Deck 3: Adjusting Accounts and Preparing Financial Statements

Question 1

A company's fiscal year must correspond with the calendar year.

Answer 1

False

Question 2

The accrual basis of accounting is a system of accounting in which the adjustments are needed to assign revenues to periods in which they are earned and to match expenses with revenues.

Answer 2

True

Question 3

The matching principle requires that revenue not be assigned to the accounting period in which it is earned.

Answer 3

False

Question 4

Adjusting entries are made after the preparation of financial statements.

Question 5

The cash basis of accounting requires that revenues be recognized when cash payments from customers are received.

Question 6

Adjusting entries are used to record the effects of internal economic (financial) transactions and events.

Question 7

The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues.

Question 8

Recording revenues before they are earned overstates current-period income; recording revenues in periods after they have been earned understates the recording period's income.

Question 9

Interim statements report a company's business activities for a 1-year period.

Question 10

Under the cash basis of accounting, no adjustments are made for prepaid, unearned and accrued items.

Question 11

The matching principle and the full closure principle are the two main accounting principles used in accrual accounting.

Question 12

The matching principle requires that expenses get recorded in the same accounting period as the revenues that are earned as a result of the expenses, not when cash is paid.

Question 13

Since the revenue recognition principle requires that revenues be earned, there are no unearned revenues in accrual accounting.

Question 14

On October 15, a company received $15,000 cash as a down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the services required by the contract were completed. The company will record consulting revenue of $1,500 from this contract for October.

Question 15

The cash basis of accounting is an accounting system in which revenues are reported when cash is received and expenses are reported when cash is paid.

Question 16

Prior to recording adjusting entries at the end of an accounting period, some accounts may not show proper financial statement amounts even though all transactions were correctly recorded.

Question 17

Adjusting entries result in a better matching of revenues and expenses.

Question 18

A company paid $6,000 for a six-month insurance policy. The policy coverage began on February 1. On February 28, $100 of insurance expense must be recorded.

Question 19

The accrual basis of accounting is an accounting system in which revenues are reported as earned when cash is received.

Question 20

The time period principle assumes that an organization's activities can be divided into specific time periods.

Question 21

In accrual accounting, accrued revenues are recorded as liabilities.

Question 22

The last four steps in the accounting cycle include preparing the adjusted trial balance, preparing financial statements and recording closing and adjusting entries.

Question 23

Profit margin can also be called return on sales.

Question 24

Profit margin is calculated by dividing net sales by net income.

Question 25

Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated.

Question 26

A classified balance sheet organizes assets and liabilities into important subgroups that are not found on an unclassified balance sheet.

Question 27

Failure to record depreciation expense will overstate the asset and understate the expense.

Question 28

The first five steps in the accounting cycle include analyzing transactions, journalizing, posting, preparing an unadjusted trial balance and recording adjusting entries.

Question 29

The current ratio is computed by dividing current liabilities by current assets.

Question 30

Depreciation expense is an example of an accrued expense.

Question 31

Current assets and current liabilities are expected to be used up or come due within one year or the company's operating cycle whichever is longer.

Question 32

Earned but uncollected revenues that are recorded during the adjusting process with a credit to a revenue account and a debit to an expense account are referred to as accrued expenses.

Question 33

For a corporation, the equity section is divided into two main accounts: Common Stock and Retained Earnings.

Question 34

Plant assets and intangible assets are usually long-term assets that are used to produce or sell products and services.

Question 35

Ben and Jerry's had total assets of $149,501,000, net income of $6,242,000 and net sales of $209,203,000. Its profit margin was 2.98%.

Question 36

Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of an asset.

Question 37

Intangible assets are long-term resources that benefit business operations, usually lack physical form and have uncertain benefits.

Question 38

Before an adjusting entry is made to recognize insurance expired, Prepaid Insurance and Insurance Expense are both overstated.

Question 39

A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account.

Question 40

Current liabilities include accounts receivable, unearned revenues and salaries payable.

Question 41

When expenses exceed revenues, there is a net loss and the Income Summary account would have a credit balance.

Question 42

Net income for a period will be overstated if accrued salaries are not recorded at the end of the accounting period.

Question 43

The Income Summary account is closed to the retained earnings account.

Question 44

All necessary numbers to prepare the income statement can be taken from the income statement columns of the work sheet, including the net income or net loss.

Question 45

Which of the following identifies the proper order of the accounting cycle?

A) Analyze, Journalize, Unadjusted Trial Balance
B) Analyze, Post, Unadjusted Trial Balance
C) Journalize, Post, Adjusted Trial Balance
D) Unadjusted Trial Balance, Adjusted Trial Balance, Close
E) Adjusted Trial Balance, Adjustments, Financial Statements

Question 46

Since it is an important financial statement, the trial balance must be prepared according to specified accounting procedures.

Question 47

An unadjusted trial balance is a listing of accounts and their balances prepared before adjustments are recorded.

Question 48

Adjustments must be entered in the journal and posted to the ledger after the work sheet is prepared.

Question 49

Adjusting entries are normally entered in the general journal prior to being posted to the work sheet.

Question 50

Closing entries are normally entered in the general journal and then posted to the work sheet.

Question 51

The account form of the balance sheet matches the accounting equation. That is, assets are on the left side of the statement and liabilities and equity are on the right side of the statement.

Question 52

A post-closing trial balance is a list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Question 53

On the work sheet, net income is entered in the Income Statement Credit column as well as the Balance Sheet Debit column.

Question 54

The Income Summary account is used to close the permanent accounts at the end of an accounting period.

Question 55

If all columns balance upon completion of a work sheet, you can be sure that no errors were made in preparing the work sheet.

Question 56

It is acceptable to credit cash received in advance to revenue accounts when cash is received.

Question 57

In preparing statements from the adjusted trial balance, the balance sheet must be prepared first.

Question 58

An expense account is normally closed by debiting Income Summary and crediting the expense account.

Question 59

It is acceptable to record prepayment of expenses as debits to expense accounts.

Question 60

The dividends account is normally closed by debiting it.

Question 61

Western Company has an annual reporting period that runs from July 1^st through June 30^th. Based on this information which of the following is a true statement?

A) Western probably has little seasonal variation in their sales
B) Western has violated the time period principle
C) Western must prepare financial statements as of December 31 each year
D) Western has adopted a fiscal year
E) Western does not have an accountant

Question 62

The asset section of a classified balance sheet usually includes:

A) Current assets, investments, plant assets and intangible assets
B) Current assets, long-term assets, revenues and intangible assets
C) Current assets, investments, plant assets and equity
D) Current liabilities, investments, plant assets and intangible assets
E) Current assets, liabilities, plant assets and intangible assets

Question 63

The main purpose of adjusting entries is to:

A) Record external transactions and events
B) Record internal transactions and events
C) Recognize assets purchased during the period
D) Recognize debts paid during the period
E) Correct errors

Question 64

Which of the following statements is incorrect?

A) Prepaid expenses, depreciation and unearned revenues involve previously recorded assets and liabilities
B) Accrued expenses and accrued revenues involve assets and liabilities that were not previously been recorded
C) Adjusting entries can be used to record both accrued expenses and accrued revenues
D) Prepaid expenses, depreciation and unearned revenues often require adjusting entries to record the effects of the passage of time
E) Adjusting entries affect the cash account

Question 65

The accounting principle that requires revenue to be reported when earned is the:

A) Matching principle
B) Revenue recognition principle
C) Time period principle
D) Accrual reporting principle
E) Going-concern principle

Question 66

Prepaid expenses, depreciation, accrued expenses, unearned revenues and accrued revenues are all examples of:

A) Items that require contra accounts
B) Items that require adjusting entries
C) Asset and equity
D) Asset accounts
E) Income statement accounts

Question 67

Which of the following is the usual final step in the accounting cycle?

A) Journalizing transactions
B) Preparing an adjusted trial balance
C) Preparing a post-closing trial balance
D) Preparing the financial statements
E) Preparing a work sheet

Question 68

Interim financial statements refer to financial reports:

A) That cover less than one year, usually spanning one, three or six-month periods
B) That are prepared before any adjustments have been recorded
C) That show the assets above the liabilities and the liabilities above the equity
D) Where revenues are reported on the income statement when cash is received and expenses are reported when cash is paid
E) Where the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues

Question 69

Which of the following accounts would not be impacted by adjusting journal entries?

A) Accounts Receivable
B) Consulting Fee Earned
C) Unearned Consulting Fees
D) Cash
E) Wages Payable

Question 70

The accrual basis of accounting:

A) Is generally accepted for external reporting since it is more useful for most business decisions
B) Is flawed because it gives complete information about cash flows
C) Recognizes revenues when received in cash
D) Recognizes expenses when paid in cash
E) Eliminates the need for adjusting entries at the end of each period

Question 71

Each letter below contains three of the steps found in the accounting cycle. Which presents the given steps in the proper sequence, first to last?

A) Adjust, Analyze transactions, Close
B) Analyze transactions, Adjust, Close
C) Prepare post-closing trial balance, Prepare statements, Close
D) Prepare statements, Post, Close
E) Prepare adjusted trial balance, Journalize, Close

Question 72

The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses is the:

A) Recognition principle
B) Cost principle
C) Cash basis of accounting
D) Matching principle
E) Time period principle

Question 73

The length of time covered by a set of periodic financial statements is referred to as the:

A) Fiscal cycle
B) Natural business year
C) Accounting period
D) Business cycle
E) Operating cycle

Question 74

A classified balance sheet:

A) Measures a company's ability to pay its bills on time
B) Organizes assets and liabilities into important subgroups
C) Presents revenues, expenses and net income
D) Reports operating, investing and financing activities
E) Reports the effect of profit and dividends on retained earnings

Question 75

The 12-month period that ends when a company's activities are at their lowest point is called the:

A) Fiscal year
B) Calendar year
C) Natural business year
D) Accounting period
E) Interim period

Question 76

A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters or years is the:

A) Operating cycle of a business
B) Time period principle
C) Going-concern principle
D) Matching principle
E) Accrual basis of accounting

Question 77

The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is:

A) Cash basis accounting
B) The matching principle
C) The time period principle
D) Accrual basis accounting
E) Revenue basis accounting

Question 78

The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called:

A) Accrual basis accounting
B) Operating cycle accounting
C) Cash basis accounting
D) Revenue recognition accounting
E) Current basis accounting

Question 79

Adjusting entries:

A) Affect only income statement accounts
B) Affect only balance sheet accounts
C) Affect both income statement and balance sheet accounts
D) Affect only cash flow statement accounts
E) Affect only equity accounts

Question 80

The recurring steps performed each accounting period, starting with analyzing and recording transactions in the journal and continuing through the post-closing trial balance, are referred to as the:

A) Accounting period
B) Operating cycle
C) Accounting cycle
D) Closing cycle
E) Natural business year