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Chapter 03 The Accounting Cycle: End of the Period Answer Key
True / False Questions
1.
Accrual-basis accounting involves recording revenues when earned and recording
expenses with their related revenues.
2.
The revenue recognition principle states that we record revenue in the period in which we
collect cash.
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3.
According to the revenue recognition principle, if a company provides services to a
customer in the current year but does not collect cash until the following year, the
company should report the revenue in the current year.
4.
Jones Corporation provides services to a customer on June 17, but the customer does not
pay for the services until August 12. According to the revenue recognition principle, Jones
Corporation should record the revenue on August 12.
5.
The matching principle states that we recognize expenses in the same period as the
revenues they help to generate.
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6.
According to the concept of expense recognition under accrual-basis accounting, if costs
associated with producing revenue in the current year are not paid in cash until the
following year, the costs should be expensed in the current year.
7.
Under cash-basis accounting, we record revenues at the time we receive cash and
expenses at the time we pay cash.
8.
Under cash-basis accounting, the timing of cash inflows and outflows exactly matches the
reporting of revenues and expenses in the income statement.
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9.
Under cash-basis accounting, if a company provides services to a customer in the current
year but does not collect cash until the following year, the company should report the
revenue in the current year.
10.
Under cash-basis accounting, if costs associated with producing revenue in the current
year are not paid in cash until the following year, the costs should be expensed in the
following year.
11.
Because cash-basis accounting violates both the revenue recognition principle and the
matching principle, it is generally not accepted in preparing financial statements.
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12.
Adjusting entries involve recording events that have occurred but that have not yet been
recorded by the end of the period.
13.
Adjusting entries should be prepared after financial statements are prepared.
14.
Because adjusting entries allow the proper application of the revenue recognition principle
or the matching principle, they are a necessary part of cash-basis accounting.
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15.
Prepaid expenses involve payment of cash (or an obligation to pay cash) for the purchase
of an asset before the expense is incurred.
16.
Deferred revenues occur when cash is received after the revenue is earned.
17.
Accrued expenses involve the payment of cash before recording an expense and a
liability.
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18.
Accrued revenues involve the receipt of cash after the revenue has been earned and an
asset has been recorded.
19.
The adjusting entry for a prepaid expense always includes a debit to an expense account
and a credit to a liability account.
20.
The adjusting entry for a prepaid expense has the effect of reducing total assets and
reducing net income.
21.
The Supplies account is an example of an accrued expense.
22.
Suppose Simeon Company begins the year with $1,000 in supplies, purchases an
additional $5,500 of supplies during the year, and ends the year with $700 in supplies. The
year-end adjusting entry includes Supplies Expense of $7,200.
23.
The adjusting entry for a deferred revenue always includes a debit to an asset account
and a credit to a revenue account.
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24.
The adjusting entry for a deferred revenue has the effects of reducing liabilities and
increasing net income.
25.
On November 1, 2018, a company receives $1,800 for services to be provided evenly over
the next six months. The December 31, 2018, adjusting entry for the company would
include a credit to Deferred Revenue for $600.
26.
The adjusting entry for an accrued expense always includes a debit to an expense account
and a credit to a liability account.
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27.
The adjusting entry for an accrued expense has the effects of decreasing net income and
decreasing liabilities.
28.
On December 31, 2018, employees who earn $500 per day have worked eight days and will
be paid on January 6, 2019. The adjusting entry on December 31, 2018, includes a debit to
Salaries Expense for $4,000.
29.
At December 31, 2018, a company has received, but not paid, a utility bill for $250. The
amount of utility expense for 2018 equals $250.
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30.
The adjusting entry for an accrued revenue always includes a debit to a liability account
and a credit to a revenue account.
31.
The adjusting entry for an accrued revenue has the effects of increasing assets and
increasing net income.
32.
Adjusting entries are unnecessary for transactions that do not involve revenue or expense
activities, such as selling common stock or paying dividends.
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33.
Adjusting entries are not necessary when cash is received at the same time revenues are
earned.
34.
Adjusting entries are not necessary when cash is paid at the same time expenses are
incurred.
35.
A post-closing trial balance is a list of all accounts and their balances after we have
updated account balances for adjusting entries.
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36.
Once the adjusted trial balance is complete, financial statements are prepared.
37.
A classified balance sheet separates assets into current and long-term, and separates
liabilities into current and long-term.
38.
Current assets are assets that provide a benefit to a company over more than one year.
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39.
Long-term assets are assets that provide a benefit to a company for more than one year.
40.
Current liabilities are liabilities due within one year.
41.
Long-term liabilities are liabilities due in more than one year.
42.
Long-term asset categories include investments; property, plant, and equipment; and
intangible assets.
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43.
The components of retained earnings include assets, expenses, and dividends.
44.
Closing entries transfer the balances of all temporary accounts (revenues, expenses, and
dividends) to the Common Stock account.
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45.
The closing entry for revenue accounts includes a debit to Retained Earnings and a credit
to all revenue accounts.
46.
The closing entry for expense accounts includes a debit to Retained Earnings and a credit
to all expense accounts.
47.
The closing entry for dividends includes a debit to the Dividends account and a credit to
Retained Earnings.
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48.
If the beginning balance of Retained Earnings equals $10,000, net income for the year
equals $6,000, and dividends for the year equal $2,000, then the ending balance of
Retained Earnings equals $18,000.
49.
If the beginning balance of Retained Earnings equals $12,000, the ending balance of
Retained Earnings equals $15,000, and dividends for the year equal $1,000, then net
income for the year equals $4,000.
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50.
After closing entries are posted to the accounts in the general ledger, all asset and liability
accounts have a balance of zero.
51.
After closing entries are prepared, the balance of Retained Earnings is updated to reflect
the activity in the revenue, expense, and dividend accounts for the period.
52.
The post-closing trial balance is a list of all accounts and their balances at a particular
date after the account balances have been updated for closing entries.
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53.
The post-closing trial balance does not include any assets or liabilities, because these
accounts all have zero balances after closing entries.
Multiple Choice Questions
54.
The accounting basis that helps to measure and report revenues and expenses in a way
that clearly reflects the ability of a company to generate value for its owners is referred to
as:
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55.
The accounting basis that records revenues when goods or services are provided to
customers and expenses with related revenues is referred to as:
56.
The revenue recognition principle states that: