Chapter 03 Adjusting Accounts for Financial Statements Answer Key
True / False Questions
1.
A company’s fiscal year must correspond with the calendar year.
2.
Interim financial statements report a company’s business activities for a one-year period.
3.
Adjusting entries are made
after
the preparation of financial statements.
4.
Adjusting entries result in a better matching of revenues and expenses for the period.
5.
Two main accounting principles used in accrual accounting are matching and full closure.
6.
Adjusting entries are necessary so that asset, liability, revenue, and expense account
balances are correctly recorded.
7.
The cash basis of accounting commonly increases the comparability of financial
statements from period to period.
8.
Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and
accrued items.
9.
The 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.
10.
Recording revenues early overstates current-period income; recording revenues late
understates current period income.
11.
Recording expenses early overstates current-period income; recording expenses late
understates current period income.
12.
Prior to recording adjusting entries at the end of an accounting period, some accounts may
not show correct balances even though all business transactions were properly recorded.
13.
On October 15, a company received $15,000 cash as a customer’s 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.
14.
Adjusting entries are designed primarily to correct accounting errors.
15.
Adjustments are necessary to bring an asset or liability account to its proper amount and
also update a related expense or revenue account.
16.
Each adjusting entry will affect a balance sheet account.
17.
Accrued expenses at the end of one accounting period are expected to result in cash
payments in a future period.
18.
Accrued revenues at the end of one accounting period are expected to result in cash
collections in a future period.
19.
Each adjusting entry affects one or more income statements account, one or more balance
sheet account, and never cash.
20.
Accrued expenses reflect transactions where cash is paid
before
a related expense is
recognized.
21.
An adjusting entry often includes an entry to Cash.
22.
Before an adjusting entry to recognize the cost of expired insurance for the period is
made, Prepaid Insurance and Insurance Expense are both overstated.
23.
Before an adjusting entry to accrue employee salaries is made, Salaries Expense and
Salaries Payable are both understated.
24.
Failure to record depreciation expense will overstate assets and understate expenses.
Topic: Adjusting Accounts
25.
Profit margin can also be called return on sales.
26.
Profit margin reflects the percent of profit in each dollar of revenue.
27.
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%.
28.
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.
29.
If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one
year of rent in advance and adjusting entries are made at the end of each month, the
balance remaining in Prepaid Rent on December 1 of that year should be $1,500.
30.
Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of
its related asset.
31.
A salary owed to employees is an example of an accrued expense.
32.
Depreciation expense for a period is the portion of a plant asset’s cost that is allocated to
that period.
33.
Depreciation measures the decline in market value of an asset.
34.
The adjusted trial balance must be prepared before the adjusting entries are made.
35.
An unadjusted trial balance is a list of accounts and balances prepared
before
adjustments are recorded.
36.
Financial statements can be prepared directly from the information in the adjusted trial
balance.
37.
Revenue and expense balances are transferred from the adjusted trial balance to the
income statement.
38.
In preparing statements from the adjusted trial balance, the balance sheet must be
prepared first.
39.
Income Summary is a temporary account only used for the closing process.
40.
Revenue accounts are temporary accounts that should begin each accounting period with
zero balances.
41.
The closing process is a step in the accounting cycle that prepares accounts for the
next
accounting period.
42.
Closing entries are required at the end of each accounting period to close all ledger
accounts.
43.
Closing entries are necessary so that retained earnings will begin each period with a zero
balance.
44.
Permanent accounts carry their balances into the next accounting period.
45.
If a company plans to continue business into the future, closing entries are not required.
46.
The first five steps in the accounting cycle include analyzing transactions, journalizing,
posting, preparing an unadjusted trial balance, and recording adjusting entries.
47.
The last four steps in the accounting cycle include preparing the adjusted trial balance,
preparing financial statements, recording adjusting entries, and recording closing entries.
48.
A classified balance sheet organizes assets and liabilities into important subgroups that
provide more information to decision makers.
49.
Current assets and current liabilities are expected to be used up or come due within one
year or the company’s operating cycle whichever is longer.
50.
Intangible assets are long-term resources that benefit business operations, usually lack
physical form and have uncertain benefits.
51.
Assets are often classified into current assets, long-term investments, plant assets, and
intangible assets.
52.
Intangible assets are assets that are long-term, have physical form, and are used to
produce or sell products and services.
53.
Current liabilities include accounts receivable, unearned revenues, and salaries payable.
54.
Cash and office supplies are both classified as current assets.
55.
Plant assets are usually listed in order from most liquid to least liquid.