Deck 3: Adjusting the Accounts

Question 1

Revenue received before services are performed and expenses paid before being used or consumed are both initially recorded as liabilities.

Answer 1

False

Question 2

An adjusting entry always involves two balance sheet accounts.

Answer 2

False

Question 3

Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

Answer 3

False

Question 4

The time period assumption states that the economic life of a business entity can be divided into artificial time periods.

Question 5

A liability-revenue account relationship exists with an unearned rent revenue adjusting entry.

Question 6

The revenue recognition principle dictates that revenue be recognized in the accounting period in which cash is received.

Question 7

The expense recognition principle requires that efforts be matched with accomplishments.

Question 8

Accumulated Depreciation is a liability account and has a normal credit account balance.

Question 9

Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

Question 10

Adjusting entries are not necessary if the trial balance debit and credit column balances are equal.

Question 11

Adjusting entries are often made because some business events are not recorded as they occur.

Question 12

Accounting time periods that are one year in length are referred to as interim periods.

Question 13

A company's calendar year and fiscal year are always the same.

Question 14

The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

Question 15

The time period assumption is often referred to as the expense recognition principle.

Question 16

Expense recognition is tied to revenue recognition.

Question 17

The cash basis of accounting is not in accordance with generally accepted accounting principles.

Question 18

Accrued revenues are revenues which have been received but not yet recognized.

Question 19

The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

Question 20

Many business transactions affect more than one time period.

Question 21

For accounting purposes, business transactions should be kept separate from the personal transactions of the owners of the business.

Question 22

The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments.

Question 23

The adjusting entry at the end of the period to record an expired cost may be different depending on whether the cost was initially recorded as an asset or an expense.

Question 24

Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.

Question 25

The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

Question 26

The Accumulated Depreciation account is a contra asset account that is reported on the balance sheet.

Question 27

Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

Question 28

Accrued revenues are revenues that have been recognized and received before financial statements have been prepared.

Question 29

Financial statements can be prepared from the information provided by an adjusted trial balance.

Question 30

Consistency in accounting means that a company uses the same accounting principles from one accounting period to the next accounting period.

Question 31

If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

Question 32

The economic entity assumption states that economic events can be identified with a particular unit of accountability.

Question 33

A contra asset account is subtracted from a related account in the balance sheet.

Question 34

Every adjusting entry affects one balance sheet account and one income statement account.

Question 35

In general, adjusting entries are required each time financial statements are prepared.

Question 36

The expense recognition principle requires that expenses be matched with revenues.

Question 37

An adjusting entry requiring a credit to Insurance Expense indicates that the initial transaction was charged to an asset account.

Question 38

Asset prepayments become expenses when they expire.

Question 39

Rent received in advance and credited to a rent revenue account which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned.

Question 40

The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.

Question 41

The expense recognition principle matches

A) customers with businesses.
B) expenses with revenues.
C) assets with liabilities.
D) creditors with businesses.

Question 42

Management usually desires ________ financial statements and the IRS requires all businesses to file _________ tax returns.

A) annual, annual
B) monthly, annual
C) quarterly, monthly
D) monthly, monthly

Question 43

Adjustments would not be necessary if financial statements were prepared to reflect net income from

A) monthly operations.
B) fiscal year operations.
C) interim operations.
D) lifetime operations.

Question 44

The time period assumption states that

A) a transaction can only affect one period of time.
B) estimates should not be made if a transaction affects more than one time period.
C) adjustments to the company's accounts can only be made in the time period when the business terminates its operations.
D) the economic life of a business can be divided into artificial time periods.

Question 45

In general, the shorter the time period, the difficulty of making the proper adjustments to accounts

A) is increased.
B) is decreased.
C) is unaffected.
D) depends on if there is a profit or loss.

Question 46

The fiscal year of a business is usually determined by

A) the IRS.
B) a lottery.
C) the business.
D) the SEC.

Question 47

The time period assumption is also referred to as the

A) calendar assumption.
B) cyclicity assumption.
C) periodicity assumption.
D) fiscal assumption.

Question 48

Live Wire Hot Rod Shop follows the revenue recognition principle. Live Wire services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Live Wire on August 5. Live Wire receives the check in the mail on August 6. When should Live Wire show that the revenue was recognized?

A) July 31
B) August 1
C) August 5
D) August 6

Question 49

When a prepaid expense is initially debited to an expense account, expenses and assets are both overstated prior to adjustment.

Question 50

Accrued revenues are amounts recorded and received but not yet recognized.

Question 51

Monthly and quarterly time periods are called

A) calendar periods.
B) fiscal periods.
C) interim periods.
D) quarterly periods.

Question 52

An accounting time period that is one year in length, but does not begin on January 1, is referred to as

A) a fiscal year.
B) an interim period.
C) the time period assumption.
D) a reporting period.

Question 53

Which of the following time periods would not be referred to as an interim period?

A) Monthly
B) Quarterly
C) Semi-annually
D) Annually

Question 54

Which of the following is in accordance with generally accepted accounting principles?

A) Accrual-basis accounting
B) Cash-basis accounting
C) Both accrual-basis and cash-basis accounting
D) Neither accrual-basis nor cash-basis accounting

Question 55

The revenue recognition principle dictates that revenue should be recognized in the accounting records

A) when cash is received.
B) when the performance obligation is satisfied.
C) at the end of the month.
D) in the period that income taxes are paid.

Question 56

The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that

A) assets should be matched with liabilities.
B) efforts should be matched with accomplishments.
C) owner withdrawals should be matched with owner contributions.
D) cash payments should be matched with cash receipts.

Question 57

Which of the following is not a common time period chosen by businesses as their accounting period?

A) Daily
B) Monthly
C) Quarterly
D) Annually

Question 58

A company spends $15 million dollars for an office building. Over what period should the cost be written off?

A) When the $15 million is expended in cash.
B) All in the first year.
C) Over the useful life of the building.
D) After $15 million in revenue is recognized.

Question 59

In a service-type business, revenue is considered recognized

A) at the end of the month.
B) at the end of the year.
C) when the service is performed.
D) when cash is received.

Question 60

An adjusted trial balance should be prepared before the adjusting entries are made.

Question 61

A candy factory's employees work overtime to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime wages should be expensed in

A) February.
B) March.
C) the period when the workers receive their checks.
D) either in February or March depending on when the pay period ends.

Question 62

Accounts often need to be adjusted because

A) there are never enough accounts to record all the transactions.
B) many transactions affect more than one time period.
C) there are always errors made in recording transactions.
D) management can't decide what they want to report.

Question 63

The following is selected information from Motley Corporation for the fiscal year ending October 31, 2015. $\begin{array}{lr}\text { Cash received from customers } & \$ 300,000 \\\text { Revenue recognized } & 375,000 \\\text { Cash paid for expenses } & 180,000 \\\text { Cash paid for computers on November 1, 2014 that will be used } & \\\quad \text { for 3 years (annual depreciation is } \$ 16,000 \text { ) } & 48,000\\\text { Expenses incurred, including interest, but excluding any depreciation }&220,000\\\text { Proceeds from a bank loan, part of which was used to pay for }\\\text { the computers }&100,000\end{array}$ Based on the accrual basis of accounting, what is Motley Corporation's net income for the year ending October 31, 2015?

A) $72,000.
B) $104,000.
C) $139,000.
D) $155,000.

Question 64

Expenses sometimes make their contribution to revenue in a different period than when they are paid. When salaries and wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the time period?

A) Due from Employees.
B) Due to Employer.
C) Salaries and Wages Payable.
D) Salaries and Wages Expense.

Question 65

If a resource has been consumed but a bill has not been received at the end of the accounting period, then

A) an expense should be recorded when the bill is received.
B) an expense should be recorded when the cash is paid out.
C) an adjusting entry should be made recognizing the expense.
D) it is optional whether to record the expense before the bill is received.

Question 66

Which one of the following is not a justification for adjusting entries?

A) Adjusting entries are necessary to ensure that the revenue recognition principle is followed.
B) Adjusting entries are necessary to ensure that the expense recognition principle is followed.
C) Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.
D) Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Question 67

A small company may be able to justify using a cash basis of accounting if they have

A) sales under $1,000,000.
B) no accountants on staff.
C) few receivables and payables.
D) all sales and purchases on account.

Question 68

Adjusting entries are required

A) yearly.
B) quarterly.
C) monthly.
D) every time financial statements are prepared.

Question 69

A flower shop makes a large sale for $1,200 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,200 considered to be recognized?

A) December 5.
B) December 10.
C) November 30.
D) December 1.

Question 70

The preparation of adjusting entries is

A) straight forward because the accounts that need adjustment will be out of balance.
B) often an involved process requiring the skills of a professional.
C) only required for accounts that do not have a normal balance.
D) optional when financial statements are prepared.

Question 71

An adjusting entry

A) affects two balance sheet accounts.
B) affects two income statement accounts.
C) affects a balance sheet account and an income statement account.
D) is always a compound entry.

Question 72

Adjusting entries are

A) not necessary if the accounting system is operating properly.
B) usually required before financial statements are prepared.
C) made whenever management desires to change an account balance.
D) made to balance sheet accounts only.

Question 73

Which statement is correct?

A) As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.
B) The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.
C) The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.
D) As long as management is ethical, there are no problems with using the cash basis of accounting.

Question 74

Adjusting entries are required

A) because some costs expire with the passage of time and have not yet been journalized.
B) when the company's profits are below the budget.
C) when expenses are recorded in the period in which they are incurred.
D) when revenues are recorded in the period in which services are performed.

Question 75

Crue Company had the following transactions during 2015:
-Sales of $4,500 on account
-Collected $2,500 for services to be performed in 2016
-Paid $1,625 cash in salaries
-Purchased airline tickets for $250 in December for a trip to take place in 2016
What is Crue's 2015 net income using cash basis accounting?

A) $625.
B) $875.
C) $5,125.
D) $5,375.

Question 76

Under accrual-basis accounting

A) cash must be received before revenue is recognized.
B) net income is calculated by matching cash outflows against cash inflows.
C) events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
D) the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

Question 77

A law firm received $3,000 cash for legal services to be rendered in the future. The full amount was credited to the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjusting entry is made, this would cause

A) expenses to be overstated.
B) net income to be overstated.
C) liabilities to be understated.
D) revenues to be understated.

Question 78

Which one of the following is not an application of revenue recognition?

A) Recording revenue as an adjusting entry on the last day of the accounting period.
B) Accepting cash from an established customer for services to be performed over the next three months.
C) Billing customers on June 30 for services completed during June.
D) Receiving cash for services performed.

Question 79

Crue Company had the following transactions during 2015:
-Sales of $4,800 on account
-Collected $2,000 for services to be performed in 2016
-Paid $1,625 cash in salaries
-Purchased airline tickets for $250 in December for a trip to take place in 2016
What is Crue's 2015 net income using accrual accounting?

A) $2,925.
B) $3,175.
C) $4,925.
D) $5,175.

Question 80

Expenses incurred but not yet paid or recorded are called

A) prepaid expenses.
B) accrued expenses.
C) interim expenses.
D) unearned expenses.