72. The 12-month period that ends when a company’s sales activities are at their lowest level
is called the:
A. Fiscal year.
B. Calendar year.
C. Natural business year.
D. Accounting period.
E. Interim period.
73. The length of time covered by a set of periodic financial statements is referred to as the:
A. Fiscal cycle.
B. Natural business year.
C. Accounting period.
D. Business cycle.
E. Operating cycle.
74. The accounting principle that requires revenue to be recorded when earned is the:
A. Matching principle.
B. Revenue recognition principle.
C. Time period assumption.
D. Accrual reporting principle.
E. Going-concern assumption.
75. Adjusting entries:
A. Affect only income statement accounts.
B. Affect only balance sheet accounts.
C. Affect both income statement and balance sheet accounts.
D. Affect only cash flow statement accounts.
E. Affect only equity accounts.
76. The main purpose of adjusting entries is to:
A. Record external transactions and events.
B. Record internal transactions and events.
C. Recognize assets purchased during the period.
D. Recognize debts paid during the period.
E. Correct errors.
77. The broad principle that requires expenses to be reported in the same period as the
revenues that were earned as a result of the expenses is the:
A. Recognition principle.
B. Cost principle.
C. Cash basis of accounting.
D. Matching principle.
E. Time period principle.
78. The system of preparing financial statements based on recognizing revenues when the
cash is received and reporting expenses when the cash is paid is called:
A. Accrual basis accounting.
B. Operating cycle accounting.
C. Cash basis accounting.
D. Revenue recognition accounting.
E. Current basis accounting.
79. Adjusting entries made at the end of an accounting period accomplish all of the following
except:
A. Updating liability and asset accounts to their proper balances.
B. Assigning revenues to the periods in which they are earned.
C. Assigning expenses to the periods in which they are incurred.
D. Assuring that financial statements reflect the revenues earned and the expenses incurred.
E. Assuring that external transaction amounts remain unchanged.
80. The approach to preparing financial statements based on recognizing revenues when they
are earned and matching expenses to those revenues is:
A. Cash basis accounting.
B. The matching principle.
C. The time period assumption.
D. Accrual basis accounting.
E. Revenue basis accounting.
81. Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued
revenues are all examples of:
A. Items that require contra accounts.
B. Items that require adjusting entries.
C. Asset and equity.
D. Asset accounts.
E. Income statement accounts.
82. The accrual basis of accounting:
A. Is generally accepted for external reporting because it is more useful than cash basis for
most business decisions.
B. Is flawed because it gives complete information about cash flows.
C. Recognizes revenues when received in cash.
D. Recognizes expenses when paid in cash.
E. Eliminates the need for adjusting entries at the end of each period.
83. Which of the following statements is incorrect?
A. Adjustments to prepaid expenses, depreciation, and unearned revenues involve previously
recorded assets and liabilities.
B. Accrued expenses and accrued revenues involve assets and liabilities that had not
previously been recorded.
C. Adjusting entries can be used to record both accrued expenses and accrued revenues.
D. Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to
record the effects of the passage of time.
E. Adjusting entries affect the cash account.
84. An adjusting entry could be made for each of the following except:
A. Prepaid expenses.
B. Depreciation.
C. Owner withdrawals.
D. Unearned revenues.
E. Accrued revenues.
85. A company made no adjusting entry for accrued and unpaid employee wages of $28,000
on December 31. This oversight would:
A. Understate net income by $28,000.
B. Overstate net income by $28,000.
C. Have no effect on net income.
D. Overstate assets by $28,000.
E. Understate assets by $28,000.
86. If a company mistakenly forgot to record depreciation on office equipment at the end of
an accounting period, the financial statements prepared at that time would show:
A. Assets overstated and equity understated.
B. Assets and equity both understated.
C. Assets overstated, net income understated, and equity overstated.
D. Assets, net income, and equity understated.
E. Assets, net income, and equity overstated.
87. If a company failed to make the end-of-period adjustment to remove from the Unearned
Management Fees account the amount of management fees that were earned, this omission
would cause:
A. An overstatement of net income.
B. An overstatement of assets.
C. An overstatement of liabilities.
D. An overstatement of equity.
E. An understatement of liabilities.
88. A company records the fees for legal services paid in advance by its clients in an account
called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to
record the portion of these fees that has been earned, one effect will be:
A. An overstatement of equity.
B. An understatement of equity.
C. An understatement of assets.
D. An understatement of liabilities.
E. An overstatement of assets.
89. Profit margin is defined as:
A. Revenues divided by net sales.
B. Net sales divided by assets.
C. Net income divided by net sales.
D. Net income divided by assets.
E. Net sales divided by net income.
90. A company earned $2,000 in net income for October. Its net sales for October were
$10,000. Its profit margin is:
A. 2%.
B. 20%.
C. 200%.
D. 500%.
E. $8,000.
91. All of the following statements regarding profit margin are true except:
A. Profit margin reflects the percent of profit in each dollar of revenue.
B. Profit margin is also called return on sales.
C. Profit margin can be used to compare a firm’s performance to its competitors.
D. Profit margin is calculated by dividing net income by net sales.
E. Profit margin is not a useful measure of a company’s operating results.
92. A company had $9,000,000 in net income for the year. Its net sales were $13,200,000 for
the same period. Calculate its profit margin.
A. 17.5%.
B. 28.0%.
C. 62.5%.
D. 160.0%.
E. 68.2%
93. On June 30 Apricot Co. paid $7,500 cash for management services to be performed over
a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts
at the time of cash payment. On June 30 Apricot should record:
A. A credit to an expense for $7,500.
B. A debit to an expense for $7,500.
C. A debit to a prepaid expense for $7,500.
D. A credit to a prepaid expense for $7,500.
E. A debit to Cash for $7,500.
94. On June 30 of the current calendar year, Apricot Co. paid $7,500 cash for management
services to be performed over a two-year period. Apricot follows a policy of recording all
prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on
December 31 for Apricot would include:
A. A debit to an expense for $5,625.
B. A debit to a prepaid expense for $5,625.
C. A debit to an expense for $1,875.
D. A debit to a prepaid expense for $1,875.
E. A credit to a liability for $1,875.
95. Accrued revenues:
A. At the end of one accounting period often result in cash receipts from customers in the
next period.
B. At the end of one accounting period often result in cash payments in the next period.
C. Are also called unearned revenues.
D. Are listed on the balance sheet as liabilities.
E. Are recorded at the end of an accounting period because cash has already been received for
revenues earned.
96. An account linked with another account that has an opposite normal balance and that is
subtracted from the balance of the related account is a(n):
A. Accrued expense.
B. Contra account.
C. Accrued revenue.
D. Intangible asset.
E. Adjunct account.
97. The total amount of depreciation recorded against an asset or group of assets during the
entire time the asset or assets have been owned:
A. Is referred to as depreciation expense.
B. Is referred to as accumulated depreciation.
C. Is shown on the income statement of the final period.
D. Is only recorded when the asset is disposed of.
E. Is referred to as an accrued asset.
98. The periodic expense created by allocating the cost of plant and equipment to the periods
in which they are used, representing the expense of using the assets, is called:
A. Accumulated depreciation.
B. A contra account.
C. The matching principle.
D. Depreciation expense.
E. An accrued account.
99. Prior to recording adjusting entries, the Office Supplies account had a $359 debit balance.
A physical count of the supplies showed $105 of unused supplies available. The required
adjusting entry is:
A. Debit Office Supplies $105 and credit Office Supplies Expense $105.
B. Debit Office Supplies Expense $105 and credit Office Supplies $105.
C. Debit Office Supplies Expense $254 and credit Office Supplies $254.
D. Debit Office Supplies $254 and credit Office Supplies Expense $254.
E. Debit Office Supplies $105 and credit Supplies Expense $254.
100. If throughout an accounting period the fees for legal services paid in advance by clients
are recorded in an account called Unearned Legal Fees, the end-of-period adjusting entry to
record the portion of those fees that has been earned is:
A. Debit Cash and credit Legal Fees Earned.
B. Debit Cash and credit Unearned Legal Fees.
C. Debit Unearned Legal Fees and credit Legal Fees Earned.
D. Debit Legal Fees Earned and credit Unearned Legal Fees.
E. Debit Unearned Legal Fees and credit Accounts Receivable.
101. On April 1, a company paid the $1,350 premium on a three-year insurance policy with
benefits beginning on that date. What will be the insurance expense on the annual income
statement for the year ended December 31?
A. $1,350.00.
B. $450.00.
C. $1,012.50.
D. $337.50.
E. $37.50.
102. A company had no office supplies available at the beginning of the year. During the year,
the company purchased $250 worth of office supplies. On December 31, $75 worth of office
supplies remained. How much should the company report as office supplies expense for the
year?
A. $75.
B. $125.
C. $175.
D. $250.
E. $325.
103. On January 1 a company purchased a five-year insurance policy for $1,800 with
coverage starting immediately. If the purchase was recorded in the Prepaid Insurance account,
and the company records adjustments only at year-end, the adjusting entry at the end of the
first year is:
A. Debit Prepaid Insurance, $1,800; credit Cash, $1,800.
B. Debit Prepaid Insurance, $1,440; credit Insurance Expense, $1,440.
C. Debit Prepaid Insurance, $360; credit Insurance Expense, $360.
D. Debit Insurance Expense, $360; credit Prepaid Insurance, $360.
E. Debit Insurance Expense, $360; credit Prepaid Insurance, $1,440.
104. Unearned revenue is reported in the financial statements as:
A. A revenue on the balance sheet.
B. A liability on the balance sheet.
C. An unearned revenue on the income statement.
D. An asset on the balance sheet.
E. An operating activity on the statement of cash flows.
105. Which of the following assets is not depreciated?
A. Store fixtures.
B. Computers.
C. Land.
D. Buildings.
E. All of these are depreciated.
106. Which of the following does not require an adjusting entry at year-end?
A. Accrued interest on notes payable.
B. Supplies used during the period.
C. Cash invested by owner.
D. Accrued wages.
E. Expired portion of prepaid insurance.
107. On April 30, a three-year insurance policy was purchased for $18,000 with coverage to
begin immediately. What is the amount of insurance expense that would appear on the
company’s income statement for the year ended December 31?
A. $500.
B. $4,000.
C. $6,000.
D. $14,000.
E. $18,000.
108. PPW Co. leased a portion of its store to another company for eight months beginning on
October 1, at a monthly rate of $800. This other company paid the entire $6,400 cash on
October 1, which PPW Co. recorded as unearned revenue. The journal entry made by PPW
Co. at year-end on December 31 would include:
A. A debit to Rent Earned for $2,400.
B. A credit to Unearned Rent for $2,400.
C. A debit to Cash for $6,400.
D. A credit to Rent Earned for $2,400.
E. A debit to Unearned Rent for $4,000.
109. On May 1, Giltus Advertising Company received $1,500 from Julie Bee for advertising
services to be completed April 30 of the following year. The Cash receipt was recorded as
unearned fees and at year-end on December 31, $1,000 of the fees had been earned. The
adjusting entry on December 31 would include:
A. A debit to Unearned Fees for $500.
B. A credit to Unearned Fees for $500.
C. A credit to Earned Fees for $1,000.
D. A debit to Earned Fees for $1,000.
E. A debit to Earned Fees for $500.
110. Incurred but unpaid expenses that are recorded during the adjusting process with a debit
to an expense and a credit to a liability are:
A. Intangible expenses.
B. Prepaid expenses.
C. Unearned expenses.
D. Net expenses.
E. Accrued expenses.
111. The adjusting entry to record the earned but unpaid salaries of employees at the end of an
accounting period is:
A. Debit Unpaid Salaries and credit Salaries Payable.
B. Debit Salaries Payable and credit Salaries Expense.
C. Debit Salaries Expense and credit Cash.
D. Debit Salaries Expense and credit Salaries Payable.
E. Debit Cash and credit Salaries Expense.
112. A company pays each of its two office employees each Friday at the rate of $100 per day
for a five-day week that begins on Monday. If the monthly accounting period ends on
Tuesday and the employees worked on both Monday and Tuesday, the month-end adjusting
entry to record the salaries earned but unpaid is:
A. Debit Unpaid Salaries $600 and credit Salaries Payable $600.
B. Debit Salaries Expense $400 and credit Salaries Payable $400.
C. Debit Salaries Expense $600 and credit Salaries Payable $600.
D. Debit Salaries Payable $400 and credit Salaries Expense $400.
E. Debit Salaries Expense $400 and credit Cash $400.
113. On January 1, Southwest College received $1,200,000 in Unearned Tuition Revenue
from its students for the spring semester, which spans four months beginning on January 2.
What amount of tuition revenue should the college recognize on January 31?
A. $300,000.
B. $600,000.
C. $800,000.
D. $900,000.
E. $1,200,000.
114. An adjusting entry was made on year-end December 31 to accrue salary expense of
$1,200. Which of the following entries would be prepared to record the $3,000 payment of
salaries in January of the following year?
Salaries
Expense
……..……..…...………..………
3,000
A.
Cash..…………………….……..……………….. 3,000
Salaries
Payable
…………….......……………….. .
3,000
B.
Cash……………..…….………..……………….. 3,000
Salaries
Payable
…………….......………………...
1,200
C.
Cash….………..…..…….…..………………….. 1,200
Salaries Expense………………………………………..
1,200
D. Salaries Payable….………………………………..
1,200
Salaries Payable……..…………………………………. 1,200
Salaries Expense…….………………………………….
1,800
E.
Cash.……………..…….…..……………………. 3,000
115. The difference between the cost of an asset and the accumulated depreciation for that
asset is called
A. Depreciation Expense.
B. Unearned Depreciation.
C. Prepaid Depreciation.
D. Depreciation Value.
E. Book Value.
116. A company purchased a new truck at a cost of $42,000 on July 1. The truck is estimated
to have a useful life of 6 years and a salvage value of $3,000. The company uses the straight-
line method of depreciation. How much depreciation expense will be recorded for the truck
during the first year ended December 31?
A. $3,250.
B. $3,500.
C. $4,000.
D. $6,500.
E. $7,000.
117. A company’s Office Supplies account shows a beginning balance of $600 and an ending
balance of $400. If office supplies expense for the year is $3,100, what amount of office
supplies was purchased during the period?
A. $2,700.
B. $2,900.
C. $3,300.
D. $3,500.
E. $3,700.
118. If a company records prepayment of expenses in an asset account, the adjusting entry
would:
A. Result in a debit to an expense and a credit to an asset account.
B. Cause an adjustment to prior expense to be overstated and assets to be understated.
C. Cause an accrued liability account to exist.
D. Result in a debit to a liability and a credit to an asset account.
E. Decrease cash.