CHAPTER 3
ADJUSTING THE ACCOUNTS
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY
Item SO BT Item SO BT Item SO BT Item SO BT Item SO BT
True-False Statements
1. 1 C 9. 2 C 17. 5 C 25. 5 K sg33. 3 K
2. 1 K 10. 2 K 18. 5 K 26. 6 K sg34. 5 K
3. 1 K 11. 3 C 19. 5 C 27. 7 K sg35. 6 K
4. 1 C 12. 3 K 20. 5 C a28. 8 C sg36. 7 K
5. 1 K 13. 3 K 21. 5 C a29. 8 C
sg,a37. 8 C
6. 2 C 14. 3 K 22. 5 K a30. 8 C
7. 2 K 15. 4 C 23. 5 K
sg31. 2 K
8. 2 K 16. 4 K 24. 5 C
sg32. 3 K
Multiple Choice Questions
38. 1 K 63. 2
A
P 88. 5
A
N 113. 5
A
N 138. 6
A
P
39. 1 K 64. 2 AP 89. 5 AN 114. 5 AP 139. 7 K
40. 1 K 65. 3 K 90. 5 K 115. 5 AN 140. 7 K
41. 1 C 66. 3 C 91. 5 K 116. 5 AN 141. 7 K
42. 1 K 67. 3 C 92. 5 C 117. 5 AP 142. 7 C
43. 1 K 68. 3 K 93. 5 C 118. 5 AP a143. 8 C
44. 1 C 69. 3 C 94. 5 AN 119. 5 AP a144. 8 C
45. 1 C 70. 3 C 95. 5 K 120. 5 C a145. 8 AN
46. 1 C 71. 3 C 96. 5 AN 121. 5 C a146. 8 AN
47. 1 K 72. 3 C 97. 5 C 122. 5 AN a147. 8 AN
48. 2 K 73. 4 K 98. 5 K 123. 5 AN
a148. 8 AN
49. 2 K 74. 4 C 99. 5 K 124. 6 C sg149. 2 C
50. 2 K 75. 4 K 100. 5 K 125. 6 C
st150. 2 K
51. 2 K 76. 4 K 101. 5 K 126. 6 AN
st151. 2 K
52. 2 C 77. 4 K 102. 5 C 127. 6 AN
sg152. 4 K
53. 2 C 78. 4 K 103. 5 C 128. 6 AN st153. 4 K
54. 2 C 79. 4 K 104. 5 K 129. 6 C sg154. 5 AP
55. 2 C 80. 4 K 105. 5 C 130. 6 AN
sg155. 6 AP
56. 2 C 81. 4 C 106. 5 AN 131. 6 AN st156. 6 K
57. 2 C 82. 4 K 107. 5 AN 132. 6 AN
sg157. 6 AP
58. 2 K 83. 4 AN 108. 5 AN 133. 6 AP st158. 7 K
59. 2 C 84. 5 C 109. 5 AN 134. 6 C sg159. 7 K
60. 2 C 85. 5 C 110. 5 AN 135. 6 AN
61. 2 C 86. 5 K 111. 5 AN 136. 6 AP
62. 2 AP 87. 5 K 112. 5 AP 137. 6 AP
sg This question also appears in the Study Guide.
st This question also appears in a self-test at the student companion website.
a This question covers a topic in an appendix to the chapter.
Test Bank for Accounting Principles, Eighth Edition
3 – 2
SUMMARY OF QUESTIONS BY STUDY OBJECTIVES AND BLOOM’S TAXONOMY
Brief Exercises
160. 4 K 163. 5
A
N 166. 5
A
N 169. 6
A
N 172. 6
A
N
161. 5 AP 164. 5 AN 167. 5 AN 170. 6 AN 173. 7 AP
162. 5 AN 165. 5 AN 168. 5,8 AN 171. 6 K 174. 7 AP
Exercises
175. 2
A
N 181. 4 C 187. 5,6
A
N 193. 6
A
N 199. 7
A
P
176. 2 AN 182. 4 C 188. 5,6 AN 194. 6 AN
a200. 8 AN
177. 3 AN 183. 4,5 AN 189. 5,6 AN 195. 6 AN
178. 3 AN 184. 5 AN 190. 5,6 AN 196. 5-7 AN
179. 4 C 185. 5 AN 191. 5,6 AN 197. 5-7 AN
180. 4 AN 186. 5,6 AN 192. 5,6 C 198. 7 AN
Completion Statements
201. 1 K 204. 2 K 207. 5 K 210. 6 K
202. 1 K 205. 2 K 208. 5 K 211. 7 K
203. 2 K 206. 5 K 209. 5 K
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
Item Type Item Type Item Type Item Type Item Type Item Type Item Type
Study Objective 1
1. TF 4. TF 39. MC 42. MC 45. MC 201. C
2. TF 5. TF 40. MC 43. MC 46. MC 202. C
3. TF 38. MC 41. MC 44. MC 47. MC
Study Objective 2
6. TF 31. TF 52. MC 57. MC 62. MC 151. MC 205. C
7. TF 48. MC 53. MC 58. MC 63. MC 175. Ex
8. TF 49. MC 54. MC 59. MC 64. MC 176. Ex
9. TF 50. MC 55. MC 60. MC 149. MC 203. C
10. TF 51. MC 56. MC 61. MC 150. MC 204. C
Study Objective 3
11. TF 14. TF 65. MC 68. MC 71. MC 178. Ex
12. TF 32. TF 66. MC 69. MC 72. MC
13. TF 33. TF 67. MC 70. MC 177. Ex
Study Objective 4
15. TF 74. MC 77. MC 80. MC 83. MC 160. BE 181. Ex
16. TF 75. MC 78. MC 81. MC 152. MC 179. Ex 182. Ex
73. MC 76. MC 79. MC 82. MC 153. MC 180. Ex 183. Ex
Adjusting the Accounts
3 – 3
SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE
Study Objective 5
17. TF 85. MC 96. MC 107. MC 118. MC 165. BE 190. Ex
18. TF 86. MC 97. MC 108. MC 119. MC 166. BE 191. Ex
19. TF 87. MC 98. MC 109. MC 120. MC 167. BE 192. Ex
20. TF 88. MC 99. MC 110. MC 121. MC 168. BE 196. Ex
21. TF 89. MC 100. MC 111. MC 122. MC 183. Ex 197. Ex
22. TF 90. MC 101. MC 112. MC 123. MC 184. Ex 206. C
23. TF 91. MC 102. MC 113. MC 154. MC 185. Ex 207. C
24. TF 92. MC 103. MC 114. MC 161. BE 186. Ex 208. C
25. TF 93. MC 104. MC 115. MC 162. BE 187. Ex 209. C
34. TF 94. MC 105. MC 116. MC 163. BE 188. Ex
84. MC 95. MC 106. MC 117. MC 164. BE 189. Ex
Study Objective 6
26. TF 128. MC 134. MC 156. MC 186. Ex 192. Ex 210. C
35. TF 129. MC 135. MC 157. MC 187. Ex 193. Ex
124. MC 130. MC 136. MC 169. BE 188. Ex 194. Ex
125. MC 131. MC 137. MC 170. BE 189. Ex 195. Ex
126. MC 132. MC 138. MC 171. BE 190. Ex 196. Ex
127. MC 133. MC 155. MC 172. BE 191. Ex 197. Ex
Study Objective 7
27. TF 140. MC 158. MC 174. BE 198. Ex
36. TF 141. MC 159. MC 196. Ex 199. Ex
139. MC 142. MC 173. BE 197. Ex 211. C
Study Objective a8
a28. TF a30. TF a143. MC a145. MC a147. MC 168. BE
a29. TF a37. TF a144. MC a146. MC a148. MC a200. Ex
Note: TF = True-False BE = Brief Exercise C = Completion
MC = Multiple Choice Ex = Exercise
The chapter also contains one set of ten Matching questions and six Short-Answer Essay
questions.
Test Bank for Accounting Principles, Eighth Edition
3 – 4
CHAPTER STUDY OBJECTIVES
1. Explain the time period assumption. The time period assumption assumes that the
economic life of a business is divided into artificial time periods.
2. Explain the accrual basis of accounting. Accrual-basis accounting means that companies
record events that change a company’s financial statements in the periods in which those
events occur, rather than in the periods in which the company receives or pays cash.
3. Explain the reasons for adjusting entries. Companies make adjusting entries at the end
of an accounting period. Such entries ensure that companies record revenues in the period
in which they are earned and that they recognize expenses in the period in which they are
incurred.
4. Identify the major types of adjusting entries. The major types of adjusting entries are
deferrals (prepaid expenses and unearned revenues) and accruals (accrued revenues and
accrued expenses).
5. Prepare adjusting entries for deferrals. Deferrals are either prepaid expenses or
unearned revenues. Companies make adjusting entries for deferrals to record the portion of
the prepayment that represents the expense incurred or the revenue earned in the current
accounting period.
6. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued
expenses. Companies make adjusting entries for accruals to record revenues earned and
expenses incurred in the current accounting period that have not been recognized through
daily entries.
7. Describe the nature and purpose of an adjusted trial balance. An adjusted trial balance
shows the balances of all accounts, including those that have been adjusted, at the end of
an accounting period. Its purpose is to prove the equality of the total debit balances and total
credit balances in the ledger after all adjustments.
a8. Prepare adjusting entries for the alternative treatment of deferrals. Companies may
initially debit prepayments to an expense account. Likewise they may credit unearned
revenues to a revenue account. At the end of the period, these accounts may be overstated.
The adjusting entries for prepaid expenses are a debit to an asset account and a credit to an
expense account. Adjusting entries for unearned revenues are a debit to a revenue account
and a credit to a liability account.
Adjusting the Accounts
3 – 5
TRUE-FALSE STATEMENTS
1. Many business transactions affect more than one time period.
2. The time period assumption states that the economic life of a business entity can be
divided into artificial time periods.
3. The time period assumption is often referred to as the matching principle.
4. A company’s calendar year and fiscal year are always the same.
5. Accounting time periods that are one year in length are referred to as interim periods.
6. Income will always be greater under the cash basis of accounting than under the accrual
basis of accounting.
7. The cash basis of accounting is not in accordance with generally accepted accounting
principles.
8. The matching principle requires that efforts be matched with accomplishments.
9. Expense recognition is tied to revenue recognition.
10. The revenue recognition principle dictates that revenue be recognized in the accounting
period in which cash is received.
11. Adjusting entries are not necessary if the trial balance debit and credit columns balances
are equal.
12. An adjusting entry always involves two balance sheet accounts.
13. Adjusting entries are often made because some business events are not recorded as they
occur.
14. Adjusting entries are recorded in the general journal but are not posted to the accounts in
the general ledger.
15. Revenue received before it is earned and expenses paid before being used or consumed
are both initially recorded as liabilities.
16. Accrued revenues are revenues which have been received but not yet earned.
17. The book value of a depreciable asset is always equal to its market value because
depreciation is a valuation technique.
18. Accumulated Depreciation is a liability account and has a credit normal account balance.
19. A liability—revenue account relationship exists with an unearned rent revenue adjusting
entry.
20. The balances of the Depreciation Expense and the Accumulated Depreciation accounts
should always be the same.
Test Bank for Accounting Principles, Eighth Edition
3 – 6
21. Unearned revenue is a prepayment that requires an adjusting entry when services are
performed.
22. Asset prepayments become expenses when they expire.
23. A contra asset account is subtracted from a related account in the balance sheet.
24. If prepaid costs are initially recorded as an asset, no adjusting entries will be required in
the future.
25. The cost of a depreciable asset less accumulated depreciation reflects the book value of
the asset.
26. Accrued revenues are revenues that have been earned and received before financial
statements have been prepared.
27. Financial statements can be prepared from the information provided by an adjusted trial
balance.
a28. The adjusting entry at the end of the period to record an expired cost may be different
depending on whether the cost was initially recorded as an asset or an expense.
a29. Rent received in advance and credited to a rent revenue account which is still unearned at
the end of the period, will require an adjusting entry crediting a liability account for the
amount still unearned.
a30. An adjusting entry requiring a credit to Insurance Expense indicates that the initial
transaction was charged to an asset account.
Additional True-False Questions
31. The matching principle requires that expenses be matched with revenues.
32. In general, adjusting entries are required each time financial statements are prepared.
33. Every adjusting entry affects one balance sheet account and one income statement
account.
34. The Accumulated Depreciation account is a contra asset account that is reported on the
balance sheet.
35. Accrued revenues are amounts recorded and received but not yet earned.
36. An adjusted trial balance should be prepared before the adjusting entries are made.
a37. When a prepaid expense is initially debited to an expense account, expenses and assets
are both overstated prior to adjustment.
Adjusting the Accounts
3 – 7
Answers to True-False Statements
Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans.
1. T 7. T 13. T 19. T 25. T 31. T a37. F
2. T 8. T 14. F 20. F 26. F 32. T
3. F 9. T 15. F 21. T 27. T 33. T
4. F 10. F 16. F 22. T
a28. T 34. T
5. F 11. F 17. F 23. T
a29. T 35. F
6. F 12. F 18. F 24. F
a30. F 36. F
MULTIPLE CHOICE QUESTIONS
38. Monthly and quarterly time periods are called
a. calender periods.
b. fiscal periods.
c. interim periods.
d. quarterly periods.
39. The time period assumption states that
a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time period.
c. adjustments to the enterprise’s accounts can only be made in the time period when
the business terminates its operations.
d. the economic life of a business can be divided into artificial time periods.
40. An accounting time period that is one year in length, but does not begin on January 1, is
referred to as
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.
41. Adjustments would not be necessary if financial statements were prepared to reflect net
income from
a. monthly operations.
b. fiscal year operations.
c. interim operations.
d. lifetime operations.
42. Management usually desires ________ financial statements and the IRS requires all
businesses to file _________ tax returns.
a. annual, annual
b. monthly, annual
c. quarterly, monthly
d. monthly, monthly
43. The time period assumption is also referred to as the
a. calendar assumption.
b. cyclicity assumption.
c. periodicity assumption.
d. fiscal assumption.
Test Bank for Accounting Principles, Eighth Edition
3 – 8
44. In general, the shorter the time period, the difficulty of making the proper adjustments to
accounts
a. is increased.
b. is decreased.
c. is unaffected.
d. depends on if there is a profit or loss.
45. Which of the following is not a common time period chosen by businesses as their
accounting period?
a. Daily
b. Monthly
c. Quarterly
d. Annually
46. Which of the following time periods would not be referred to as an interim period?
a. Monthly
b. Quarterly
c. Semi-annually
d. Annually
47. The fiscal year of a business is usually determined by
a. the IRS.
b. a lottery.
c. the business.
d. the SEC.
48. Which of the following are in accordance with generally accepted accounting principles?
a. Accrual basis accounting
b. Cash basis accounting
c. Both accrual basis and cash basis accounting
d. Neither accrual basis nor cash basis accounting
49. The revenue recognition principle dictates that revenue should be recognized in the
accounting records
a. when cash is received.
b. when it is earned.
c. at the end of the month.
d. in the period that income taxes are paid.
50. In a service-type business, revenue is considered earned
a. at the end of the month.
b. at the end of the year.
c. when the service is performed.
d. when cash is received.
51. The matching principle matches
a. customers with businesses.
b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.
Adjusting the Accounts
3 – 9
52. Ken’s Tune-up Shop follows the revenue recognition principle. Ken services a car on July
31. The customer picks up the vehicle on August 1 and mails the payment to Ken on
August 5. Ken receives the check in the mail on August 6. When should Ken show that
the revenue was earned?
a. July 31
b. August 1
c. August 5
d. August 6
53. A company spends $10 million dollars for an office building. Over what period should the
cost be written off?
a. When the $10 million is expended in cash
b. All in the first year
c. Over the useful life of the building
d. After $10 million in revenue is earned
54. The matching principle states that expenses should be matched with revenues. Another
way of stating the principle is to say that
a. assets should be matched with liabilities.
b. efforts should be matched with accomplishments.
c. owner withdrawals should be matched with owner contributions.
d. cash payments should be matched with cash receipts.
55. A dress shop makes a large sale for $1,000 on November 30. The customer is sent a
statement on December 5 and a check is received on December 10. The dress shop
follows GAAP and applies the revenue recognition principle. When is the $1,000
considered to be earned?
a. December 5
b. December 10
c. November 30
d. December 1
56. A furniture factory’s employees work overtime to finish an order that is sold on February
28. The office sends a statement to the customer in early March and payment is received
by mid-March. The overtime wages should be expensed in
a. February.
b. March.
c. the period when the workers receive their checks.
d. either in February or March depending on when the pay period ends.
57. Expenses sometimes make their contribution to revenue in a different period than when
the expense is paid. When wages are incurred in one period and paid in the next period,
this often leads to which account appearing on the balance sheet at the end of the time
period?
a. Due from Employees
b. Due to Employer
c. Wages Payable
d. Wages Expense
Test Bank for Accounting Principles, Eighth Edition
3 – 10
58. Under accrual-basis accounting
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company’s financial statements are recognized in the period they
occur rather than in the period in which cash is paid or received.
d. the ledger accounts must be adjusted to reflect a cash basis of accounting before
financial statements are prepared under generally accepted accounting principles.
59. Adjusting entries are required
a. yearly.
b. quarterly.
c. monthly.
d. every time financial statements are prepared.
60. Which is not an application of revenue recognition?
a. Recording revenue as an adjusting entry on the last day of the accounting period.
b. Accepting cash from an established customer for services to be performed over the
next three months.
c. Billing customers on June 30 for services completed during June.
d. Receiving cash for services performed.
61. Which statement is correct?
a. As long as a company consistently uses the cash basis of accounting, generally
accepted accounting principles allow its use.
b. The use of the cash basis of accounting violates both the revenue recognition and
matching principles.
c. The cash basis of accounting is objective because no one can be certain of the
amount of revenue until the cash is received.
d. As long as management is ethical, there are no problems with using the cash basis of
accounting.
62. The following is selected information from J Corporation for the fiscal year ending October
31, 2008.
Cash received from customers $300,000
Revenue earned 350,000
Cash paid for expenses 170,000
Cash paid for computers on November 1, 2007 that will be used
for 3 years (annual depreciation is $16,000) 48,000
Expenses incurred, not including any depreciation 200,000
Proceeds from a bank loan, part of which was used to pay for
the computers 100,000
Based on the accrual basis of accounting, what is J Corporation’s net income for the year
ending October 31, 2008?
a. $114,000
b. $134,000
c. $82,000
d. $150,000
Adjusting the Accounts
3 – 11
Use the following information for questions 63–64.
Sheepskin Company had the following transactions during 2008.
• Sales of $4,500 on account
• Collected $2,000 for services to be performed in 2009
• Paid $625 cash in salaries
• Purchased airline tickets for $250 in December for a trip to take place in 2009
63. What is Sheepskin’s 2008 net income using accrual accounting?
a. $3,875
b. $5,875
c. $5,625
d. $3,625
64. What is Sheepskin’s 2008 net income using cash basis accounting?
a. $5,875
b. $1,375
c. $5,625
d. $1,125
65. Adjusting entries are required
a. because some costs expire with the passage of time and have not yet been
journalized.
b. when the company’s profits are below the budget.
c. when expenses are recorded in the period in which they are incurred.
d. when revenues are recorded in the period in which they are earned.
66. A small company may be able to justify using a cash basis of accounting if they have
a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.
67. Which one of the following is not a justification for adjusting entries?
a. Adjusting entries are necessary to ensure that revenue recognition principles are
followed.
b. Adjusting entries are necessary to ensure that the matching principle is followed.
c. Adjusting entries are necessary to enable financial statements to be in conformity with
GAAP.
d. Adjusting entries are necessary to bring the general ledger accounts in line with the
budget.
68. An adjusting entry
a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account.
d. is always a compound entry.
Test Bank for Accounting Principles, Eighth Edition
3 – 12
69. The preparation of adjusting entries is
a. straight forward because the accounts that need adjustment will be out of balance.
b. often an involved process requiring the skills of a professional.
c. only required for accounts that do not have a normal balance.
d. optional when financial statements are prepared.
70. If a resource has been consumed but a bill has not been received at the end of the
accounting period, then
a. an expense should be recorded when the bill is received.
b. an expense should be recorded when the cash is paid out.
c. an adjusting entry should be made recognizing the expense.
d. it is optional whether to record the expense before the bill is received.
71. Accounts often need to be adjusted because
a. there are never enough accounts to record all the transactions.
b. many transactions affect more than one time period.
c. there are always errors made in recording transactions.
d. management can’t decide what they want to report.
72. Adjusting entries are
a. not necessary if the accounting system is operating properly.
b. usually required before financial statements are prepared.
c. made whenever management desires to change an account balance.
d. made to balance sheet accounts only.
