Question 1

The two main accounting principles used in the adjusting process are matching and full disclosure.

Accepted Answer

The two main accounting principles used in the adjusting process are the matching principle and the revenue recognition principle.

Question 2

The 12 consecutive months (or 52 weeks) selected as an organization's accounting period is called the fiscal year.

Accepted Answer

The statement is true.

Question 3

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

Accepted Answer

A company's fiscal year can start and end on any date, and it may or may not correspond with the calendar year.

Question 4

Internal transactions often include cash payments.

Accepted Answer

The answer of Internal transactions often include cash payments....

Question 5

Companies with little seasonal variation in sales often choose the calendar year as their fiscal year.

Accepted Answer

This is because the calendar year is a well-established and widely recognized standard for tracking financial and tax reporting. Additionally, companies may choose to align their fiscal year with the calendar year to simplify reporting and budgeting processes. When sales do not vary significantly throughout the year, there is no need to choose a different fiscal year.

Question 6

If equipment were purchased from an outside party, the using up of the equipment's economic benefit would be considered an external transaction.

Accepted Answer

The using up of the equipment's economic benefit through depreciation is considered an internal transaction because it involves the allocation of the equipment's cost over its useful life within the company, not a transaction with an outside party.

Question 7

Adjusting entries are designed primarily to correct errors made by bookkeepers.

Accepted Answer

Adjusting entries are primarily made to record events that have occurred but are not yet recorded by the end of the accounting period, to ensure that the financial statements are accurate and comply with the accrual basis of accounting. They are not primarily for correcting bookkeeper errors.

Question 8

The natural business year can only be used when the seasonal variation in sales does not match the calendar year.

Accepted Answer

The natural business year is based on the company's own natural cycle of activity, which does not always match the calendar year. It is used when the company's sales patterns do not follow the traditional seasonal cycles.

Question 9

The matching principle requires that revenue be assigned to the accounting period in which it is earned.

Accepted Answer

The matching principle requires that expenses be matched with the revenues they help to generate, not that revenue be assigned to the period it is earned.

Question 10

Interim financial reports cover a firm's business activity for one year.

Accepted Answer

Interim financial reports cover a shorter period of time, typically one quarter or six months, rather than a full year.

Question 11

Adjusting entries are made after the preparation of financial statements.

Accepted Answer

Adjusting entries are made before the preparation of financial statements to ensure that the revenue recognition and matching principles are followed.

Question 12

Internal transactions have no effect on the accounting equation.

Accepted Answer

Internal transactions involve exchanges within a company that may affect the accounting equation by reallocating amounts among assets, liabilities, and equity, but the overall equation remains balanced.

Question 13

Adjusting entries are used to record the effects of internal economic events.

Accepted Answer

Adjusting entries are necessary to record the effects of internal economic events like accruals, prepayments, depreciation, and amortization. These adjustments ensure that the financial statements accurately reflect the financial position and performance of the company.

Question 14

External business transactions are transactions between the business entity and some other (outside) party.

Accepted Answer

External business transactions involve the business entity interacting with outside parties, such as customers, suppliers, creditors, or investors.

Question 15

Before making 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.

Accepted Answer

Adjusting entries are made at the end of an accounting period to update certain accounts that may not show proper financial statement amounts, even though all transactions were correctly recorded. Without these adjustments, the financial statements may not accurately reflect the current financial position and performance of the company.

Question 16

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

Accepted Answer

The revenue recognition principle states that revenue should be recognized when it is earned, and adjusting entries are made to account for unearned and accrued revenues in accordance with this principle.

Question 17

The timeliness principle assumes that an organization's activities can be divided into specific periods.

Accepted Answer

The timeliness principle assumes that an organization's activities can be divided into specific periods that can be measured and reported on in a timely manner, such as monthly, quarterly, or annually. This allows for better decision-making and evaluation of performance.

Question 18

Adjusting entries are required to match revenues and expenses.

Accepted Answer

Adjusting entries are necessary to ensure that revenues and expenses are recorded in the correct period and match each other. This process helps to accurately reflect the company's financial position and performance.

Question 19

Since the revenue recognition principle requires that revenues be earned, there is no such thing as unearned revenues in accounting.

Accepted Answer

The statement is false. Unearned revenues, also known as deferred revenues, refer to the payments received from customers for goods or services that have not yet been delivered or provided. They are considered liabilities on the balance sheet until the revenue is earned and recognized in accordance with the revenue recognition principle.

Question 20

IFRS requires the preparation of interim financial statements.

Accepted Answer

IFRS does not require the preparation of interim financial statements; it is optional. However, if an entity chooses to prepare them, IAS 34 Interim Financial Reporting applies.

Quiz 3: Adjusting Accounts for Financial Statements