Financial and Managerial Accounting, 8e (Wild)
Chapter 3 Adjusting Accounts for Financial Statements
1) A company’s fiscal year must correspond with the calendar year.
2) The time period assumption assumes that an organization’s activities can be divided into
specific time periods such as months, quarters, or years.
3) Interim financial statements report a company’s business activities for a one-year period.
4) A fiscal year refers to an organization’s accounting period that spans twelve consecutive
months or 52 weeks.
5) Adjusting entries are made after the preparation of financial statements.
6) Adjusting entries result in a better matching of revenues and expenses for the period.
7) Two main accounting principles used in accrual accounting are expense recognition and full
closure.
8) Adjusting entries are necessary so that asset, liability, revenue, and expense account balances
are correctly reported.
9) The expense recognition (matching) principle does not aim to record expenses in the same
accounting period as the revenue earned as a result of these expenses.
10) The revenue recognition principle is the basis for making adjusting entries that pertain to
unearned and accrued revenues.
11) The cash basis of accounting commonly increases the comparability of financial statements
from period to period.
12) Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and
accrued items.
13) Since the revenue recognition principle requires that revenues be recorded when earned,
there are no unearned revenues in accrual accounting.
14) The expense recognition (matching) principle requires that expenses get recorded in the same
accounting period as the revenues that are earned as a result of the expenses, not necessarily
when cash is paid.
15) The cash basis of accounting is a system in which revenues are recorded when earned and
expenses are recorded when incurred.
16) The cash basis of accounting recognizes revenues when cash payments from customers are
received.
17) The accrual basis of accounting recognizes revenues when cash is received from customers,
regardless of when the goods or services are provided.
18) The accrual basis of accounting recognizes expenses when cash is paid.
19) Recording revenues early overstates current-period income; recording revenues late
understates current period income.
20) Recording expenses early overstates current-period income; recording expenses late
understates current period income.
21) Prior to recording adjusting entries at the end of an accounting period, some accounts may
not show correct balances even though all transactions were properly recorded.
22) A company paid $9,000 for a twelve-month insurance policy on February 1. The policy
coverage began on February 1. On February 28, $750 of insurance expense must be recorded.
23) On October 15, a company received $15,000 cash as a down payment on a consulting
contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the
services required by the contract were completed. The company will record consulting revenue
of $1,500 from this contract for October.
24) The accrual basis of accounting reflects the principle that revenue is recorded when it is
earned, not when cash is received.
25) The accrual basis of accounting requires adjustments to recognize revenues in the periods
they are earned and to match expenses with revenues.
26) Adjusting entries are designed primarily to correct accounting errors.
27) Adjustments are necessary to bring an asset or liability account to its proper amount and also
update a related expense or revenue account.
28) Each adjusting entry will affect a balance sheet account.
29) Adjusting entries always affect the cash account.
30) Accrued expenses at the end of one accounting period are expected to result in cash
payments in a future period.
31) Accrued revenues at the end of one accounting period are expected to result in cash receipts
in a future period.
32) Each adjusting entry affects one or more income statement account, one or more balance
sheet account, and never cash.
33) Accrued expenses reflect transactions where cash is paid before a related expense is
recognized.
34) Under the accrual basis of accounting, adjustments are often made for prepaid expenses and
unearned revenues.
35) The entry to record a cash receipt from a customer when the service is to be provided in a
future period involves a debit to an unearned revenue account.
36) Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses.
37) An adjusting entry often includes an entry to Cash.
38) Before an adjusting entry is made to recognize the cost of expired insurance for the period,
Prepaid Insurance and Insurance Expense are both overstated.
39) Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries
Payable are both understated.
40) Failure to record depreciation expense will overstate assets and understate expenses.
41) A company’s month-end adjusting entry for Insurance Expense is $1,000. If this entry is not
made then expenses are understated by $1,000 and net income is overstated by $1,000.
42) Profit margin can also be called return on sales.
43) Profit margin measures the relation of debt to assets.
44) Profit margin reflects the percent of profit in each dollar of revenue.
45) Profit margin is calculated by dividing net sales by net income.
46) Truman had total assets of $149,501,000, net income of $6,276,090, and net sales of
$209,203,000. Its profit margin was 3%.
47) A contra account is an account linked with another account; it is added to that account to
show the proper amount for the item recorded in the associated account.
48) If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year
of rent in advance (lease beginning January 1), and adjusting entries are made at the end of each
month, the balance remaining in Prepaid Rent on December 1 should be $1,500.
49) Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its
related asset.
50) A salary owed to employees is an example of an accrued expense.
51) In accrual accounting, accrued revenues are recorded as liabilities.
52) Depreciation expense is an example of an accrued expense.
53) Earned but unrecorded revenues are recorded during the adjusting process with a credit to a
revenue account and a debit to an expense account.
54) Depreciation expense for a period is the portion of a plant asset’s cost that is allocated to that
period.
55) All plant assets, including land, are depreciated.
56) Net income for a period will be understated if accrued revenues are not recorded at the end of
the accounting period.
57) Depreciation measures the decline in market value of an asset.
58) A company owes its employees $5,000 for the year ended December 31. It will pay
employees on January 6 for the previous two weeks’ salaries. The year-end adjusting entry on
December 31 will include a debit to Salaries Expense and a credit to Cash.
59) A company had no supplies available at the beginning of August. A company purchased
$6,000 worth of supplies in August and recorded the purchase in the Supplies account. On
August 31, the fiscal year-end, the physical count of supplies indicates the cost of unused
supplies is $3,200. The adjusting entry would include a $2,800 debit to Supplies.
60) A company performs 20 days of work on a 30-day contract before the end of the year. The
total contract is valued at $6,000 and payment is not due until the contract is fully completed.
The required adjusting entry includes a $4,000 debit to Unearned Revenue.
61) A company performs 20 days of work on a 30-day contract before the end of the year. The
total contract is valued at $6,000, with payment received in advance. The $6,000 cash receipt
was initially recorded as Unearned Revenue. The required adjusting entry includes a $4,000
debit to Unearned Revenue.
62) A company entered into a 2-month contract for $50,000 on April 1. It earned $25,000 of the
contract services in April and billed the customer. The company should recognize the revenue
when it receives the customer’s check.
63) The adjusted trial balance must be prepared before the adjusting entries are made.
64) An unadjusted trial balance is a list of accounts and balances prepared before adjustments are
recorded.
65) Financial statements can be prepared directly from the information in the adjusted trial
balance.
66) Asset and liability balances are transferred from the adjusted trial balance to the income
statement.
67) Asset and liability balances are transferred from the adjusted trial balance to the balance
sheet.
68) Revenue and expense balances are transferred from the adjusted trial balance to the income
statement.
69) In preparing statements from the adjusted trial balance, the balance sheet must be prepared
first.
70) It is acceptable to record prepayment of expenses as debits to expense accounts if an
adjusting entry is made at the end of the period to bring the asset account balance to the correct
unused or unexpired amount.
71) It is acceptable to record cash received in advance of providing products or services to
revenue accounts if an adjusting entry is made at the end of the period to bring the liability
account balance to the correct unearned amount.
72) Accounts that appear in the balance sheet are often called temporary (nominal) accounts.
73) Income Summary is a temporary account only used for the closing process.