Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
1. The trial balance is similar to the balance sheet in that it is a listing of assets, liabilities, and
stockholders’ equity and is provided to external decision makers.
2. The trial balance is a listing of account balances that are found in the general ledger.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
3. An objective of preparing the trial balance is to test the equality of debits and credits.
4. Prepaid expenses are reported as assets at the time of the initial cash flow and when they
are consumed in the future, both expenses and liabilities increase.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
5. Income taxes incurred but not yet paid at the end of the accounting period is an example of
an accrued expense.
6. Cash collected from customers in advance of providing the goods or services creates a
liability which is reduced when the goods or services are later provided.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
7. Accrued revenues are revenues that have been earned, but the customer has not yet paid for
the goods or services.
8. An accrued expense has been both incurred and paid for using cash.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
9. A deferred expense such as prepaid insurance is created when cash is paid in advance of the
expense incurrence and is reduced when the expense is actually incurred.
10. The adjusting entry to record an accrued expense increases liabilities.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
11. The adjusting entry to adjust the unearned revenue account for revenues earned results in
an increase in assets and a decrease in liabilities.
12. The adjusting entry to adjust the prepaid rent account for rent expired during the period
results in an increase in expenses and a decrease in stockholders’ equity.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
13. The adjusting entry to record accrued revenues results in an increase in assets and
stockholders’ equity.
14. The adjusting entry to record an accrued expense results in a decrease in both assets and
stockholders’ equity.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
15. Rent of $4,000 collected in advance was recorded as unearned rent revenue. At the end of
the accounting period, half the rent was earned. The related adjusting entry should be a credit
to rent revenue for $2,000 and a debit to unearned rent revenue for $2,000.
16. Depreciation expense is an estimated allocation of the cost of long-term assets and is
recorded in a contra-asset called accumulated depreciation.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
17. Accounts which retain their balance from one period to the next are referred to as
permanent accounts and include balance sheet accounts.
18. Accounts which start a new accounting period with zero balances are referred to as
temporary accounts and include both balance sheet and income statement accounts.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
19. Earnings per share are calculated by dividing net income minus preferred dividends by the
average number of shares of common stock outstanding.
20. Adjusting entries do not involve a cash flow and therefore do not impact the cash flow
statement.
21. The net profit margin ratio is calculated by dividing net sales by net income.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
22. The net profit margin ratio is a measure of how much profit was created per sales dollar.
23. Income statement accounts often are called temporary accounts because their balances are
closed out at the end of the accounting year.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
24. At the end of the accounting period, the balances in the nominal accounts are closed while
the balances in the real accounts are carried forward to the next accounting period.
25. Closing the revenue and gain accounts at year-end requires that these accounts be debited.
26. The year-end closing process transfers net income to retained earnings.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
27. Closing the expense and loss accounts at year-end requires that these accounts be debited.
28. Which of the following is a false statement about the unadjusted trial balance?
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
29. Morgan Company purchased supplies inventory for $2,000. Due to an error in posting to
the general ledger, the inventory account was debited for only $200 while accounts payable
was credited for $2,000. During which phase of the accounting cycle would this error be first
discovered?
30. Which is the correct sequential order of the following steps in the accounting cycle?
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
31. Which is the correct order of the following steps in the accounting cycle?
32. On October 1, 2010, Adams Company paid $4,000 for a two-year insurance policy with
the insurance coverage beginning on that date. As of December 31, 2010, which of the
following account balances are correct after adjusting entries have been made?
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
33. On April 1, 2011, the premium on a one-year insurance policy was purchased for $3,000
cash with the insurance coverage beginning on that date. Which of the following correctly
describes the effect of the December 31, 2011 adjusting entry on the financial statements?
(Assume that no adjusting entries have been made during the year.)
34. The CHS Company paid $30,000 cash to its landlord on November 1, 2011 for rent
covering the six-month period from November 1, 2011 through April 30, 2012. Which of the
following doesn’t correctly describe the effect of the December 31, 2011 adjusting entry on
CHS Company’s financial statements? (Assume that no adjusting entries have been made
during the year.)
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
35. Which of the following journal entries was created as the result of an accrual?
36. Which of the following journal entries was created as the result of a deferral?
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
37. Which of the following journal entries was created as the result of a deferral?
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
38. Which of the following journal entries was created as the result of an accrual?
39. On July 1, 2011, Allen Company signed a $100,000, one-year, 6 percent note payable.
The principal and interest will be paid on June 30, 2012. How much interest expense should
be reported on the income statement for the year ended December 31, 2011?
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
40. Which of the following doesn’t correctly describe a journal entry which debits interest
expense and credits interest payable?
41. Which of the following doesn’t correctly describe a journal entry which debits rent
expense and credits prepaid rent?