Deck 2: Understanding the Accounting Cycle

Question 1

Why are adjusting entries necessary in an accrual accounting system? What are some common examples?

Answer 1

Adjusting entries are necessary to update ledger account balances before preparing financial statements in order to recognize revenues and expenses that should be recognized in the current year,but have not yet been recorded.Some common adjusting entries include recognizing accrued salaries expense,accrued interest revenue,and deferred expenses,such as prepaid rent,as well as recognizing revenue that had been previously unearned.

Question 2

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.

Banks Co.performed $5,000 of services for customers on account.

Answer 2

(I)(N)(I)(I)(N)(I)(N)

Question 3

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.

Amity Co.signed contracts for $25,000 of services to be performed in the future.

Answer 3

(N)(N)(N)(N)(N)(N)(N)

Question 4

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.

Ingstrom Co.provided $2,600 of services for a customer who paid $1,000 cash immediately and promised to pay an additional $1,600 one month later.

Question 5

What is the effect on the accounting equation of a cash payment to creditors?

Question 6

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.

Todd Co.collected $2,000 cash from accounts receivable.

Question 7

Define the accounting cycle and list the stages of the cycle.

Question 8

Discuss the importance of ethics in the accounting profession.

Question 9

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.

Calloway Company received $750 from a customer for services to be performed at a future date.

Question 10

What effect does providing services on account have on the statement of cash flows? The balance sheet?

Question 11

What does the balance in accounts receivable represent?

Question 12

Explain the meaning of the term,"matching concept."

Question 13

The temporary accounts are closed prior to the start of the next accounting cycle.In this closing process,the amounts in each of these accounts are transferred to what other account(s)?

Question 14

What effect does the recording of revenue normally have on total assets?

Question 15

When are expenses recognized under accrual accounting in relation to the payment of cash?

Question 16

Indicate how each event affects the elements of financial statements.Use the following letters to record your answer in the box shown below each element.You do not need to enter amounts.

At the end of the accounting period,Signet Co.recognized accrued salaries.

Question 17

Describe the difference between temporary and permanent accounts,and state which ones are closed.

Question 18

When is revenue recognized under accrual accounting?

Question 19

What is the "fraud triangle"?

Question 20

Describe the purpose of the closing process.

Question 21

The adjusting entry to recognize work completed on unearned revenue involves which of the following?

A)An increase in assets and a decrease in liabilities
B)An increase in liabilities and a decrease in equity
C)A decrease in liabilities and an increase in equity
D)A decrease in assets and a decrease in liabilities

Question 22

The year-end adjustment to recognize one month's work on the three-month contract results in a $2,000 decrease in liabilities (unearned revenue)and an increase in equity (retained earnings due to recognizing revenue).
The following account balances were drawn from the 2016 financial statements of Grayson Company:


-Jason Company paid $7,200 for one year's rent in advance beginning on October 1,2015.Jason's 2015 income statement would report rent expense,and its statement of cash flows would report cash outflow for rent,respectively,of

A)$7,200;$7,200
B)$1,800;$1,800
C)$1,800;$7,200
D)$1,200;$7,200

Question 23

Revenue on account amounted to $9,000.Cash collections of accounts receivable amounted to $8,100.Cash paid for expenses was $7,500.The amount of employee salaries accrued at the end of the year was $900.Cash flow from operating activities was

A)$900.
B)$600.
C)$1,500.
D)$8,700.

Question 24

The recognition of an expense may be accompanied by which of the following?

A)An increase in liabilities
B)A decrease in liabilities
C)A decrease in revenue
D)An increase in assets

Question 25

Which of the following statements is true in regard to accrual accounting?

A)Revenue is recorded only when cash is received.
B)Expenses are recorded when they are incurred.
C)Revenue is recorded in the period when it is earned.
D)Revenue is recorded in the period when it is earned and expenses are recorded when they are incurred.

Question 26

Recognition of revenue may be accompanied by which of the following?

A)A decrease in a liability.
B)An increase in a liability.
C)An increase in an asset.
D)An increase in an asset or a decrease in a liability.

Question 27

Revenue on account amounted to $5,000.Cash collections of accounts receivable amounted to $2,300.Expenses for the period were $2,100.The company paid dividends of $450.Net income for the period was

A)$1,200.
B)$2,900.
C)$2,850.
D)$2,450.

Question 28

Purchasing prepaid rent is classified as a(n):

A)asset source transaction.
B)asset use transaction.
C)asset exchange transaction
D)claims exchange transaction.

Question 29

Jack's Snow Removal Company received a cash advance of $6,000 on December 1,2016 to provide services during the months of December,January,and February.The 2016 year-end adjustment to recognize the partial expiration of the contract will

A)increase assets by $2,000
B)increase equity by $2,000
C)increase liabilities by $2,000
D)increase assets by $2,000 and increase equity by $2,000

Question 30

The year-end adjustment to recognize one month's work on the three-month contract results in a $2,000 decrease in liabilities (unearned revenue)and an increase in equity (retained earnings due to recognizing revenue).
The following account balances were drawn from the 2016 financial statements of Grayson Company:


-Sheldon Company began 2016 with $1,200 in its supplies account.During the year,the company purchased $3,400 of supplies on account.The company paid $3,000 on accounts payable by year end.On December 31,2016,Sheldon counted $1,400 of supplies on hand.Sheldon's financial statements for 2016 would show:

A)$1,600 of supplies;$200 of supplies expense
B)$1,400 of supplies;$2,000 of supplies expense
C)$1,400 of supplies;$3,200 of supplies expense
D)$1,600 of supplies;$3,400 of supplies expense

Question 31

Mize Company provided $45,500 of services on account,and collected $38,000 from customers during the year.The company also incurred $37,000 of expenses on account,and paid $32,400 against its payables.As a result of these events,

A)total assets would increase
B)total liabilities would increase
C)total equity would increase
D)all of these answer choices are correct

Question 32

Which of the following transactions does not involve an accrual?

A)Recording interest earned that will be received in the next period.
B)Recording operating expense incurred but not yet paid.
C)Recording salary expense incurred but not yet paid.
D)Recording the pre-payment of two years' worth of insurance.

Question 33

The year-end adjustment to recognize one month's work on the three-month contract results in a $2,000 decrease in liabilities (unearned revenue)and an increase in equity (retained earnings due to recognizing revenue).
The following account balances were drawn from the 2016 financial statements of Grayson Company:


-Prior to closing,Syracuse Company's accounting records showed the following balances:

After closing,Syracuse's retained earnings balance would be

A)$16,800.
B)$23,700.
C)$21,000.
D)$26,400.

Question 34

Which of the following choices accurately reflects how the recording of accrued salary expense affects the financial statements of a business?

Question 35

Which of the following events would not require an end-of-year adjusting entry?

A)Purchasing supplies for cash
B)Paying for one year's rent on July 1
C)Providing services on account
D)Each of these answer choices would require an end-of-year adjustment

Question 36

Jantzen Company recorded employee salaries earned but not yet paid.Which of the following represents the effect of this transaction on the financial statements?

Question 37

Bledsoe Company received $17,000 cash from the issue of stock on January 1,2016.During 2016 Bledsoe earned $8,500 of revenue on account.The company collected $6,000 cash from accounts receivable and paid $5,400 cash for operating expenses.Based on this information alone,during 2016,

A)Total assets increased by $20,100.
B)Total assets increased by $600.
C)Total assets increased by $26,100.
D)Total assets did not change.

Question 38

In uncertain circumstances,the conservatism principle guides accountants to

A)accelerate revenue recognition and delay expense recognition.
B)accelerate expense recognition and delay revenue recognition.
C)recognize expense of prepaid items when payment is made.
D)delay both expense recognition and revenue recognition.

Question 39

Addison Company experienced an accounting event that affected its financial statements as indicated below:
Which of the following accounting events could have caused these effects on Addison's statements?

A)Issued common stock.
B)Earned revenue on account.
C)Earned cash revenue.
D)Collected cash from accounts receivable.

Question 40

The year-end adjustment to recognize one month's work on the three-month contract results in a $2,000 decrease in liabilities (unearned revenue)and an increase in equity (retained earnings due to recognizing revenue).
The following account balances were drawn from the 2016 financial statements of Grayson Company:


-Based on the above information,what is the balance of Common Stock for Grayson Company?

A)$15,400
B)$19,900
C)$900
D)$20,800

Question 41

Rushmore Company provided services for $45,000 cash during the 2016 accounting period.Rushmore incurred $36,000 expenses on account during 2016,and by the end of the year,$9,000 of that amount had been paid with cash.Assuming that these are the only accounting events that affected Rushmore during 2016,

A)The amount of net loss shown on the income statement is $9,000.
B)The amount of net income shown on the income statement is $27,000.
C)The amount of net income shown on the income statement is $9,000.
D)The amount of net cash flow from operating activities shown on the statement of cash flows is $18,000.

Question 42

Gomez Company collected $9,000 on September 1,2016 from a customer for services to be provided over a one-year period beginning on that date.How much revenue would Gomez Company report related to this contract on its income statement for the year ended December 31,2016? How much would it report as cash flows from operating activities for 2016?

A)$3,000;$3,000
B)$9,000;$9,000
C)$3,000;$9,000
D)$0;$9,000

Question 43

Which of the following would cause net income on the accrual basis to be different from (either higher or lower than)"cash provided by operating activities" on the statement of cash flows?

A)Purchased land for cash.
B)Purchased supplies for cash.
C)Paid advertising expense.
D)Paid dividends to stockholders.

Question 44

Use the following information for questions
Nelson Company experienced the following transactions during 2016,its first year in operation.
1.Issued $12,000 of common stock to stockholders.
2.Provided $4,600 of services on account.
3.Paid $3,200 cash for operating expenses.
4.Collected $3,800 of cash from accounts receivable.
5.Paid a $200 cash dividend to stockholders.

-The amount of net income recognized on Nelson Company's 2016 income statement is:

A)$1,400.
B)$800.
C)$1,000.
D)$1,200.

Question 45

Warren Enterprises had the following events during 2016:
The business issued $40,000 of common stock to its stockholders.
The business purchased land for $24,000 cash.
Services were provided to customers for $32,000 cash.
Services were provided to customers for $10,000 on account.
The company borrowed $32,000 from the bank.
Operating expenses of $24,000 were incurred and paid in cash.
Salary expense of $1,600 was accrued.
A dividend of $8,000 was paid to the stockholders of Warren Enterprises.
Assuming the company began operations during 2016,the amount of retained earnings as of December 31,2016 would be:

A)$10,000
B)$8,400
C)$16,400
D)$42,000

Question 46

Which of the following accounts would not appear on a balance sheet?

A)Service Revenue.
B)Salaries Payable.
C)Unearned Revenue.
D)Neither Service Revenue nor Unearned Revenue would appear on a balance sheet.

Question 47

The matching concept refers to the "matching" of:

A)expenses and revenues
B)expenses and liabilities
C)assets and equity
D)assets and liabilities

Question 48

On December 31,2016,Gaskins Co.owed $4,500 in salaries to employees who had worked during December but would be paid in January.If the year-end adjustment is properly recorded on December 31,2016,what will be the effect of this accrual on the following items for Gaskins?

A)Option A
B)Option B
C)Option C
D)Option D

Question 49

Which of the following correctly states the proper order of the accounting cycle?

A)Record transactions,adjust accounts,close temporary accounts,prepare statements.
B)Adjust accounts,record transactions,close temporary accounts,prepare statements.
C)Record transactions,adjust accounts,prepare statements,close temporary accounts.
D)Adjust accounts,prepare statements,record transactions,close temporary accounts.

Question 50

Use the following information for questions
Nelson Company experienced the following transactions during 2016,its first year in operation.
1.Issued $12,000 of common stock to stockholders.
2.Provided $4,600 of services on account.
3.Paid $3,200 cash for operating expenses.
4.Collected $3,800 of cash from accounts receivable.
5.Paid a $200 cash dividend to stockholders.

-The amount of net cash flow from operating activities shown on Nelson Company's 2016 statement of cash flows is

A)$400.
B)$600.
C)$1,400.
D)$1,200.

Question 51

Use the following information for questions
The following accounts and balances were drawn from the records of Carolina Company on December 31,2016:


-The amount of net income shown on Carolina's 2016 income statement would amount to:

A)$2,200.
B)$3,200.
C)$1,000.
D)$200.

Question 52

The matching concept most significantly influences which financial statement?

A)Balance sheet
B)Income statement
C)Statement of changes in stockholders' equity
D)Statement of cash flows

Question 53

Use the following information for questions
Nelson Company experienced the following transactions during 2016,its first year in operation.
1.Issued $12,000 of common stock to stockholders.
2.Provided $4,600 of services on account.
3.Paid $3,200 cash for operating expenses.
4.Collected $3,800 of cash from accounts receivable.
5.Paid a $200 cash dividend to stockholders.

-The amount of retained earnings appearing on Nelson Company's December 31,2016 balance sheet is:

A)$1,200.
B)$1,000.
C)$1,400.
D)$13,200.

Question 54

If retained earnings decreased during the year,and no dividends were paid,which of the following must be true?

A)Expenses for the year exceeded revenues
B)The company did not have enough cash to pay its expenses
C)Total equity decreased
D)Liabilities increased during the year

Question 55

Use the following information for questions
The following accounts and balances were drawn from the records of Carolina Company on December 31,2016:


-The amount of Carolina's retained earnings after closing on December 31,2016 was:

A)$5,900.
B)$7,200.
C)$3,900.
D)$4,900.

Question 56

The purpose of the accrual basis of accounting is to:

A)Report revenue when received.
B)Match assets and liabilities in the proper period.
C)Report expenses when cash disbursements are made.
D)Match revenues and expenses in the proper period.

Question 57

Duluth Co.collected a $6,000 cash advance from a customer on November 1,2016 for work to be performed over a six-month period beginning on that date.If the year-end adjustment is properly recorded,what will be the effect of the adjusting entry on Duluth's 2016 financial statements?

A)Increase assets and decrease liabilities
B)Increase assets and increase revenues
C)Decrease liabilities and increase revenues
D)No effect

Question 58

Use the following information for questions
The following accounts and balances were drawn from the records of Carolina Company on December 31,2016:


-Total assets on Carolina's December 31,2016 balance sheet would amount to:

A)$12,600.
B)$13,800.
C)$7,200.
D)$10,600.

Question 59

Expenses that are matched with the period in which they are incurred are frequently called:

A)market expenses
B)matching expenses
C)period costs
D)working costs

Question 60

Use the following information for questions
Nelson Company experienced the following transactions during 2016,its first year in operation.
1.Issued $12,000 of common stock to stockholders.
2.Provided $4,600 of services on account.
3.Paid $3,200 cash for operating expenses.
4.Collected $3,800 of cash from accounts receivable.
5.Paid a $200 cash dividend to stockholders.

-The total amount of assets shown on Nelson Company's December 31,2016 balance sheet is:

A)$12,400.
B)$12,600.
C)$13,400.
D)$13,200.

Question 61

Wyatt Company paid $57,000 in January 2016 for salaries that had been earned by employees in December 2015.Indicate whether each of the following statements about financial statement effects of the January 2016 event is true or false.
_____ a)The income statement for 2016 is not affected because the salaries expense had been recognized at the end of December in 2015.
_____ b)On the 2016 statement of cash flows,cash flows from operating activities decreased.
_____ c)Payment of the salaries in 2016 increased a liability.
_____ d)The 2016 statement of changes in stockholders' equity would not be affected because the salaries expense had been recognized at the end of December in 2015.
_____ e)Both assets and equity decreased in 2016 as a result of this transaction.

Question 62

Which of the following is not a common feature of ethical misconduct?

A)The capacity to rationalize.
B)The existence of pressure leading to an incentive.
C)The assistance of others.
D)The presence of an opportunity.

Question 63

Which of the following describes the effects of a claims exchange transaction on a company's financial statements?

Question 64

Dixon Company collected cash in 2015 from a customer for services to be performed beginning January 2016.Indicate whether each of the following statements about this transaction is true or false.
_____ a)Dixon's 2016 income statement would not be affected by this transaction.
_____ b)Dixon's 2015 statement of cash flows would be affected by this transaction.
_____ c)This transaction is an asset exchange transaction.
_____ d)The revenue for the services provided will be recorded in 2016.
_____ e)The transaction increases Dixon's liabilities.

Question 65

The accounting principle that guides accountants,when faced with a recognition dilemma,to choose the alternative that produces the lowest net income is referred to as

A)the matching concept.
B)internal control.
C)conservatism.
D)materiality.

Question 66

Which of the following is not a principle of the AICPA Code of Professional Conduct?

A)Due Care
B)Objectivity and Independence
C)Integrity
D)Conservatism

Question 67

Which of the following is an asset source transaction?

A)Issued common stock.
B)Paid a cash dividend to stockholders.
C)Received a payment on accounts receivable.
D)Accrued salary expense.

Question 68

Wheaton Co.performed services for a customer on account.Indicate whether each of the following statements about this transaction is true or false.
_____ a)Assets and equity both increase when the revenue is recognized.
_____ b)This transaction did not affect cash flows.
_____ c)The company recorded an increase in revenue and a decrease in accounts receivable.
_____ d)Recognition of revenue would be delayed until cash was received.
_____ e)This transaction is an example of an asset exchange transaction.

Question 69

The balance in a revenue account at the beginning of an accounting period will always be

A)zero.
B)last period's ending balance.
C)higher than the previous periods beginning balance.
D)equal to the amount of retained earnings for the previous period.

Question 70

Which of the following is an asset exchange transaction?

A)Issued common stock.
B)Accrued salary expense at the end of the accounting period.
C)Collected cash on accounts receivable.
D)Recognized revenue earned on a contract where the cash had been collected at an earlier date.

Question 71

Which of the following is a claims exchange transaction?

A)Recognized revenue earned on a contract where the cash had been collected at an earlier date.
B)Issued common stock.
C)Invested cash in an interest earning account.
D)Purchased machine for cash.

Question 72

Regarding the relationships of revenues and expenses to assets and liabilities,state whether each of the following statements is true or false.
_____ a)Recording an increase in a revenue account may be associated with a decrease in assets.
_____ b)Recording an increase in a revenue account may be associated with a decrease in liabilities.
_____ c)An increase in Salaries Expense may be accompanied by a decrease in Salaries Payable.
_____ d)Recording a decrease in assets may be associated with an increase in an expense account.
_____ e)A decrease in Supplies will be accompanied by an increase in Supplies Expense.

Question 73

Which of the following accounts is not closed at the end of an accounting cycle?

A)Revenues
B)Retained earnings
C)Dividends
D)Expenses

Question 74

Which of the following is not a component of the fraud triangle?

A)Reliance
B)Rationalization
C)Opportunity
D)Pressure

Question 75

Vanguard Company uses accrual accounting.Indicate whether each of the following statements regarding Vanguard's accounting system is true or false.
_____ a)The recognition of accounting events and the realization of cash consequences must occur in different accounting periods.
_____ b)The cash consequence of a transaction sometimes precedes its accounting recognition.
_____ c)Expenses may either be matched to revenues they produce or to periods in which they are incurred.
_____ d)Vanguard may record accrual transactions,but may not record deferral transactions.
_____ e)Vanguard is not permitted to make cash sales.

Question 76

Earning revenue on account would be classified as a/an?

A)claims exchange transaction.
B)asset use transaction.
C)asset source transaction.
D)asset exchange transaction.

Question 77

Which of the following financial statement elements is closed at the end of an accounting cycle?

A)Dividends
B)Common stock
C)Assets
D)Liabilities

Question 78

Policies and procedures designed to reduce the opportunities for fraud are often called:

A)internal controls
B)asset source transactions
C)accounting standards
D)financial systems

Question 79

Which of the following is an asset use transaction?

A)Purchased machine for cash.
B)Recorded insurance expense at the end of the period.
C)Invested cash in an interest earning account.
D)Accrued salary expense at the end of the period.

Question 80

What action did the U.S.Congress take because of the audit failures at Enron,WorldCom and other companies?

A)Required publicly-traded companies to be audited by a government agency
B)Passed the Sarbanes-Oxley Act
C)Required companies to begin preparing an additional financial statement
D)Passed an amendment to the Securities and Exchange Act