Deck 4: Adjusting the Accounts and Preparing Financial Statements

Question 1

Which of the following statements relating to the cash basis of accounting is incorrect?

A) Income is recorded in the period in which the cash is received.
B) It is used by small business entities and professionals who conduct most of their business activities in cash.
C) It is considered to be a suitable method of accounting for governments.
D) The cost of goods and services consumed in the current period, but not paid for, are recognised as expenses in a later period when cash is paid.

Answer 1

C

Question 2

Profit for a financial period is measured as:

A) Income less expenses.
B) Assets less liabilities.
C) Current assets less current liabilities.
D) DRs less CRs.

Answer 2

A

Question 3

On the first day of the financial year Merv's Boats purchased a truck for $16 000. The truck is to be depreciated by 25% each year and has a zero residual value. At the end of the first year the adjusting entry to record depreciation on the truck is:

A) DR Depreciation - Truck $4000; CR Truck $4000
B) DR Depreciation - Truck $12000; CR Accumulated depreciation - Truck $12000
C) DR Accumulated depreciation - Truck $4000; CR Depreciation - Truck 4000
D) DR Depreciation - Truck $4000; CR Accumulated depreciation - Truck $4000

Answer 3

D

Question 4

Adjustments where income is earned or expenses incurred before the cash is received or paid are called:

A) deferrals.
B) prepayments.
C) unrecorded adjustments.
D) accruals.

Question 5

The last step in the manual accounting cycle before the preparation of financial statements is:

A) Post adjusting entries to the general journal.
B) Determine adjusting entries.
C) Prepare an adjusted trial balance.
D) Record journal entries and post to the ledger.

Question 6

Which of the following statements relating to balance day adjustments is correct?

A) They affect either the income statement or the balance sheet.
B) They only affect the income statement.
C) They always affect the cash/bank account.
D) They have at least one effect on the income statement and one effect on the balance sheet.

Question 7

Hannah Ltd uses gardening supplies on a daily basis. Under the accrual method of accounting these supplies would be an expense of the period in which they are:

A) ordered.
B) used.
C) received.
D) paid for.

Question 8

Which of the following statements concerning accrual accounting is correct?

A) Expenses are recognised in the period in which the consumption of costs can be measured in a faithful, verifiable manner.
B) Profit is the excess of cash inflows from income over cash outflows for expenses.
C) Income from sales is recognised in the period when the cheque is cashed.
D) For most businesses the cash approach gives a better measure of economic performance than does the accrual approach.

Question 9

Preparing adjusting entries at the end of the financial year is necessary:

A) to prepare the ledger for the next accounting period.
B) to close the accounts.
C) to correct any errors made during the period.
D) to calculate the profit or loss as accurately as possible.

Question 10

The office supplies stock account is a/an:

A) liability.
B) asset.
C) income.
D) expense.

Question 11

The correct order of steps in the manual recording process is:
I Post transactions to the ledger
Ii Record transactions in the journal
Iii Prepare financial statements
Iv Record adjusting entries

A) i, ii, iii, iv
B) iv, ii, i, iii
C) i, iv, iii, ii
D) ii, i, iv, iii

Question 12

Sampson Ltd.'s employees perform work to the value of $6500. They are paid $3500 immediately with the balance to be settled in the next accounting period. Under the cash approach to profit measurement, the amount of wages expense that will be recorded in the current period is:

A) $3000.
B) $3500.
C) $6500.
D) Nil.

Question 13

Which of these is not a name for the original cost of an asset less its accumulated depreciation (if any)?

A) Carrying amount
B) Depreciable amount
C) Book value
D) Written down value

Question 14

Accountants prefer to calculate profitability using the basis rather than the basis:

A) adjusted; unadjusted.
B) permanent ; temporary.
C) accrual; cash.
D) current; non-current.

Question 15

The cash approach to profit measurement will not give a reliable profit figure for an entity that conducts a significant portion of its business:

A) overseas.
B) on credit.
C) with an overdraft.
D) with subsidiaries.

Question 16

Adjustments which are necessary because cash for expenses is paid in advance or cash from income is received before the provision of goods or services are called:

A) deferrals/prepayments.
B) accruals.
C) temporary adjustments.
D) recorded adjustments.

Question 17

The accrual approach to profit measurement is underpinned by which two main accounting assumptions?

A) going concern and historical cost.
B) historical cost and accounting period.
C) accounting period and entity period.
D) accounting period and going concern.

Question 18

What type of account is Unearned Income?

A) Income
B) Expense
C) Liability
D) Asset

Question 19

On 1 October 2018 Tanya's Pools paid $2400 for a 12 month insurance premium. The $2400 was initially recorded in the insurance expense account. The adjusting entry required to accurately represent the expired insurance at 31 December 2018, the close of the annual accounting period, is:

A) DR Prepaid insurance $1800; CR Insurance expense $1800
B) DR Prepaid insurance $600; CR Insurance expense $600
C) DR Prepaid insurance $1200; CR Insurance expense $1200
D) DR Insurance expense $200; CR Prepaid insurance $200

Question 20

Accrued salaries is a/an:

A) contra asset account.
B) asset account.
C) liability account.
D) equity account.

Question 21

On 1 March 2018, Indiana Ltd rented out part of its manufacturing premises and collected $6000 in advance for a one year period. The receipt was credited to a liability account. At 31 December 2018, Indiana Ltd's end of financial year, the following adjusting journal should be recorded:

A) DR Unearned rent income $4500; CR Rent income $4500
B) DR Rent income $3000; CR Unearned rent income $3000
C) DR Unearned rent income $5000; CR Rent income $5000
D) DR Rent receivable $5000; CR Rent income $5000

Question 22

On 1 November 2018 the publishers of 'Home' magazine received $198 (including GST) in advance for a 12-month subscription to their monthly issue. Which is the correct entry to be recorded on receipt of the subscription?

A) DR Cash $198; CR Subscriptions income $198
B) DR Cash $198; CR GST payable $18, CR Unearned subscriptions (liability) $180
C) DR Cash $198; CR GST payable $18, CR Prepaid subscriptions (asset) $180
D) DR Cash $180; CR Subscriptions income $180

Question 23

The supplies inventory account of Forever Flowers shows a balance of $1800 on 30 June 2018, the end of the financial year. Supplies of $1550 were used during the month of June 2018. Which of the following is correct after recording the adjustment on 30 June 2018?

A) Supplies expense in the income statement is $1550 and Supplies inventory in the balance sheet is $250.
B) Supplies expense in the income statement is $1800 and Supplies inventory in the balance sheet is $0.
C) Supplies expense in the income statement is $0 and Supplies inventory in the balance sheet is $1800.
D) Supplies expense in the income statement is $250 and Supplies inventory in the balance sheet is $1550.

Question 24

MAC's Airport Parking purchased two vans for the business on 1 January 2018. The vans cost $80 000 each and have a useful life of 5 years with an expected residual of $10 000 each. The adjusting entry for depreciation on 30 June 2018, using the straight-line method, is:

A) DR Accumulated depreciation $14 000; CR Depreciation expense $14 000
B) DR Depreciation expense $14 000; CR Accumulated depreciation $14 000
C) DR Accumulated depreciation $28 000; CR Depreciation expense $28 000
D) DR Depreciation expense $28 000 CR Accumulated depreciation $28 000

Question 25

James Myers Ltd paid salaries and wages of $450 000 during the year ended 30 June 2018. The company owes $12 000 for work carried out during the last week of June but which is not due to be paid until 3 July. Assume there were no salaries and wages outstanding at the beginning of the financial year. After the adjusting entry for the year ended 30 June 2018:

A) Salaries and wages in the income statement are $462 000 and accrued Salaries and wages in the balance sheet are $12 000.
B) Salaries and wages in the income statement are $450 000 and accrued Salaries and wages in the balance sheet are $12 000.
C) Salaries and wages in the income statement are $438 000 and accrued Salaries and wages in the balance sheet are $12 000.
D) Salaries and wages in the income statement are $462 000 and accrued Salaries and wages in the balance sheet are $0.

Question 26

On 1 May 2018, Dress in Style received a $2000 advance payment from a customer for the design and making of a formal gown. The gown is expected to be completed by the end of August 2018. By 30 June 2018, approximately half of the dress is complete. The correct adjusting entry to be recorded at 30 June 2018 is:

A) DR Dress-making expenses $1000; CR Unearned income $1000
B) DR Unearned income $1000; CR Bank $1000
C) DR Unearned income $1000; CR Dress-making income $1000
D) DR Income earned $1000; CR Dress-making income $1000

Question 27

On 1 July 2018 Tandem Bicycles paid $4 800, representing a two-year insurance premium. The $4 800 was initially recorded in the Insurance expense account. After adjustment at 31 December 2018, the close of the annual accounting period:

A) Insurance expense in the income statement is $2400 and Prepaid Insurance in the balance sheet is $2400.
B) Insurance expense in the income statement is $3600 and Prepaid Insurance in the balance sheet is $0.
C) Insurance expense in the income statement is $3600 and Prepaid Insurance in the balance sheet is $1200.
D) Insurance expense in the income statement is $1200 and Prepaid Insurance in the balance sheet is $3600.

Question 28

The Prepaid Insurance account of Stephen's Spas shows a balance of $3000, representing a two-year insurance premium paid on 1 February 2018. After recording the adjustment on 30 June 2018, the end of the accounting period:

A) Insurance expense in the income statement is $3000 and Prepaid Insurance in the balance sheet is $0.
B) Insurance expense in the income statement is $625 and Prepaid Insurance in the balance sheet is $2375.
C) Insurance expense in the income statement is $2375 and Prepaid Insurance in the balance sheet is $625.
D) Insurance expense in the income statement is $750 and Prepaid Insurance in the balance sheet is $2250.

Question 29

On 1 May 2018, Dress in Style received a $2000 advance payment from a customer for the design and making of a formal gown. The gown is expected to be completed by the end of August 2018. The correct accounting entry to initially record the $2000 is:

A) DR Bank $2000; CR Unearned income $2000
B) DR Unearned income $2000; CR Bank $2000
C) DR Bank $2000; CR Accounts payable $2000
D) DR Income earned $2000; CR Bank $2000

Question 30

The wages expense account for Ray's Plumbing showed the following entries for the month of May. What was the portion of wages that was treated as an expense in April but was not paid until May?
Wages expense
$$\begin{array} { | l | l | r | r | r | } \hline \text { Date } & \text { Particulars } \text { DR } & \text { CR } & \text { Balance } \\\hline & & \mathbf { \$ } & \$ & \mathbf { \$ } \\\text { May 1 } & \text { Beginning balance } & 34000 & & \mathbf { 3 4 0 0 0 \mathrm { Dr } } \\\text { May 1 } & \text { Accrued expenses } & & 2200 & 31800 \mathrm { Dr } \\\text { May 1-31 } & \text { Various cash payments } & 15400 & & 47200 \mathrm { Dr } \\\text { May 31 } & \text { Accrued expenses } & 3700 & & 50900 \mathrm { Dr } \\\hline\end{array}$$

A) $ 3 700
B) $15 400
C) $ 2 200
D) $34 000

Question 31

Everything Bikes is owed $550 rent which has not been received by 3l December 2018, the last day of the accounting period. The adjusting entry on that date is:

A) DR Bank $550; CR Rent income $550
B) DR Accounts receivable $550; CR Rent income $550
C) DR Rent income $550; CR Accounts receivable $550
D) DR Rent expense $550; CR Accrued Rent $550

Question 32

What type of account is Prepaid Rent?

A) Liability
B) Income
C) Asset
D) Expense

Question 33

On 1 November 2018 the publishers of 'Home' magazine received $198 (including GST) in advance for a 12-month subscription to their monthly issue. At the end of the financial year on 30 June 2019 the adjusting entry will be:

A) DR Unearned subscriptions (liability) $120; CR Subscriptions income $120
B) DR Cash $120; CR Subscriptions income $120
C) DR Cash $198; CR GST payable $18; CR Unearned subscriptions (liability) $180
D) DR Unearned subscriptions (liability) $132; CR Subscriptions income $120; CR GST payable $12

Question 34

During 2019 Annette's Mechanical paid out $85 000 in wages from its bank account. This $85 000 included $5 400 that was owing but unpaid at year-end for 2018. At year-end 2019 wages owing but unpaid were $12 300. The business uses accrual accounting. How much would be reported as wages expense for 2019?

A) $85 000
B) $91 900
C) $97 300
D) $12 300

Question 35

Newsome Company purchased equipment for $105 000 on 1 January 2018 with an estimated life of 8 years and a residual value of $5 000. The straight-line method of depreciation is used. What is the carrying amount of the equipment in the balance sheet of Newsome Company at 30 June 2019?

A) $100 000
B) $105 000
C) $81 250
D) $87 500

Question 36

Which statement relating to the accumulated depreciation account is correct?

A) It normally has a DR balance.
B) It provides information on the market value of the asset at a particular date.
C) It is classified as a liability in the balance sheet.
D) It reflects the portion of the cost of the asset that has been assigned as an expense since the date of purchase.

Question 37

If an adjustment for accrued rent is omitted from the financial reports the effect is:

A) liabilities are understated; profit is overstated.
B) liabilities are overstated; profit is understated.
C) assets are understated; profit is overstated.
D) assets are overstated; profit is understated.

Question 38

If a company has earned income which has not been received in cash at the end of the accounting period an adjustment should be made which will:

A) DR an expense account and CR cash.
B) DR an income account and CR an asset account.
C) DR cash and CR a liability account.
D) DR an asset account and CR an income account.

Question 39

An account that is always deducted from a related account is known as a:

A) contra account.
B) temporary account.
C) carrying account.
D) negative account.

Question 40

Deferral type adjustments occur when cash for expenses is paid in advance or cash from income is received in advance. Which of the following will require a deferral type adjustment?
I) Rent paid for in advance
II) Plant and Equipment to be depreciated
III) Rent collected in advance from tenants
IV) Interest is owed to the bank

A) I and III.
B) II and IV.
C) I, II, and III.
D) II, III, and IV.

Question 41

The income statement columns on the worksheet are not equal because:

A) an error has been made with the adjustments.
B) the balance sheet has not yet been prepared.
C) the unadjusted trial balance was incorrect.
D) the difference is the profit or loss for the period.

Question 42

ABC Rentals collects rent from several properties. Prior to recording adjusting entries, assume the rent income account has a credit balance of $4 000. Two adjustments are to be made at the end of the financial year:
(1) an accrual for accrued rent income of $800; and
(2) the unearned rent income account is to be decreased by $200.
After processing these adjusting entries the amount of rent income to be shown in the income statement is:

A) $5 000.
B) $4 600.
C) $3 400.
D) $3 000.

Question 43

Which of the following is an intangible asset?

A) Patent
B) Goodwill
C) Brand name
D) All of the options are intangible assets.

Question 44

Which of the following is not an advantage of preparing an adjusted trial balance?

A) It verifies that the total DRs equal the total CRs in the ledger after the preparation of the adjusting entries.
B) It is a shortcut which means that the adjusting entries do not have to be entered into the ledger.
C) It assists in the preparation of the financial statements.
D) It reduces the possibility of errors being carried forward from the ledger into the financial reports.

Question 45

Penelope Company's employees carry out work to the value of $8 400. They are paid $6 000 immediately with the balance to be settled in the next accounting period. Under the accrual method of accounting, the amount of wages expense that will be recorded in the current period is:

A) $6 000.
B) $8 400.
C) $2 400.
D) nil.

Question 46

refers to the excess of current assets over current liabilities.

A) Working capital.
B) Tangible assets.
C) Net assets.
D) Current capital.

Question 47

The primary basis for classifying assets and liabilities in the balance sheet is:

A) age.
B) profitability.
C) liquidity.
D) cost.

Question 48

The period of time over which a non-current asset, such as furniture, is expected to be used by the entity is known as its:

A) carrying life.
B) useful life.
C) working life.
D) book life.

Question 49

Indicate the order that the following current assets should be listed in the balance sheet.
I Accounts receivable
II Cash at Bank
III Prepaid expenses
IV Inventory

A) I, II, III, IV
B) II, III, I, IV
C) II, I, IV, III
D) III, II, I, IV

Question 50

Which of the following items is the current liability?

A) long-term borrowings
B) accounts receivable.
C) accrued utilities expenses.
D) rent expense.

Question 51

The portion of a non-current asset, such as machinery, which is transferred to an expense account during an accounting period, is known as:

A) carrying amount.
B) unused expense.
C) depreciation.
D) residual value.

Question 52

When preparing the financial statements using a manual accounting system, the worksheet will show profit:

A) in the DR column of the income statement and in the CR column of the balance sheet.
B) as zero.
C) as a CR to the capital account and a DR to the bank account.
D) in the DR column of the adjustments and in the CR column of the balance sheet.

Question 53

On the first day of the year Major Renos purchased scaffolding for $25 000 which is to be depreciated over 10 years with a zero residual value. At the end of the first year:

A) Depreciation in the income statement is $1250 and the carrying value of the scaffolding in the balance sheet is $23 750.
B) Depreciation in the income statement is $5 000 and the carrying value of the scaffolding in the balance sheet is $20 000.
C) Depreciation in the income statement is $2 500 and the carrying value of the scaffolding in the balance sheet is $22 500.
D) Depreciation in the income statement is $0 and the carrying value of the scaffolding in the balance sheet is $25 000.

Question 54

Assets that have a physical subsistence and are expected to provide future benefits are known as:

A) current assets.
B) tangible assets.
C) intangible assets.
D) cash.

Question 55

The correct set of column headings used in a worksheet to assist in the preparation of accounting reports in a manual accounting system are:

A) Opening balances for the period, adjustments and adjusted trial balance.
B) Adjusted trial balance, income statement and balance sheet.
C) Unadjusted trial balance, adjustments, income statement, balance sheet and statement of changes in equity.
D) Unadjusted trial balance, adjustments, adjusted trial balance, income statement, balance sheet.

Question 56

To assist in evaluating an entity's liquidity, assets and liabilities are classified as:

A) temporary and permanent.
B) tangible and intangible.
C) operating and non-operating.
D) current and non-current.

Question 57

Obligations of the entity that can be paid over a period of more than one year from the balance sheet date are classified as:

A) non-current assets.
B) current liabilities.
C) non-current liabilities.
D) long-standing obligations.

Question 58

The balance sheet may list current assets in their order of liquidity. Liquidity refers to:

A) the entity's operating cycle.
B) how many buyers there are for the asset.
C) whether the asset is held as security over a liability.
D) the average length of time it takes to convert an asset into cash.

Question 59

The capital account of Benjie Maintenance, a sole trader, was credited with $15 000. Which of the following would not give rise to such a CR?

A) The business earned a profit of $15 000.
B) The owner purchased a family holiday valued at $15 000 using funds from the business.
C) The owner introduced $15 000 new capital.
D) The owner brought in his personal ride-on lawn mower (valued at $15 000) to be used by the business.

Question 60

In preparing its 2019 adjusting entries, Zena Ltd forgot to adjust the Office Supplies (asset) account for the amount of supplies used during the year. As a result of this error:

A) 2019 profit is understated, the balance of equity is understated, and assets are understated.
B) 2019 profit is overstated, the balance of equity is correct, and assets are overstated.
C) 2019 profit is overstated, the balance of equity is overstated, and assets are correctly stated.
D) 2019 profit is overstated, the balance of equity is overstated, and assets are overstated.

Question 61

At year-end the bookkeeper forgot to accrue an income item. This will result in an:

A) understatement of assets, profit, and equity.
B) overstatement of assets, profit, and equity.
C) understatement of assets and an overstatement of profit and equity.
D) overstatement of liabilities and an understatement of profit and equity.

Question 62

Which of the following is correct in matching decisions with information in financial reports?

A) Determine profitability using the balance sheet.
B) Determine solvency using the income statement.
C) Determine long-term borrowing using the statement of changes in equity.
D) Determine return on investment using both the income statement and balance sheet.

Question 63

If an adjustment for depreciation is not recorded for the year the effect on the financial statements will be:

A) Assets are understated; profit is understated
B) Assets are understated; profit is overstated
C) Assets are overstated; profit is overstated
D) Assets are overstated; profit is understated