Deck 3: Adjusting Accounts for Financial Statements

Question 1

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

Answer 1

False

Question 2

Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly recorded.

Answer 2

True

Question 3

Adjusting entries result in a better matching of revenues and expenses for the period.

Answer 3

True

Question 4

Adjusting entries are designed primarily to correct accounting errors.

Question 5

Each adjusting entry affects one or more income statements account, one or more balance sheet account, and never cash.

Question 6

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

Question 7

Interim financial statements report a company's business activities for a one-year period.

Question 8

Accrued revenues at the end of one accounting period are expected to result in cash collections in a future period.

Question 9

Recording revenues early overstates current-period income; recording revenues late understates current period income.

Question 10

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

Question 11

The matching principle requires that expenses get recorded in the same accounting period as the revenues that are earned as a result of the expenses, not when cash is paid.

Question 12

Accrued expenses at the end of one accounting period are expected to result in cash payments in a future period.

Question 13

Each adjusting entry will affect a balance sheet account.

Question 14

Two main accounting principles used in accrual accounting are matching and full closure.

Question 15

Recording expenses early overstates current-period income; recording expenses late understates current period income.

Question 16

On October 15, a company received $15,000 cash as a customer's down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the services required by the contract were completed. The company will record consulting revenue of $1,500 from this contract for October.
Revenue = $15,000 * 10% = $1,500

Question 17

Adjusting entries are made after the preparation of financial statements.

Question 18

The cash basis of accounting commonly increases the comparability of financial statements from period to period.

Question 19

Prior to recording adjusting entries at the end of an accounting period, some accounts may not show correct balances even though all business transactions were properly recorded.

Question 20

Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account.

Question 21

Before an adjusting entry to accrue employee salaries is made, Salaries Expense and Salaries Payable are both understated.

Question 22

An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded.

Question 23

Failure to record depreciation expense will overstate assets and understate expenses.

Question 24

If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year of rent in advance and adjusting entries are made at the end of each month, the balance remaining in Prepaid Rent on December 1 of that year should be $1,500.
$18,000 * 1/12 = $1,500

Question 25

Income Summary is a temporary account only used for the closing process.

Question 26

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

Question 27

Before an adjusting entry to recognize the cost of expired insurance for the period is made, Prepaid Insurance and Insurance Expense are both overstated.

Question 28

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

Question 29

A salary owed to employees is an example of an accrued expense.

Question 30

Torsten had total assets of $149,501,000, net income of $6,242,000, and net sales of $209,203,000. Its profit margin was 2.98%.
Profit Margin = Net Income/Net Sales
Profit Margin = $6,242,000/$209,203,000 = 2.98%

Question 31

Profit margin reflects the percent of profit in each dollar of revenue.

Question 32

Revenue accounts are temporary accounts that should begin each accounting period with zero balances.

Question 33

A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account.

Question 34

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

Question 35

Profit margin can also be called return on sales.

Question 36

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

Question 37

Revenue and expense balances are transferred from the adjusted trial balance to the income statement.

Question 38

An adjusting entry often includes an entry to Cash.

Question 39

Depreciation measures the decline in market value of an asset.

Question 40

In preparing statements from the adjusted trial balance, the balance sheet must be prepared first.

Question 41

Permanent accounts carry their balances into the next accounting period.

Question 42

Cash and office supplies are both classified as current assets.

Question 43

A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers.

Question 44

The last four steps in the accounting cycle include preparing the adjusted trial balance, preparing financial statements, recording adjusting entries, and recording closing entries.

Question 45

If a company plans to continue business into the future, closing entries are not required.

Question 46

Plant assets are usually listed in order from most liquid to least liquid.

Question 47

Assets are often classified into current assets, long-term investments, plant assets, and intangible assets.

Question 48

The first five steps in the accounting cycle include analyzing transactions, journalizing, posting, preparing an unadjusted trial balance, and recording adjusting entries.

Question 49

Intangible assets are assets that are long-term, have physical form, and are used to produce or sell products and services.

Question 50

The work sheet is a required report made available to external decision makers.

Question 51

A benefit of using a work sheet is that it aids in the preparation of the financial statements.

Question 52

Closing entries are necessary so that retained earnings will begin each period with a zero balance.

Question 53

The current ratio is used to help assess a company's ability to pay its debts in the near future.

Question 54

Current assets and current liabilities are expected to be used up or come due within one year or the company's operating cycle whichever is longer.

Question 55

If a company has current assets of $15,000 and current liabilities of $9,500, its current ratio is 1.6.
Current Ratio = Current Assets/Current Liabilities
Current Ratio = $15,000/$9,500 = 1.6

Question 56

Flo's Flowers' current ratio is 1.3. The industry average for the current ratio is 1.2. This indicates that Flo's can cover its short term liabilities with its short term assets.

Question 57

Closing entries are required at the end of each accounting period to close all ledger accounts.

Question 58

The closing process is a step in the accounting cycle that prepares accounts for the next accounting period.

Question 59

Intangible assets are long-term resources that benefit business operations, usually lack physical form and have uncertain benefits.

Question 60

Current liabilities include accounts receivable, unearned revenues, and salaries payable.

Question 61

Closing the temporary accounts at the end of each accounting period does all of the following except:

A)Serves to transfer the effects of these accounts to the retained earnings account on the balance sheet.
B)Prepares the dividends account for use in the next period.
C)Brings the revenue and expense accounts to zero balances.
D)Has no effect on the retained earnings account.
E)Causes retained earnings to reflect increases from revenues and decreases from expenses and dividends.

Question 62

When there is a net loss the Income Summary account would have a credit balance.

Question 63

Adjusting entries are often entered in the work sheet before they are entered in the general journal.

Question 64

On a work sheet, if the Debit total exceeds the Credit total of the Income Statement columns, a net loss is indicated.

Question 65

When closing entries are made:

A)All ledger accounts are closed to start the new accounting period.
B)All temporary accounts are closed but permanent accounts are not closed.
C)All real accounts are closed but nominal accounts are not closed.
D)All permanent accounts are closed but nominal accounts are not closed.
E)All balance sheet accounts are closed.

Question 66

Another name for a temporary account is a(n):

A)Real account.
B)Contra account.
C)Accrued account.
D)Balance column account.
E)Nominal account.

Question 67

An expense account is normally closed by debiting Income Summary and crediting the expense account.

Question 68

The closing process is necessary in order to:

A)Calculate net income or net loss for an accounting period.
B)Ensure that all permanent accounts are closed to zero at the end of each accounting period.
C)Ensure that the company complies with state laws.
D)Ensure that net income or net loss and dividends for the period are closed into the retained earnings account.
E)Ensure that management is aware of how well the company is operating.

Question 69

If all columns of a completed work sheet balance, you can be sure that no errors were made in its preparation.

Question 70

Journal entries recorded at the end of each accounting period to prepare the revenue, expense, and dividend accounts for the upcoming period and to update the retained earnings account for the events of the period just finished are referred to as:

A)Adjusting entries.
B)Closing entries.
C)Final entries.
D)Work sheet entries.
E)Updating entries.

Question 71

Reversing entries are optional.

Question 72

Assets, liabilities, and equity accounts are not closed; these accounts are called:

A)Nominal accounts.
B)Temporary accounts.
C)Permanent accounts.
D)Contra accounts.
E)Accrued accounts.

Question 73

After posting the entries to close all revenue and expense accounts, the Income Summary account of Cleaver Auto Services has a $4,000 debit balance. This result implies that Cleaver earned a net income of $4,000.

Question 74

Revenue, expense, and dividend accounts, which are closed at the end of each accounting period, are:

A)Real accounts.
B)Temporary accounts.
C)Closing accounts.
D)Permanent accounts.
E)Balance sheet accounts.

Question 75

On the work sheet, net income is entered in the Income Statement Credit column as well as the Balance Sheet Credit column.

Question 76

Normally closing entries are first entered in the general journal and then posted to the work sheet.

Question 77

The aim of a post-closing trial balance is to verify that (1) total debits equal total credits for temporary accounts, and (2) all temporary accounts have zero balances.

Question 78

Which of the following accounts is a permanent (real) account?

A)Fees earned.
B)Office supplies expense.
C)Interest revenue.
D)Accounts payable.
E)Salaries expense.

Question 79

A post-closing trial balance is a list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

Question 80

The steps in the closing process are (1) close credit balances in revenue accounts to Income Summary; (2) close debit balances in expense accounts to Income Summary; (3) close Income Summary to Retained Earnings; (4) close Dividends to Retained Earnings.