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

Question 1

On January 1,20B,the ledger of Global Corporation correctly showed supplies inventory of $500.During 20B,supplies purchases amounted to $700.A count (inventory)of supplies on hand at December 31,20B,showed $400.The 20B income statement should report supplies expense amounting to which of the following?

A)$700.
B)$800.
C)$1,100.
D)$1,200.

Answer 1

B

Question 2

At the end of its accounting period,December 31,20B,May Corporation owed $1,000 for property taxes which had not been recorded nor paid.Therefore,the 20B adjusting entry should be which of the following?

A)$1,000 credited to an expense account and debited to a liability account.
B)$1,000 debited to an expense account and credited to an asset account.
C)$1,000 credited to a liability account and debited to an expense account.
D)$1,000 debited to a liability account and credited to an asset account.

Answer 2

C

Question 3

Expresso Company purchased a machine that cost $28,000 and had an estimated useful life of 7 years (no residual value)on January 1,20A.The company uses the straight-line method of amortization.The net book value at the end of 20B,would be which of the following?

A)$16,000.
B)$20,000.
C)$24,000.
D)$28,000.

Answer 3

B

Question 4

On April 1,20A,Allen Company signed a $12,000,one-year,10 percent note payable.At due date,April 1,20B,the principal and interest will be paid.Interest expense should be reported on the income statement (for the year ended December 31,20A)as which of the following?

A)$700.
B)$800.
C)$900.
D)$1,200.

Question 5

A machine that cost $10,000 was purchased at the beginning of the current business year.Assuming that an equal amount of amortization will be recorded for each year of the machine's life at $800,the adjusting entry made at the end of the current business year should include which of the following?

A)an $800 credit to accumulated amortization.
B)an $800 credit to amortization expense.
C)a $10,000 credit to accumulated amortization.
D)a $10,000 credit to amortization expense.

Question 6

Joe Company purchased supplies inventory for $5,000.Due to an error in posting,the inventory account was debited for only $500 when trade payables was credited for $5,000.During which phase of the accounting information cycle would this error be discovered?

A)Recording transaction in the journal.
B)Preparation of the financial statements.
C)Preparation of the trial balance.
D)Analysis of each transaction.

Question 7

On March 1,20A,the premium on a two-year insurance policy on equipment was paid amounting to $1,800.At the end of 20A (end of the accounting period),the financial statements for 20A,would report which of the following?

A)Insurance expense,$0; Prepaid insurance $1,800.
B)Insurance expense,$750; Prepaid insurance $1,050.
C)Insurance expense,$900; Prepaid insurance $900.
D)Insurance expense,$1,800; Prepaid insurance $0.

Question 8

As prepaid expenses expire with the passage of time,the correct adjusting entry will be a

A)debit to an expense account and a credit to an asset account.
B)debit to an asset account and a credit to an asset account.
C)debit to an expense account and a credit to an expense account.
D)debit to an asset account and a credit to an expense account.

Question 9

On January 1,20A,Wilkins Company purchased a delivery truck that cost $20,000.Cash of $15,000 was paid,and the balance of $5,000 was payable on January 31,20A.The truck has an estimated useful life of four years and no residual value.The company uses the straight-line method for amortizing all trucks.Considering only these facts,amortization expense (on the truck)for 20A,would be which of the following?

A)$5,000.
B)$10,000.
C)$15,000.
D)$20,000.

Question 10

On July 1,20A,Goode Company borrowed $10,000.The company signed a note payable with interest at 12 percent per year.The note and interest are due on December 31,20A.On December 31,20A,Goode paid $10,600 to settle the debt in full.Transaction analysis of the $10,600 cash payment on December 31,20A,should reflect which of the following?

A)decrease assets,$10,600; decrease liabilities,$10,600.
B)decrease assets,$10,000; decrease shareholders' equity,$600; and decrease liabilities,$10,600.
C)decrease liabilities,$10,000; decrease shareholders' equity,$600; and decrease assets,$10,600.
D)decrease shareholders' equity,$10,000; decrease liabilities,$600; and decrease assets,$10,600.

Question 11

An adjusted trial balance

A)is prepared after the financial statements are completed.
B)proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made.
C)is a required financial statement under international financial reporting standards.
D)cannot be used to prepare financial statements.

Question 12

On January 1,20A,Thomas Company paid $1,000 for a two-year insurance policy on the building.The accounting period ends December 31.At the end of 20A,the financial statements should report which of the following?

A)Choice A
B)Choice B
C)Choice C
D)Choice D

Question 13

On July 1,20A,Bill Company signed a two-year $8,000 note payable with 9 percent interest.At due date,July 1,20C,the principal and interest will be paid in full.Interest expense should be reported on the income statement for the year ended December 31,20A,in the amount of which of the following?

A)$360.
B)$420.
C)$720.
D)$1,440.

Question 14

On October 1,20A,Ethan Company borrowed $10,000 on a 4-month note with an annual interest rate of 9 percent.How much interest expense should be reported for 20A,assuming that the note is paid on time and Ethan Company's accounting year coincides with the calendar year?

A)$-0-.
B)$225.
C)$300.
D)$900.

Question 15

Assume Minor Company recorded the following adjusting entry at year-end: If the beginning balance in prepaid insurance was $700 and $1,500 was paid for an insurance premium during the year,the ending balance in the prepaid insurance account (after the above adjusting entry)would be which of the following?

A)$100 debit.
B)$1,400 debit.
C)$1,500 debit.
D)$2,200 debit.

Question 16

If a company fails to adjust a Prepaid Rent account for rent that has expired,what effect will this have on that month's financial statements?

A)Failure to make an adjustment does not affect the financial statements.
B)Assets will be overstated and profit and shareholders' equity will be understated.
C)Assets will be overstated and profit and shareholders' equity will be overstated.
D)Expenses will be overstated and profit and shareholders' equity will be understated.

Question 17

The process that begins with analyzing transactions and ends with the preparation of a post-closing trial balance is called

A)the fiscal period.
B)the business cycle.
C)the accounting period.
D)the accounting cycle.

Question 18

At the beginning of 20B,Down Company had office supplies inventory of $400.During 20B,the company purchased office supplies amounting to $2,500 (paid for in cash and debited to office supplies inventory).At December 31,20B (end of the accounting year),a count of office supplies on hand reflected $300.Therefore,the adjusting entry should include which of the following?

A)credit to office supplies inventory of $2,400.
B)credit to office supplies inventory of $2,500.
C)debit to supplies expense of $2,500.
D)debit to supplies expense of $2,600.

Question 19

On July 1,20A,Childe Company paid the premium in advance of $2,400 for a two-year fire insurance policy on machinery.At that time,the full amount paid was recorded as prepaid insurance.On December 31,20A,the end of the accounting year,the required adjusting entry should include which of the following?

A)a $600 debit to prepaid insurance.
B)a $600 debit to insurance expense.
C)a $2,400 credit to prepaid insurance.
D)a $2,400 debit to insurance expense.

Question 20

Which is the correct order of the steps in the accounting cycle during the accounting period?

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

Question 21

Time Corporation reported the following for 20A: What was the amount of earnings per share?

A)$1.00.
B)$2.00.
C)$19.00.
D)$20.00.

Question 22

The difference between the equipment account balance and the accumulated amortization equipment account balance is called which of the following?

A)market value
B)acquisition cost
C)net realizable value
D)net book value

Question 23

Which of the following is one of the sections on the statement of cash flows?

A)Operating activities.
B)Inventing activities.
C)Borrowing activities.
D)Cycling activities.

Question 24

Failure to make an adjusting entry to recognize accrued salaries payable would cause which of the following?

A)an understatement of expenses and liabilities and an overstatement of shareholders' equity.
B)an overstatement of expenses and liabilities.
C)an understatement of expenses,liabilities and shareholders' equity.
D)an understatement of assets and shareholders' equity.

Question 25

Which of the following statements best describes the relationship between profit for the period and the ending balance in retained earnings?

A)Profit for the period reduces the ending balance of retained earnings.
B)Retained earnings at the end of the period increases the amount of profit.
C)Profit for the period increases the ending balance of retained earnings.
D)Profit for the period has no effect on the ending balance of retained earnings.

Question 26

Failure to make an adjusting entry to recognize service revenue receivable would cause which of the following?

A)an overstatement of assets,profit,and shareholders' equity.
B)an overstatement of assets and shareholders' equity and an understatement of profit.
C)no effect on assets,liabilities,profit,nor shareholders' equity.
D)an understatement of assets,profit,and shareholders' equity.

Question 27

For the year 20A,Tally Corporation reported $50,000 pretax profit (average annual income tax rate of 40%).What was the after tax profit?

A)$10,000.
B)$15,000.
C)$20,000.
D)$30,000.

Question 28

Which of the following would most likely lead to an accrued adjustment?

A)Interest revenue earned but not yet collected
B)Wages incurred as an expense but not yet paid
C)Rent owed to us and not yet received
D)All of these are accrued adjustments

Question 29

The basic financial statements prepared for external users do not include which of the following?

A)the statement of financial position.
B)the income statement.
C)the revenue statement.
D)the statement of cash flows.

Question 30

Because of its complexity and susceptibility to errors,which step in the process do independent auditors examine most closely?

A)financial statement preparation
B)tax reports
C)deferred and accrued adjustments
D)closing entries

Question 31

A calendar year reporting company preparing its annual financial statements should use the phrase "At December 31,20XX" in the heading of which of the following?

A)all of the required financial statements it prepares.
B)the statement of financial position only.
C)the income statement and statement of financial position,but not the statement of cash flows.
D)the income statement,but neither the statement of financial position nor the statement of cash flows.

Question 32

Which of the following accounts would most likely lead to a deferred adjustment?

A)Prepaid expenses
B)Wages payable
C)Subscriptions revenue receivable
D)All of these are deferral adjustments

Question 33

An income statement reports which of the following?

A)revenues,expenses,assets,and liabilities during an accounting period.
B)profit of a business at a point in time.
C)profit of a business for a period of time.
D)resources,liabilities,and shareholders' equity of a business at a point in time.

Question 34

If a business declared and paid a $500 dividend,it would appear on which of the following?

A)Income statement only.
B)Statement of financial position only.
C)Statement of changes in equity and the statement of cash flows.
D)Statement of changes in equity only.

Question 35

At the end of 20D,Dallas Company made the following adjusting entry to record $10,000 accrued (unpaid)wages: A payroll of $40,000 (including the $10,000 accrued wages)was paid during the first week of January,20E.The entry to record the payment of this payroll should include a

A)$10,000 debit to wages expense and a $30,000 debit to wages payable.
B)$30,000 debit to wages expense and a $10,000 debit to wages payable.
C)$40,000 debit to wages expense and a $10,000 debit to wages payable.
D)$50,000 debit to wages expense and a $10,000 debit to wages payable.

Question 36

At the end of 20C,Libby Company reported an ending balance for retained earnings of $50,000.During 20D,the company reported the following amounts: Dividends declared and paid,$30,000 and profit,$40,000.The 20D statement of Retained Earnings should report an ending balance for retained earnings of which of the following?

A)$60,000.
B)$80,000.
C)$90,000.
D)$100,000.

Question 37

The primary purpose of the statement of cash flows is to report which of the following?

A)profit earned and dividends paid during the period.
B)all inflows and outflows of cash during the period.
C)assets owned and claims against those assets at the end of the period.
D)liability changes made by the financial department of the company during the period.

Question 38

Why is the statement of cash flows important?

A)of the three required financial statements,it is the only one which reports changes which took place during an accounting period.
B)it indicates the asset and liability position of a company by reflecting the amounts and types of its assets and liabilities at the beginning and end of the period.
C)it summarizes the information already reported in the income statement and statement of financial position.
D)it explains the sources and uses of cash during the period.

Question 39

Which of the following is the essential difference between an unadjusted trial balance and an adjusted trial balance?

A)an unadjusted trial balance is prepared at the start of the accounting year,while an adjusted trial balance is prepared at the end of the year.
B)an unadjusted trial balance is prepared by companies which 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 are reflected,while an adjusted trial balance is prepared after the adjusting entries are reflected.
D)an unadjusted trial balance is prepared after the post-closing trial balance.

Question 40

The statement of changes in equity would not include which of the following?

A)Profit.
B)Net sales.
C)The closing balance in the relevant accounts from the previous year.
D)Dividends declared.

Question 41

The changes in revenues and expenses caused by accruals and deferrals are classified as which of the following?

A)investing activities
B)financing activities
C)operating activities
D)all of these activities are affected by accruals and deferrals

Question 42

Which of the following applies to both the depreciation expense account and the accumulated depreciation account at the end of the first year of operations?

A)They are closed.
B)They appear in a trial balance prepared prior to the adjusting and closing entries.
C)They are not closed at the end of the accounting period.
D)They appear in a trial balance prepared after the adjusting entries but before the closing entries.

Question 43

The statement of cash flows does which of the following?

A)explains what caused profit during the accounting period.
B)identifies all assets held at the end of the accounting period by type and amount.
C)explains that the trial balance is in balance.
D)explains all of the sources and uses of cash during the accounting period.

Question 44

Select the statement that best describes the primary purpose of closing entries.

A)To facilitate adjusting entries.
B)To reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period.
C)To complete the recording of various transactions which are begun in one period and concluded in a later period.
D)To determine the amount of profit or loss for the period.

Question 45

Which of the following statements about a high net profit margin is FALSE?

A)It demonstrates how effective your business is at converting sales into profit.
B)It may mean that you are capitalizing on some competitive advantage that can provide your business with extra capacity and flexibility during the hard times.
C)It may mean that you are keeping your operating expenses under control to leave an acceptable profit.
D)It may mean that your business might need to take on debt to pay its expenses.

Question 46

A post-closing trial balance will show account balances for which of the following?

A)permanent and temporary accounts.
B)permanent accounts only.
C)temporary accounts only.
D)income statement accounts only.

Question 47

The trial balance,prepared immediately after all transactions of the period have been recorded and posted,should show all account balances that are in the ledger (T-accounts).

Question 48

Of the following accounts,which one would not appear in the post-closing trial balance?

A)Supplies inventory.
B)Dividends declared.
C)Share capital.
D)Retained earnings.

Question 49

Which of the following accounts is closed at the end of the year but does not enter the calculation of profit?

A)Interest receivable
B)Dividends declared
C)Depreciation expense
D)Salaries payable

Question 50

The purpose of the post-closing trial balance is to

A)prove the equality of the permanent account balances that are carried forward into the next accounting period.
B)prove the equality of the temporary account balances that are carried forward into the next accounting period.
C)list all the statement of financial position accounts in alphabetical order for easy reference.
D)prove that no mistakes were made.

Question 51

Return on equity is a ratio that:

A)is calculated by dividing profit plus preferred dividends by average common shareholders' equity.
B)cannot be calculated if the company has preferred shares in addition to common shares.
C)is calculated by dividing profit plus preferred dividends by average common shareholders' equity and shows the relationship between profit available for common shareholders and average common shareholders' equity.
D)shows the relationship between profit available for common shareholders and average common shareholders' equity.

Question 52

Before the closing entries were made at the end of 20B,the following data were taken from the accounts of Joe Corporation: What is the amount of shareholders' equity that should appear on Joe Corporation's statement of financial position dated December 31,20B?

A)$300,000.
B)$270,000.
C)$230,000.
D)$110,000.

Question 53

At the end of 20D,the following data were taken from the accounts of Timberline Company: The 20D closing entries would include which of the following?

A)$10,000 net credit to retained earnings.
B)$10,000 net debit to retained earnings.
C)$190,000 debit to retained earnings.
D)$180,000 credit to retained earnings.

Question 54

Profit would appear on which of the following?

A)Income statement only.
B)Statement of financial position only.
C)Statement of changes in equity and income statement.
D)Income statement and statement of financial position.

Question 55

Which of the following errors would most likely lead to an overstatement of income?

A)Recording revenue next period when the cash is collected although it is earned in the current year
B)Recording an expense incurred this year when the cash is paid next year
C)Failure to adjust deferred rent revenue account for the portion of rent earned this year
D)Failure to adjust prepaid expenses account for the portion of insurance expired this year

Question 56

A post-closing trial balance will show

A)only statement of financial position accounts.
B)zero balances for all accounts.
C)zero balances for statement of financial position accounts.
D)only income statement accounts.

Question 57

Which of the following statements is true about earnings per share?

A)It is the only ratio required to be disclosed on the income statement
B)It assesses the ability of the firm to pay their bills as they come due
C)It evaluates the efficiency with which the company uses their assets to generate sales revenue
D)It represents the profit available to the preferred shareholders

Question 58

A trial balance prepared after the closing entries have been posted would exclude which one of the following accounts?

A)Inventory.
B)Trade receivables.
C)Accumulated depreciation.
D)Service revenue.

Question 59

Which one of the following accounts would not be closed at the end of the accounting year?

A)Rent expense.
B)Dividends payable.
C)Sales revenue.
D)Salaries expense.

Question 60

The journal contains information that has been posted from the ledger.

Question 61

The unadjusted trial balance does not reflect adjusting entries.

Question 62

A trial balance is a list of all accounts with their debit or credit balances indicated in the appropriate column to provide a check on the equality of the debits and credits.

Question 63

At the end of the accounting period,wages earned by employees but not yet recorded nor paid amounted to $400; therefore,the adjusting entry should be: Debit--Wages payable; Credit-- Wages expense.

Question 64

To compute amortization expense using the straight-line formula,the cost of a depreciable asset (i.e.,equipment)must be reduced by any estimated residual or salvage value.

Question 65

Deferred expenses are previously recorded liabilities that must be adjusted for the amount of expense incurred during the period.

Question 66

Amortization expense is an example of the need for accountants to make estimates in order to record adjustments.

Question 67

Adjusting entries are recorded in the journal (i.e.,journalized)but they are not posted to the ledger.

Question 68

Service revenue earned but not yet collected by the end of the period was $200; therefore,the adjusting entry should be: Debit--Service revenue receivable,$200; Credit--Unearned service revenue,$200.

Question 69

Both the adjusting entries and the closing entries usually are dated as of the last day of the accounting period.

Question 70

Usually,adjusting entries are entered in the accounts at the end of the accounting period.

Question 71

Adjusting entries are used to update income statement accounts and statement of financial position accounts.

Question 72

Expenses paid in advance of the use of services or goods give rise to an asset until the goods and services are used,consumed,or expired.

Question 73

Each adjusting entry affects at least one income statement account and at least one statement of financial position account.

Question 74

An adjusted trial balance is usually developed to show the balances in all of the accounts after the effects of the adjusting and closing entries.

Question 75

The primary purpose of a trial balance is to determine the equality of debits and credits in the ledger accounts (or T-accounts).

Question 76

On July 1,20A,Liz Company borrowed $5,000 cash and signed a one year note payable,interest 10 percent,payable on the maturity date,June 30,20B.The accounting period ends on December 31; therefore,the required adjusting entry on December 31,20A would be: Debit--Interest payable,$250; Credit--Interest expense,$250.

Question 77

During the accounting period,an expense paid in advance and debited to prepaid expense was $180; therefore,the adjusting entry for the expiration of this item should be to debit an expense account for $180 and credit a prepaid expense account for $180.

Question 78

An expense incurred,but not yet recorded nor paid,creates a liability until the payment is made.

Question 79

Adjusting entries are necessary at the end of the accounting period to measure income properly and to provide appropriate amounts for financial statement accounts.

Question 80

Rent of $150 collected in advance was credited to rent revenue.At the end of the accounting period,it was still unearned.The related adjusting entry should be: Debit-- Rent revenue,$150; Credit--Unearned rent revenue,$150.