978-1337276337 Test Bank Chapter 4 Part 1

Chapter 4

Page 1

True / False

1. Recognition is the process of formally recording or incorporating an item into the financial statements.

a. True

b. False

2. The unit of measure in Japan is the U.S. dollar.

a. True

b. False

3. When initially recording the cost of land purchased, most companies use the cost of the land at the time it is purchased.

a. True

b. False

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4. Because of its objective nature, historical cost is the attribute used to measure many of the assets recognized on the

balance sheet.

a. True

b. False

5. The accounting profession is currently experimenting with financial statements adjusted for the changing value of the

dollar since inflation is increasing.

a. True

b. False

6. The process of recording an item in the financial statements is called measurement.

a. True

b. False

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7. The amount of cash that could be received by selling an asset currently is called historical cost.

a. True

b. False

8. Under the accrual method, expenses are recognized when revenue is earned.

a. True

b. False

9. The statement of cash flows reflects the revenues actually earned by the business, regardless of whether cash has been

collected.

a. True

b. False

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10. When a company recognizes the portion of supplies used during a year, the effect is to decrease net income.

a. True

b. False

11. All financial statements are prepared using the accrual basis of accounting.

a. True

b. False

12. The justification for the accrual basis of accounting lies in the needs of financial statement users for periodic

information on the financial position and the profitability of the entity.

a. True

b. False

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13. Most companies use the cash basis of accounting.

a. True

b. False

14. The income statement tells the reader about the actual cash inflows during a period of time.

a. True

b. False

15. The revenue recognition principle does not pertain to situations where revenue is recognized over time such as long-

term contracts, franchises, commodities, and installment sales.

a. True

b. False

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16. Revenue is always earned continuously over time.

a. True

b. False

17. The revenue recognition principle involves two factors: paid and incurred.

a. True

b. False

18. An asset is always involved when revenue is recognized.

a. True

b. False

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19. The recognition of revenue may result from the settlement of a liability rather than from the acquisition of an asset.

a. True

b. False

20. Expired costs are called assets.

a. True

b. False

21. Three months before year-end, Billings Company signed a $100,000, 12%, six-month note. Principal and interest will

be paid at maturity. No interest should be accrued at year-end because the company has no obligation to pay the interest

until the note matures.

a. True

b. False

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22. Costs incurred for purchases of merchandise result in an asset, Merchandise Inventory, and are eventually matched

with revenue at the time the product is sold.

a. True

b. False

23. Matching can occur directly (like cost of goods sold), indirectly (like plant assets), or immediately when no future

benefits from the cost are expected.

a. True

b. False

24. Conceptually, anytime a cost is incurred, an asset is acquired.

a. True

b. False

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25. A cost can be an asset or expense depending on whether the future economic benefits have expired or not.

a. True

b. False

26. One effect of recognizing depreciation is a decrease in net income.

a. True

b. False

27. A company that forgets to recognize depreciation for the year overstates its income and assets.

a. True

b. False

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28. An entry that includes the Cash account is probably an adjustment.

a. True

b. False

29. Every company prepares only four adjustments—one for each of the four types of adjustments.

a. True

b. False

30. When cash is paid before an expense is incurred, an accrual is necessary.

a. True

b. False

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31. The amount of interest accrued is added to the Note Payable account and reported in the Liabilities section of the

balance sheet.

a. True

b. False

32. Accumulated depreciation is increased when depreciation is recognized.

a. True

b. False

33. Adjustments are recorded for all transactions involving outside entities.

a. True

b. False

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34. When revenue is earned before the receipt of cash, an adjustment that increases a receivable and decreases a liability

account is recorded.

a. True

b. False

35. Every adjustment involves at least one income statement and one balance sheet account.

a. True

b. False

36. When an expense is incurred prior to the payment of cash for that expense, an adjustment that increases an expense

account and decreases an asset is prepared.

a. True

b. False

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37. The balance in the account, Rent Collected in Advance, is reported as an asset on the balance sheet of the landlord.

a. True

b. False

38. While most companies make adjustments and prepare statements monthly, companies complete the accounting cycle

only once per year.

a. True

b. False

39. Accountants often prepare work sheets at the end of an accounting period in place of financial statements.

a. True

b. False

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40. Financial statements should be prepared before any adjustments are made.

a. True

b. False

41. Interim financial statements are prepared annually.

a. True

b. False

42. Adjustments are recorded at the end of each accounting period so that net income is accurately reflected in the

financial statements for the period.

a. True

b. False

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43. Balance sheet accounts are called real accounts.

a. True

b. False

44. Expense accounts are closed or zeroed out in the closing process.

a. True

b. False

45. Closing entries serve two important purposes: (1) to return the balances in all temporary or nominal accounts to zero

to start the next accounting period and (2) to transfer the net income (or net loss) and the dividends of the period to the

Retained Earnings account.

a. True

b. False

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Multiple Choice

46. Measurement of the economic effects on an entity involves each of the following except

a. quantification of effects.

b. identification of the attribute to be measured.

c. selection of an appropriate unit of measure.

d. recording the economic effects in the financial statements.

47. The selection of historical cost over current value as the attribute to be measured for assets is an example of the trade-

off of

a. reliability over relevance.

b. costs over benefit.

c. comparability over consistency.

d. understandability over verifiability.

48. An accountant describes the effects of an economic event on an entity by recording the transaction and reporting the

amount on the financial statements. What is this called?

a. Measurement

b. Recognition

c. Disclosure

d. Matching

49. A decline in purchasing power is evidenced by all of the following except

a. inflation.

b. a continuing rise in the general level of prices in an economy.

c. buying the same amount of goods or services for a higher price a year later.

d. current value is equal to historical cost.

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50. Which of the following is the attribute used to measure many assets that are recognized on a balance sheet, because it

is more objective and verifiable?

a. Market value

b. Historical cost

c. Liquidation value

d. Current replacement cost

51. Why is the use of the U.S. dollar as a unit of measure for financial statement data in the United States widely

accepted?

a. The U.S. dollar remains stable over a long period of time.

b. The U.S. dollar is universally recognized as a reliable financial measure.

c. The U.S. dollar is the medium of monetary exchange in the United States.

d. The U.S. dollar is required for financial statement presentation by the FASB and SEC.

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52. Which one of the following statements is true?

a. Recognition is concerned with the dollar amount of each economic effect that should be reported in the financial

statements.

b. Measurement is concerned with how economic effects should be quantified.

c. The stability concept is concerned with identification of the specific entity for which economic effects are to be

recognized and measured.

d. The monetary unit assumption is concerned with the valuation of economic effects in terms of current purchasing

power.

53. Sally’s Choice sells season memberships for $200 each. During January 2017, 60 season memberships were sold. As

of March 31, 2017, $3,000 of season membership fees had been collected from customers. The season runs for four

months starting March 1, 2017. Which one of the following is an amount reported on the financial statements for the

period ending March 31, 2017?

a. Unearned membership revenue of $3,000

b. Unearned membership revenue of $9,000

c. Accounts receivable of $3,000

d. Membership revenue of $9,000

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54. Fox Auto sold merchandise to a customer for $3,000 on credit on March 10. The customer paid Fox Auto the amount

due on March 31. Under the accrual basis of accounting, which of the following statements is true?

a. Fox Auto will recognize the revenue on March 31.

b. The March 10 transaction increases revenue, but has no effect on assets because cash has not been received.

c. Revenue is recognized after the cost of the merchandise sold has been paid by Fox Auto.

d. The March 31 transaction has no effect on total assets under the accrual basis.

55. Alexander City Consultants started business on January 1, 2017, and immediately purchased $1,000 of supplies on

credit to use in the business. At the end of the month, 25% of the supplies remain unpaid and 20% are still on hand. What

amounts should appear on the financial statements for January 2017?

Income Statement Statement of Cash Flows

a.

$ 1,000 $ 1,000

b.

$ 1,000 $ 750

c.

$ 800 $ 25

d.

$ 800 $ 750

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56. During December, Horn Inc. purchased $800 of supplies on account for use in its business. At the end of December,

20% of the supplies were still on hand, but only 75% had been paid. What amounts will appear on the company’s balance

sheet on December 31?

Supplies on Hand Accounts Payable

a.

$800 $600

b.

$160 $200

c.

$640 $200

d.

$160 $800

57. Camp Consulting Services started business on January 1, 2017. Camp performed services for customers totaling

$100,000 of which 40% remain uncollected at the end of December. Under the accrual basis, what amounts would appear

on Camp Consulting’s financial statements for 2017?

Income Statement Statement of Cash Flows

a.

$100,000 $60,000

b.

$100,000 $100,000

c.

$60,000 $60,000

d.

$60,000 $100,000