Deck 3: Adjusting Accounts and Preparing Financial Statements

Question 1

Adjusting entries are made after the preparation of financial statements.

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

The cash basis of accounting commonly increases the comparability of financial statements from period to period.

Question 6

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

Question 7

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

Question 8

The expense recognition (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 9

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

Question 10

The expense recognition (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

The time period assumption assumes that an organization's activities can be divided into specific time periods such as months, quarters, or years.

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

The cash basis of accounting is a system in which revenues are recorded when earned and expenses are recorded when incurred.

Question 21

Failure to record depreciation expense will overstate assets and understate expenses.

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.

Question 23

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

Question 24

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

Question 25

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

Question 26

Each adjusting entry will affect a balance sheet account.

Question 27

An adjusting entry often includes an entry to Cash.

Question 28

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

Question 29

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

Question 30

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 31

A company paid $9,000 for a twelve-month insurance policy on February 1. The policy coverage began on February 1. On February 28, $750 of insurance expense must be recorded.

Question 32

Adjusting entries always affect the cash account.

Question 33

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

Question 34

The entry to record a cash receipt from a customer when the service is to be provided in a future period involves a debit to an unearned revenue account.

Question 35

Adjusting entries are designed primarily to correct accounting errors.

Question 36

Prior to recording adjusting entries at the end of an accounting period, some accounts may not show correct balances even though all transactions were properly recorded.

Question 37

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

Question 38

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

Question 39

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

Question 40

Each adjusting entry affects one or more income statement account, one or more balance sheet account, and never cash.

Question 41

Depreciation expense is an example of an accrued expense.

Question 42

Depreciation measures the decline in market value of an asset.

Question 43

Profit margin measures the relation of debt to assets.

Question 44

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 45

All plant assets, including land, are depreciated.

Question 46

Torsten 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 47

Profit margin can also be called return on sales.

Question 48

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 49

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 50

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 required adjusting entry includes a $4,000 debit to Unearned Revenue.

Question 51

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

Question 52

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

Question 53

In accrual accounting, accrued revenues are recorded as liabilities.

Question 54

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

Question 55

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 56

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 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

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 62

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

Question 63

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 64

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

Question 65

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

Question 66

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, with payment received in advance. The $6,000 cash receipt was initially recorded as Unearned Revenue. The required adjusting entry includes a $4,000 debit to Unearned Revenue.

Question 67

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

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

Question 68

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

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

Question 69

The main purpose of adjusting entries is to:

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

Question 70

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 71

Adjusting entries:

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

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) Expense recognition (Matching) principle.
B) Recognition principle.
C) Cost principle.
D) Time period principle.
E) Cash basis of accounting.

Question 73

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

A) Time period assumption.
B) Operating cycle of a business.
C) Going-concern assumption.
D) Accrual basis of accounting.
E) Expense recognition (matching) principle.

Question 74

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

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

Question 75

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

Question 76

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

Question 77

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) Days.
C) Fiscal years.
D) Calendar years.
E) Quarters.

Question 78

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

Question 79

Interim financial statements refer to financial reports:

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

Question 80

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