Deck 3: The Adjusting Process

Question 1

Which of the following would result in an increase in income under the accrual method of accounting, but would not result in an increase in income under the cash basis accounting?

A) Purchase of supplies for cash
B) Performance of services on account
C) Use of supplies purchased earlier
D) Receipt of cash for services that were performed earlier on account

Answer 1

B

Question 2

The owner of Recipes.org purchased $2,000 of supplies on account. Under the accrual basis of accounting, no entry is made until the $2,000 is paid.

Answer 2

False

Question 3

Under accrual accounting, transactions are recorded only when cash is received or paid.

Answer 3

False

Question 4

Which of the following entries would be recorded if a company uses the cash basis method of accounting?

A) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Accounts Receivable } & & 1,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Salary Expense } & 1,000 & \\\hline \text { Salary Payable } & & 1,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Prepaid rent } & 1,000 & \\\hline \text { Cash } & & 1,000 \\\hline\end{array}$$
D) $$\begin{array} { | r | r | r | } \hline \text { Rent Expense } & 1,000 & \\\hline \text { Cash } & & 1,000 \\\hline\end{array}$$

Question 5

Which of the following accounts would be used under the accrual method of accounting, but not under the cash basis accounting?

A) Cash
B) Unearned Revenue
C) Service Revenue
D) Salary Expense

Question 6

In cash basis accounting, revenue is recognized when cash is received and expenses are recognized when they are paid.

Question 7

Under cash basis accounting, revenue is recorded when it is earned, regardless of when cash is received.

Question 8

Under cash basis accounting, an expense is recorded only when cash is paid.

Question 9

If a company is using the accrual basis accounting method, when should it record its earned revenue?

A) When cash is received, even though services may be rendered at a later date
B) When services are rendered, even though cash may be received at a later date
C) When services are completely rendered and cash is received
D) When cash is received, 30 days after the completion of the services

Question 10

When does a company account for earned revenue if it follows cash basis accounting?

A) When services are rendered, even though cash may be received at a later date
B) When cash is received after the service is completely rendered
C) When the services are being rendered
D) When cash is received, either prior to the services being rendered or at a time after the services are rendered

Question 11

Two weeks earlier, a business had rendered services to one of its customers on account for which the payment was received today. Which of the following entries would be recorded if the company uses accrual basis accounting?

A) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Accounts Receivable } & & 1,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Salary Expense } & 1,000 & \\\hline \text { Cash } & & 1,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Service Revenue } & & 1,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Supplies } & 1,000 & \\\hline \text { Cash } & & 1,000 \\\hline\end{array}$$

Question 12

Which of the following statements is true of accrual basis accounting?

A) Accrual basis accounting is allowed by Generally Accepted Accounting Principles (GAAP).
B) Accrual basis accounting records expenses only when cash has been paid for them.
C) Accrual basis accounting records revenue only when cash is received.
D) It always results in greater net income than cash basis accounting.

Question 13

Revenue is said to be earned when the business has:

A) entered into an agreement with the customer about the goods or services to be delivered.
B) passed a journal entry to record revenue.
C) received cash from the customer before goods or services are delivered.
D) delivered a good or service to the customer.

Question 14

Under accrual basis accounting, revenue is recorded only when cash is received.

Question 15

Under accrual basis accounting, an expense is recorded only when the cash is paid.

Question 16

In accounting terms, the calendar year is always called the fiscal year.

Question 17

Which of the following is considered a fiscal year?

A) six months
B) three months
C) twelve months
D) four months

Question 18

The Generally Accepted Accounting Principles (GAAP) requires the use of accrual accounting.

Question 19

Which of the following accounts does cash basis accounting ignore?

A) Payables
B) Revenue
C) Cash
D) Expenses

Question 20

The revenue recognition principle is the basis for recording revenues-both when to record revenue and the amount of revenue to record.

Question 21

The time period concept states that:

A) financial statements can be prepared for specific periods.
B) all expenses should be recorded when they are incurred during the period.
C) companies should record revenue when it has been earned.
D) expenses incurred during a period should be matched against the revenues of the period.

Question 22

Prepaid insurance is an asset account, and hence it appears on the balance sheet.

Question 23

The assumption that the financial statements of a business can be prepared for specific periods is made by the:

A) matching principle.
B) revenue recognition principle.
C) time period concept.
D) adjusting entry principle.

Question 24

The depreciation method that allocates an equal amount of depreciation each year is called the straight-line method.

Question 25

The sum of all the depreciation expense recorded to date for a depreciable asset is called residual value.

Question 26

In the case of a prepaid expense, the adjusting entry required at the end of a period will consist of a credit to the Prepaid Expense account. Assume the prepaid expense was initially recorded as an asset.

Question 27

Which of the following entries would be made because of the matching principle?

A) $$\begin{array} { | c | r | r | } \hline \text { Salaries Expense } & 1,000 & \\\hline \text { Accounts Payable } & & 1,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Salaries Expense } & & 1,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Salaries Expense } & 1,000 & \\\hline \text { Salaries Payable } & & 1,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Cash } & 1,000 & \\\hline \text { Unearned Revenue } & & 1,000 \\\hline\end{array}$$

Question 28

Which of the following accounting elements does the matching principle help to match?

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

Question 29

Which of the following entries would be made as the result of the revenue recognition principle?

A) $$\begin{array} { | c | r | r | } \hline \text { Service Revenue } & 1,000 & \\\hline \text { Service Revenue } & & 1,000 \\\hline\end{array}$$
B) $$\begin{array} { | c | r | r | } \hline \text { Accounts Receivable } & 1,000 & \\\hline \text { Service Revenue } & & 1,000 \\\hline\end{array}$$
C) $$\begin{array} { | c | r | r | } \hline \text { Salaries Expense } & 1,000 & \\\hline \text { Accounts Payable } & & 1,000 \\\hline\end{array}$$
D) $$\begin{array} { | c | r | r | } \hline \text { Depreciation Expense } & 1,000 & \\\hline \text { Accumulated Depreciation } & & 1,000 \\\hline\end{array}$$

Question 30

Which of the following accounting terms assumes that a business's activities can be divided into small segments and financial statements can be prepared for specific periods, such as a month, quarter, or year?

A) adjusting entry concept
B) revenue recognition principle
C) matching principle
D) time period concept

Question 31

Prepaid rent is an expense account, and hence it appears on the income statement.

Question 32

A contra account's normal balance (debit or credit) is the opposite of the normal balance of the related account.

Question 33

In the case of unearned revenue, the cash is received first, and the revenue is earned later.

Question 34

The revenue recognition principle guides accountants in:

A) ensuring only revenues received in cash are recorded.
B) determining when to record expenses.
C) determining when to record revenues.
D) ensuring expenses are deducted from revenues.

Question 35

Accrued revenues are the income that has been received but not earned.

Question 36

The accounting principle that ensures that all expenses are recorded when they are incurred during the period, and compares those expenses against the revenues of the period is called the ________ principle.

A) comparison
B) accrual
C) matching
D) revenue recognition

Question 37

The matching principle is also called:

A) adjusting entry concept.
B) revenue recognition principle.
C) expense recognition principle.
D) time period concept.

Question 38

To match expenses against revenues means to:

A) add expenses incurred during one period from revenues earned during that same period.
B) subtract expenses incurred during one period from revenues earned during the previous period.
C) add expenses incurred during one period from revenues earned during the previous period.
D) subtract expenses incurred during one period from revenues earned during that same period.

Question 39

In the case of a prepaid expense, the adjusting entry required at the end of a period will consist of a debit to the Prepaid Expense account. Assume the prepaid expense was initially recorded as an asset.

Question 40

The matching principle states that:

A) financial statements can be prepared for specific periods.
B) a business's activities can be sliced into small time segments.
C) all expenses should be recorded when they are incurred during the period.
D) companies should record revenue when it has been earned.

Question 41

Healthy Living, a diet magazine, collected $480,000 in subscription revenue on May 31. Healthy Living earns a minimum of $351,000 from the buyers who are not the subscribers. Each subscriber will receive an issue of the magazine for each of the next 12 months, beginning with the June issue. The company uses the accrual method of accounting. What is the balance in the Unearned Revenue account on December 31?

A) $200,000
B) $280,000
C) $480,000
D) $351,000

Question 42

Smith owns manufacturing equipment that was bought for $12,600. It has an estimated useful life of 7 years. Smith should record depreciation expense of $100 per month.

Question 43

In the case of unearned revenue, the adjusting entry at the end of the period includes a credit to Service Revenue. Assume the unearned revenue is initially recorded as a liability.

Question 44

On January 1, 2014, Smith had a beginning balance in Prepaid Insurance Expense of $1,200. On February 1, 2014, Smith paid an annual insurance premium in the amount of $4,800. On February 28, 2014, the balance in Prepaid Insurance is $2,000. The prepaid expense was initially recorded as an asset.

Question 45

Smith borrowed $21,000 on a one year Note payable with an interest rate of 10% per year on June 1. He will repay the principal and interest at the end of the one-year period. Smith makes accrual adjustments at the end of each month. He should record interest expense of $2,100 on June 30.

Question 46

Argyle Designs has entered into a contract to design 20 new dresses for a customer. It will collect a total of $40,000 after the design services are complete. Argyle started design work on June 1. As of June 30, Argyle finished 4 of the 20 designs. Argyle will make an adjusting entry at the end of June to accrue $10,000 of service revenue.

Question 47

The contra asset accounts, like Accumulated Depreciation, always have normal debit balances.

Question 48

The following information is available for Able Company's Office Supplies account. $$\begin{array} { | l | r | } \hline \text { Beginning balance } & \$ 2,000 \\\hline \text { Office Supplies expensed } & \$ 8,000 \\\hline \text { Ending balance } & \$ 3,000 \\\hline\end{array}$$ From the above information, calculate the amount of office supplies purchased.

A) $9,000
B) $8,000
C) $2,000
D) $3,000

Question 49

Robert Rogers, CPA, performed accounting services for a client in December. A bill was mailed to the client on December 30. Roberts received the client's check by mail on January 5. Which of the following accounts should appear on the income statement for the year ended December 31 as per the revenue recognition principle?

A) Service Revenue
B) Unearned Revenue
C) Accounts Payable
D) Prepaid Expense

Question 50

Robert Rogers, CPA, owns a computer that is used in his consultancy services. As per the matching principle, the related account that should appear on the balance sheet as of December 31, 2014 is:

A) Depreciation Expense.
B) Service Revenue.
C) Accumulated Depreciation.
D) Equipment Expense.

Question 51

Smith signed a contract with a service provider for security services at a rate of $250 per month for the period of January through June. He will pay the service provider the entire amount at the end of June. Smith makes adjusting entries each month. During the month of June, Smith should have recorded total security expense of $500.

Question 52

Healthy Living, a diet magazine, collected $480,000 in subscription revenue on May 31st. Healthy Living earns a minimum of $351,000 from the buyers who are not the subscribers. Each subscriber will receive an issue of the magazine for each of the next 12 months, beginning with the June issue. The company uses the accrual method of accounting. By the end of December, what is the amount of Subscription Revenue that has been earned?

A) $204,750
B) $351,000
C) $480,000
D) $280,000

Question 53

The employees of Robert Rogers, CPA, worked the last two weeks of December. They received their paychecks on January 2. Which of the following accounts should appear on the balance sheet as of December 31 as per the matching principle?

A) Accounts Payable
B) Salaries Payable
C) Salary Expense
D) Prepaid Expense

Question 54

Unearned Revenue is classified as a(n) ________ account.

A) liability
B) asset
C) revenue
D) equity

Question 55

On January 1, Smith had $2,000 of supplies on hand. During January, Smith purchased $4,000 worth of new supplies. At the end of the month, a count revealed $1,000 worth of supplies remaining on the shelves. The adjustment entry needed will include a debit to Supplies Expense of $5,000. The supplies were initially recorded as an asset.

Question 56

On January 1, Smith had a beginning balance in Unearned Revenue of $2,000. During January, he earned $1,000 of the unearned revenue. He also collected $6,000 from a new customer for services to be rendered the following month. At the end of January, the Unearned Revenue account had a balance of $6,000.

Question 57

Robert Rogers, CPA, performed accounting services for a client in December. A bill was mailed to the client on December 30. Roberts received a check by mail on January 5. As per the revenue recognition principle, the related account that should appear on the balance sheet as of December 31 is:

A) Prepaid Expense.
B) Accounts Receivable.
C) Unearned Revenue.
D) Accounts Payable.

Question 58

The employees of Robert Rogers, CPA, worked on the last two weeks of December, 2014. They received their paychecks on January 2. Which of the following accounts should appear on the income statement for the year ended December 31, 2014, as per the matching principle?

A) Salary Expense
B) Prepaid Expense
C) Salaries Payable
D) Unearned Revenue

Question 59

Robert Rogers, CPA, owns a computer that is used in his consultancy services. As per the matching principle, the related account that should appear on the income statement for the year ended December 31, 2014 is:

A) Depreciation Expense.
B) Service Revenue.
C) Accumulated Depreciation.
D) Equipment Expense.

Question 60

In the case of unearned revenue, the adjusting entry at the end of the period includes a debit to Service Revenue. Assume the unearned revenue is initially recorded as a liability.

Question 61

The sum of all the depreciation expense recorded to date for a depreciable asset is called:

A) book value.
B) residual value.
C) depreciation expense.
D) accumulated depreciation.

Question 62

If an adjusting entry includes a debit to Rent Expense, that would indicate that the payment of rent had been previously recorded as a(n):

A) prepaid expense.
B) depreciation.
C) accrued expense.
D) accrued revenue.

Question 63

Revenue that has been earned but not yet collected in cash is called a(n):

A) accrued revenue.
B) prepaid expense.
C) unearned revenue.
D) accrued expense.

Question 64

The value of a depreciable asset at the end of its useful life is called:

A) book value.
B) residual value.
C) accrued revenue.
D) accrued expense.

Question 65

Adjusting entries are needed to correctly measure the:

A) ending balance in the Cash account.
B) net income (loss) on the balance sheet.
C) net income (loss) on the income statement.
D) beginning balance in the Cash account.

Question 66

An adjusting entry is completed:

A) at the beginning of the accounting period.
B) at the end of the accounting period.
C) when the balance sheet is prepared.
D) when accounts need to be balanced in the ledger.

Question 67

Which of the following is a contra account?

A) Depreciation Expense
B) Accumulated Depreciation
C) Unearned Revenue
D) Earned Revenue

Question 68

The advance cash receipts of future revenues are called:

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

Question 69

An adjusting entry that debits Accounts Receivable is an example of a(n):

A) prepaid expense.
B) accrued revenue.
C) accrued expense.
D) unearned revenue.

Question 70

The liability created when a business collects cash from customers in advance of completing a service or delivering a product is called:

A) accrued revenue.
B) accrued expense.
C) deferred revenue.
D) prepaid expense.

Question 71

An expense that has been incurred but not yet paid is called a(n):

A) accrued revenue.
B) prepaid expense.
C) unearned revenue.
D) accrued expense.

Question 72

Which of the following is the correct formula for calculating depreciation under the straight-line method?

A) Straight-line depreciation = (Cost + Residual value) ÷ Useful life
B) Straight-line depreciation = (Cost - Residual value) ÷ Useful life
C) Straight-line depreciation = (Cost + Residual value) × Useful life
D) Straight-line depreciation = (Cost - Residual value) × Useful life

Question 73

A depreciable asset's cost minus accumulated depreciation is called:

A) book value.
B) residual value.
C) accrued revenue.
D) accrued expense.

Question 74

The entry to record depreciation includes a credit to:

A) the Depreciation Payable account.
B) the Cash account.
C) the Accumulated Depreciation account.
D) the Depreciation Expense account.

Question 75

The advance cash payments of future expenses are called:

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

Question 76

The allocation of a plant asset's cost over its useful life is called:

A) residual value.
B) book value.
C) accrued revenue.
D) depreciation.

Question 77

Unearned revenue is revenue that:

A) will be collected and earned in the future.
B) the business has collected in cash, but not yet earned.
C) has been collected and earned.
D) the business has earned, but not collected in cash.

Question 78

An adjusting entry that credits Salaries Payable is an example of a(n):

A) accrued expense.
B) unearned revenue.
C) accrued revenue.
D) prepaid expense.

Question 79

The entry to record depreciation includes a debit to:

A) the Equipment account.
B) the Cash account.
C) the Accumulated Depreciation account.
D) the Depreciation Expense account.

Question 80

Accrued revenue is revenue that:

A) has been collected and earned.
B) the business has collected in cash, but not yet earned.
C) the business has earned, but not yet collected in cash.
D) will be collected and earned in the future.