Deck 3: Accrual Accounting and Income

Question 1

On November 1, Phillips Tool and Die Company paid six months' insurance in advance totaling $9,000. An adjusted trial balance prepared on December 31 would include a balance in the Prepaid Insurance account of:

A)$3,000.
B)$9,000.
C)$0.
D)$6,000.

Answer 1

D

Question 2

An expense incurred in 2008 is not paid until 2009. Using the accrual basis of accounting, the expense should appear on:

A)neither the 2008 nor the 2009 income statement.
B)the 2009 income statement.
C)the 2008 income statement.
D)both the 2008 and 2009 income statements.

Answer 2

C

Question 3

The operating cycle is the time required to:

A)accept a customer order and manufacture the goods.
B)close the accounts and prepare the post- closing trial balance.
C)record accounting transactions and prepare financial statements.
D)acquire goods and services for sale to customers; sell the goods and services; and collect cash from customers.

Answer 3

D

Question 4

The requirement to report accounting information at regular intervals is known as the:

A)GAAP concept.
B)time- period concept.
C)reporting concept.
D)interval concept.

Question 5

On November 1 of the current year, Prepaid Rent was debited $5,400 for three months of rent, in advance. The amount of the adjusting entry on December 31 is:

A)$3,600.
B)$1,800.
C)$0.
D)$5,400.

Question 6

A company has $800 in beginning supplies and supplies on hand at the end of the month of $150. The adjusting entry for this company is a debit to:

A)Supplies Expense of $150 and a credit of $150 to Supplies
B)Supplies Expense of $650 and a credit of $650 to Supplies
C)Supplies of $150 and a credit of $150 to Supplies Expense
D)There is not enough information given to prepare the entry.

Question 7

The following accounts are listed in order of liquidity. Which of the following is CORRECT?

A)Cash, Accounts Receivable, Inventory, Furniture
B)Furniture, Cash, Inventory, Accounts Receivable
C)Furniture, Cash, Accounts Receivable, Inventory
D)Cash, Inventory, Accounts Receivable, Furniture

Question 8

An interim period is generally:

A)the life of the company.
B)more than one year, but less than the life of the company.
C)more than one year.
D)less than one year.

Question 9

Assume the beginning balance in the Retained Earnings account is zero. If a debit balance of $5,000 exists in Retained Earnings after closing out revenues and expenses at the end of the current period, it indicates:

A)the company had net income of $5,000.
B)the company had a net loss of $5,000.
C)a decrease in cash of $5,000.
D)an increase in cash of $5,000.

Question 10

On August 1 of the current year, Jamie Simmons received $5,400 for legal services to be performed evenly throughout the next six months. An adjusted trial balance prepared on December 31 of the current year will show a credit balance in Unearned Revenue in the amount of:

A)$4,500.
B)$900.
C)$0.
D)$5,400.

Question 11

An adjustment for which the business paid or received cash in advance is:

A)expense recognition.
B)an accrual.
C)a deferral.
D)earned revenue.

Question 12

Cash for merchandise to be delivered in 2009 is received in 2008. Using the accrual basis of accounting, the revenue should appear on:

A)the 2009 income statement.
B)the 2008 income statement.
C)neither the 2008 nor the 2009 income statement.
D)both the 2008 and 2009 income statements.

Question 13

Associated Services Company paid twelve months' insurance in advance totaling $9,000. At the end of the first month, the adjusting entry would include a:

A)debit to Insurance Expense for $8,250.
B)debit to Insurance Expense for $750.
C)debit to Prepaid Insurance for $750.
D)debit to Prepaid Insurance for $8,250.

Question 14

On August 1 of the current year, Jamie Simmons received $5,400 for legal services to be performed evenly throughout the next six months. The adjusting entry on December 31 of the current year would include a:

A)debit to Unearned Service Revenue of $900.
B)debit to Service Revenue of $900.
C)credit to Service Revenue of $4,500.
D)credit to Unearned Service Revenue of $4,500.

Question 15

The book value of an asset at the beginning of the year was $17,000. The equipment originally cost $27,000. Depreciation expense for the year was $8,000. The book value of the asset at the end of the year is:

A)$19,000.
B)$10,000.
C)$17,000.
D)$ 9,000.

Question 16

On September 1, Boz sold to Skaggs prepaid maintenance for $6,000 for six months. As of December 31, what is the amount in the Unearned Revenue account?

A)$6,000
B)$2,000
C)$0
D)$4,000

Question 17

On August 1, 2008, Magic Carpet Entertainment received $4,800 for services to be performed evenly over the next twelve months. The adjusting entry on December 31, 2008, would include a:

A)debit to Cash for $4,800.
B)credit to Service Revenue for $4,800.
C)debit to Unearned Service Revenue for $2,800.
D)debit to Unearned Service Revenue for $2,000.

Question 18

Which account is debited in the adjusting entry to record salaries owed to employees but NOT paid until the next accounting period?

A)Salary Expense
B)Unearned Salaries
C)Deferred Salary
D)Salary Payable

Question 19

How does an accrued expense adjustment affect the financial statements? The adjustment:

A)decreases expenses and increases liabilities.
B)increases expenses and decreases assets.
C)decreases expenses and increases assets.
D)increases expenses and increases liabilities.

Question 20

At the beginning of the year, Megaron Company's balance sheet showed current assets of $16,000 and current liabilities of $10,000. During the current year, Megaron issued common stock for $5,000 for cash and purchased $3,000 of inventory on account. After these transactions were recorded, Megaron's current ratio was:

A)2.10.
B)1.85.
C)1.17.
D)1.60.

Question 21

Closing entries transfer the balances of revenue and dividends accounts to which account?

A)Paid- in Capital
B)Common Stock
C)Retained Earnings
D)Net Income

Question 22

On July 25, Hamilton Bey Company's accountant prepared a check for August's rent payment. Hamilton Bey Company mails the check on July 27 to the landlord. The landlord receives the check July 31 and cashes the check on August 02. When should Hamilton Bey Company record the rent expense associated with this transaction?

A)July 27
B)August 30
C)August 02
D)July 25

Question 23

Adjusting entries are:

A)prepared at the end of the accounting period to update certain accounts.
B)prepared at the option of the accountant.
C)prepared at the beginning of the accounting period to update all accounts.
D)not needed under the accrual basis of accounting.

Question 24

The revenue principle governs two things:

A)to record the amount to be received and in which journal to record this amount.
B)where to record a revenue and the amount of revenue to record.
C)when to record revenue and the amount of revenue to record.
D)when to record a revenue and where to record this revenue.

Question 25

The revenue principle requires that a business record revenue when the business:

A)delivers goods or services to a customer.
B)prepares the invoice bill)for the customer.
C)receives payment from a customer.
D)receives an order from a customer.

Question 26

Current assets include:

A)cash, payables and retained earnings.
B)cash and receivables only.
C)cash and payables only.
D)cash, receivables and inventory.

Question 27

Lefton Company made a $2 million sale on account. How will this transaction affect the current ratio and the debt ratio?

A)It improves the current ratio and has no effect on the debt ratio.
B)It improves both the current ratio and the debt ratio.
C)It hurts the current ratio and has no effect on the debt ratio.
D)It hurts both the current ratio and the debt ratio.

Question 28

Which of the following accounts does NOT appear on the post- closing trial balance?

A)Dividends
B)Accounts Receivable
C)Salaries Payable
D)Accumulated Depreciation

Question 29

The purchase of an insurance policy for cash would appear on a statement of cash flows in the:

A)operating activities section.
B)financing activities section.
C)investing activities section.
D)This transaction would not appear on a statement of cash flows.

Question 30

Which account is debited in the adjusting entry to record insurance expired during the current period?

A)Insurance Payable
B)Accrued Insurance
C)Prepaid Insurance
D)Insurance Expense

Question 31

On December 1, 2009, Debbie's Plantscape receives $2,400 in advance for an agreement to care, in equal monthly efforts, for a client's office plants during the months of December, January, and February. As of December 31, 2009, Debbie's Plantscape would have:

A)a $1,600 liability to its client under accrual accounting, or have a $2,400 liability to its client under cash- basis accounting.
B)a $0 liability to its client under accrual accounting, or have a $1,600 liability to its client under cash- basis accounting.
C)recognized $800 cash under accrual accounting, or have recognized $2,400 cash under cash- basis accounting.
D)recognized $800 revenue under accrual accounting, or have recognized $2,400 revenue under cash- basis accounting.

Question 32

Which of the following accounts is considered a "temporary" account?

A)Inventory
B)Common Stock
C)Rent Expense
D)Accounts Payable

Question 33

AMR received $1,600 on a sale using the cash basis of accounting and did not record a sale on account. This transaction should have been recorded under accrual accounting. The balance sheet problem, using the cash basis of accounting, is the failure to record an entry to which account?

A)Cash
B)Sales
C)Accounts Receivable
D)Both Accounts Receivable and Sales

Question 34

On December 31, 2009, salaries owed to employees total $4,150. These will be paid on January 4, 2010. An adjusted trial balance prepared on December 31, 2009, includes which of the following?

A)Salaries Expense, $4,150
B)Both Salaries Expense, $4,150 and Salaries Payable, $4,150.
C)Salaries Payable, $4,150
D)Unearned Salaries, $4,150

Question 35

Which term refers to the allocation of the cost of an asset over the asset's useful life?

A)Accrual
B)Depreciation
C)Expiration
D)Deferral

Question 36

Assume that a firm has total assets of $1,000,000 and current liabilities of $700,000. Eighty percent of the assets are current assets. An analyst reviewing this firm's current ratio would most likely conclude that the:

A)firm should have little trouble paying its current debt.
B)firm may experience some trouble paying its debts.
C)firm will definitely experience trouble paying its debts.
D)current ratio is extremely strong.

Question 37

On December 31, 2009, salaries owed to employees total $4,150. These will be paid on January 4, 2010. The adjusting entry prepared on December 31, 2009, includes a:

A)debit to Salary Payable for $4,150.
B)credit to Cash for $4,150.
C)debit to Salary Expense for $4,150.
D)credit to Salary Expense for $4,150.

Question 38

An accrual refers to an event where the:

A)expense or revenue is recorded before the cash settlement.
B)liability is recorded after the cash settlement.
C)expense or revenue is not recorded after the cash settlement.
D)asset is recorded only after the cash settlement.

Question 39

The debt ratio is computed by dividing:

A)total assets by total liabilities.
B)total assets by current liabilities.
C)total liabilities by total assets.
D)current liabilities by total assets.

Question 40

The Unearned Revenue account was not adjusted for work performed in the current period. What is the effect of this error?

A)The liabilities will be understated and revenues will be understated.
B)The assets will be understated and expenses will be understated.
C)The assets will be overstated and liabilities will be overstated.
D)The liabilities will be overstated and revenues will be understated.

Question 41

There are two methods used to account for transactions. These methods are:

A)accrual and deferral.
B)cash and accrual.
C)cash and deferral.
D)deferral and prepaid.

Question 42

The term deferral refers to an event where the:

A)liability for an expense is recorded after the expense is actually incurred.
B)recognition of an expense or revenue is recorded before the cash is paid or received.
C)recognition of an expense or revenue is recorded after the cash is paid or received.
D)liability for an expense is recorded before the expense is actually incurred.

Question 43

Rosewood Company had Current Assets of $582, Current Liabilities of $433, Total Assets of $732, and only Current Liabilities are Total Liabilities. What is Rosewood's Debt Ratio?

A)0.80
B)0.59
C)1.95
D)1.34

Question 44

Thompson Company executives are planning a $5 million advertising campaign. The expense of this advertising campaign should be recognized when:

A)commercials are broadcast.
B)cash is paid to the television stations which will run the commercials.
C)commercials are filmed.
D)planning for the campaign is complete.

Question 45

The entry made to close Service Revenue would include a debit to:

A)Retained Earnings and a credit to Service Revenue.
B)Service Revenue and a credit to Dividends.
C)Service Revenue and a credit to Retained Earnings.
D)Service Revenue and a credit to net income.

Question 46

An accountant recognizes the impact of a business event as it occurs and accounts for it appropriately under which basis of accounting?

A)Accrual
B)Deferred
C)Cash
D)Prepaid

Question 47

The entry to close revenue accounts:

A)decreases retained earnings.
B)increases total assets.
C)increases retained earnings.
D)decreases total assets.

Question 48

Arizona Teak Company paid $54,000 for computers. These computers have an estimated service life of 3 years and a salvage value of $3,000. After one year of use, the book value of the computers will be:

A)$37,000.
B)$17,000.
C)$51,000.
D)$0.

Question 49

In what order are financial statements generally prepared?

A)balance sheet, income statement, and statement of retained earnings
B)statement of retained earnings, balance sheet, and income statement
C)income statement, balance sheet, and statement of retained earnings
D)income statement, statement of retained earnings, and balance sheet

Question 50

Which of the accounts listed below is a NOT a permanent account?

A)Salary Payable
B)Unearned Revenue
C)Dividends
D)Prepaid Rent

Question 51

Which of the following accounts appear on the post- closing trial balance?

A)Salaries Payable and Retained Earnings
B)Service Revenue and Insurance Expense
C)Retained Earnings only
D)Insurance Expense only

Question 52

The debt ratio measures a firm's ability to:

A)purchase additional assets.
B)pay current debt.
C)pay long- term debt.
D)pay both current and long- term debt.

Question 53

A journal entry contains a debit to an expense account and a credit to an asset account. This is an example of an):

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

Question 54

The entry to close expense accounts):

A)increases total assets.
B)increases retained earnings.
C)decreases retained earnings.
D)decreases total assets.

Question 55

Current assets are $40,000 and long- term assets are $50,000. Total liabilities are $60,000, of which current liabilities are 50%. The current ratio is:

A)1.50.
B)1.33.
C)9.00.
D)3.00.

Question 56

What effect does an accrued revenue adjustment have on a company's net income?

A)The adjustment decreases net income for the period.
B)The adjustment increases net income for the period.
C)The effect of the adjustment cannot be determined with the information given.
D)The adjustment has no effect on net income.

Question 57

A company has current assets of $45,000, current liabilities of $30,000, and total liabilities of $55,000. The current ratio is:

A)1.50.
B)0.66.
C)1.22.
D)1.36.

Question 58

On September 1, Boz sold to Skaggs prepaid maintenance for $6,000 for six months. As of December 31, what is the amount that is applied toward net income?

A)$ 0
B)$6,000
C)$2,000
D)$4,000

Question 59

Which of the following financial statements is prepared using the adjusted trial balance?

A)Both the balance sheet and the income statement
B)Neither the balance sheet nor the income statement
C)The balance sheet only
D)The income statement only

Question 60

Hamilton Tool and Die Company purchased $72,000 of equipment with an estimated service life of 4 years. The equipment will be worth $4,000 at the end of its life. The annual amount of depreciation on this equipment is:

A)$18,000.
B)$0.
C)$19,000.
D)$17,000.

Question 61

A tired accountant failed to record the adjusting entry for salaries. How does this error affect net income?

A)The net income for the period will be overstated.
B)The net income for the period will be understated.
C)The net income for the period will not be affected.
D)The assets for the period will be understated.

Question 62

Which of the following accurately describes the account type and the normal balance of the Accumulated Depreciation account?

A)Expense account, debit balance
B)Liability account, credit balance
C)Contra- asset account, credit balance
D)Contra- expense account, credit balance

Question 63

On December 15, 2009, a company receives an order from a customer for services to be performed on December 28, 2009. Due to a backlog of orders, the company does not perform the services until January 3, 2010. The customer pays for the services on January 6, 2010. The matching principle requires the revenue to be recorded by the company on:

A)December 15, 2009.
B)December 28, 2009.
C)January 3, 2010.
D)January 6, 2010.

Question 64

Which time period indicates that a company has prepared interim statements?

A)For the month ended June 30
B)For the quarter ended April 30
C)For the year ended December 31
D)Both the month ended June 30 and the quarter ended April 30 are correct.

Question 65

The beginning balance in Retained Earnings is found on:

A)only the statement of retained earnings.
B)only the balance sheet.
C)both the income statement and the balance sheet.
D)both the statement of retained earnings and the balance sheet.

Question 66

O'Connor Company purchased supplies totaling $21,600. By year end, $9,300 of supplies were still on hand. How much supplies expense should O'Connor recognize?

A)$21,600
B)$12,300
C)$0
D)$9,300

Question 67

Rosewood Company had Current Assets of $582, Current Liabilities of $433, Total Assets of $732, and only Current Liabilities are Total Liabilities. If Rosewood executes a note for $500 for six months, what is the new debt ratio?

A)0.75
B)0.59
C)1.27
D)2.15

Question 68

Current assets are $40,000 and long- term assets are $50,000. Total liabilities are $60,000, of which current liabilities are 50%. The debt ratio is:

A)0.67.
B)0.86.
C)0.58.
D)0.17.

Question 69

Which of the following is a temporary or nominal)account?

A)Unearned Revenue
B)Dividends Payable
C)Rent Expense
D)Salaries Payable

Question 70

HG Enterprises paid $108,000 for office furniture. The furniture has an estimated service life of 7 years and a salvage value of $3,000. After three years of use, the book value of the furniture will be:

A)$ 63,000.
B)$ 45,000.
C)$108,000.
D)$105,000.

Question 71

A debit entry in the Unearned Revenue account indicates the:

A)amount of cash to be paid for future services.
B)value of services owed to customers.
C)value of services performed in the current period.
D)amount of cash to be collected from customers.

Question 72

The closing entry made for the Dividends account would include a debit to:

A)Net Income and a credit to Dividends.
B)Retained Earnings and a credit to Dividends.
C)Dividends and a credit to Retained Earnings.
D)Dividends and a credit to Net Income.

Question 73

A journal entry contains a debit to a liability account and a credit to a revenue account. This is an example of an):

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

Question 74

The closing entry for the Salaries Expense account would include a debit to:

A)net income and a credit to Salaries Expense.
B)Salaries Expense and a credit to net income.
C)Retained Earnings and a credit to Salaries Expense.
D)Salaries Expense and a credit to Retained Earnings.

Question 75

Which of the following combinations of ratios is preferable?

A)A low current ratio and a low debt ratio
B)A high current ratio and a low debt ratio
C)A high current ratio and a high debt ratio
D)A low current ratio and a high debt ratio

Question 76

Ben George Inc has Accumulated Depreciation-Truck of $12,000 as of December 31, 2008. This relates to a Truck purchased for $16,000, with a salvage value at the end of five years of $1,000. The amount in the Accumulated Depreciation-Truck account as of December 31, 2009 is:

A)$15,000.
B)$3,000.
C)$12,000.
D)$1,000.

Question 77

Dividends appears on:

A)only the income statement.
B)only the statement of retained earnings.
C)both the income statement and the balance sheet.
D)both the income statement and the statement of retained earnings.

Question 78

A company started the year with $400 of supplies. During the year the company purchased additional supplies costing $1,600. There were $800 of supplies on hand at the end of the year. An adjusted trial balance prepared at the end of the accounting period will show the following balance in supplies:

A)$0.
B)$800.
C)$600.
D)$1,400.

Question 79

On September 1, Banger Bros Company paid $9,000 for one year of rent, in advance. Which of the following accounts and amounts will appear on an adjusted trial balance prepared on December 31?

A)Prepaid Rent, $9,000
B)Rent Expense, $6,000
C)Prepaid Rent, $3,000
D)Rent Expense, $3,000

Question 80

Rosewood Company had Current Assets of $582, Current Liabilities of $433, Total Assets of $732, and only Current Liabilities are Total Liabilities. What is Rosewood's Current Ratio?

A)0.80
B)1.95
C)0.59
D)1.34