Question 1

What effect does recognizing accrued wages expense at the end of the accounting period have on the accounting equation?

Accepted Answer

Recognizing accrued wages expense at the end of the accounting period will increase the liabilities (due to the unpaid wages owed to employees) and decrease shareholders' equity (due to the expense being recognized). Therefore, the option B is correct.

Question 2

Dobson Company sold stock for cash and received cash for services performed during the current month. Which of the following summarizes the income statement impact of these transactions for the current month?

Accepted Answer

The sale of stock is a financing activity, not an operating activity, and does not affect revenues. Only the performance of services, which is an operating activity, increases revenues.

Question 3

A company sold vacant land that it had owned for three years. The difference between the amount of cash receipts and the original cost of land owned by the company

Accepted Answer

The difference between the amount of cash receipts and the original cost of land owned by the company represents the amount of gain or loss associated with the asset sold. Therefore, the best choice is B.

Question 4

Which one of the following is a required characteristic of accruals and deferrals?

Accepted Answer

One characteristic of accruals and deferrals is that they always result in the recognition of an asset or liability on the balance sheet. This is because accruals and deferrals are used to adjust financial statements to more accurately reflect the economic reality of the business, by recognizing revenue or expenses that have been earned or incurred but not yet paid or received. As a result, they impact the balance sheet by creating a new asset or liability account. The other choices are incorrect because they do not accurately describe the required characteristic of accruals and deferrals.

Question 5

The statement of cash flows provides information about

Accepted Answer

The statement of cash flows provides information about all three types of activities: operating, financing, and investing.

Question 6

If the balance sheet is in balance,

Accepted Answer

A balance sheet being in balance means that assets equal liabilities plus equity, but errors can still exist in the recorded transactions or classifications.

Question 7

Phoenix Corp. paid rent of $12,000 per month for 3 months in advance on November 1, 2010. Phoenix accounting period ends on December 31, 2010. Which amount will be reported at December 31, 2010?

Accepted Answer

Phoenix Corp. paid $36,000 for 3 months of rent ($12,000 per month). By December 31, 2010, two months' rent ($24,000) is used, leaving $12,000 - $8,000 = $4,000 as Prepaid Rent for January on the balance sheet.

Question 8

Items and rights that a company acquires through objectively measurable transactions that can be used in the future to generate economic benefits are

Accepted Answer

Assets are items and rights that a company acquires through objectively measurable transactions that can be used in the future to generate economic benefits. Liabilities refer to an obligation that a company owes and must settle in the future, while contributing capital refers to the initial funds invested by owners or shareholders. Revenues refer to the income generated from the sale of goods or services.

Question 9

Which one of the following transactions will ultimately cause a decrease in retained earnings?

Accepted Answer

Payment of the current month's telephone bill is an expense, which reduces net income and, consequently, decreases retained earnings.

Question 10

Which of the following sets of accounts is closed at the end of an accounting period?

Accepted Answer

Interest Expense, Rent Revenue, and Dividends are temporary accounts that are closed at the end of an accounting period to prepare for the next period.

Question 11

The accounting concepts that underlie the accrual system of accounting are

Accepted Answer

The accrual system of accounting is based on two fundamental accounting concepts: revenue recognition and matching. Revenue recognition is the accounting concept that deals with when revenue should be recognized in the financial statements. Matching is the accounting concept that deals with matching expenses to the revenues they help generate. Together, these two concepts ensure that the financial statements accurately reflect the financial performance of the entity. Debits and credits are simply the means by which these concepts are applied in practice, and they do not form the underlying concepts themselves. Similarly, the requirement that debits must equal credits is an aspect of the double-entry accounting system, which is a useful tool for ensuring the accuracy of the accounting records, but it is not a fundamental accounting concept in and of itself. Finally, deferrals are a type of adjustment that may be necessary to properly account for certain types of transactions, but they are not a fundamental concept underlying the accrual system of accounting.

Question 12

Which one of the following is a characteristic of the double entry system?

Accepted Answer

The double entry system requires that the total dollar amount of debits must equal the total dollar amount of credits across all accounts, ensuring the accounting equation remains balanced.

Question 13

Which one of the following statements is true?

Accepted Answer

Accruals are adjustments that record revenues and expenses in the applicable period, regardless of when the cash inflows or outflows occur. They are recorded before the associated cash flow has taken place.

Question 14

Recognition of a gain or loss may result from

Accepted Answer

The sale of a non-current asset can result in a gain or loss, which is calculated as the difference between the sale price and the book value of the asset. The other choices (A, B, D) do not necessarily result in a gain or loss.

Question 15

What effect does recognizing revenue at the end of the accounting period for rent received in advance have on the accounting equation?

Accepted Answer

Recognizing revenue at the end of the accounting period for rent received in advance increases revenues because it is now earned, but it decreases liabilities because the obligation to provide the service has been fulfilled.

Question 16

Journal entries are used to indicate how

Accepted Answer

Journal entries are used to record the financial transactions of a business and how those transactions affect the accounting equation (Assets = Liabilities + Equity). By using journal entries, accountants can ensure that the financial statements accurately reflect the company's financial position and performance. While the other options may be recorded in journal entries, they are not the primary reason for creating them.

Question 17

Subdivisions of assets, liabilities, and shareholders' equity are called

Accepted Answer

Assets, liabilities, and shareholders' equity are divided into different accounts, hence subdivisions are called accounts. Revenues and contributed capital are not subdivisions of assets, liabilities or shareholders' equity. Journals are books/records where the financial transactions are initially recorded.

Question 18

Scottsdale Corp. received several invoices in the mail for oil changes performed on its company trucks during the last week of April. The total of the invoices was $800 and all are due on May 13. What entry should Scottsdale make at April 30 as a result of receiving the invoices?

Accepted Answer

Scottsdale Corp. should record the maintenance expense incurred in April by debiting Maintenance Expense and crediting Accounts Payable, as the invoices are due in the future and not yet paid.

Question 19

All of the following statements are true except:

Accepted Answer

Not all economic events recorded in financial statements need to affect liabilities. Some events may only impact assets or equity. The other statements (A, C, and D) are all true.

Question 20

Shareholders' equity increases because of two primary reasons, which are the

Accepted Answer

Shareholders' equity increases due to the sale of stock, which brings new capital into the business, and the earning of income, which increases retained earnings. Payment of dividends actually decreases equity, and the collection of cash or payment of expenses impacts the company's cash flow and income statement but not directly its initial equity increase.

Quiz 4: The Mechanics of Financial Accounting