Deck 3: Adjusting Accounts and Preparing Financial Statements

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

Adjusting entries are made after the preparation of financial statements.

Answer 3

False

Question 4

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

Question 5

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

Question 6

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

Question 7

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 8

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

Question 9

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

Question 10

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 11

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 12

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

Question 13

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 14

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

Question 15

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 16

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

Question 17

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 18

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

Question 19

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

Question 20

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.

Question 21

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

Question 22

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

Question 23

Depreciation expense is an example of an accrued expense.

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

Profit margin can also be called return on sales.

Question 30

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

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

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

Question 33

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

Question 34

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

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.Profit margin was 2.98%.

Question 36

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

Question 37

In accrual accounting,accrued revenues are recorded as liabilities.

Question 38

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 39

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

Question 40

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

Question 41

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

Question 42

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 43

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

Question 44

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 45

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

Question 46

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 principle.
D) Matching principle.
E) Accrual basis of accounting.

Question 47

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

Question 48

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

Question 49

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 50

Western Company has an annual reporting period that runs from July 1 through
June 30.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 51

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 52

The dividends account is normally closed by debiting it.

Question 53

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

Question 54

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) That are prepared on the last day of the calendar year.

Question 55

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, unadjusted trial balance
D) Unadjusted trial balance, adjusted trial balance, close
E) Adjusted trial balance, adjustments, financial statements

Question 56

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

Question 57

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

Question 58

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

Question 59

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

Question 60

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

Question 61

If a company 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 62

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 63

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 64

What is the difference between GAAP and IFRS presentations of the current assets section on the balance sheet?

A) Under IFRS it is mandatory to present current assets first while under GAAP it is customary (but not required) to present noncurrent assets first.
B) Both IFRS and GAAP require that current assets are listed first.
C) Under GAAP it is mandatory to present current assets first, while under IFRS it is customary (but not required) to present noncurrent assets first.
D) It is customary (but not required) under both IFRS and GAAP to present noncurrent assets first.
E) GAAP requires that current assets be presented first, while IFRS requires that current assets be presented last.

Question 65

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 66

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 67

If a company failed to make the end-of-period adjustment to remove the amount earned from the Unearned Management Fees account,there would be:

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 68

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 record the portion of these fees that has been earned,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 69

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 70

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

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

Question 71

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 72

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 73

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 74

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

Question 75

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 76

IFRS tends to be more principles-based compared with GAAP,which is viewed as more rules-based.Which of the following is a true statement about a principles-based system?

A) A principles-based system eliminates the need for internal controls.
B) A principles-based system is significantly weaker than a rules-based system.
C) A principles-based system will eliminate all fraud.
D) A principles-based system is a way to calculate interest receivable or payable.
E) A principles-based system depends heavily on control procedures to reduce the potential for fraud or misconduct.

Question 77

Due to an oversight,a company made no adjusting entry for accrued and unpaid employee wages of $24,000 on December 31.This oversight would:

A) Understate net income by $24,000.
B) Overstate net income by $24,000.
C) Have no effect on net income.
D) Overstate assets by $24,000.
E) Understate assets by $24,000.

Question 78

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 79

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 80

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.