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.
A)
True
B)
False
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.
A)
True
B)
False
63)
The adjusted trial balance must be prepared before the adjusting entries are made.
A)
True
B)
False
64)
An unadjusted trial balance is a list of accounts and balances prepared before adjustments are
recorded.
A)
True
B)
False
65)
Financial statements can be prepared directly from the information in the adjusted trial balance.
A)
True
B)
False
66)
Asset and liability balances are transferred from the adjusted trial balance to the income statement.
A)
True
B)
False
67)
Asset and liability balances are transferred from the adjusted trial balance to the balance sheet.
A)
True
B)
False
68)
Revenue and expense balances are transferred from the adjusted trial balance to the income
statement.
A)
True
B)
False
69)
In preparing statements from the adjusted trial balance, the balance sheet must be prepared first.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
72)
The time period assumption assumes that an organization’s activities may be divided into specific
reporting time periods including all of the following except:
A)
Months.
B)
Days.
C)
Fiscal years.
D)
Calendar years.
E)
Quarters.
73)
A broad principle that requires identifying the activities of a business with specific time periods
such as months, quarters, or years is the:
A)
Time period assumption.
B)
Operating cycle of a business.
C)
Going-concern assumption.
D)
Accrual basis of accounting.
E)
Expense recognition (matching) principle.
74)
Interim financial statements refer to financial reports:
A)
That show the assets above the liabilities and the liabilities above the equity.
B)
That cover less than one year, usually spanning one, three, or six-month periods.
C)
That are prepared before any adjustments have been recorded.
D)
Where the adjustment process is used to assign revenues to the periods in which they are
earned and to match expenses with revenues.
E)
Where revenues are reported on the income statement when cash is received and expenses are
reported when cash is paid.
75)
The 12-month period that ends when a company’s sales activities are at their lowest level is called
the:
A)
Natural business year.
B)
Interim period.
C)
Fiscal year.
D)
Accounting period.
E)
Calendar year.
76)
The length of time covered by a set of periodic financial statements, primarily a year for most
companies, is referred to as the:
A)
Calendar year.
B)
Accounting period.
C)
Business cycle.
D)
Fiscal year.
E)
Natural business year.
77)
The accounting principle that requires revenue to be recorded when earned is the:
A)
Expense recognition (matching) principle.
B)
Going-concern assumption.
C)
Time period assumption.
D)
Accrual reporting principle.
E)
Revenue recognition principle.
78)
Adjusting entries:
A)
Affect only income statement accounts.
B)
Affect only equity accounts.
C)
Affect cash accounts.
D)
Affect only balance sheet accounts.
E)
Affect both income statement and balance sheet accounts.
79)
The main purpose of adjusting entries is to:
A)
Correct errors in the accounting records.
B)
Recognize assets purchased during the period.
C)
Record internal transactions and events.
D)
Recognize debts paid during the period.
E)
Record external transactions and events.
80)
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)
Expense recognition (Matching) principle.
B)
Recognition principle.
C)
Cost principle.
D)
Time period principle.
E)
Cash basis of accounting.
81)
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)
Cash basis accounting.
B)
Revenue recognition accounting.
C)
Current basis accounting.
D)
Accrual basis accounting.
E)
Operating cycle accounting.
82)
Adjusting entries made at the end of an accounting period accomplish all of the following except:
A)
Assigning expenses to the periods in which they are incurred.
B)
Assigning revenues to the periods in which they are earned.
C)
Assuring that financial statements reflect the revenues earned and the expenses incurred.
D)
Updating liability and asset accounts to their proper balances.
E)
Assuring that external transaction amounts remain unchanged.
83)
The approach to preparing financial statements based on recognizing revenues when they are
earned and matching expenses to those revenues is:
A)
The time period assumption.
B)
Accrual basis accounting.
C)
Revenue basis accounting.
D)
The expense recognition (matching) principle.
E)
Cash basis accounting.
84)
Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued revenues are all
examples of:
A)
Income statement accounts.
B)
Asset and equity.
C)
Items that require contra accounts.
D)
Items that require adjusting entries.
E)
Asset accounts.
85)
The accrual basis of accounting:
A)
Recognizes expenses when paid in cash.
B)
Is generally accepted for external reporting because it is more useful than cash basis for most
business decisions.
C)
Recognizes revenues when received in cash.
D)
Is flawed because it gives complete information about cash flows.
E)
Eliminates the need for adjusting entries at the end of each period.
86)
In its first year of operations, Grace Company reports the following: Earned revenues of $60,000
($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash paid toward
them); Prepaid $8,000 cash for costs that will not be expensed until next year. Net income under
the accrual basis of accounting is:
A) $13,000.
B) $21,000.
C) $25,000.
D) $17,000.
E)
None of these options are correct
87)
In its first year of operations, Grace Company reports the following: Earned revenues of $60,000
($52,000 cash received from customers); Incurred expenses of $35,000 ($31,000 cash paid toward
them); Prepaid $8,000 cash for costs that will not be expensed until next year. Net income under
the cash basis of accounting is:
A) $21,000.
B) $13,000.
C) $25,000.
D) $17,000.
E)
None of the above.
88)
Which of the following statements is incorrect?
A)
Adjusting entries affect only balance sheet accounts.
B)
Adjustments to prepaid expenses and unearned revenues involve previously recorded assets
and liabilities.
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)
Accrued expenses and accrued revenues involve assets and liabilities that had not previously
been recorded.
89)
An adjusting entry could be made for each of the following except:
A)
Unearned revenues.
B)
Accrued expenses.
C)
Depreciation.
D)
Prepaid expenses.
E)
Owner investments.
90)
A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on
December 31. This oversight would:
A)
Overstate assets by $28,000.
B)
Have no effect on net income.
C)
Understate net income by $28,000.
D)
Overstate net income by $28,000.
E)
Understate assets by $28,000.
91)
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, net income, and equity understated.
B)
Assets overstated and equity understated.
C)
Assets and equity both understated.
D)
Assets, net income, and equity overstated.
E)
Assets overstated, net income understated, and equity overstated.
92)
If a company failed to make the end-of-period adjustment to move the amount of management fees
that were earned from the Unearned Management Fees account to the Management Fees Revenue
account, this omission would cause:
A)
An overstatement of liabilities.
B)
An overstatement of assets.
C)
An understatement of liabilities.
D)
An overstatement of net income.
E)
An overstatement of equity.
93)
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 move the
portion of these fees that has been earned to a revenue account, one effect will be:
A)
An understatement of assets.
B)
An understatement of equity.
C)
An overstatement of assets.
D)
An understatement of liabilities.
E)
An overstatement of equity.
94)
Profit margin is defined as:
A)
Net income divided by assets.
B)
Net sales divided by assets.
C)
Net income divided by net sales.
D)
Net sales divided by net income.
E)
Revenues divided by net sales.
95)
A company earned $3,000 in net income for October. Its net sales for October were $10,000. Its
profit margin is:
A) 333%. B) 33%. C) 33.3% D) 3%. E) 30%.
96)
All of the following statements regarding profit margin are true except:
A)
Profit margin is not a useful measure of a company’s operating results.
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 reflects the percent of profit in each dollar of revenue.
E)
Profit margin is calculated by dividing net income by net sales.
97)
A company had $7,000,000 in net income for the year. Its net sales were $15,200,000 for the same
period. Calculate its profit margin.
A) 85.4%. B) 46.1%. C) 53.9%. D) 217.1%. E) 117.1%.
98)
On July 1 Plum Co. paid $7,500 cash for management services to be performed over a two-year
period. Plum follows a policy of recording all prepaid expenses to asset accounts at the time of
cash payment. On July 1 Plum should record:
A)
A debit to an expense and credit to Cash for $7,500.
B)
A debit to Cash for $7,500 and a credit to an expense for $7,500.
C)
A debit to an expense and credit to a prepaid expense for $7,500.
D)
A credit to a prepaid expense and a debit to Cash for $7,500.
E)
A debit to a prepaid expense and a credit to Cash for $7,500.
99)
On July 1 of the current calendar year, Plum Co. paid $7,500 cash for management services to be
performed over a two-year period beginning July 1. Plum follows a policy of recording all prepaid
expenses to asset accounts at the time of cash payment. The adjusting entry on December 31 of the
current year for Plum would include:
A)
A credit to a liability and a debit to a prepaid expense for $1,875.
B)
A debit to an expense and a credit to a prepaid expense for $1,875.
C)
A debit to a prepaid expense and a credit to an expense for $1,875.
D)
A debit to an expense and a credit to a prepaid expense for $5,625.
E)
A debit to a prepaid expense and a credit to Cash for $5,625.
100)
Accrued revenues:
A)
At the end of one accounting period result in cash receipts in a future period.
B)
Are listed on the balance sheet as liabilities.
C)
At the end of one accounting period often result in cash payments in the next period.
D)
Are recorded at the end of an accounting period because cash has already been received for
revenues earned.
E)
Are also called unearned revenues.
101)
An account linked with another account that has an opposite normal balance and is subtracted from
the balance of the related account is a(n):
A)
Intangible asset.
B)
Contra account.
C)
Accrued revenue.
D)
Accrued expense.
E)
Adjunct account.