Deck 3: The Adjusting Process

Question 1

What is the difference between cash basis accounting and accrual basis accounting?

Answer 1

^{Cash basis accounting records revenues only when cash is received and expenses only when cash is paid.Accrual basis accounting records revenues when earned and expenses when incurred.}

Question 2

Under cash basis accounting,an expense is recorded only when cash is paid.

Answer 2

True

Question 3

The Hartman Dental Company prepays the rent on its dental office.On July 1,the company paid $18,000 for 6 months of rent.The rent period begins on July 1.How much Rent Expense should the company record for the three months ended September 30 under the accrual basis? Why?

Answer 3

Hartman Dental should report Rent Expense of $9,000 because the expense is recorded when incurred.

Question 4

Generally Accepted Accounting Principles (GAAP)require the use of the accrual basis of accounting.

Question 5

The Pediatric Dental Company prepays the rent on its dental office.On July 1,the company paid $18,000 for 6 months of rent.The rent period begins on July 1.How much Rent Expense should the company record for the three months ended September 30 under the cash basis? Why?

Question 6

In cash basis accounting,revenue is recorded when cash is received,and expenses are recorded when they are paid.

Question 7

The accrual method is an easier accounting method to follow than cash basis accounting because it generally requires less knowledge of accounting concepts and principles.

Question 8

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

A) Cash
B) Unearned Revenue
C) Service Revenue
D) Salaries Expense

Question 9

Under accrual basis accounting,revenue is recorded only when cash is received.

Question 10

Which of the following entries would be recorded by a company that uses the cash basis method of accounting?

A) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Accounts Receivable } & & 1,000 \\\hline\end{array}$$
B) $\begin{array}{|l|r|c|}\hline \text { Salaries Expense } & 1,000 & \\\hline \text { Salaries Payable } & & 1,000 \\\hline\end{array}$

C) $\begin{array}{|l|r|c|}\hline \text { Prepaid Rent } & 1,000 & \\\hline \text { Cash } & & 1,000 \\\hline\end{array}$

D) $$\begin{array} { | l | r | r | } \hline \text { Rent Expense } & 1,000 & \\\hline \text { Cash } & & 1,000 \\\hline\end{array}$$

Question 11

Which of the following statements is TRUE of accrual basis accounting?

A) Accrual basis accounting is required by Generally Accepted Accounting Principles (GAAP).
B) Accrual basis accounting records expenses only when cash has been paid for them.
C) Accrual basis accounting records revenue only when cash is received.
D) Accrual basis accounting always results in greater net income than cash basis accounting.

Question 12

If a company is using accrual basis accounting,when should it record revenue?

A) when cash is received, even though services may be performed at a later date
B) when services are performed, even though cash may be received at a later date
C) before services are performed
D) when cash is received, 30 days after the completion of the services

Question 13

A company receives payment from one of its customers on August 5 for services performed on July 21.Which of the following entries would be recorded if the company uses accrual basis accounting?

A) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Accounts Receivable } & & 1,000 \\\hline\end{array}$$
B) $\begin{array}{|l|r|c|}\hline \text { Accounts Payable } & 1,000 & \\\hline \text { Cash } & & 1,000 \\\hline\end{array}$

C) $\begin{array}{|l|r|l|}\hline \text { Cash } & 1,000 & \\\hline \text { Service Revenue } & & 1,000 \\\hline\end{array}$

D) $\begin{array}{|l|r|c|}\hline \text { Service Revenue } & 1,000 & \\\hline \text { Cash } & & 1,000 \\\hline\end{array}$

Question 14

The cash basis of accounting ignores ________.

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

Question 15

When does a company account for revenue if it uses cash basis accounting?

A) when services are performed, even though cash may be received at a later date
B) before services are performed
C) when the services are being performed
D) when cash is received, either prior to, at the time of, or after the services are performed

Question 16

Aquatic Supplies Company purchased $2,000 of supplies on account.Under the accrual basis of accounting,no entry is made until the amount is paid.

Question 17

Under cash basis accounting,revenue is recorded when it is earned,regardless of when cash is received.

Question 18

At the time the transaction occurred,which of the following would result in an increase in net income under the accrual basis of accounting,but would not result in an increase in net income under cash basis accounting?

A) purchase of supplies for cash
B) performance of services on account
C) use of supplies purchased earlier
D) receipt of cash for services that were performed earlier on account

Question 19

Under accrual basis accounting,an expense is recorded only when cash is paid.

Question 20

The major difference between a cash basis accounting system and an accrual basis accounting system is the timing of recording revenues and assets.

Question 21

Revenue is earned when ________.

A) there is a binding agreement to provide goods or services
B) the journal entry to record revenue has been prepared
C) the business has received cash from the customer
D) (or as) the business satisfies each performance obligation

Question 22

Which of the following accounting terms assumes that a business's activities can be divided into small segments and that financial statements can be prepared for specific periods,such as a month,quarter,or year?

A) adjusting entry concept
B) economic entity concept
C) matching principle
D) time period concept

Question 23

A good or service is considered transferred when the customer places an order or requests a service.

Question 24

The accounting period used for the annual financial statements is called the fiscal year.

Question 25

The key differences between the cash basis and accrual basis of accounting are the timing and recognition of assets and liabilities.

Question 26

The revenue recognition principle requires companies to record revenue when (or as)the entity satisfies each performance obligation.

Question 27

The revenue recognition principle tells accountants when to record revenue and requires companies to follow a three step process.

Question 28

A performance obligation is a contractual promise with a customer to transfer a distinct good or service.

Question 29

Which of the following accounting principles does NOT help to explain the timing and recognition of revenues and expenses?

A) time period concept
B) revenue recognition principle
C) economic entity concept
D) matching principle

Question 30

The key differences between the cash basis and accrual basis of accounting can be explained by understanding the time period concept and the revenue recognition and matching principles.

Question 31

Which of the following is considered a fiscal year?

A) six months
B) three months
C) twelve months
D) four months

Question 32

The time period concept states that ________.

A) financial statements can be prepared for specific periods
B) all expenses should be recorded when they are incurred during the period
C) companies should record revenue when it has been earned
D) expenses incurred during a period should be matched against the revenues of the period

Question 33

A contract can only have one performance obligation.

Question 34

The key differences between the cash basis and accrual basis of accounting can be explained by understanding the rules of debits and credits.

Question 35

The time period concept assumes that the activities of a business can be sliced into small time segments.

Question 36

The goal of the time period concept is to compute an accurate net income or net loss.

Question 37

The time period concept assumes that the activities of a business can be sliced into small time segments and that financial statements can be prepared for specific periods of time.

Question 38

For each of the following statements,indicate whether it applies to:
the cash basis of accounting (cash basis)
the accrual basis of accounting (accrual basis)
both the cash and accrual basis of accounting (both)
neither the cash nor the accrual basis of accounting (neither).
Your response should be cash basis,accrual basis,both,or neither.
$$\begin{array} {|l | l | } \hline \text { Statement } & \text { Applies to } \\\hline \text { An easier method of accounting to } & \\\text { follow } & \\\hline \text { Provides a better picture of a } & \\\text { business's revenues and expenses } & \\\hline \text { Small businesses may use this } & \\\text { method } & \\\hline\end{array}$$

Question 39

For each of the following statements,indicate whether it applies to:
the cash basis of accounting (cash basis)
the accrual basis of accounting (accrual basis)
both the cash and accrual basis of accounting (both)
neither the cash nor the accrual basis of accounting (neither).
Your response should be cash basis,accrual basis,both,or neither.
$$\begin{array} { | l | l | } \hline \text { Statement } & \text { Applies to } \\\hline \text { Does a good job of tracking a } & \\\text { business's cash flows } & \\\hline \text { It is irrelevant when cash is received } & \\\text { or paid } & \\\hline \text { May require a company to prorate a } & \\\text { prepayment of rent } & \\\hline\end{array}$$

Question 40

Which of the following assumes that the financial statements of a business can be prepared for specific periods?

A) matching principle
B) revenue recognition principle
C) time period concept
D) adjusting entry principle

Question 41

The goal of matching is to compute an accurate net income or net loss for the time period.

Question 42

Under the revenue recognition principle,a good or service is considered transferred when ________.

A) all performance obligations have been satisfied
B) the customer obtains control of the good or service
C) the business has received cash from the customer
D) the transaction price has been determined

Question 43

In applying the revenue recognition principle,which of the following statements regarding multiple performance obligations is incorrect?

A) If the transaction has multiple performance obligations, the transaction price is allocated among the different performance obligations.
B) The business can recognize revenue when (or as) it satisfies each performance obligation by transferring a good or service to a customer.
C) A contract might have multiple performance obligations.
D) Revenue is recognized after all performance obligations are satisfied.

Question 44

The matching principle states that ________.

A) financial statements can be prepared for specific periods
B) a business's activities can be sliced into small time segments
C) all expenses should be recorded when they are incurred during the period
D) companies should record revenue when it has been earned

Question 45

The revenue recognition principle requires companies to follow a five-step process.List these five steps.

Question 46

List and briefly discuss three accounting concepts and principles that apply to accrual basis accounting.

Question 47

The matching principle ________.

A) guides accounting for revenues and expenses
B) results in the matching of expenses incurred during the period to the cash paid for expenses
C) ensures that all expenses are recorded when they are incurred during the period
D) results from a natural link between all expenses and revenues

Question 48

The matching principle is also called the ________.

A) adjusting entry concept
B) revenue recognition principle
C) expense recognition principle
D) time period concept

Question 49

To match expenses against revenues means to add expenses paid in cash during one month to revenues earned during that same month.

Question 50

Financial statements can be prepared from the unadjusted trial balance.

Question 51

Which of the following entries would be made because of the matching principle?

A) $\begin{array}{|l|r|l|}\hline \text { Rent Expense } & 2,500 & \\\hline \text { Rent Revenue } & & 2,500 \\\hline\end{array}$

B) $\begin{array}{|l|r|r|}\hline \text { Unearned Revenue } & 2,500 \\\hline \text { Cash } &&2,500 \\\hline\end{array}$
C) $\begin{array}{|l|r|r|}\hline \text { Rent Expense } & 2,500 \\\hline \text { Unearned Rent } &&2,500 \\\hline\end{array}$
D) $\begin{array}{|l|r|l|}\hline \text { Rent Expense } & 2,500 & \\\hline \text { Prepaid Rent } & & 2,500 \\\hline\end{array}$

Question 52

The revenue recognition principle guides accountants in ________.

A) ensuring only revenues received in cash are recorded
B) determining when to record expenses
C) determining when to record revenues
D) ensuring expenses are deducted from revenues

Question 53

Accrual basis accounting requires the business to review the unadjusted trial balance and determine whether any additional revenues and expenses need to be recorded.

Question 54

Which of the following accounting elements does the matching principle help to match?

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

Question 55

Which of the following entries would be made because of the matching principle?

A) $\begin{array}{|l|r|c|}\hline \text { Salaries Expense } & 1,000 & \\\hline \text { Service Revenue } & & 1,000 \\\hline\end{array}$

B) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Salaries Expense } & & 1,000 \\\hline\end{array}$$
C) $\begin{array}{|l|r|c|}\hline \text { Salaries Expense } & 1,000 & \\\hline \text { Salaries Payable } & & 1,000 \\\hline\end{array}$

D) $$\begin{array} { | l | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Unearned Revenue } & & 1,000 \\\hline\end{array}$$

Question 56

Adjusting entries record revenues in the period in which cash is received and expenses in the period when cash is paid.

Question 57

To match expenses against revenues means to ________.

A) add expenses incurred during one period to revenues earned during that same period
B) subtract expenses incurred during one period from revenues earned during the previous period
C) add expenses incurred during one period to revenues earned during the previous period
D) subtract expenses incurred during one period from revenues earned during that same period

Question 58

The matching principle ensures all expenses are recorded when they are incurred during the period and are matched to the cash payments for expenses.

Question 59

The accounting principle that ensures all expenses are recorded during the period when they are incurred and offsets those expenses against the revenues of the period is called the ________ principle.

A) comparison
B) accrual
C) matching
D) revenue recognition

Question 60

There is a natural link between some expenses and revenues.

Question 61

The asset account,Office Supplies had a beginning balance of $5,700.During the accounting period,office supplies were purchased,on account,for $5,100.A physical count,on the last day of the accounting period,shows $2,000 of office supplies on hand.What is the amount of Supplies Expense for the accounting period?

A) $5,100
B) $2,600
C) $8,800
D) $3,700

Question 62

Dynamic Services Company purchased computers that are to be used in its consulting services.Based on the matching principle,the related account that should appear on the income statement for the year ended December 31,2018 is ________.

A) Depreciation Expense - Equipment
B) Service Revenue
C) Accumulated Depreciation - Equipment
D) Equipment Expense

Question 63

The depreciation method that allocates an equal amount of depreciation to each year is called the straight-line method.

Question 64

Prepaid Rent is an expense account that appears on the income statement.

Question 65

Contra asset accounts,such as Accumulated Depreciation,always have normal debit balances.

Question 66

An accrual adjusting entry records an expense after the cash is paid,or it records revenue before the cash is received.

Question 67

The sum of all the depreciation expenses recorded to date for a depreciable asset is called residual value.

Question 68

A contra account's normal balance is the opposite of the normal balance of the related account.

Question 69

In the case of a deferred expense,the adjusting entry required at the end of a period will consist of a debit to the Prepaid Expense account.Assume the deferred expense was initially recorded as an asset.

Question 70

The following Office Supplies account information is available for Nabors Company. $$\begin{array} { | l | r | } \hline \text { Beginning balance } & \$ 2,000 \\\hline \text { Office Supplies expensed } & 8,000 \\\hline \text { Ending balance } & 1,000 \\\hline\end{array}$$ From the above information,calculate the amount of office supplies purchased.

A) $7,000
B) $8,000
C) $2,000
D) $1,000

Question 71

Prepaid Insurance is an asset account that appears on the balance sheet.

Question 72

On January 1,2018,the Prepaid Insurance account of Dogwood Company had a beginning balance of $1,500.Three months of insurance premiums remain in this beginning balance.On February 21,2018,the company paid an annual insurance premium in the amount of $3,400 for the period beginning March 1.On February 28,2018,the balance in Prepaid Insurance is $1,000.

Question 73

On January 1,Nash Company had $1,000 of supplies on hand.During January,Nash purchased $5,500 worth of new supplies.At the end of the month,a count revealed $700 worth of supplies remaining on the shelves.The adjusting entry needed will include a debit to Supplies Expense of $5,800.The supplies were initially recorded as an asset.

Question 74

Adjusting entries are needed to correctly measure the ________.

A) ending balance in the Cash account
B) net income (loss) on the balance sheet
C) net income (loss) on the income statement
D) beginning balance in the Cash account

Question 75

Which of the following is NOT a type of adjusting entry?

A) deferred expenses
B) accrued revenues
C) unearned expenses
D) deferred revenues

Question 76

Stallings Company purchased manufacturing equipment for $8,400.It has an estimated useful life of seven years and no residual value.The company should record depreciation expense of $50 per month.(Assume that the company uses the straight-line method.)

Question 77

In the case of a deferred expense,the adjusting entry required at the end of a period will consist of a credit to the Prepaid Expense account.Assume the deferred expense was initially recorded as an asset.

Question 78

A contra account's normal balance (debit or credit)is the opposite of the normal balance of the related account.

Question 79

An adjusting entry is completed ________.

A) at the beginning of the accounting period
B) at the end of the accounting period
C) after all performance obligations are satisfied
D) when accounts need to be balanced in the ledger

Question 80

Princeton Financial Services Company purchased computers that are to be used in its consulting services.Based on the matching principle,what account,other than Computers,should appear on the balance sheet as of December 31,2018?

A) Depreciation Expense - Equipment
B) Service Revenue
C) Accumulated Depreciation - Equipment
D) Equipment Expense