Question 1

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.

Accepted Answer

Forgetting to record depreciation on office equipment means that the cost of the equipment is still being reported as an asset on the balance sheet, but the decrease in value over time (depreciation) has not been accounted for on the income statement. This leads to an overstatement of assets and net income, which in turn leads to an overstatement of equity.

Question 2

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.

Accepted Answer

The accrual basis of accounting is generally accepted for external reporting because it provides more useful information for most business decisions. It recognizes revenues when earned (not necessarily received in cash) and expenses when incurred (not necessarily paid in cash). This method provides a more accurate picture of a company's financial performance than the cash basis of accounting, which only recognizes revenue and expenses when cash is physically received or paid out. Adjusting entries are still needed at the end of each period to ensure that revenues and expenses are properly recorded.

Question 3

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.

Accepted Answer

The usual final step in the accounting cycle is preparing a post-closing trial balance. This step is done after all the financial statements have been prepared and all temporary accounts have been closed to ensure that the ledger is balanced and ready for the next accounting period.

Question 4

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.

Accepted Answer

Under GAAP it is mandatory to present current assets first, while under IFRS it is customary (but not required) to present noncurrent assets first.

Question 5

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.

Accepted Answer

A classified balance sheet organizes assets and liabilities into important subgroups such as current and non-current assets/liabilities, allowing for a clearer understanding of a company's financial position. It does not present revenues, expenses, net income, report operating, investing, and financing activities, or report the effect of profit and dividends on retained earnings, which are all components of an income statement and statement of cash flows.

Question 6

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

Accepted Answer

The system described is the cash basis accounting method, which recognizes revenue when cash is received and expenses when cash is paid. It is simpler than the accrual basis accounting method, which recognizes revenue when it is earned and expenses when they are incurred, regardless of when cash is received or paid.

Question 7

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.

Accepted Answer

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

Question 8

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 9

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.

Accepted Answer

Adjusting entries are primarily made to record internal transactions and events that have not been recorded through daily entries. They are used to update the accounts to their correct balances before financial statements are prepared, ensuring that revenues and expenses are recognized in the period in which they occur, regardless of when cash transactions related to them happen.

Question 10

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

Accepted Answer

The Matching principle requires that expenses be recognized in the same period as the revenues that were earned as a result of those expenses. This principle ensures that financial statements accurately reflect the true financial performance of a company during a given time period. A and E are similar principles but do not specifically address the matching of expenses and revenues. The Cost principle requires assets to be recorded at their historical cost, while the Cash basis of accounting only recognizes transactions when cash is received or paid out.

Question 11

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.

Accepted Answer

Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued revenues all require adjusting entries at the end of an accounting period in order to properly reflect the balances on the financial statements. Therefore, option B is the correct choice.

Question 12

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.

Accepted Answer

The answer of Each letter below contains three of the...

Question 13

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

Accepted Answer

Accrual basis accounting is the approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues. This means that even if cash is not yet received or paid, revenues and expenses are still recorded at the time they are earned or incurred. This method provides a more accurate representation of a company's financial performance and position compared to cash basis accounting. The matching principle and time period principle both play a role in accrual basis accounting, but they do not fully encompass this approach. Revenue basis accounting is not a recognized accounting method.

Question 14

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

Accepted Answer

The recurring steps performed each accounting period are known as the accounting cycle. This includes analyzing and recording transactions in the journal, posting to the ledger, preparing a trial balance, adjusting entries, preparing financial statements, closing temporary accounts, and preparing a post-closing trial balance. The other options, such as the operating cycle, closing cycle, and natural business year, do not encompass all of the necessary steps in the accounting process.

Question 15

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.

Accepted Answer

Adjusting entries do not affect the cash account. They are made to ensure that the financial statements accurately reflect the company's financial position and results of operations for a given period, but they do not involve cash transactions.

Question 16

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.

Accepted Answer

A principles-based system provides general guidelines and objectives, requiring more judgment in interpretation and application. Therefore, control procedures are necessary to reduce the potential for fraud and misconduct. Option A and C are incorrect as a principles-based system still requires internal controls and cannot eliminate fraud entirely. Option B and D are also incorrect as a principles-based system is not weaker and does not focus on specific calculations such as interest receivable or payable.

Question 17

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.

Accepted Answer

The answer of Due to an oversight,a company made no...

Question 18

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

Accepted Answer

Cash is a real account and is not impacted by adjusting journal entries, which are used to update temporary accounts.

Question 19

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.

Accepted Answer

The asset section of a classified balance sheet usually includes current assets (such as cash, accounts receivable), investments (such as stocks and bonds), plant assets (such as equipment and machinery), and intangible assets (such as patents and trademarks). Option A includes all of these categories. Option B includes revenues which are not assets. Option C includes equity which is not an asset. Option D includes current liabilities which are not assets. Option E includes liabilities which are not assets.

Question 20

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.

Accepted Answer

Adjusting entries are made to ensure that financial statements reflect the accurate financial position of the company. Therefore, they can affect both the income statement and balance sheet accounts. For example, an adjusting entry for accrued expenses would increase an expense account on the income statement while also increasing a liability account on the balance sheet.

Quiz 3: Adjusting Accounts and Preparing Financial Statements

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:

The accrual basis of accounting:

Which of the following is the usual final step in the accounting cycle?

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

A classified balance sheet:

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:

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 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 main purpose of adjusting entries is to:

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:

Prepaid expenses,depreciation,accrued expenses,unearned revenues,and accrued revenues are all examples of:

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?

The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is:

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:

Which of the following statements is incorrect?

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?

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:

Which of the following accounts would not be impacted by adjusting journal entries?

The asset section of a classified balance sheet usually includes:

Adjusting entries: