Chapter 2 Review of the Accounting Process
60. Permanent accounts would not include:
a. Interest expense.
b. Salaries and wages payable.
c. Prepaid rent.
d. Deferred revenues.
61. Permanent accounts would not include:
a. Cost of goods sold.
b. Inventory.
c. Current liabilities.
d. Accumulated depreciation.
62. The purpose of closing entries is to transfer:
a. Accounts receivable to retained earnings when an account is fully paid.
b. Balances in temporary accounts to a permanent account.
c. Inventory to cost of goods sold when merchandise is sold.
d. Assets and liabilities when operations are discontinued.
Chapter 2 Review of the Accounting Process
63. Temporary accounts would not include:
a. Salaries payable.
b. Depreciation expense.
c. Supplies expense.
d. Cost of goods sold.
64. When converting an income statement from a cash basis to an accrual basis, expenses:
a. Exceed cash payments to suppliers.
b. Equal cash payments to suppliers.
c. Are less than cash payments to suppliers.
d. May exceed or be less than cash payments to suppliers.
65. When the amount of revenue collected in advance decreases during an accounting period:
a. Accrual-basis revenues exceed cash collections from customers.
b. Accrual-basis net income exceeds cash-basis net income.
c. Accrual-basis revenues are less than cash collections from customers.
d. Accrual-basis net income is less than cash-basis net income.
66. When converting an income statement from a cash basis to an accrual basis, which of the
following is incorrect?
a. An adjustment for depreciation reduces net income.
b. A decrease in salaries payable decreases net income.
c. A reduction in prepaid expenses decreases net income.
d. An increase in accrued payables decreases net income.
Chapter 2 Review of the Accounting Process
67. Molly’s Auto Detailers maintains its records on the cash basis. During 2016, Molly’s collected
$72,000 from customers and paid $21,000 in expenses. Depreciation expense of $5,000 would
have been recorded on the accrual basis. Over the course of the year, accounts receivable
increased $4,000, prepaid expenses decreased $2,000, and accrued liabilities decreased
$1,000. Molly’s accrual basis net income was:
a. $38,000.
b. $54,000.
c. $49,000.
d. $42,000.
68. Pat’s Custom Tuxedo Shop maintains its records on the cash basis. During this past year Pat’s
collected $42,000 in tailoring fees, and paid $14,000 in expenses. Depreciation expense
totaled $2,000. Accounts receivable increased $1,500, supplies increased $4,000, and accrued
liabilities increased $2,500. Pat’s accrual basis net income was:
a. $18,000.
b. $34,000.
c. $23,000.
d. $29,000.
69. The Hamada Company sales for 2016 totaled $150,000 and purchases totaled $95,000.
Selected January 1, 2016, balances were: accounts receivable, $18,000; inventory, $14,000;
and accounts payable, $12,000. December 31, 2016, balances were: accounts receivable,
$16,000; inventory, $15,000; and accounts payable, $13,000. Net cash flows from these
activities were:
a. $45,000.
b. $55,000.
c. $58,000.
d. $74,000.
70. When the amount of interest receivable decreases during an accounting period:
a. Accrual-basis interest revenues exceed cash collections from borrowers.
b. Accrual-basis net income exceeds cash-basis net income.
c. Accrual-basis interest revenues are less than cash collections from borrowers.
d. Accrual-basis net income is less than cash-basis net income.
Chapter 2 Review of the Accounting Process
71. When converting an income statement from a cash basis to an accrual basis, cash received for
services:
a. Exceed service revenue.
b. May exceed or be less than service revenue.
c. Is less than service revenue.
d. Equals service revenue.
72. Compared to the accrual basis of accounting, the cash basis of accounting produces a higher
amount of income by the net decrease during the accounting period of:
Accounts Receivable Accrued Liabilities
a. Yes No
b. No Yes
c. Yes Yes
d. No No
Chapter 2 Review of the Accounting Process
73. On June 1, Royal Corp. began operating a service company with an initial cash investment by
shareholders of $2,000,000. The company provided $6,400,000 of services in June and
received full payment in July. Royal also incurred expenses of $3,000,000 in June that were
paid in August. During June, Royal paid its shareholders cash dividends of $1,000,000. What
was the company’s income before income taxes for the two months ended July 31 under the
following methods of accounting?
Cash Basis Accrual Basis
a. $3,400,000 $3,400,000
b. $5,400,000 $2,400,000
c. $6,400,000 $3,400,000
d. $6,400,000 $2,400,000
Chapter 2 Review of the Accounting Process
74. When Castle Corporation pays insurance premiums, the transaction is recorded as a debit to
prepaid insurance. Additional information for the year ended December 31 is as follows:
Prepaid insurance at January 1 $52,500
Insurance expense recognized
during the year 218,750
Prepaid insurance at December 31 61,250
What was the total amount of cash paid by Castle for insurance premiums during the year?
a. $218,750
b. $166,250
c. $210,000
d. $227,500
Chapter 2 Review of the Accounting Process
Matching Pair Questions
75. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
Number for term that
matches the phrase.
1. Prepayments
Assets or liabilities created when recognition
precedes cash flows.
____
2. Post-closing trial balance
Assets or liabilities created when cash flows
precede recognition.
____
3. Accruals
A list of accounts and balances containing the
source data for preparation of financial
statements.
____
4. Unadjusted trial balance
A list of accounts and their balances prepared
before the effects of internal transactions are
recorded.
____
5. Adjusted trial balance
A list of only permanent accounts and their
balances prepared to show that the accounting
equation is in balance.
____
Answer:
1. Prepayments
Assets or liabilities created when recognition
precedes cash flows.
3. Accruals
A list of accounts and balances containing the
source data for preparation of financial
statements.
4. Unadjusted trial balance
A list of accounts and their balances prepared
recorded.
5. Adjusted trial balance
A list of only permanent accounts and their
balances prepared to show that the accounting
equation is in balance.
Chapter 2 Review of the Accounting Process
76. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
Number for term
that matches the
phrase.
1. Balance sheet
Reports operating, investing, and financing
activities.
____
2. Adjusting entries
Records internal transactions not previously
reported.
____
3. Expenses
Portrays financial position at a point in time.
____
4. Statement of cash flows
Represents outflows of resources incurred to
generate revenues.
____
5. Post-closing trial balance
The last step in the accounting processing
cycle.
____
Answer:
1. Balance sheet
Reports operating, investing, and financing
activities.
3. Expenses
Portrays financial position at a point in time.
4. Statement of cash flows
Represents outflows of resources incurred to
5. Post-closing trial balance
The last step in the accounting processing
cycle.
Chapter 2 Review of the Accounting Process
77. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
Number for term
that matches the
phrase.
1. Periodic system
Recorded when there are dispositions of assets for
consideration in excess of book
values.
____
2. Prepayments
Recorded when there are dispositions of assets for
consideration less than book values.
____
3. Perpetual system
Requires adjusting entries to update the inventory
account.
____
4. Losses
Requires entries to cost of goods sold account when
merchandise is sold.
____
5. Gains
When cash flow precedes either expense or revenue
recognition.
____
TERM
PHRASE
2. Prepayments
Recorded when there are dispositions of assets for
consideration less than book values.
3. Perpetual system
Requires adjusting entries to update the inventory
account.
4. Losses
Requires entries to cost of goods sold account when
5. Gains
When cash flow precedes either expense or revenue
recognition.
Chapter 2 Review of the Accounting Process
78. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
Number for term
that matches the
phrase.
1. General ledger
Refers to the right side of an account.
____
2. Credit
Asset and expense accounts normally have this type of
balance.
____
3. General journal
Used to record any type of transaction in chronological
order.
____
4. Debit
Contains all the accounts of an entity.
____
5. Closing entries
Used to reset temporary accounts to a zero balance.
____
Answer:
1. General ledger
Refers to the right side of an account.
2. Credit
Asset and expense accounts normally have this type of
balance.
order.
4. Debit
Contains all the accounts of an entity.
5. Closing entries
Used to reset temporary accounts to a zero balance.
Chapter 2 Review of the Accounting Process
79. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
Number for term
that matches the
phrase.
1. Liabilities
Transfer balances from journals to ledgers.
____
2. Retained earnings
Record chronologically the effects of transactions in
debit/credit form.
____
3. Journalize
Refers to nonowner claims against the assets of a
firm.
____
4. Post
Represents the cumulative amount of net income, less
distributions to shareholders.
____
5. Special journals
Used to record repetitive types of transactions.
____
Answer:
1. Liabilities
Transfer balances from journals to ledgers.
2. Retained earnings
Record chronologically the effects of transactions in
debit/credit form.
3. Journalize
Refers to nonowner claims against the assets of a
firm.
4. Post
Represents the cumulative amount of net income, less
distributions to shareholders.
5. Special journals
Used to record repetitive types of transactions.
Chapter 2 Review of the Accounting Process
80. Listed below are five terms followed by a list of phrases that describe or characterize each of
the terms. Match each phrase with the number for the correct term.
TERM
PHRASE
Number for term
that matches the
phrase.
1. Source documents
Refers to inflows of assets from the sale of goods
and services.
____
2. Revenues
Used to identify external transactions.
____
3. Transaction analysis
Used to record repetitive types of transactions.
____
4. Deferred revenues
Liabilities created by a customer’s prepayment.
____
5. Special journals
Determines the effects of an event in terms of the
accounting equation.
____
1. Source documents
Refers to inflows of assets from the sale of goods
and services.
2. Revenues
Used to identify external transactions.
3. Transaction analysis
Used to record repetitive types of transactions.
4. Deferred revenues
Liabilities created by a customer’s prepayment.
5. Special journals
Determines the effects of an event in terms of the
accounting equation.
Chapter 2 Review of the Accounting Process
81. Listed below are 10 terms followed by a list of phrases that describe or characterize the terms.
Match each phrase with the number for the correct term.
TERM
PHRASE
Number for term
that matches the
phrase.
1. Unadjusted trial
balance
Refers to inflows of assets from the sale of goods
and services.
____
2. Accrued receivables
Records the effects of internal transactions.
____
3. Deferred revenues
Cash received from a customer in advance of
providing a good or service.
____
4. Temporary accounts
Last step in the accounting processing cycle.
____
5. Accrued liabilities
Changes in the retained earnings component of
shareholders’ equity.
____
6. Adjusting entries
Collection of storage areas, called accounts.
____
7. Prepaid expense
Asset recorded when an expense is paid for in
advance.
____
8. General ledger
Revenue earned before cash is received.
____
9. Revenues
A list of the general ledger accounts and their
balances.
____
10. Post-closing trial
balance
Expenses incurred but not yet paid.
____
Answer:
Number for term
that matches the
1. Unadjusted trial
balance
Refers to inflows of assets from the sale of goods
and services.
2. Accrued receivables
Records the effects of internal transactions.
3. Deferred revenues
Cash received from a customer in advance of
providing a good or service.
4. Temporary accounts
Last step in the accounting processing cycle.
5. Accrued liabilities
Changes in the retained earnings component of
shareholders’ equity.
6. Adjusting entries
Collection of storage areas, called accounts.
7. Prepaid expense
Asset recorded when an expense is paid for in
advance.
8. General ledger
Revenue earned before cash is received.
9. Revenues
A list of the general ledger accounts and their
balances.
10. Post-closing trial
balance
Expenses incurred but not yet paid.
Chapter 2 Review of the Accounting Process
Chapter 2 Review of the Accounting Process
Problems
Use the following to answer questions 82–93:
Below is a list of accounts in no particular order. Assume that all accounts have normal balances.
Required: In column A, indicate whether a debit will:
1. Increase the account balance, or
2. Decrease the account balance.
In column B, classify each account according to the following scheme. For contra accounts, indicate
the classification of the account to which it relates.
1. A current asset in the balance sheet.
2. A noncurrent asset in the balance sheet.
3. A current liability in the balance sheet.
4. A long-term liability in the balance sheet.
5. A permanent equity account in the balance sheet.
6. A revenue account in the income statement.
7. An expense account shown in the income statement.
8. Account does not appear in either the balance sheet or the income statement.
A
B
Effect of a
Classification
debit on account
EXAMPLE: Advertising expense
1
7
Chapter 2 Review of the Accounting Process
82. Buildings and equipment (B&E)
83. Short-term notes payable
84. Cost of goods sold
85. Accounts receivable
86. Inventory
87. Deferred revenues
88. Property taxes payable
89. Retained earnings
90. Interest revenue
91. Supplies expense
92. Prepaid rent
93. Capital stock
