Deck 2: Accounting for Accruals and Deferrals

Question 1

Describe the purpose of the closing process.

Answer 1

The purpose of the closing process is to bring the balance of the nominal (temporary) accounts to zero at the end of an accounting period and to update the retained earnings account.
Explanation: Closing entries are made after the income statement is prepared. Note that retained earnings is only affected by revenues, expenses, and dividends as the result of the closing process.

Question 2

Curtis Company received $250 from a customer for services to be performed at a future date.

Answer 2

(I) (I) (N) (N) (N) (N) (I)
Explanation: Collecting a payment in advance from a customer increases assets (cash) and increases liabilities (unearned revenue). It does not affect the income statement. Revenue will not be recognized until the services are provided. It will be reported as a cash inflow from operating activities on the statement of cash flows.

Question 3

What effect does providing services on account have on the statement of cash flows? The balance sheet?

Answer 3

There is no effect on the statement of cash flows when services are performed on account. Assets and equity will increase on the balance sheet.
Explanation: Providing services on account does not affect the cash account; therefore the statement of cash flows is unaffected. The asset accounts receivable increases as does equity (revenue increases retained earnings).

Question 4

Describe the difference between temporary and permanent accounts, and state which ones are closed.

Question 5

Why are adjusting entries necessary in an accrual accounting system? What are some common examples?

Question 6

The temporary or nominal accounts are closed prior to the start of the next accounting cycle. In this closing process, the amounts in each of these accounts are transferred to what other account(s)?

Question 7

George Co. collected $1,000 cash from accounts receivable.

Question 8

Define the accounting cycle and list the stages of the cycle.

Question 9

What is the effect on the accounting equation of a cash payment to creditors?

Question 10

What does the balance in accounts receivable represent?

Question 11

Jenkins Co. performed services for customers on account.

Question 12

What effect does the recording of revenue normally have on total assets?

Question 13

At the end of the accounting period, Stewart Co. recognized accrued salaries.

Question 14

Sparta Co. provided $1,600 of services for a customer who paid $1,000 cash immediately and promised to pay an additional $600 one month later.

Question 15

Discuss the importance of ethics in the accounting profession.

Question 16

What is meant by the "fraud triangle"?

Question 17

Explain the meaning of the term, "matching concept."

Question 18

Aztec Co. signed contracts for $20,000 of services to be performed in the future.

Question 19

When are expenses recognized under accrual accounting in relation to the payment of cash?

Question 20

When is revenue recognized under accrual accounting?

Question 21

Sandridge Company recorded salaries earned by employees but not yet paid. Which of the following represents the effect of this transaction on the financial statements?

A)
B)
C)
D)

Question 22

In uncertain circumstances, the conservatism principle guides accountants to

A)accelerate revenue recognition and delay expense recognition.
B)accelerate expense recognition and delay revenue recognition.
C)recognize expense of prepaid items when payment is made.
D)maximize reported net income.

Question 23

Which of the following transactions does not involve an accrual?

A)Recording interest earned that will be received in the next period.
B)Recording operating expense incurred but not yet paid.
C)Recording salary expense incurred but not yet paid.
D)Recording the pre-payment of two years' worth of insurance.

Question 24

Adkins Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on ABC's statements?

A)Issued common stock.
B)Earned cash revenue.
C)Earned revenue on account.
D)Collected cash from accounts receivable.

Question 25

The recognition of an expense may be accompanied by which of the following?

A)An increase in assets
B)A decrease in liabilities
C)A decrease in revenue
D)An increase in liabilities

Question 26

Prior to closing, XYZ Company's accounting records showed the following balances: After closing, XYZ's retained earnings balance would be

A)$5,600.
B)$7,000.
C)$7,900.
D)None of the above.

Question 27

Which of the following choices accurately reflects how the recording of accrued salary expense affects a business's financial statements?

A)
B)
C)
D)

Question 28

Mackie Company provided $25,500 of services on account, and collected $18,000 from customers during the year. The company also incurred $17,000 of expenses on account, and paid $15,400 against its payables. As a result of these events.

A)total assets would increase
B)total liabilities would increase
C)total equity would increase
D)all of the above are correct

Question 29

Revenue on account amounted to $4,000. Cash collections of accounts receivable amounted to $2,300. Expenses for the period were $2,100. The company paid dividends of $450. Net income for the period was

A)$200.
B)$1,450.
C)$1,850.
D)$1,900.

Question 30

Which of the following accounts would not appear on a balance sheet?

A)Unearned Revenue.
B)Salaries Payable.
C)Interest Revenue.
D)Retained Earnings.

Question 31

Purchasing prepaid rent is classified as a(n):

A)asset source transaction.
B)asset use transaction.
C)asset exchange transaction
D)claims exchange transaction.

Question 32

Revenue on account amounted to $3,000. Cash collections of accounts receivable amounted to $2,700. Cash paid for expenses was $2,500. The amount of employee salaries accrued at the end of the year was $300. Cash flow from operating activities was

A)$200.
B)$300.
C)$500.
D)None of these.

Question 33

Which of the following events would not require an end-of-year adjusting entry?

A)Purchasing supplies for cash
B)Providing services on account
C)Purchasing a 12-month insurance policy on July 1
D)All of the above would require an end-of-year adjustment

Question 34

Olaf Company began 2013 with $600 in its supplies account. During the year, the company purchased $1,700 of supplies on account. The company paid $1,500 on accounts payable by year end. On December 31, 2013, Olaf counted $700 of supplies on hand. Olaf's financial statements for 2013 would show:

A)$800 of supplies; $100 of supplies expense
B)$700 of supplies; $1,600 of supplies expense
C)$700 of supplies; $1,000 of supplies expense
D)$800 of supplies; $1,700 of supplies expense

Question 35

James Company paid $1,800 for one year's rent in advance beginning on October 1, 2013. James's 2013 income statement would report rent expense, and its statement of cash flows would report cash outflow for rent, respectively, of

A)$1,800; $1,800
B)$450; $1,800
C)$450; $450
D)$300; $1,800

Question 36

Woodward Enterprises had the following events during 2013: The business issued $20,000 of common stock to its stockholders.
The business purchased land for $12,000 cash.
Services were provided to customers for $16,000 cash.
Services were provided to customers for $5,000 on account.
The company borrowed $16,000 from the bank.
Operating expenses of $12,000 were incurred and paid in cash.
Salary expense of $800 was accrued.
A dividend of $4,000 was paid to the owners of Woodward Enterprises.
Assuming the company began operations during 2013, the amount of retained earnings as of December 31, 2013 would be:

A)$4,200
B)$5,000
C)$8,200
D)$21,000

Question 37

The entry to recognize work completed on unearned revenue involves which of the following?

A)An increase in assets and a decrease in liabilities
B)An increase in liabilities and a decrease in equity
C)A decrease in assets and a decrease in liabilities
D)A decrease in liabilities and an increase in equity

Question 38

The following account balances were drawn from the 2013 financial statements of Gunn Company Based on the above information, what is the balance of Common Stock for Gunn Company?

A)$9,950
B)$7,700
C)$450
D)$10,400

Question 39

Franklin Trash Removal Company received a cash advance of $9,000 on December 1, 2013 to provide services during the months of December, January, and February. The year-end adjustment to recognize the partial expiration of the contract will

A)increase equity by $3,000
B)increase assets by $3,000
C)increase liabilities by $3,000
D)both A and B

Question 40

Bledsoe Company received $15,000 cash from the issue of stock on January 1, 2013. During 2013 Bledsoe earned $8,500 of revenue on account. The company collected $6,000 cash from accounts receivable and paid $5,400 cash for operating expenses. Based on this information alone, during 2013.

A)Total assets increased by $24,100.
B)Total assets increased by $600.
C)Total assets increased by $18,100.
D)Total assets did not change.

Question 41

Tocca Co. collected a $5,000 cash advance from a customer on November 1, 2013 for work to be performed over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect on Tocca's 2013 financial statements?

A)Increase assets and increase liabilities
B)Increase assets and increase revenues
C)Decrease liabilities and increase revenues
D)No effect

Question 42

On December 31, 2013, Farrell Co. owed $1,500 in salaries to employees who had worked during December but would be paid in January. If the year-end adjustment is properly recorded on December 31, 2013, what will be the effect of the accrual on the following items for Farrell?

A)Option A
B)Option B
C)Option C
D)Option D

Question 43

Total assets on the December 31, 2013 balance sheet would amount to:

A)$3,150.
B)$3,450.
C)$1,800.
D)$2,650.

Question 44

If retained earnings decreased during the year, and no dividends were paid, which of the following must be true?

A)Expenses for the year exceeded revenues
B)The company did not have enough cash to pay its expenses
C)Total equity decreased
D)Liabilities increased during the year

Question 45

The amount of net income shown on the December 31, 2013 income statement would amount to:

A)$550.
B)$800.
C)$50.
D)$250.

Question 46

The amount of net cash flow from operating activities shown on Norris Company's 2013 statement of cash flows is

A)$200.
B)$300.
C)$700.
D)$600.

Question 47

Gonzales Company collected $18,000 on September 1, 2013 from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gonzales Company report related to this contract on its income statement for the year ended December 31, 2013? How much would it report as cash flows from operating activities for 2013?

A)$6,000; $6,000
B)$6,000; $18,000
C)$18,000; $18,000
D)$0; $18,000

Question 48

The matching concept refers to the "matching" of:

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

Question 49

The amount of retained earnings appearing on Norris Company's December 31, 2013 balance sheet is:

A)$500.
B)$600.
C)$700.
D)$6,600.

Question 50

Which of the following accounts is not closed at the end of an accounting cycle?

A)Liabilities
B)Revenues
C)Dividends
D)Expenses

Question 51

The purpose of the accrual basis of accounting is to:

A)Report revenue when received.
B)Match revenues and expenses in the proper period.
C)Report expenses when cash disbursements are made.
D)Improve the company's earnings per share.

Question 52

Expenses that are matched with the period in which they are incurred are frequently called:

A)market expenses
B)matching expenses
C)period costs
D)working costs

Question 53

Which of the following financial statement elements is closed at the end of an accounting cycle?

A)Liabilities
B)Common stock
C)Assets
D)Revenues

Question 54

The total amount of assets shown on Norris Company's December 31, 2013 balance sheet is:

A)$6,200.
B)$6,600.
C)$6,700.
D)None of these.

Question 55

The amount of net income recognized on Norris Company's 2013 income statement is:

A)$500.
B)$400.
C)$700.
D)$600.

Question 56

Which of the following would cause net income on the accrual basis to be different than (either higher or lower than) "cash provided by operating activities" on the statement of cash flows?

A)Purchased supplies for cash.
B)Purchased land for cash.
C)Invested cash in an interest earning account.
D)All of the above are correct.

Question 57

Ruiz Company provided services for $15,000 cash during the 2013 accounting period. Ruiz incurred $12,000 expenses on account during 2013, and by the end of the year, $3,000 of that amount had been paid with cash. Assuming that these are the only accounting events that affected Ruiz during 2013.

A)The amount of net income shown on the income statement is $3,000.
B)The amount of net income shown on the income statement is $9,000.
C)The amount of net loss shown on the income statement is $3,000.
D)The amount of net cash flow from operating activities shown on the statement of cash flows is $6,000.

Question 58

The amount of retained earnings as of January 1, 2014 was:

A)$1,475.
B)$1,800.
C)$975.
D)$1,225.

Question 59

Which of the following correctly states the proper order of the accounting cycle?

A)Record transactions, adjust accounts, prepare statements, close temporary accounts.
B)Adjust accounts, record transactions, close temporary accounts, prepare statements.
C)Prepare statements, record transactions, close temporary accounts, adjust accounts.
D)Adjust accounts, prepare statements, record transactions, close temporary accounts.

Question 60

The results of the matching process are best reported on which financial statement?

A)Balance sheet
B)Income statement
C)Statement of changes in stockholders' equity
D)Statement of cash flows

Question 61

Which of the following is an asset exchange transaction?

A)Issued common stock.
B)Accrued salary expense at the end of the accounting period.
C)Recognized revenue earned on a contract where the cash had been collected at an earlier date.
D)Collected cash on accounts receivable

Question 62

The accounting principle that guides accountants, when faced with a recognition dilemma, to choose the alternative that produces the lowest net income is referred to as

A)the matching principle.
B)internal control.
C)conservatism.
D)materiality.

Question 63

Which of the following is a claims exchange transaction?

A)Purchased machine for cash.
B)Issued common stock.
C)Invested cash in an interest earning account.
D)Recognized revenue earned on a contract where the cash had been collected at an earlier date.

Question 64

Which of the following is an asset use transaction?

A)Purchased machine for cash.
B)Recorded supplies expense at the end of the period.
C)Invested cash in an interest earning account.
D)Accrued salary expense.

Question 65

Regarding the effects of end-of-period adjustments, state whether each of the following statements is true or false.
_____ a) Recording the usage of supplies involves a decrease in assets and a decrease in equity.
_____ b) The accrual of salaries is considered a claims exchange transaction.
_____ c) Recording services performed on a prepaid contract involves a decrease in liabilities and an increase in assets.
_____ d) End of period adjustments never affect cash flows.
_____ e) Failure to record accrued salaries at the end of the year will cause reported income to be higher than it should have been.

Question 66

Policies and procedures designed to reduce the opportunities for fraud are often called:

A)accounting principles
B)asset source transactions
C)internal controls
D)financial systems

Question 67

Which of the following is not an article of the AICPA Code of Professional Conduct?

A)Conservatism
B)Objectivity and Independence
C)Integrity
D)Due Care

Question 68

Regarding the relationships of revenues and expenses to assets and liabilities, state whether each of the following statements is true or false.
_____ a) Recording an increase in a revenue account may be associated with an increase in assets.
_____ b) Recording an increase in a revenue account may be associated with a decrease in liabilities.
_____ c) An increase in Salaries Expense may be accompanied by a decrease in Salaries Payable.
_____ d) Recording a decrease in assets may be associated with an increase in an expense account.
_____ e) An increase in Supplies may be accompanied by an increase in Supplies Expense.

Question 69

The balance in a revenue account at the beginning of an accounting period will always be

A)equal to the amount of retained earnings for the previous period.
B)last period's ending balance.
C)higher than the previous periods beginning balance.
D)zero.

Question 70

Wyatt Company paid $57,000 in January 2013 for salaries that had been earned by employees in December 2012. Indicate whether each of the following statements about financial statement effects of the January 2013 event is true or false.
_____ a) The income statement for 2013 is not affected because the salaries expense had been recognized at the end of December.
_____ b) On the 2013 statement of cash flows, cash flows from operating activities decreased.
_____ c) Payment of the salaries in 2013 decreased a liability.
_____ d) The 2013 statement of changes in stockholders' equity would not be affected because the salaries expense had been recognized at the end of December.
_____ e) Both assets and equity decreased as a result of this transaction.

Question 71

Dandridge Company collected cash in 2012 from a customer for services to be performed beginning January 2013. Indicate whether each of the following statements about this transaction is true or false.
_____ a) Dandridge's 2012 income statement would not be affected by this transaction.
_____ b) Dandridge's 2012 statement of cash flows would be affected by this transaction.
_____ c) This transaction is an asset exchange transaction.
_____ d) The revenue for the services provided will be recorded in 2013.
_____ e) This transaction is considered an accrual transaction.

Question 72

Kenyon Company uses accrual accounting. Indicate whether each of the following statements regarding Kenyon's accounting system is true or false.
_____ a) The recognition of accounting events and the realization of cash consequences may occur in different accounting periods.
_____ b) The cash consequence of a transaction always precedes its accounting recognition.
_____ c) Expenses may either be matched to revenues they produce or to periods in which they are incurred.
_____ d) Kenyon may record accrual transactions, but may not record deferral transactions.
_____ e) Kenyon is not permitted to make cash sales.

Question 73

Earning revenue on account would be classified as a/an?

A)claims exchange transaction.
B)asset source transaction.
C)asset use transaction.
D)asset exchange transaction.

Question 74

Which of the following is not a common feature of ethical misconduct?

A)The capacity to rationalize.
B)The existence of pressure leading to an incentive.
C)The assistance of others.
D)The presence of an opportunity.

Question 75

Which of the following is an asset source transaction?

A)Issued common stock.
B)Paid a cash dividend to stockholders.
C)Received a payment on accounts receivable.
D)Accrued salary expense.

Question 76

What action did the U. S. Congress take because of the audit failures at Enron, WorldCom and other companies?

A)Required publicly-traded companies to be audited by a government agency
B)Required companies to begin preparing an additional financial statement
C)Passed the Sarbanes-Oxley Act
D)Passed an amendment to the Securities and Exchange Act

Question 77

Which of the following is not a component of the fraud triangle?

A)Opportunity
B)Rationalization
C)Trust
D)Pressure

Question 78

Which of the following describes the effects of a claims exchange transaction on a company's financial statements?

A)
B)
C)
D)

Question 79

Whetstone Co. performed services for a customer on account. Indicate whether each of the following statements about this transaction is true or false.
_____ a) Assets and equity both increase when the revenue is recognized.
_____ b) This transaction did not affect cash flows.
_____ c) The company recorded an increase in revenue and a decrease in accounts receivable.
_____ d) Recognition of revenue would be delayed until cash was received.
_____ e) This transaction is an example of an asset source transaction.

Question 80

Indicate whether each of the following statements about the closing process and the accounting cycle is true or false.
_____ a) The closing process transfers certain account balances to retained earnings at the end of the accounting cycle.
_____ b) Only accounts that appear on the income statement are closed at the end of each accounting cycle.
_____ c) Another name for permanent accounts is "nominal accounts."
_____ d) The permanent accounts contain information that is cumulative in nature.
_____ e) The retained earnings balance at the end of any given year is equal to that year's net income.