Chapter 03 Adjusting Accounts and Preparing Financial Statements
MULTIPLE CHOICE QUESTIONS
1)
A company’s fiscal year must correspond with the calendar year.
A)
True
B)
False
2)
The time period assumption assumes that an organization’s activities can be divided into specific
time periods such as months, quarters, or years.
A)
True
B)
False
3)
Interim financial statements report a company’s business activities for a one-year period.
A)
True
B)
False
4)
A fiscal year refers to an organization’s accounting period that spans twelve consecutive months or
52 weeks.
A)
True
B)
False
5)
Adjusting entries are made after the preparation of financial statements.
A)
True
B)
False
6)
Adjusting entries result in a better matching of revenues and expenses for the period.
A)
True
B)
False
7)
Two main accounting principles used in accrual accounting are expense recognition and full
closure.
A)
True
B)
False
8)
Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are
correctly recorded.
A)
True
B)
False
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.
A)
True
B)
False
10)
The revenue recognition principle is the basis for making adjusting entries that pertain to unearned
and accrued revenues.
A)
True
B)
False
11)
The cash basis of accounting commonly increases the comparability of financial statements from
period to period.
A)
True
B)
False
12)
Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued
items.
A)
True
B)
False
13)
Since the revenue recognition principle requires that revenues be recorded when earned, there are
no unearned revenues in accrual accounting.
A)
True
B)
False
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 when cash is
paid.
A)
True
B)
False
15)
The cash basis of accounting is a system in which revenues are recorded when earned and expenses
are recorded when incurred.
A)
True
B)
False
16)
The cash basis of accounting recognizes revenues when cash payments from customers are
received.
A)
True
B)
False
17)
The accrual basis of accounting recognizes revenues when cash is received from customers.
A)
True
B)
False
18)
The accrual basis of accounting recognizes expenses when cash is paid.
A)
True
B)
False
19)
Recording revenues early overstates current-period income; recording revenues late understates
current period income.
A)
True
B)
False
20)
Recording expenses early overstates current-period income; recording expenses late understates
current period income.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
24)
The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not
when cash is received.
A)
True
B)
False
25)
The accrual basis of accounting requires adjustments to recognize revenues in the periods they are
earned and to match expenses with revenues.
A)
True
B)
False
26)
Adjusting entries are designed primarily to correct accounting errors.
A)
True
B)
False
27)
Adjustments are necessary to bring an asset or liability account to its proper amount and also
update a related expense or revenue account.
A)
True
B)
False
28)
Each adjusting entry will affect a balance sheet account.
A)
True
B)
False
29)
Adjusting entries always affect the cash account.
A)
True
B)
False
30)
Accrued expenses at the end of one accounting period are expected to result in cash payments in a
future period.
A)
True
B)
False
31)
Accrued revenues at the end of one accounting period are expected to result in cash collections in a
future period.
A)
True
B)
False
32)
Each adjusting entry affects one or more income statement account, one or more balance sheet
account, and never cash.
A)
True
B)
False
33)
Accrued expenses reflect transactions where cash is paid before a related expense is recognized.
A)
True
B)
False
34)
Under the accrual basis of accounting, adjustments are often made for prepaid expenses and
unearned revenues.
A)
True
B)
False
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.
A)
True
B)
False
36)
Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses.
A)
True
B)
False
37)
An adjusting entry often includes an entry to Cash.
A)
True
B)
False
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.
A)
True
B)
False
39)
Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries
Payable are both understated.
A)
True
B)
False
40)
Failure to record depreciation expense will overstate assets and understate expenses.
A)
True
B)
False
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.
A)
True
B)
False
42)
Profit margin can also be called return on sales.
A)
True
B)
False
43)
Profit margin measures the relation of debt to assets.
A)
True
B)
False
44)
Profit margin reflects the percent of profit in each dollar of revenue.
A)
True
B)
False
45)
Profit margin is calculated by dividing net sales by net income.
A)
True
B)
False
46)
Torsten had total assets of $149,501,000, net income of $6,242,000, and net sales of $209,203,000.
Its profit margin was 2.98%.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
49)
Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its
related asset.
A)
True
B)
False
50)
A salary owed to employees is an example of an accrued expense.
A)
True
B)
False
51)
In accrual accounting, accrued revenues are recorded as liabilities.
A)
True
B)
False
52)
Depreciation expense is an example of an accrued expense.
A)
True
B)
False
53)
Earned but uncollected revenues are recorded during the adjusting process with a credit to a
revenue account and a debit to an expense account.
A)
True
B)
False
54)
Depreciation expense for a period is the portion of a plant asset’s cost that is allocated to that
period.
A)
True
B)
False
55)
All plant assets, including land, are depreciated.
A)
True
B)
False
56)
Net income for a period will be understated if accrued revenues are not recorded at the end of the
accounting period.
A)
True
B)
False
57)
Depreciation measures the decline in market value of an asset.
A)
True
B)
False
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.
A)
True
B)
False
59)
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.
A)
True
B)
False
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.
A)
True
B)
False