Question 1

A journal entry contains a debit to an asset account and a credit to a revenue account. This is an example of a(n):

Accepted Answer

A debit to an asset account indicates an increase in an asset, while a credit to a revenue account indicates an increase in revenue. The combination of these transactions is characteristic of accrued revenue, which occurs when revenue is earned but not yet received.

Question 2

The adjusting entry to allocate the cost of a plant asset such as equipment over its useful life involves a credit to:

Accepted Answer

The correct adjusting entry for allocating the cost of a plant asset over its useful life involves a debit to Depreciation Expense and a credit to Accumulated Depreciation. Accumulated Depreciation is a contra asset account that accumulates the total depreciation of an asset over time, reducing the asset's book value on the balance sheet.

Question 3

Assume the beginning balance in the Retained Earnings account is zero. If a debit balance exists in Retained Earnings after closing out revenues and expenses at the end of the current period, it indicates:

Accepted Answer

A debit balance in the Retained Earnings account after closing revenues and expenses indicates that the company incurred a net loss for the current period, as expenses exceeded revenues.

Question 4

Closing entries transfer the balances of revenue, expense, and dividends accounts to which account?

Accepted Answer

Closing entries transfer the balances of revenue, expense, and dividends accounts to Retained Earnings account, which is a component of stockholders' equity.

Question 5

Adjusting entries:

Accepted Answer

Adjusting entries are necessary at the end of the accounting period to update certain accounts in accordance with the accrual basis of accounting. These entries ensure that the financial statements are accurate and complete.

Question 6

Current assets include:

Accepted Answer

Current assets are assets that are expected to be converted to cash within one year or one operating cycle, whichever is longer. Cash, receivables, and inventory are all examples of current assets. Payables and retained earnings are liabilities and equity, respectively, and equipment is a long-term asset. Therefore, only choice A includes all current assets.

Question 7

The adjusting entry for supplies used during the current period will involve a credit to:

Accepted Answer

The adjusting entry for supplies used involves a credit to the Supplies account to decrease the balance of supplies on hand, reflecting the consumption of supplies during the period.

Question 8

The accounting principle which tells accountants when to record revenue and in what amount is called the:

Accepted Answer

The revenue recognition principle is the accounting principle that guides accountants as to when and how much revenue should be recorded. It dictates that revenue should be recognized when it is earned and realized or realizable, and when it is earned, even if cash has not yet been received. This principle is important for ensuring that financial statements accurately and fairly reflect a company's financial performance. The expense recognition principle, also known as the matching principle, governs when and how expenses should be recorded, while the going concern principle assumes that a business will continue to operate indefinitely. The cost constraint principle states that financial reporting should incur only reasonable costs to provide information to users.

Question 9

In what order are financial statements generally prepared?

Accepted Answer

The income statement is prepared first to report a company's revenues and expenses over a specific period. The statement of retained earnings is then prepared to show how the net income or loss from the income statement affects the company's retained earnings. Finally, the balance sheet is prepared to show the company's financial position at the end of the period, based on its assets, liabilities, and equity. Therefore, the correct order is income statement, statement of retained earnings, and balance sheet.

Question 10

One of the most widely used financial ratios is the:

Accepted Answer

The current ratio is a widely used financial ratio that measures a company's ability to pay off its short-term liabilities with its current assets. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates a company's strong liquidity and ability to meet its short-term obligations.

Question 11

The adjusting entry made to record prepaid insurance that has expired during the period would include a debit to:

Accepted Answer

The adjusting entry to record the expiration of prepaid insurance would involve debiting Insurance Expense and crediting Prepaid Insurance. This is because the expense has been incurred during the current period and Prepaid Insurance is no longer an asset as it has been used up. Accrued Insurance and Unearned Insurance are not relevant accounts in this situation.

Question 12

A classified balance sheet:

Accepted Answer

A classified balance sheet separates current assets from non-current assets and current liabilities from non-current liabilities. This helps provide greater detail and insight into a company's financial position. A non-classified balance sheet (option A) would not provide this level of detail. The format of the balance sheet (report format or account format) is not related to whether or not it is classified.

Question 13

An accrual refers to an event:

Accepted Answer

An accrual refers to an event where the cash has not been exchanged between the two parties yet. It is a recognition of revenue earned or expenses incurred, irrespective of whether cash has been received or paid. Accruals are important to ensure that financial statements accurately represent the financial position and performance of a company.

Question 14

An accountant who keeps his books using accrual accounting performs a service but does not receive payment at the time the service is performed. The entry made by the accountant will require a credit to:

Accepted Answer

In accrual accounting, revenues are recognized when earned, regardless of when the payment is received. Therefore, when a service is performed but not yet paid for, the accountant would credit Service Revenue to recognize the revenue earned from the service.

Question 15

A company using the cash basis of accounting receives cash for services yet to be performed. The entry to record the cash received will involve a credit to:

Accepted Answer

Under the cash basis of accounting, revenue is recognized when cash is received. Therefore, when cash is received for services yet to be performed, it is recorded as Service Revenue.

Question 16

What effect does an accrued revenue adjustment have on a company's net income?

Accepted Answer

An accrued revenue adjustment increases net income for the period because it recognizes revenue that has been earned but not yet received, thus increasing the total revenue reported in the financial statements for that period.

Question 17

Which of the four accounts listed below would be considered the most liquid?

Accepted Answer

Accounts Receivable is considered the most liquid of these options as it represents money owed to the company by its customers, which can be quickly converted to cash.

Question 18

There are two methods used to account for transactions. These methods are:

Accepted Answer

The two methods used to account for transactions are cash and accrual. The cash method records transactions when the actual exchange of cash occurs, while the accrual method records transactions when they occur, regardless of when the cash is exchanged. Both methods have their advantages and disadvantages, but the accrual method is generally considered the more accurate reflection of a company's financial situation.

Question 19

A journal entry contains a debit to the Cash account and a credit to the Unearned Service Revenue account. This is an example of a(n):

Accepted Answer

The debit to Cash indicates receipt of payment, while the credit to Unearned Service Revenue indicates that the revenue has not yet been earned and is therefore deferred. This is an example of deferred revenue, where payment is received before the revenue is earned.

Question 20

A deferral refers to an event:

Accepted Answer

A deferral occurs when the recognition of an expense or revenue is postponed until after the cash is paid or received. This is different from an accrual, where the recognition of an expense or revenue is recorded before the cash is paid or received. Option A is describing an accrual, option B is describing an error in accounting, and option D is a non-existent accounting term.

Quiz 3: Accrual Accounting and the Financial Statements

A journal entry contains a debit to an asset account and a credit to a revenue account. This is an example of a(n) :