Question 1

One major difference between deferral and accrual adjustments is that deferral adjustments:

Accepted Answer

Adjustments need to be made at the end of an accounting period to (1)update amounts already recorded in the accounting records and (2)include events that occurred but had not yet been recorded.The first type includes deferral adjustments and the second type includes accrual adjustments.Both types of adjustments may be influenced by estimates of future events and are made before financial statements are prepared.

Question 2

One of the major advantages of making adjustments in order to improve the quality of financial statements is that they:

Accepted Answer

Adjustments need to be made at the end of an accounting period to (1)update amounts already recorded in the accounting records and (2)include events that occurred but had not yet been recorded.Without these adjustments,the financial statements present an incomplete and misleading picture of the company's financial performance.Proper counting is critical to income measurement,but estimation also plays a role.

Question 3

When existing assets are used up in the ordinary course of business:

Accepted Answer

When the company pays cash before incurring the expense,the prepayment is recorded in an asset account on the balance sheet.A deferral adjustment occurs when the asset is partially used up during the accounting period.The expense is incurred and recorded and the asset account is decreased.

Question 4

Which of the following statements about the need for adjustments is not correct?

Accepted Answer

Adjustments need to be made at the end of an accounting period to (1)update amounts already recorded in the accounting records and (2)include events that occurred but had not yet been recorded.Without these adjustments,the financial statements present an incomplete and misleading picture of the company's financial performance.

Question 5

An example of an account that could be included in an accrual adjustment for revenue is:

Accepted Answer

An accrual adjustment is needed when a company has earned revenue in the current period but has not yet received the related cash.Cash will not be received until a later period.As a result,the asset involved usually has the word "Receivable" in the account name.If Rent Revenue is earned this month but not received in cash until a later month,an accrual adjustment is needed at the end of the current month to record increases in the company's Rent Revenue and Rent Receivable accounts.

Question 6

Which of the following statements about adjustments is correct?

Accepted Answer

Each deferral adjustment involves one asset and one expense account,or one liability and one revenue account.Each accrual adjustment involves one asset and one revenue account,or one liability and one expense account.

Question 7

Which of the following best describes when an accrual adjustment is required?

Accepted Answer

Accrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet received or paid the related cash.The related cash will not be received or paid until a later period.

Question 8

If certain assets are partially used up during the accounting period,then:

Accepted Answer

When the company pays cash before incurring the expense,the prepayment is recorded in an asset account on the balance sheet.When an asset is partially used up during the accounting period,the expense is incurred and recorded with a debit and the asset account is decreased with a credit.

Question 9

An example of an account that could be included in an accrual adjustment for expense is:

Accepted Answer

An accrual adjustment is needed when a company has incurred an expense in the current period but has not yet received or paid the related cash.The related cash will not be paid until a later period.As a result,the liability involved usually has the word "Payable" in the account name.If income tax is owed but not paid in cash until later,an accrual adjustment is needed at the end of the current month to record increases in the company's Income Tax Expense and Income Tax Payable accounts.

Question 10

At the end of the year,accrual adjustments could include a:

Accepted Answer

Accrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period.As a result,accrual adjustments would include a debit to an expense account and a credit to a liability account or a debit to an asset account and a credit to a revenue account.

Question 11

When a deferral adjustment is made to a liability account,that liability becomes a(n):

Accepted Answer

Deferral adjustments are used to update amounts that have been previously deferred on the balance sheet.When a company receives cash from customers before delivering the goods or services,this revenue is initially deferred as a liability on the balance sheet (in an account called Deferred Revenue).Later,when the company delivers the goods or services,thereby meeting its obligation and earning the revenue,a deferral adjustment is made to decrease the liability and increase the related revenue account.

Question 12

A company makes a deferral adjustment that increased a revenue account.This must mean that a(n):

Accepted Answer

Previously deferred amounts exist on the balance sheet because the company paid cash before incurring the expense or received cash before earning revenue.When a company receives cash from customers before delivering the goods or services,this revenue is initially deferred as a liability on the balance sheet (in an account called Deferred Revenue).Later,when the company delivers the goods or services,thereby meeting its obligation and earning the revenue,a deferral adjustment is made to decrease the liability and increase the related revenue account.

Question 13

Accrued revenues recorded at the end of the current year:

Accepted Answer

An accrual adjustment is needed when a company has earned revenue in the current period but has not yet received the related cash.Cash will not be received until a later period.

Question 14

The term deferral best describes a situation in which:

Accepted Answer

The term defer means to postpone until later.In accounting,we say an expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period.A deferral exists when cash is paid in advance of recognizing an expense or when cash is received in advance of recognizing revenue.

Question 15

A company owes rent at a rate of $6,000 per month.The company pays the rent owed on the tenth of each month for the previous month.At the end of each month,what kind of adjustment is required?

Accepted Answer

Accrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet received or paid the related cash.The related cash will not be received or paid until a later period.In this case,at the end of each month,rent expense has been incurred but is not paid until the tenth of the following month.

Question 16

The company uses up $5,000 of an existing asset and the company adjusts its accounts accordingly.This is an example of a(n):

Accepted Answer

When the company pays cash before incurring the expense,the prepayment is recorded in an asset account on the balance sheet.A deferral adjustment occurs when the asset is partially used up during the accounting period.The expense is incurred and recorded and the asset account is decreased.

Question 17

Accrual adjustments involve increasing:

Accepted Answer

Accrual adjustments are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period.As a result,accrual adjustments would include a debit to increase an expense account and a credit to increase a liability account or a debit to increase an asset account and a credit to increase a revenue account.

Question 18

Adjusting entries are typically prepared:

Accepted Answer

Companies wait until the end of the accounting period to adjust their accounts because daily adjustments would be costly and time-consuming.

Question 19

What is the main difference between accrual and deferral adjustments?

Accepted Answer

Deferral adjustments are needed when an asset (or liability)has already been recorded and it needs to be updated to show that some of its benefits have been used up (or its obligations have been fulfilled).Accrual adjustments are needed when revenue has been earned (but not yet recorded)or expenses have been incurred (but not yet recorded).

Question 20

If an expense has been incurred but will be paid later,then:

Accepted Answer

An accrual adjustment is needed when a company has incurred an expense in the current period but has not yet paid the related cash.The related cash will not be paid until a later period.The accrual adjustment record increases in an expense account and a liability account.

Quiz 4: Adjustments,Financial Statements,and Financial Results