Financial Accounting, 10e (Libby)
Chapter 4 Adjustments, Financial Statements, and the Quality of Earnings
1) At the time of the initial cash flow, deferred expenses are recorded as assets, and when used in
the future, expenses will increase, and liabilities will increase.
2) Deferred expenses are initially recorded as assets and when they are later used, expenses will
increase and assets will decrease.
3) Income taxes incurred but not yet paid at the end of the accounting period is an example of an
accrued expense.
4) Cash collected from customers in advance of providing the goods or services creates a
liability, which is later reduced when the goods or services are provided.
5) Accrued revenues are revenues that have been earned, but the customer has not yet paid for
the goods or services.
6) An accrued expense is incurred and paid for in the current period.
7) A deferred expense such as prepaid insurance is created when cash is paid in advance of the
expense being incurred, and is reduced when the expense is actually incurred.
8) The adjusting entry to record an accrued expense increases liabilities.
9) The journal entry to adjust the unearned revenue account when revenues are earned results in
an increase in assets and a decrease in liabilities.
10) The journal entry to adjust the prepaid rent account for rent used during the period results in
an increase in expenses and a decrease in stockholders’ equity.
11) The adjusting entry to record accrued revenues results in an increase in assets and an increase
in stockholders’ equity.
12) The adjusting entry to record an accrued expense results in a decrease in both assets and
stockholders’ equity.
13) 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.
14) Depreciation expense is an estimated allocation of the cost of long-term assets and is
recorded in a contra-asset called accumulated depreciation.
15) Earnings per share is calculated by dividing net income minus preferred dividends by the
average number of shares of common stock outstanding.
16) Earnings per share is calculated by dividing net income by the average number of shares of
common stock outstanding.
17) Adjusting entries do not involve cash and therefore do not impact the cash flow statement.
18) Under accrual accounting, interest expense would be recognized on the income statement
when the interest has accrued with the passage of time even though cash has not been paid.
19) The total asset turnover ratio is computed by dividing sales revenue by average total assets.
20) The total asset turnover ratio measures sales dollars generated per dollar of assets and is a
measure of efficient management of assets to generate sales.
21) Accounts that retain their balance from one period to the next are referred to as permanent
accounts and include balance sheet accounts.
22) Accounts that start a new accounting period with zero balances are referred to as temporary
accounts and include both balance sheet and income statement accounts.
23) Income statement accounts are temporary accounts because their balances are closed out at
the end of the accounting year.
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) At the end of the accounting period, the balances in the temporary accounts are closed while
the balances in the permanent accounts are carried forward to the next accounting period.
26) Closing the revenue and gain accounts at year-end requires that these accounts be debited.
27) The year-end closing process transfers net income to retained earnings.
28) Closing the expense and loss accounts at year-end requires that these accounts be debited.
29) Due to the relationship of financial statements, the statement of stockholders’ equity links the
income statement to the balance sheet.
30) Which of the following is a false statement about the unadjusted trial balance?
A) It is not a financial statement for external reporting purposes.
B) It provides data in a convenient form for preparing the adjusting entries and financial
statements.
C) It provides a check of the equality of the debits and credits of the ledger accounts after
transactions have been journalized and posted.
D) It provides a listing of balance sheet accounts only.
31) Morgan Company used supplies in the amount of $2,000. Due to an error in posting to the
general ledger, the supplies account was credited for only $200 while supplies expense was
debited for $2,000. During which phase of the accounting cycle would this error be first
discovered?
A) Analysis of the supplies purchase transaction.
B) Closing the books.
C) Preparation of the adjusted trial balance.
D) Preparation of the income statement.
32) Which is the correct sequence of the following steps in the accounting cycle?
A) Prepare journal entries, analyze transactions, prepare adjusted trial balance.
B) Prepare adjusted trial balance, prepare closing entries, and prepare financial statements.
C) Post adjusting journal entries, prepare adjusted trial balance, prepare financial statements.
D) Post closing entries, prepare financial statements, prepare adjusted trial balance.
33) Which is the correct order of the following steps in the accounting cycle?
A) Prepare financial statements, journalize and post adjusting entries, journalize and post the
closing entries, and prepare a post-closing trial balance.
B) Prepare an unadjusted trial balance, journalize and post adjusting entries, journalize and post
the closing entries, and prepare financial statements.
C) Journalize and post adjusting entries, journalize and post the closing entries, prepare financial
statements, and prepare an adjusted trial balance.
D) Prepare an unadjusted trial balance, journalize and post adjusting entries, prepare financial
statements, and journalize and post the closing entries.
34) On October 1, 2019, Adams Company paid $4,800 for a two-year insurance policy with the
insurance coverage beginning on that date. As of December 31, 2019, which of the following
account balances are correct after adjusting entries have been made?
A) Prepaid insurance $4,800, and Insurance expense $0.
B) Prepaid insurance $0, and Insurance expense $4,800.
C) Prepaid insurance $2,400, and Insurance expense $2,400.
D) Prepaid insurance $4,200, and Insurance expense $600.
35) On April 1, 2019, the premium on a one-year insurance policy was purchased for $3,000
cash with the insurance coverage beginning on that date. The books are adjusted only at year-
end. Which of the following correctly describes the effect on the financial statements of the
December 31, 2019 adjusting entry?
A) Prepaid insurance will decrease $750.
B) Insurance expense will increase $750.
C) Insurance expense will increase $2,250.
D) Prepaid insurance will increase $2,250.
36) The CHS Company paid $30,000 cash to its landlord on November 1, 2019 for rent covering
the six-month period from November 1, 2019 through April 30, 2020. The books are adjusted
only at year-end. Which of the following does not correctly describe the effect on CHS
Company’s financial statements of the December 31, 2019 adjusting entry?
A) Net income decreases $10,000.
B) Prepaid rent decreases $10,000.
C) Rent expense increases $10,000.
D) Stockholders’ equity increases $10,000.
37) Which of the following journal entries is created as the result of an accrual?
A)
Deferred revenue
xxx
Revenue
xxx
B)
Interest expense
xxx
Interest payable
xxx
C)
Cash
xxx
Deferred revenue
xxx
D)
Revenue receivable
xxx
Unearned revenue
xxx
38) Which of the following journal entries is created as the result of a deferral?
A)
Wages expense
xxx
Wages payable
xxx
B)
Interest expense
xxx
Interest payable
xxx
C)
Cash
xxx
Unearned revenue
xxx
D)
Accounts receivable
xxx
Deferred revenue
xxx
39) Which of the following journal entries is created to adjust for a previously recorded deferral?
A)
Unearned revenue
xxx
Revenue
xxx
B)
Interest expense
xxx
Interest payable
xxx
C)
Cash
xxx
Revenue
xxx
D)
Accounts receivable
xxx
Unearned revenue
xxx
40) Which of the following journal entries is created to record an accrual?
A)
Accounts receivable
xxx
Revenues
xxx
B)
Interest expense
xxx
Cash
xxx
C)
Accounts receivable
xxx
Deferred revenue
xxx
D)
Rent expense
xxx
Prepaid rent
xxx
41) On July 1, 2019, Allen Company signed a $100,000, one-year, 6 percent note payable. The
principal and interest will be paid on June 30, 2020. How much interest expense should be
reported on the income statement for the year ended December 31, 2019?
A) $6,000.
B) $3,000.
C) $1,500.
D) $0.
42) Which of the following does not correctly describe an adjusting journal entry that debits
interest expense and credits interest payable?
A) The entry increases expenses and decreases retained earnings.
B) The entry decreases net income and decreases stockholders’ equity.
C) The entry increases expenses and increases liabilities.
D) The entry decreases assets and decreases stockholders’ equity.
43) Which of the following does not correctly describe an adjusting journal entry that debits rent
expense and credits prepaid rent?
A) The entry increases expenses and decreases stockholders’ equity.
B) The entry decreases net income and decreases assets.
C) The entry increases expenses and decreases current assets.
D) The entry decreases net income and decreases liabilities.
44) Which of the following does not correctly describe an adjusting journal entry that debits
supplies expense and credits supplies?
A) The entry increases expenses and decreases assets.
B) The entry decreases net income and decreases assets.
C) The entry increases expenses and increases retained earnings.
D) The entry decreases net income and decreases stockholders’ equity.