Deck 3: Adjusting Accounts and Preparing Financial Statements

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

The accrual basis of accounting recognizes revenues when cash is received from customers.

Answer 3

False

Question 4

Adjusting entries are made after the preparation of financial statements.

Question 5

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

Question 6

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

Question 7

The cash basis of accounting commonly results in financial statements that are less comparable from period to period than the accrual basis of accounting.

Question 8

Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly recorded.

Question 9

Recording expenses early overstates current-period income; recording expenses late understates current period income.

Question 10

The matching principle does not aim to record expenses in the same accounting period as the revenue earned as a result of these expenses.

Question 11

Two main accounting principles used in accrual accounting are matching and full closure.

Question 12

The cash basis of accounting recognizes revenues when cash payments from customers are received.

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

A fiscal year refers to an organization's accounting period that spans twelve consecutive months or 52 weeks.

Question 18

The accrual basis of accounting recognizes expenses when cash is paid.

Question 19

Recording revenues early overstates current-period income; recording revenues late understates current period income.

Question 20

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

Question 21

Each adjusting entry affects only one or more income statements account and never cash.

Question 22

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.
Revenue = $15,000 x 10% = $1,500

Question 23

A company's month-end adjusting entry for Insurance Expense is $1,000. If this entry is not made then expenses are understated by $1,000 and net income is overstated by $1,000.

Question 24

Adjusting entries are designed primarily to correct accounting errors.

Question 25

Each adjusting entry can only affect a balance sheet account.

Question 26

Before an adjusting entry is made to recognize the cost of expired insurance for the period, Prepaid Insurance and Insurance Expense are both overstated.

Question 27

The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when cash is received.

Question 28

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

Question 29

Accrued expenses reflect transactions where cash is paid before a related expense is recognized.

Question 30

Under the accrual basis of accounting, adjustments are often made for prepaid expenses and unearned revenues.

Question 31

An adjusting entry often includes an entry to Cash.

Question 32

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 33

The entry to record a cash receipt from a customer when the service to be provided has not yet been performed involves a debit to an unearned revenue account.

Question 34

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

Question 35

Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses.

Question 36

A company paid $9,000 for a six-month insurance policy. The policy coverage began on February 1. On February 28, $150 of insurance expense must be recorded.
Expense = $9,000/6 = $1,500

Question 37

The accrual basis of accounting requires adjustments to recognize revenues in the periods they are earned and to match expenses with revenues.

Question 38

Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account.

Question 39

Accrued revenues at the end of one accounting period are expected to result in cash payments in a future period.

Question 40

Accrued expenses at the end of one accounting period are expected to result in cash payments in a future period.

Question 41

A company owes its employees $5,000 for the year ended December 31. It will pay employees on January 6 for the previous two weeks' salaries. The year-end adjusting on entry on December 31 will include a debit to Salaries Expense and a credit to Cash.

Question 42

If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year of rent in advance and adjusting entries are made at the end of each month, the balance of Prepaid Rent as of December 1 should be $1,500.
$18,000 x 1/12 = $1,500

Question 43

All plant assets, including land, eventually wear out or decline in usefulness.

Question 44

A salary owed to employees is an example of an accrued expense.

Question 45

Depreciation expense is an example of an accrued expense.

Question 46

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

Question 47

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 48

A company entered into a 2-month contract for $50,000 on April 1. It earned $25,000 of the contract services in April and billed the customer. The company should recognize the revenue when it receives the customer's check.

Question 49

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

Question 50

Earned but uncollected revenues are recorded during the adjusting process with a credit to a revenue and a debit to an expense.

Question 51

A company performs 20 days work on a 30-day contract before the end of the year. The total contract is valued at $6,000 and payment is not due until the contract is fully completed. The adjusting entry includes a $4,000 credit to unearned revenue.

Question 52

Ben 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%.
$6,242,000/$209,203,000 = 2.98%

Question 53

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

Question 54

Depreciation expense for a period is the portion of a plant asset's cost that is allocated to that period.

Question 55

A company purchased $6,000 worth of supplies in August and recorded the purchase in the Supplies account. On August 31, the fiscal year-end, the supplies count equaled $3,200. The adjusting entry would include a $2,800 debit to Supplies.

Question 56

Profit margin can also be called return on sales.

Question 57

In accrual accounting, accrued revenues are recorded as liabilities.

Question 58

Depreciation measures the decline in market value of an asset.

Question 59

Profit margin reflects the percent of profit in each dollar of revenue.

Question 60

Profit margin measures the relation of debt to assets.

Question 61

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 assumption.
C) Going-concern assumption.
D) Matching principle.
E) Accrual basis of accounting.

Question 62

Revenue and expense balances are transferred from the adjusted trial balance to the income statement.

Question 63

The adjusted trial balance must be prepared before the adjusting entries are made.

Question 64

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

Question 65

Adjusting entries made at the end of an accounting period accomplish all of the following except:

A) Updating liability and asset accounts to their proper balances.
B) Assigning revenues to the periods in which they are earned.
C) Assigning expenses to the periods in which they are incurred.
D) Assuring that financial statements reflect the revenues earned and the expenses incurred.
E) Assuring that external transaction amounts remain unchanged.

Question 66

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 67

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 68

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 69

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

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

Question 70

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 assumption.
D) Accrual basis accounting.
E) Revenue basis accounting.

Question 71

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 72

The time period assumption assumes that an organization's activities can be divided into specific time periods including all of the following except:

A) Months.
B) Quarters.
C) Fiscal years.
D) Calendar years.
E) Days.

Question 73

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 74

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

Question 75

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

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

Question 76

It is acceptable to record cash received in advance of providing products or services to revenue accounts.

Question 77

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

Question 78

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 79

Financial statements can be prepared directly from the information in the adjusted trial balance.

Question 80

Asset and liability balances are transferred from the adjusted trial balance to the income statement.