Deck 3: Adjusting Accounts and Preparing Financial Statements

Question 1

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

Answer 1

True

Question 2

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.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

Depreciation measures the decline in market value of an asset.

Question 5

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

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

Depreciation expense is an example of an accrued expense.

Question 11

In accrual accounting,accrued revenues are recorded as liabilities.

Question 12

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

Question 13

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

Question 14

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

Question 15

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 16

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 entry on December 31 will include a debit to Salaries Expense and a credit to Cash.

Question 17

All plant assets,including land,are depreciated.

Question 18

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 physical count of supplies indicates the cost of unused supplies is $3,200.The adjusting entry would include a $2,800 debit to Supplies.

Question 19

A company performs 20 days of 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 debit to unearned revenue.

Question 20

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

Question 21

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 22

Which of the following statements is incorrect?

A)Adjustments to prepaid expenses and unearned revenues involve previously recorded assets and liabilities.
B)Accrued expenses and accrued revenues involve assets and liabilities that had 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 only balance sheet accounts.

Question 23

If a company failed to make the end-of-period adjustment to move the amount of management fees that were earned from the Unearned Management Fees account to the Management Fees Revenue account,this omission would cause:

A)An overstatement of net income.
B)An overstatement of assets.
C)An overstatement of liabilities.
D)An overstatement of equity.
E)An understatement of liabilities.

Question 24

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)Expense recognition (Matching)principle.
E)Time period principle.

Question 25

The length of time covered by a set of periodic financial statements,primarily a year for most companies,is referred to as the:

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

Question 26

The accrual basis of accounting:

A)Is generally accepted for external reporting because it is more useful than cash basis 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 27

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 28

An adjusting entry could be made for each of the following except:

A)Prepaid expenses.
B)Depreciation.
C)Owner investments.
D)Unearned revenues.
E)Accrued expenses.

Question 29

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 in the accounting records.

Question 30

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 31

It is acceptable to record cash received in advance of providing products or services to revenue accounts if an adjusting entry is made at the end of the period to bring the liability account balance to the correct unearned amount.

Question 32

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 33

It is acceptable to record prepayment of expenses as debits to expense accounts if an adjusting entry is made at the end of the period to bring the asset account balance to the correct unused or unexpired amount.

Question 34

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 35

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

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

Question 36

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 37

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 38

A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on December 31.This oversight would:

A)Understate net income by $28,000.
B)Overstate net income by $28,000.
C)Have no effect on net income.
D)Overstate assets by $28,000.
E)Understate assets by $28,000.

Question 39

If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting period,the financial statements prepared at that time would show:

A)Assets overstated and equity understated.
B)Assets and equity both understated.
C)Assets overstated,net income understated,and equity overstated.
D)Assets,net income,and equity understated.
E)Assets,net income,and equity overstated.

Question 40

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 cash accounts.
E)Affect only equity accounts.

Question 41

On July 1 Plum Co.paid $7,500 cash for management services to be performed over a two-year period.Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment.On July 1 Plum should record:

A)A debit to an expense and credit to a prepaid expense for $7,500.
B)A debit to an expense and credit to Cash for $7,500.
C)A debit to a prepaid expense and a credit to Cash for $7,500.
D)A credit to a prepaid expense and a debit to Cash for $7,500.
E)A debit to Cash for $7,500 and a credit to an expense for $7,500.

Question 42

On July 1of the current calendar year,Plum Co.paid $7,500 cash for management services to be performed over a two-year period.Plum follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment.The adjusting entry on December 31 of the current year for Plum would include:

A)A debit to an expense and a credit to a prepaid expense for $5,625.
B)A debit to a prepaid expense and a credit to Cash for $5,625.
C)A debit to an expense and a credit to a prepaid expense for $1,875.
D)A debit to a prepaid expense and a credit to an expense for $1,875.
E)A credit to a liability and a debit to a prepaid expense for $1,875.

Question 43

A company had no office supplies available at the beginning of the year.During the year,the company purchased $250 worth of office supplies.On December 31,$75 worth of office supplies remained.How much should the company report as office supplies expense for the year?

A)$75.
B)$125.
C)$175.
D)$250.
E)$325.

Question 44

The periodic expense created by allocating the cost of plant and equipment to the periods in which they are used,representing the expense of using the assets,is called:

A)Accumulated depreciation.
B)A contra account.
C)The matching principle.
D)Depreciation expense.
E)An accrued account.

Question 45

A company earned $3,000 in net income for October.Its net sales for October were $10,000.Its profit margin is:

A)3%.
B)30%.
C)33%.
D)333%.
E)$7,000.

Question 46

All of the following statements regarding profit margin are true except:

A)Profit margin reflects the percent of profit in each dollar of revenue.
B)Profit margin is also called return on sales.
C)Profit margin can be used to compare a firm's performance to its competitors.
D)Profit margin is calculated by dividing net income by net sales.
E)Profit margin is not a useful measure of a company's operating results.

Question 47

Prior to recording adjusting entries,the Office Supplies account had a $359 debit balance.A physical count of the supplies showed $105 of unused supplies available.The required adjusting entry is:

A)Debit Office Supplies $105 and credit Office Supplies Expense $105.
B)Debit Office Supplies Expense $105 and credit Office Supplies $105.
C)Debit Office Supplies Expense $254 and credit Office Supplies $254.
D)Debit Office Supplies $254 and credit Office Supplies Expense $254.
E)Debit Office Supplies $105 and credit Supplies Expense $254.

Question 48

Which of the following assets is not depreciated?

A)Store fixtures.
B)Computers.
C)Land.
D)Buildings.
E)Equipment.

Question 49

An account linked with another account that has an opposite normal balance and is subtracted from the balance of the related account is a(n):

A)Accrued expense.
B)Contra account.
C)Accrued revenue.
D)Intangible asset.
E)Adjunct account.

Question 50

If throughout an accounting period the fees for legal services paid in advance by clients are recorded in an account called Unearned Legal Fees,the end-of-period adjusting entry to record the portion of those fees that has been earned is:

A)Debit Cash and credit Legal Fees Earned.
B)Debit Cash and credit Unearned Legal Fees.
C)Debit Unearned Legal Fees and credit Legal Fees Earned.
D)Debit Legal Fees Earned and credit Unearned Legal Fees.
E)Debit Unearned Legal Fees and credit Accounts Receivable.

Question 51

Accrued revenues:

A)At the end of one accounting period result in cash receipts in a future period.
B)At the end of one accounting period often result in cash payments in the next period.
C)Are also called unearned revenues.
D)Are listed on the balance sheet as liabilities.
E)Are recorded at the end of an accounting period because cash has already been received for revenues earned.

Question 52

On July 1,a company paid the $2,400 premium on a one-year insurance policy with benefits beginning on that date.What will be the insurance expense on the annual income statement for the current year ended December 31?

A)$1,200.
B)$2,400.
C)$1,000.
D)$400.
E)$1,400.

Question 53

On January 1 a company purchased a five-year insurance policy for $1,800 with coverage starting immediately.If the purchase was recorded in the Prepaid Insurance account,and the company records adjustments only at year-end,the adjusting entry at the end of the first year is:

A)Debit Prepaid Insurance,$1,800;credit Cash,$1,800.
B)Debit Prepaid Insurance,$1,440;credit Insurance Expense,$1,440.
C)Debit Prepaid Insurance,$360;credit Insurance Expense,$360.
D)Debit Insurance Expense,$360;credit Prepaid Insurance,$360.
E)Debit Insurance Expense,$360;credit Prepaid Insurance,$1,440.

Question 54

On April 1,a company paid the $1,350 premium on a three-year insurance policy with benefits beginning on that date.What will be the insurance expense on the annual income statement for the year ended December 31?

A)$1,350.00.
B)$450.00.
C)$1,012.50.
D)$337.50.
E)$37.50.

Question 55

Which of the following does not require an adjusting entry at year-end?

A)Accrued interest on notes payable.
B)Supplies used during the period.
C)Cash invested by owner.
D)Accrued wages.
E)Expired portion of prepaid insurance.

Question 56

Unearned revenue is reported in the financial statements as:

A)A revenue on the balance sheet.
B)A liability on the balance sheet.
C)An unearned revenue on the income statement.
D)An asset on the balance sheet.
E)A financing activity on the statement of cash flows.

Question 57

The total amount of depreciation recorded against an asset over the entire time the asset has been owned:

A)Is referred to as depreciation expense.
B)Is referred to as accumulated depreciation.
C)Is shown on the income statement of the final period.
D)Is only recorded when the asset is disposed of.
E)Is referred to as an accrued asset.

Question 58

A company records the fees for legal services paid in advance by its clients in an account called Unearned Legal Fees.If the company fails to make the end-of-period adjusting entry to move the portion of these fees that has been earned to a revenue account,one effect will be:

A)An overstatement of equity.
B)An understatement of equity.
C)An understatement of assets.
D)An understatement of liabilities.
E)An overstatement of assets.

Question 59

Profit margin is defined as:

A)Revenues divided by net sales.
B)Net sales divided by assets.
C)Net income divided by net sales.
D)Net income divided by assets.
E)Net sales divided by net income.

Question 60

A company had $7,000,000 in net income for the year.Its net sales were $15,200,000 for the same period.Calculate its profit margin.

A)85.4%.
B)117.1%.
C)53.9%.
D)217.1%.
E)46.1%.

Question 61

A company's Office Supplies account shows a beginning balance of $600 and an ending balance of $400.If office supplies expense for the year is $3,100,what amount of office supplies was purchased during the period?

A)$2,700.
B)$2,900.
C)$3,300.
D)$3,500.
E)$3,700.

Question 62

On April 1,Griffith Publishing Company received $1,548 from Santa Fe,Inc.for 36-month subscriptions to several different magazines.The subscriptions started immediately.What is the amount of revenue that should be recorded by Griffith Publishing Company for the second year of the subscription assuming the company uses a calendar reporting period?

A)$0.
B)$516.
C)$387.
D)$129.
E)$430.

Question 63

What is the proper adjusting entry at December 31,the end of the accounting period,if the balance in the prepaid insurance account is $7,750 before adjustment,and the unexpired amount per analysis of policies is,$3,250?

A)Debit Insurance Expense,$3,250;credit Prepaid Insurance,$3,250.
B)Debit Insurance Expense,$4,500;credit Prepaid Insurance,$4,500.
C)Debit Prepaid Insurance,$4,500;credit Insurance Expense,$4,500.
D)Debit Insurance Expense,$7,750;credit Prepaid Insurance,$7,750.
E)Debit Cash,$7,750;Credit Prepaid Insurance,$7,750.

Question 64

If accrued salaries were recorded on December 31 with a debit to Salaries Expense and a credit to Salaries Payable,the entry to record payment of these wages on the following January 5 would include:

A)A debit to Cash and a credit to Salaries Payable.
B)A debit to Cash and a credit to Prepaid Salaries.
C)A debit to Salaries Payable and a credit to Cash.
D)A debit to Salaries Payable and a credit to Salaries Expense.
E)No entry would be necessary on January 5.

Question 65

On January 1,Eastern College received $1,200,000 from its students for the spring semester that it recorded in Unearned Tuition and Fees.The term spans four months beginning on January 2 and the college spreads the revenue evenly over the months of the term.What amount of tuition revenue should the college recognize on February 28?

A)$300,000.
B)$600,000.
C)$800,000.
D)$900,000.
E)$1,200,000.

Question 66

On January 1,Fashion Forward Magazine received $15,000 from subscribers for the annual subscriptions that it recorded in Unearned Subscription Revenue.The issues of the magazine are mailed to subscribers quarterly.What amount of tuition revenue should the magazine recognize on March 31 when the first issue is sent in March?

A)$15,000.
B)$1,250.
C)$7,500.
D)$3,750.
E)$0.

Question 67

Incurred but unpaid expenses that are recorded during the adjusting process with a debit to an expense and a credit to a liability are:

A)Intangible expenses.
B)Prepaid expenses.
C)Unearned expenses.
D)Net expenses.
E)Accrued expenses.

Question 68

If a company records prepayment of expenses in an asset account,the adjusting entry when all or part of the prepaid asset is used or expired would:

A)Result in a debit to an expense and a credit to an asset account.
B)Cause an adjustment to prior expense to be overstated and assets to be understated.
C)Cause an accrued liability account to exist.
D)Result in a debit to a liability and a credit to an asset account.
E)Decrease cash.

Question 69

A company pays each of its two office employees each Friday at the rate of $100 per day for a five-day week that begins on Monday.If the monthly accounting period ends on Tuesday and the employees worked on both Monday and Tuesday,the month-end adjusting entry to record the salaries earned but unpaid is:

A)Debit Unpaid Salaries $600 and credit Salaries Payable $600.
B)Debit Salaries Expense $400 and credit Salaries Payable $400.
C)Debit Salaries Expense $600 and credit Salaries Payable $600.
D)Debit Salaries Payable $400 and credit Salaries Expense $400.
E)Debit Salaries Expense $400 and credit Cash $400.

Question 70

Wilson Company paid insurance premiums for four months in advance on November 1.The balance in the prepaid insurance account before adjustment at the end of the year is $4,800 and no adjustments had been made previously.The adjusting entry required on December 31 is:

A)Debit Insurance Expense,$2,400;credit Prepaid Insurance,$2,400.
B)Debit Prepaid Insurance,$2,400;credit Insurance Expense,$2,400.
C)Debit Insurance Expense,$1,200;credit Prepaid Insurance,$1,200.
D)Debit Prepaid Insurance,$1,200;credit Insurance Expense,$1,200.
E)Debit Cash,$4,800;Credit Prepaid Insurance,$4,800.

Question 71

On May 1,a two-year insurance policy was purchased for $18,000 with coverage to begin immediately.What is the amount of insurance expense that would appear on the company's income statement for the first year ended December 31?

A)$750.
B)$5,270.
C)$6,000.
D)$6,750.
E)$18,000.

Question 72

Fragmental Co.leased a portion of its store to another company for eight months beginning on October 1,at a monthly rate of $800.Fragmental collected the entire $6,400 cash on October 1 and recorded it as unearned revenue.The journal entry made by Fragmental Co.at year-end on December 31 would be:

A)A debit to Rent Revenue and a credit to Cash for $2,400.
B)A debit to Rent Revenue and a credit to Unearned Rent for $2,400.
C)A debit to Cash and a credit to Rent Revenue for $6,400.
D)A debit to Unearned Rent and a credit to Rent Earned for $2,400.
E)A debit to Unearned Rent and a credit to Rent Earned for $4,000.

Question 73

A company purchased a new delivery van at a cost of $45,000 on July 1.The truck is estimated to have a useful life of 6 years and a salvage value of $3,000.The company uses the straight-line method of depreciation.How much depreciation expense will be recorded for the van during the first year ended December 31?

A)$3,250.
B)$3,500.
C)$4,000.
D)$6,500.
E)$7,000.

Question 74

The difference between the cost of an asset and the accumulated depreciation for that asset is called

A)Depreciation Expense.
B)Unearned Depreciation.
C)Prepaid Depreciation.
D)Depreciation Value.
E)Book Value.

Question 75

The adjusting entry to record the salaries earned due to employees for services provided but unpaid at the end of the accounting period affects the accounts in which of the following ways?

A)Debit Salaries Payable and credit Salaries Expense.
B)Debit Salaries Expense and credit Cash.
C)Debit Accrued Salaries and credit Salaries Payable.
D)Debit Cash and credit Salaries Expense.
E)Debit Salaries Expense and credit Salaries Payable.

Question 76

On May 1,Sellers Marketing Company received $1,500 from Franco Marcelli for a marketing campaign effective from May 1 this year to April 30 of the following year.The Cash receipt was recorded as unearned fees and at year-end on December 31,$1,000 of the fees had been earned.The adjusting entry on December 31 would be:

A)A debit to Unearned Fees and a credit to Cash for $500.
B)A debit to Fees Earned and a credit to Unearned Fees for $500.
C)A debit to Unearned Fees and a credit to Fees Earned for $1,000.
D)A debit to Fees Earned and a credit to Cash for $1,000.
E)A debit to Fees Earned and a credit to Cash for $500.

Question 77

A company pays its employees $4,000 each Friday,which amounts to $800 per day for the five-day workweek that begins on Monday.If the monthly accounting period ends on Thursday and the employees worked through Thursday,the amount of salaries earned but unpaid at the end of the accounting period is:

A)$4,000.
B)$800.
C)$1,600.
D)$2,400.
E)$3,200.

Question 78

The adjusting entry at the end of an accounting period to record the unpaid salaries of employees for work provided is:

A)Debit Unpaid Salaries and credit Salaries Payable.
B)Debit Salaries Payable and credit Salaries Expense.
C)Debit Salaries Expense and credit Cash.
D)Debit Salaries Expense and credit Salaries Payable.
E)Debit Cash and credit Salaries Expense.

Question 79

On April 1,Griffith Publishing Company received $1,548 from Santa Fe,Inc.for 36-month subscriptions to several different magazines.The subscriptions started immediately.What is the amount of revenue that should be recorded by Griffith Publishing Company for the first year of the subscription assuming the company uses a calendar reporting period?

A)$0.
B)$516.
C)$387.
D)$129.
E)$430.

Question 80

On December 1,Simpson Marketing Company received $3,600 from a customer for a marketing plan to be completed January 31 of the following year.The cash receipt was recorded as unearned fees.The adjusting entry for the year ended December 31 would include:

A)a debit to Earned Fees for $3,600.
B)a debit to Unearned Fees for $1,800.
C)a credit to Unearned Fees for $1,800.
D)a debit to Earned Fees for $1,800.
E)a credit Earned Fees for $3,600.