

Question 16

The trial balance is similar to the balance sheet in that it is a listing of assets,liabilities,and stockholders' equity and is provided to external decision makers.

Question 17

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

Question 18

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

Question 19

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

Question 20

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

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

On July 1,2011,Allen Company signed a $100,000,one-year,6 percent note payable.The principal and interest will be paid on June 30,2012.How much interest expense should be reported on the income statement for the year ended December 31,2011?

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

Question 23

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

Question 24

The net profit margin ratio is a measure of how much profit was created per sales dollar.

Question 25

Which of the following journal entries was created as the result of an accrual?

A) Accounts receivable
$\quad$$\quad$ Revenues
B) Interest expense
$\quad$$\quad$ Cash
C) Cash
$\quad$ Deferred revenue
D) Rent expense
$\quad$ Prepaid rent

Question 26

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 27

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 28

The CHS Company paid $30,000 cash to its landlord on November 1,2011 for rent covering the six-month period from November 1,2011 through April 30,2012.Which of the following doesn't correctly describe the effect of the December 31,2011 adjusting entry on CHS Company's financial statements? (Assume that no adjusting entries have been made during the year.)

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 29

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

Question 30

On April 1,2011,the premium on a one-year insurance policy was purchased for $3,000 cash with the insurance coverage beginning on that date.Which of the following correctly describes the effect of the December 31,2011 adjusting entry on the financial statements? (Assume that no adjusting entries have been made during the year.)

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 31

Which of the following doesn't correctly describe a journal entry which 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 32

Which of the following journal entries was created as the result of an accrual?

A) Cash
$\quad$ Revenue
B) Interest expense
$\quad$ Interest payable
C) Cash
$\quad$ Deferred revenue
D) Deferred revenue
$\quad$$\quad$ Revenue

Question 33

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

Question 34

The net profit margin ratio is calculated by dividing net sales by net income.

Question 35

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

Question 36

On October 1,2010,Adams Company paid $4,000 for a two-year insurance policy with the insurance coverage beginning on that date.As of December 31,2010,which of the following account balances are correct after adjusting entries have been made?

A)Prepaid insurance, $4,000 and Insurance expense, $0.
B)Prepaid insurance, $0 and Insurance expense, $4,000.
C)Prepaid insurance, $2,000 and Insurance expense, $2,000.
D)Prepaid insurance, $3,500 and Insurance expense, $500.

Question 37

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

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

Question 38

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

A)Recording the transaction in the general journal.
B)Preparation of the financial statements.
C)Preparation of the trial balance.
D)Preparation of the income statement.

Question 39

Which of the following journal entries was created as the result of a deferral?

A) Salaries expense
$\quad$ Salaries payable
B) Interest expense
$\quad$$\quad$ Interest payable
C) Cash
$\quad$ Unearned revenue
D) Cash
$\quad$ Revenue

Question 40

Which of the following journal entries was created as the result of a deferral?

A) Unearned revenue
$\quad$$\quad$ Revenue
B) Interest expense
$\quad$$\quad$ Interest payable
C) Cash
$\quad$ Revenue
D) Salaries expense
$\quad$ Cash

Question 41

Which of the following doesn't correctly describe a journal entry which debits rent expense and credits prepaid rent?

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

Question 42

Which of the following doesn't correctly describe a journal entry which debits depreciation expense and credits accumulated depreciation?

A)It increases expenses and does not affect 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 43

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

A)Total assets do not change.
B)The transaction is an example of an accrual.
C)Stockholders' equity is not affected.
D)Net income is not affected.

Question 44

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

A)Total assets increase.
B)The transaction is an example of an accrual.
C)Stockholders' equity is not affected.
D)Net income increases.

Question 45

Which of the following correctly describes the effects of 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.

Question 46

Which of the following journal entries was not created as the result of an accrual?

A) Interest expense
$\quad$$\quad$ Interest payable
B) Accounts receivable
$\quad$$\quad$ Service revenue
C) Prepaid Rent
$\quad$ Cash
D) Salaries expense
$\quad$$\quad$ Salaries payable

Question 47

Which of the following does not correctly describe the following journal entry? Supplies
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.

Question 48

Which of the following journal entries was not created as the result of a deferral?

A) Prepaid rent
$\quad$ Cash
B) Cash
$\quad$ Service revenue
C) Supplies inventory
$\quad$ Cash
D) Cash
$\quad$ Unearned revenues

Question 49

On January 1,2011,the general ledger of Global Corporation included supplies inventory of $1,000.During 2011,supplies purchases amounted to $5,000.A physical count of inventory on hand at December 31,2011 determined that the supplies inventory was $1,200.How much is the 2011 supplies expense?

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

Question 50

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

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

Question 51

Which of the following accounts was created as the result of a deferral?

A)Interest payable
B)Interest revenue
C)Supplies inventory
D)Accounts receivable

Question 52

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

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

Question 53

Which of the following journal entries was created as the result of a deferral?

A) Interest expense
$\quad$$\quad$ Interest payable
B) Accounts receivable
$\quad$$\quad$ Service revenues
C) Salaries expense
$\quad$$\quad$ Salaries payable
D) Cash
$\quad$ Unearned revenue

Question 54

Which of the following does not correctly describe the following journal entry? Salaries expense
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.

Question 55

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 is not affected.

Question 56

Which of the following correctly describes the following journal entry? Utilities expense
$\quad$$\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 doesn't change.

Question 57

Which of the following correctly describes the effects of recording prepaid insurance 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 decreases.

Question 58

Which of the following accounts was created as the result of an accrual for expenses?

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

Question 59

Which of the following journal entries was created as the result of an accrual?

A) Salaries expense
$\quad$$\quad$ Salaries payable
B) Depreciation expense
$\quad$$\quad$ Accumulated depreciation
C) Prepaid Rent
$\quad$$\quad$ Cash
D) Cash
$\quad$ Unearned revenue

Question 60

Which of the following doesn't correctly describe a journal entry which 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 61

Which of the following transactions 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 revenue which was previously recorded as unearned revenue.
D)Adjustment of the prepaid rent account for rent which expired during the period.

Question 62

Assume Idaho Company recorded the following adjusting journal entry at year-end: Insurance expense $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\$ 2000$
$\quad$ Insurance expense $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ $\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\$ 2000$ 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?

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

Question 63

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.

Question 64

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 65

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.

Question 66

Which of the following transactions 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.

Question 67

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.

Question 68

On December 31,2011,Krug Company reported pretax income of $120,000 prior to the following adjusting entries:
Depreciation expense was $31,000;
Accrued service revenues totaled $29,000;
Accrued expenses totaled $12,000;
Expired insurance which was prepaid totaled $9,000;
Rent revenue earned was $7,000; the rent was 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 69

On December 31,2011,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;
Expired insurance which was prepaid totaled $9,000;
Rent revenue earned was $7,000; the rent was 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 70

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 71

On July 1,2011,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 31,2011.On December 31,2011,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 31,2011 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 72

On December 31,2011,Krug Company reported stockholders' equity of $280,000 prior to the following adjusting entries:
Depreciation expense was $31,000;
Accrued service revenues totaled $29,000;
Accrued expenses totaled $12,000;
Expired insurance which was prepaid totaled $9,000;
Rent revenue earned was $7,000; the rent was 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 73

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 74

On January 1,2011,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 31,2011,Ryan Company's records would reflect what balance in the prepaid insurance account?

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

Question 75

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)Revenues are understated and stockholders' equity is overstated.
D)Net income is understated and liabilities are overstated.

Question 76

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 not affected.

Question 77

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.

Question 78

On December 31,2011,Krug Company reported total liabilities of $110,000 prior to the following adjusting entries:
Depreciation expense was $31,000;
Accrued service revenues totaled $29,000;
Accrued expenses totaled $12,000;
Expired insurance which was prepaid totaled $9,000;
Rent revenue earned was $7,000; the rent was 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 79

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.

Question 80

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

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.