Question 1

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

Accepted Answer

Salaries Expense and Salaries Payable are both understated because the salaries earned by employees have not yet been recorded in the accounting records. The adjusting entry will increase Salaries Expense and increase Salaries Payable, correcting the previous understatement.

Question 2

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

Accepted Answer

An unadjusted trial balance is prepared before any adjustments are recorded. It is used to ensure that the total debits equal the total credits before adjusting entries are made to the accounts.

Question 3

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

Accepted Answer

Depreciation expense is a necessary expense that reflects the wear and tear on assets over time. Failing to record depreciation will result in overstated assets on the balance sheet and understated expenses on the income statement, leading to an inaccurate portrayal of the company's financial position and performance.

Question 4

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

Accepted Answer

The adjusting entry on December 31 will be a debit to Rent Expense for $16,500 and a credit to Prepaid Rent for $16,500. This will reduce the balance in Prepaid Rent to $1,500.

Question 5

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

Accepted Answer

Income Summary is a temporary account used specifically for the closing process to transfer the balances of revenue and expense accounts. It is not used for any other purpose.

Question 6

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

Accepted Answer

Adjusted trial balance includes all the necessary account balances and adjustments needed for the preparation of financial statements. Therefore, financial statements can be directly prepared from the adjusted trial balance.

Question 7

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

Accepted Answer

Before the adjusting entry, Prepaid Insurance is overstated, but Insurance Expense is understated, not overstated.

Question 8

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

Accepted Answer

Accumulated depreciation is a contra-asset account that is subtracted from the cost of the related asset on the balance sheet to show the net book value or carrying value of the asset.

Question 9

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

Accepted Answer

Accrued expenses are expenses that are recognized on the income statement but have not been paid yet. Wages or salaries owed to employees are considered accrued expenses because they have been earned by the employees, but the payment has not been made yet.

Question 10

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%

Accepted Answer

The calculation shown for the profit margin is correct, and the given profit margin of 2.98% aligns with the result of the calculation. Therefore, the statement is true.

Question 11

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

Accepted Answer

Profit margin is calculated by dividing net profit by revenue and expressing the result as a percentage. Therefore, it reflects the percent of profit in each dollar of revenue.

Question 12

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

Accepted Answer

Revenue accounts are used to record income earned during a particular accounting period. At the end of the period, the balance in these accounts is usually transferred to a permanent account like Retained Earnings, and the revenue accounts are reset to zero to start the next accounting period. Therefore, they should begin each accounting period with zero balances.

Question 13

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.

Accepted Answer

The answer of A contra account is an account linked...

Question 14

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

Accepted Answer

Depreciation expense is an ongoing accounting process that allocates the cost of a plant asset over its useful life. This allocation is done for each period, and hence, depreciation expense for a period is the portion of a plant asset's cost that is allocated to that period.

Question 15

Profit margin can also be called return on sales.

Accepted Answer

Profit margin is a ratio that measures the percentage of profit a company earns for every dollar of sales. Return on sales is another term used to refer to profit margin.

Question 16

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

Accepted Answer

The answer of The adjusted trial balance must be prepared...

Question 17

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

Accepted Answer

Revenue and expense balances are part of the income statement, so they are transferred from the adjusted trial balance to the income statement to calculate net income or loss.

Question 18

An adjusting entry often includes an entry to Cash.

Accepted Answer

An adjusting entry includes changes to accounts such as depreciation, prepaid expenses, accrued income, and accrued expenses. Cash is typically not affected by adjusting entries as it reflects actual money transactions.

Question 19

Depreciation measures the decline in market value of an asset.

Accepted Answer

The answer of Depreciation measures the decline in market value...

Question 20

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

Accepted Answer

The answer of In preparing statements from the adjusted trial...

Quiz 3: Adjusting Accounts for Financial Statements