Deck 3: Adjusting Accounts for Financial Statements

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

False

Question 4

Internal transactions often include cash payments.

Question 5

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

Adjusting entries are made after the preparation of financial statements.

Question 12

Internal transactions have no effect on the accounting equation.

Question 13

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

Question 14

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

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.

Question 16

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

Question 17

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

Question 18

Adjusting entries are required to match revenues and expenses.

Question 19

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

Question 20

IFRS requires the preparation of interim financial statements.

Question 21

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 22

Before an adjusting entry for expired insurance is made, the amount in Prepaid Insurance is overstated and Insurance Expense is overstated.

Question 23

Gallery Corp. paid $6,000 for a six-month insurance policy for the company van. The policy coverage began on January 1. On January 31, $1,000 of insurance expense must be reported.

Question 24

The accrual basis of accounting reflects the understanding that the economic effect of revenue generally occurs when it is earned, not when cash is received.

Question 25

The accrual basis of accounting is a system of accounting in which the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues.

Question 26

Generally, accrual basis accounting results in a more accurate measurement of profit the period than does cash basis accounting.

Question 27

An adjusting entry can only affect income statement accounts.

Question 28

Adjusting entries may affect only balance sheet accounts.

Question 29

Both the accrual basis and the cash basis of accounting increase the comparability of financial statement information from period to period.

Question 30

Accrued expenses reflect transactions where cash is paid before a related expense is recognized.

Question 31

The cash basis of accounting commonly results in financial statements that are not comparable from period to period.

Question 32

Canadian ASPE allows accrual accounting as an option whereas IFRS requires accrual accounting.

Question 33

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

Question 34

Adjusting entries are posted to the general ledger.

Question 35

The cash basis of accounting is an accounting system in which revenues are reported in the income statement when cash is received, and expenses are reported when cash is paid.

Question 36

Adjustments are necessary for transactions and events that extend over more than one accounting period.

Question 37

On October 15, Gallery Corp. received $12,500 as a down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the contract was completed. Gallery Corp. needs to prepare an adjusting entry for $1,250.

Question 38

The economic effect of an expense is incurred when the benefit expires or is used up, not when cash is paid.

Question 39

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

Question 40

Adjusting entries are always dated at the end of the accounting period.

Question 41

Gallery Corp. performs 20 days' work on a 30-day contract. The total contract is valued at $6,000. The adjusting entry of $4,000 includes a credit to unearned revenue.

Question 42

Expenses incurred during an accounting period but that, before end-of-period adjustments, remain unrecorded because payment is not due are referred to as accrued expenses.

Question 43

Gallery Corp. owes its employees $7,000 for the week ended March 31. The company will pay the employees on April 5. The adjusting journal entry prepared on March 31 will include a debit to Salaries Expense and a credit to Cash.

Question 44

Salaries earned by employees, but unrecorded, are an example of an accrued expense.

Question 45

The amount of the month-end adjusting entry for Insurance Expense is $1,000. If the entry is not made then expenses are understated by $1,000 and profit is overstated by $1,000.

Question 46

Before an adjusting entry for accrued salaries is made, the amount in Salaries Expense is understated and the amount in Salaries Payable is also understated.

Question 47

A contra-asset account has a normal debit balance.

Question 48

A contra account is an account the balance of which is added to the balance of an associated account to show a more proper amount for the item recorded in the associated account.

Question 49

During August, Gallery Corp. purchased $4,000 worth of supplies. At August 31 the adjusted balance in the Supplies account was $2,800. The adjusting entry included a $1,200 debit to Supplies Expense.

Question 50

The entry to record a cash receipt from a customer when the service to be provided to earn the cash has not yet been performed involves a debit to an unearned revenue account.

Question 51

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

Question 52

In accrual basis accounting, accrued revenues are recorded as liabilities.

Question 53

Depreciation expense for a period is the portion of a plant asset's cost that is allocated to that period.

Question 54

If on January 1 of this year, a company paid $12,000 rent for one year and adjusting entries are made at the end of each month, the balance of Prepaid Rent at December 1 of this year should be $1,000.

Question 55

Depreciation expense is an example of accrued expense.

Question 56

Accrued expenses at the end of one period result in cash payments in a subsequent period.

Question 57

All items of plant and equipment, including land, eventually wear out or lose their usefulness.

Question 58

Accrued revenues at the end of one period result in cash payments in a subsequent period.

Question 59

If you fail to record accrued salaries at the end of the month, profit for the month will be overstated.

Question 60

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

Question 61

On April 1, Gallery Corp. entered into a two-month contract for $50,000. Gallery Corp. earned $25,000 of the contract in April and billed the customer. Gallery Corp. should recognize the revenue when it receives the customer's cheque.

Question 62

Correcting an error always requires two entries.

Question 63

Before adjusting for accrued revenues, both assets and equity are understated.

Question 64

The book value of an asset is equivalent to the market value of that asset.

Question 65

Prepaid expenses may be recorded as debits to expense accounts.

Question 66

Even if no errors have been detected in the processing of accounting data, adjusting entries may be needed at the end of an accounting period.

Question 67

Correcting entries are a specialized type of adjusting entry.

Question 68

Correcting entries cannot involve cash.

Question 69

Depreciation attempts to adjust the ledger account balances for assets to equate to their current market value.

Question 70

The report format is considered to be the only correct format for the balance sheet.

Question 71

An adjusting entry may include an entry to Cash.

Question 72

Computerized accounting systems should include controls to show when and where corrections are made.

Question 73

It is acceptable to credit unearned revenues to revenue accounts when cash is received.

Question 74

In preparing financial statements from the trial balance, the balance sheet is prepared first.

Question 75

Financial statements can be prepared directly from the information in the adjusted trial balance.

Question 76

The adjusted trial balance must be prepared before the adjusting entries are made.

Question 77

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

Question 78

The account format of the balance sheet matches the accounting equation. Assets are on the left side of the statement. Liabilities and equity are on the right side of the statement.

Question 79

Under the alternative method for recording prepaid expenses, the purchase of insurance for cash would be recorded as a debit to Cash and a credit to Prepaid Insurance.

Question 80

On January 8, Gallery Corp. records $5,000 of accrued salaries. On January 15, $10,000 of salaries are paid. The entry on January 15 includes a debit to the Salaries Payable account.