Question 1

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.

Accepted Answer

The answer of If a company mistakenly forgot to record...

Question 2

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.

Accepted Answer

Profit margin is calculated by dividing the net income by net sales. This ratio represents the percentage of each dollar of sales that is converted into profit after all expenses are paid.

Question 3

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.

Accepted Answer

The accrual basis of accounting is generally accepted for external reporting because it provides a more accurate representation of a company's financial position and performance over a particular period of time than the cash basis of accounting. It recognizes revenues when earned, not necessarily when received, and recognizes expenses when incurred, not necessarily when paid. This method requires adjusting entries at the end of each period to record revenues and expenses that were earned or incurred, but not yet recognized.

Question 4

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.

Accepted Answer

$1,350 * 9/36 = $337.50

Question 5

On June 30 Apricot Co.paid $7,500 cash for management services to be performed over a two-year period.Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment.On June 30 Apricot should record:
A)A credit to an expense for $7,500.
B)A debit to an expense for $7,500.
C)A debit to a prepaid expense for $7,500.
D)A credit to a prepaid expense for $7,500.
E)A debit to Cash for $7,500.

Accepted Answer

When a company pays for an expense in advance, it is recorded as a prepaid expense. In this case, Apricot paid $7,500 for management services to be performed over a two-year period. Therefore, the correct journal entry on June 30 would be a debit to prepaid expense for $7,500 and a credit to cash for $7,500. Option C is the correct answer as it reflects this journal entry.

Question 6

On June 30 of the current calendar year,Apricot Co.paid $7,500 cash for management services to be performed over a two-year period.Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment.The adjusting entry on December 31 for Apricot would include:
A)A debit to an expense for $5,625.
B)A debit to a prepaid expense for $5,625.
C)A debit to an expense for $1,875.
D)A debit to a prepaid expense for $1,875.
E)A credit to a liability for $1,875.

Accepted Answer

The total cost of the management services is $7,500 for a two-year period, which equals $3,750 per year. Since the services were paid for on June 30 and the adjustment is being made on December 31, only 6 months of the service has been used. Therefore, the expense for 6 months is $3,750 / 2 = $1,875. This amount should be recognized as an expense for the current period, hence a debit to an expense account.

Question 7

An account linked with another account that has an opposite normal balance and that 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.

Accepted Answer

A contra account is linked with another account that has an opposite normal balance and is subtracted from the balance of the related account. This is commonly used for assets such as depreciation or for liabilities such as contra-accounts for bad debts. Accrued expenses and revenues are not necessarily linked with other accounts and may not have a contra account. Intangible assets and adjunct accounts are not related to the concept of a contra account.

Question 8

If a company failed to make the end-of-period adjustment to remove from the Unearned Management Fees account the amount of management fees that were earned,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.

Accepted Answer

The answer of If a company failed to make the...

Question 9

An adjusting entry could be made for each of the following except:
A)Prepaid expenses.
B)Depreciation.
C)Owner withdrawals.
D)Unearned revenues.
E)Accrued revenues.

Accepted Answer

Owner withdrawals are not an account that requires adjusting entries. They simply decrease the owner's equity account and are recorded directly in the general journal. The other options listed (prepaid expenses, depreciation, unearned revenues, and accrued revenues) all involve timing differences that require adjusting entries to accurately reflect the financial status of the company.

Question 10

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.

Accepted Answer

Depreciation expense is 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. Accumulated depreciation is the running total of the depreciation expense that has been allocated to the assets since they were acquired. A contra account is an account that is used to reduce the balance of another account, such as accumulated depreciation. The matching principle requires that expenses be recognized in the same period as the related revenue, so depreciation expense is matched with the revenue generated by the use of the assets. An accrued account represents an expense that has been incurred but not yet paid.

Question 11

A company earned $2,000 in net income for October.Its net sales for October were $10,000.Its profit margin is:
A)2%.
B)20%.
C)200%.
D)500%.
E)$8,000.

Accepted Answer

Profit Margin = Net Income/Net Sales
Profit Margin = $2,000/$10,000 = .20 = 20%

Question 12

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.

Accepted Answer

The answer of A company made no adjusting entry for...

Question 13

A company had $9,000,000 in net income for the year.Its net sales were $13,200,000 for the same period.Calculate its profit margin.
A)17.5%.
B)28.0%.
C)62.5%.
D)160.0%.
E)68.2%

Accepted Answer

Profit Margin = Net Income/Net Sales
Profit Margin = $9,000,000/$13,200,000 = .682 = 68.2%

Question 14

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.

Accepted Answer

The adjusting entry should recognize the portion of the unearned fees that have been earned during the accounting period. This would involve debiting the Unearned Legal Fees account to reduce the liability and credit the Legal Fees Earned account to recognize the revenue. Therefore, the correct entry is to Debit Unearned Legal Fees and credit Legal Fees Earned.

Question 15

Accrued revenues:
A)At the end of one accounting period often result in cash receipts from customers in the next 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.

Accepted Answer

Accrued revenues are revenues that have been earned but not yet received in cash. At the end of the accounting period, they are recorded as accounts receivable (an asset) and later result in cash receipts from customers in the next period.

Question 16

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.

Accepted Answer

The correct adjusting entry is to debit Office Supplies Expense for $254 and credit Office Supplies for $254. This adjusts the Office Supplies account to its actual ending balance of $105 by recognizing the $254 of supplies used.

Question 17

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.

Accepted Answer

This statement is not true. Profit margin is widely used as a measure of a company's operating results and is considered an important financial metric for investors and analysts.

Question 18

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.

Accepted Answer

The answer of A company records the fees for legal...

Question 19

The total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have 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.

Accepted Answer

The total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have been owned is referred to as accumulated depreciation. It is a contra asset account and is reported as a deduction from the original cost of the asset on the balance sheet. It is not the same as depreciation expense, which is the amount of depreciation recorded for a particular period of time, and it is not shown on the income statement of the final period. It is also not only recorded when the asset is disposed of, as it is recorded throughout the useful life of the asset. It is also not an accrued asset, as it is a fixed asset account.

Question 20

Which of the following statements is incorrect?
A)Adjustments to prepaid expenses, depreciation, 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 the cash account.

Accepted Answer

Adjusting entries do not affect the cash account as they only involve changes to the balance sheet accounts such as assets, liabilities, and equity. The cash account is adjusted through regular journal entries during the accounting period.

Quiz 3: Adjusting Accounts and Preparing Financial Statements

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:

Profit margin is defined as:

The accrual basis of accounting:

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?

On June 30 Apricot Co.paid $7,500 cash for management services to be performed over a two-year period.Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment.On June 30 Apricot should record:

On June 30 of the current calendar year,Apricot Co.paid $7,500 cash for management services to be performed over a two-year period.Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment.The adjusting entry on December 31 for Apricot would include:

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

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

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

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 company earned $2,000 in net income for October.Its net sales for October were $10,000.Its profit margin is:

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

A company had $9,000,000 in net income for the year.Its net sales were $13,200,000 for the same period.Calculate its profit margin.

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:

Accrued revenues:

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:

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

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:

The total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have been owned:

Which of the following statements is incorrect?