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89
Chapter 3--Measuring Revenues and Expenses
True/
False
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Level of
Difficulty
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1
EASY
8
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EASY
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Multiple
Choice
L.O.’s
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Multiple
Choice
L.O.’s
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Multiple
Choice
L.O.’s
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1
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EASY
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1
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40
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EASY
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5
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2,4
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42
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67
5
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2
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EASY
68
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69
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EASY
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70
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EASY
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90 ♦ Chapter 3
Matching
L.O’s
Level of
Difficulty
Matching
L.O.’s
Level of
Difficulty
Matching
L.O’s
Level of
Difficulty
1
5
EASY
17
5
MOD
32
5
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2
5
EASY
18
4
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33
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6
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EASY
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Problem
L.O.’s
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Difficulty
Problem
L.O.’s
Level of
Difficulty
Problem
L.O.’s
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Difficulty
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2,3,4
MOD
12
2,3
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22
5
MOD
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2,3,4
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2,3,4
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2,3,4
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Essay
L.O.’s
Level of
Difficulty
Essay
L.O.’s
Level of
Difficulty
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MOD
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4
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EASY
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Measuring Revenues and Expenses ♦ 91
TRUE/FALSE
1. Businesses typically use the accrual basis of measurement of revenues and expenses.
2. If a firm fails to record an accrued revenue, its net income and assets will be understated.
3. In accounting, the term recognition means "recorded in the accounting system."
4. Revenues and expenses are recognized when resources are created and consumed by an
organization.
5. If a fiscal period ends during the middle of a pay period, the amount earned by employees, but not
yet paid to them by the company during the fiscal period should be recognized as an expense.
6. Prepaid insurance is considered a liability.
7. Accrued revenues and expenses occur when revenues and expenses are recognized before cash is
received or paid.
8. The cost of plant equipment is normally charged to an expense in the year of purchase.
9. Accrued liabilities are costs directly associated with prepayment of expenses.
92 ♦ Chapter 3
10. A ledger is a chronological record of an organization’s financial transactions.
11. Adjusting the books is the last step in the accounting cycle.
12. Adjusting entries are necessary to ensure the correct account balances are reported for a particular
fiscal period.
13. Assets and liabilities accounts are considered permanent accounts.
14. The operating cycle is a repeating process used in accounting systems to record, summarize and
report accounting information.
MULTIPLE CHOICE
1. The ______ basis of accounting measurement recognizes revenues when resources are created as
part of an organization’s operating activities.
a.
cash
b.
financing
c.
investing
d.
accrual
2. The accrual basis of accounting is used because
a.
companies may create or use resources in a different period than when they receive or pay
the cash associated with those resources
b.
it requires less time and effort than cash basis
c.
it recognizes the collection and payment of cash
d.
revenues are not recognized throughout the year
Measuring Revenues and Expenses ♦ 93
3. Accrual basis accounting
a.
is an attempt to report net income at the earliest possible point in time
b.
has the effect of delaying the payment of taxes until the latest point in time possible
c.
captures the economic effects of an event in the period when the event occurred
d.
leads to higher net income being reported than does cash flow accounting
4. Under accrual-basis accounting, sales made to customers on credit are usually reported as
a.
liabilities
b.
accounts payable
c.
cash from operating activities
d.
sales revenue
5. Under accrual basis of accounting, revenue is recognized when
a.
cash is received from customers to which a previous sale was made on account
b.
goods or services are purchased from vendors
c.
customers place orders for future delivery
d.
goods or services are sold to customers
6. Which of the following is considered a liability?
a.
interest revenue
b.
unearned revenue
c.
sales revenue
d.
rent revenue
7. Which of the following liabilities would reflect that a company is required to provide goods or
services to a customer in the future?
a.
wages payable
b.
unearned revenues
c.
accounts payable
d.
note payable
8. Office supplies of $900 were purchased on account to be used in future months. One part of the
accounting entry to record this event in the accounting system would be to
a.
increase assets by $900
b.
decrease assets by $900
c.
increase expenses by $900
d.
decrease liabilities by $900
94 ♦ Chapter 3
9. Which of the following is an accurate representation of the accounting equation?
a.
assets - liabilities = owners' equity + revenues - expenses
b.
assets - expenses = liabilities + owners' equity + revenues
c.
assets = liabilities + owners' equity + revenues + expenses
d.
assets + expenses = liabilities + owners' equity - revenues
10. Which of the following statements is true?
a.
accounts receivable is decreased when sales are made on account
b.
accounts receivable is a revenue account
c.
individual customer accounts are subsidiary accounts
d.
accounts receivable are closed out at the end of the accounting period
11. The sale of merchandise on credit requires an entry in which two accounts?
a.
cash and sales revenue
b.
accounts receivable and sales revenue
c.
accounts receivable and cash
d.
sales revenue and accounts payable
12. Which of the following transactions would cause a decrease in the Accounts Receivable account?
a.
a credit sale to a customer
b.
a collection of cash from a customer to whom a previous sale was made
c.
a cash sale to a customer
d.
a credit purchase by the company
13. Sanchez Office Supplies collected $500 from a customer from a sale that had previously been
recorded as accounts receivable. Recording of this event in the accounting system will result in
a.
an increase in assets
b.
a decrease in assets
c.
no change to total assets
d.
an increase in revenue
Measuring Revenues and Expenses ♦ 95
14. Which of the following accounts would be affected by the sale of a product to a customer?
a.
inventory
b.
cost of goods sold
c.
sales revenue
d.
all of the above accounts would be affected
15. Accrued revenues and expenses result when
a.
the end of the year has occurred after the transaction has been completed
b.
revenues and expenses are recognized after cash is received or paid
c.
revenues and expenses are recognized before cash is received or paid
d.
the bookkeeper has made an error
16. At December 31, 2007, the end of Smith and Jones Co. fiscal year, there were $470 of office
supplies on hand. During 2008, $1,800 of office supplies were purchased and charged to the
Office Supplies Expense account. On December 31, 2008, a physical count of office supplies
revealed that there was $700 worth on hand. As a result of this information, the bookkeeper will
have to
a.
increase an asset account by $230
b.
increase an expense account by $230
c.
increase an asset account by $700
d.
increase an expense account by $1570
17. The cost associated with borrowing money during a fiscal period is
a.
rent expense
b.
depreciation expense
c.
interest expense
d.
cost of goods sold
18. ACE Company sells insurance policies to customers who pay the entire premium in advance.
Which of the following adjustments is necessary when ACE has earned one-half of a customer's
prepaid insurance premium?
a.
increase Unearned Revenue
b.
increase Cash
c.
increase Insurance Revenue
d.
increase Insurance Expense
96 ♦ Chapter 3
19. Reliance Computers received a bank loan of $50,000 on December 31, 2007. In January, 2008 the
company made its monthly interest payment of $500. Which of the following statements is true?
a.
the cash account would be increased for $50,000 in December, 2007
b.
expenses would be increased by $500 in January, 2008
c.
the bank loan was a financing activity
d.
all of the above are true
20. B & F Auto Body purchased equipment costing $60,000. Of this amount, $40,000 was paid in
cash and the balance is due in six months. Recording this purchase would have what effect on the
firm's accounting system?
a.
total assets would increase $60,000
b.
total assets would increase $100,000
c.
accounts payable would increase $40,000
d.
total assets would increase by $20,000
21. A sells a product from its inventory to a customer on account. What effect does this transaction
have on a firm's accounting system?
a.
total assets increase and revenues increase by the same amount
b.
revenues increase and expenses increase by the same amount
c.
merchandise inventory decreases and revenues increase by the same amount
d.
accounts receivable increases and expenses increase but by different amounts
22. An owner invests $100,000 in the business. Which of the following statements is NOT true?
a.
the transaction is a financing activity
b.
owners' equity would increase
c.
total assets would increase
d.
the transaction will be reported on the income statement
23. Memory Collectibles purchased $25,000 of inventory on account. Which of the following
statements is NOT true?
a.
assets and liabilities would increase
b.
the transaction would be summarized and reported on the balance sheet
c.
when cash payment is made on the account, expenses will increase
d.
an entry would be made in both a control account and subsidiary account
Measuring Revenues and Expenses ♦ 97
24. On July 1, 2007, Smart Company purchased a four-year fire insurance policy for $4,800.
Regarding this event, what amounts should be reported on the December 31, 2007 balance sheet
and income statement, respectively?
Balance Sheet Income Statement
a.
$1,200 prepaid asset $3,600 insurance expense
b.
$ 600 prepaid asset $1,200 insurance expense
c.
$4,200 prepaid asset $ 600 insurance expense
d.
$4,800 prepaid asset $ 0 insurance expense
25. On December 31, 2007, Sean counted the office supplies on hand that amounted to $2,500. The
firm had $1,900 of supplies on hand on January 1, 2007 and had purchased $6,000 of supplies
during the year. What was the total supplies expense for the year?
a.
$6,600
b.
$3,500
c.
$5,400
d.
$6,000
26. Fiber-Optics Company had an office supplies inventory of $800 at the end of its first year of
operation. Office supplies costing $3,000 had been purchased during the year. What is the amount
of office supplies expense for the year?
a.
$ 800
b.
$2,200
c.
$3,000
d.
$3,800
27. The bookkeeper at the Happy Holly Ranch forgot to record the expiration of prepaid insurance
during 2007. The result of this error is that
a.
2007 net income is understated, the balance in owners' equity is understated, and assets are
understated
b.
2007 net income is overstated, the balance in owners' equity is overstated, and assets are
correctly stated
c.
2007 net income is overstated, the balance in owners' equity is overstated, and assets are
overstated
d.
liabilities are understated
98 ♦ Chapter 3
28. The bookkeeper at the We Build It Construction Co. failed to accrue interest expense on a loan at
year end. This will result in an
a.
understatement of liabilities, and an overstatement of net income and owners' equity
b.
overstatement of liabilities and an understatement of net income and owners' equity
c.
overstatement of assets, net income, and owners' equity
d.
understatement of assets, net income, and owners' equity
29. Which of the following requires the reduction of a prepaid asset?
a.
rent is received in advance from a tenant
b.
interest has been incurred on a note receivable
c.
prepaid insurance has expired during the period
d.
employee wages expense need to be accrued
30. On July 1, 2007, Transom Co. borrowed $80,000. The monthly interest is computed at $400. The
necessary entry to the accounting system at December 31, 2007, if interest is paid only on the
annual anniversary date of the note, is to
a.
decrease Cash and increase Interest Expense by $2,400
b.
decrease Cash and decrease Interest Expense by $2,400
c.
increase Cash and increase Interest Expense by $4,800
d.
increase Interest Payable and increase Interest Expense by $2,400
e.
no entry is required
31. Which of the following accounts is considered a contra account?
a.
accumulated depreciation
b.
accounts receivable
c.
notes payable
d.
buildings
32. The cost of fixed assets recognized as being consumed during a fiscal period is recorded as
a.
plant expense
b.
depreciation expense
c.
interest expense
d.
cost of goods sold
Measuring Revenues and Expenses ♦ 99
33. When a company reports depreciation expense on the income statement,
a.
it is based on allocations of cost rather than on the current value of the asset
b.
the firm is reporting that asset's decline in its current value during the period
c.
the shortest possible estimated useful life and lowest possible estimated residual value are
usually chosen
d.
the company is ignoring the going concern concept
34. Which set of accounts below is correctly listed under the financial statement upon which it is
usually reported?
Income Statement Balance Sheet
a.
cost of goods sold accounts payable
b.
notes receivable owners' investment
c.
sales revenue cash paid for expenses
d.
interest revenue cost of goods sold
35. Accumulated depreciation is reported
a.
on the balance sheet as a liability
b.
on the balance sheet as an contra-asset
c.
on the income statement as revenues
d.
on the income statement as expenses
36. If a firm's depreciation expense doubles, which of the following will decrease (ignore taxes)?
Net Income Cash Flow
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
37. When a firm records depreciation expense for the month, which of the following categories will be
affected (ignore taxes)?
Net Income Cash Flow
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
100 ♦ Chapter 3
38. A company might maintain subsidiary accounts for which of the following:
a.
accounts receivable
b.
accounts payable
c.
inventory
d.
all of the above
39. Subsidiary accounts are summarized into
a.
income statement accounts
b.
other subsidiary accounts
c.
control accounts
d.
balance sheet accounts
40. A general ledger is a collection of
a.
account balances
b.
financial statements
c.
subsidiary accounts
d.
journal entries
41. Which of the following transactions would NOT be considered an adjusting entry?
a.
annual depreciation expense
b.
cash paid for current month rent
c.
wages earned by employees in 2007 but not paid until 2008
d.
interest expense in 2007 to be paid in 2008
42. Which of the following statements about closing entries is NOT true?
a.
all expense accounts will be closed
b.
all revenue accounts will be closed
c.
assets will be increased for an amount equal to the period's net income
d.
after closing entries are recorded, all temporary accounts will have a zero balance
43. If an end-of-period adjusting entry is made to accrue wages, it means that
a.
the company pays its employees monthly
b.
employees have earned wages since the end of the last payroll period, but have not been
paid
c.
the account Wages Payable will be decreased
d.
the company has already distributed payroll checks
Measuring Revenues and Expenses ♦ 101
44. An adjusting entry generally requires entries into
a.
two balance sheet accounts
b.
the cash account and an income statement account
c.
an income statement account and a balance sheet account
d.
two income statement accounts
45. If an adjustment to record the accrual of interest payable is omitted from the accounting system by
the accountant, which of the following effects will result?
a.
total expenses will be overstated on the income statement
b.
net income will be overstated
c.
liabilities on the balance sheet will be overstated
d.
cash will be overstated
46. Which of the following entries would likely be considered an adjusting entry?
a.
an increase to both depreciation expense and accumulated depreciation
b.
an increase to cash and a decrease to accounts receivable
c.
a decrease to cash and a decrease to accounts payable
d.
an increase to merchandise inventory and an increase to accounts payable
47. Which of the following events would require an adjusting entry?
Wages earned but not paid to Depreciation of
employees totaled $3,000 this period $2,500 was incurred this period
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
48. Which of the following situations would require an adjusting entry?
Recording $480 of interest expense Recording $9,000 for machinery
incurred during 2007 but not paid until 2008 acquired on the last day of the year for cash
a.
Yes Yes
b.
Yes No
c.
No Yes
d.
No No
102 ♦ Chapter 3
49. Famous Frames Company purchased office equipment on January 1, 2007 for $10,000. Its annual
depreciation was computed as $1,000. To record the depreciation for 2007, the accounting system
entry should be which of the following?
a.
increase both Depreciation Expense and Accumulated Depreciation by $1,000
b.
increase Depreciation Expense and decrease Equipment, both by $1,000
c.
increase Depreciation Expense and decrease Accumulated Depreciation, both by $1,000
d.
decrease both Depreciation Expense and Accumulated Depreciation by $1,000
50. Consider the following events that occurred during the accounting period just ended.
1.
A five-year insurance policy that had been purchased two years ago was
partially used up.
2.
Wages to be paid next year were recorded during the current year.
3.
Goods which a customer had paid for last year were manufactured this year and
delivered to her satisfaction.
Which of the transactions above represents an example of an adjusting entry?
a.
transaction 1
b.
transactions 1 and 2
c.
transactions 1 and 3
d.
transactions 1, 2 and 3
51. Adjusting entries
a.
may be required only when revenues and expenses are recognized at the same time cash is
received or paid
b.
may be required when revenues and expenses are recognized before cash is received or
paid
c.
are not allowed by generally accepted accounting principles
d.
are recognized for tax purposes but not for financial reporting purposes
52. If a careless bookkeeper fails to accrue $12,000 of wages payable at the end of the accounting
period, which of the following will be true of the financial statements?
a.
net income will be understated by $12,000
b.
retained earnings will be overstated by $12,000
c.
liabilities will be overstated by $12,000
d.
assets will be overstated by $12,000
Measuring Revenues and Expenses ♦ 103
53. Which of the following situations results in a decrease in both assets and owner's equity?
a.
revenue is accrued for $10,000
b.
liability is accrued for $6,000
c.
depreciation expense is recorded for $2,000
d.
$1,000 of rent received in advance is earned
54. Which of the following financial statements is usually prepared first?
a.
balance sheet
b.
stockholders' equity statement
c.
cash-flow statement
d.
income statement
55. When a bookkeeper closes the books, which of the following occurs?
a.
all revenue and expense accounts are reset to zero
b.
retained earnings is reset to zero
c.
all asset and liability accounts are reset to zero
d.
the company is liquidated
56. Which of the following is a temporary account?
a.
cost of goods sold
b.
office equipment
c.
owners' equity
d.
accumulated depreciation
57. Which of the following is NOT a temporary account?
a.
sales
b.
interest expense
c.
accumulated depreciation
d.
cost of goods sold
58. Which of the following accounts will be closed to Retained Earnings?
a.
Interest Expense
b.
Sales Revenue
c.
Cost of Goods Sold
d.
all of the above will be closed to Retained Earnings
104 ♦ Chapter 3
59. During December, Francesca was hired. She earned $2,600 for the month. By December 31,
$2,000 of these wages had been paid with the remainder to be paid during January. How will this
information appear on the balance sheet and income statement at December 31?
Balance Sheet Income Statement
a.
$2,600 as a liability $2,000 as an expense
b.
$2,000 as a liability $2,600 as an expense
c.
$ 600 as a liability $2,600 as an expense
d.
$ 600 as a liability $2,000 as an expense
60. A firm with a fiscal year ending December 31, purchased a 6-month insurance policy for $1,200
on November 1. What amount of the insurance cost should be expensed for the year ended on
December 31.
a.
None
b.
$100
c.
$400
d.
$1,200
61. On December 31, 2007, Jimmy Landlord collected $6,000 rent for January, 2008 from his tenants.
Which of the following should be reported on his company's December 31, 2007 financial
statements?
a.
revenue of $6,000
b.
expense of $6,000
c.
liability of $6,000
d.
equity of $6,000
62. The Boater’s News magazine sold 5-year subscriptions in January, 2007 totaling $75,000. Assume
that all subscriptions were effective January 1, 2007 and the calendar year is the accounting
period. At December 31, 2007, which of the following should be reported on Boaters' financial
statements?
a.
revenue of $75,000 and an asset of $75,000
b.
revenue of $15,000 and equity of $60,000
c.
revenue of $15,000 and liabilities of $60,000
d.
revenue of $15,000 and an asset of $60,000
Measuring Revenues and Expenses ♦ 105
63. On October 1, 2007, Kincaid Enterprises paid $8,000 for eight months rent to its landlord in
advance. Kincaid’s bookkeeper recorded the transaction by decreasing the cash account and
increasing the rent expense account. On December 31 (end of Kincaid's fiscal year), an entry will
need to be made by the company that will result in a
a.
decrease of rent expense by $8,000
b.
increase of prepaid rent by $5,000
c.
increase of cash by $5,000
d.
decrease of cash by $5,000
64. On September 1, 2007, the Blue Streak Airline paid eight months rent to its landlord in advance.
Blue Streak's bookkeeper recorded the transaction by decreasing the cash account and increasing
the rent expense account. On December 31 (end of Blue Streak's fiscal year), an adjusting entry
will need to be made by the airline that will increase
a.
rent expense
b.
prepaid rent
c.
cash
d.
accounts payable
65. On April 1, 2007, a two-year insurance policy was purchased and the total premium of $5,280 was
paid. At December 31, 2008, the financial statements should report
a.
Insurance Expense $2,640; Prepaid Insurance $2,640
b.
Insurance Expense $5,280; Prepaid Insurance $0
c.
Insurance Expense $3,300; Prepaid Insurance $1,980
d.
Insurance Expense $1,980; Prepaid Insurance $3,300
66. Custom Bikes Corporation reports these balances in its accounting system. Determine the balance
of the Retained Earnings account.
Accounts payable
$ 400
Bonds payable
2,000
Land
200
Supplies inventory
80
Notes payable
160
Owners' investment
2,200
Equipment
2,400
Buildings, net
2,000
Cash
800
Interest payable
40
Accounts receivable
2 ,200
Retained earnings
?
Inventory
720
a.
$3,600
b.
$5,800
c.
$6,200
d.
$7,800
106 ♦ Chapter 3
67. Which of the financial statements provides both cash and accrual information?
a.
the income statement
b.
the cash-flow statement
c.
the balance sheet
d.
all of the above
68. Doctor’s, Inc. subscribes to three magazines and pays $140, $90 and $76, respectively, on July 1,
2007 The subscriptions are for one year and are recorded in Prepaid Subscriptions when paid. At
December 31, 2007, which of the following entries should be made?
Magazine Expense Prepaid Subscriptions
a.
increase $153 decrease $153
b.
increase $306 decrease $306
c.
decrease $153 increase $153
d.
decrease $306 increase $306
69. The systematic process used in accounting systems to convert accounting data into useful
information is the
a.
business cycle
b.
operating cycle
c.
accounting cycle
d.
working cycle
70. The end product of an accounting system is the
a.
internal control system
b.
design and use of source documents
c.
trial balance
d.
financial statements
71. Which of the following is a TRUE statement about the accounting cycle?
a.
accounting cycles are only used by large, public companies
b.
regardless of the type of business, the activities of the accounting cycle remains the same
c.
the accounting cycle determines the types of business activities in which a company will
engage
d.
the accounting cycle was developed by the SEC
Measuring Revenues and Expenses ♦ 107
72. Which of the following statements about the accounting cycle is NOT true?
a.
the accounting cycle is an eight-step procedure that occurs each accounting period
b.
adjusting entries must be prepared before the final closing of the books
c.
financial statements are prepared after closing the books for the accounting period
d.
the accounting cycle is a repeating process used to record, summarize, and report
accounting information
73. The eight steps in the accounting cycle are listed. Identify the proper order in which these steps
occur.
1. Preparing the income statement
2. Recording transactions in journals
3. Preparing summary of account balances
4. Post transactions to ledger accounts
5. Prepare post-closing summary of account balances
6. Prepare adjusting entries at end of fiscal period
7. Prepare balance sheet and statement of cash flows
8. Close revenue and expense accounts to retained earnings
a.
3, 2, 5, 8, 4, 1, 6, 7
b.
2, 3, 6, 1, 4, 7, 8, 5
c.
4, 3, 2, 6, 8, 5, 1, 7
d.
2, 4, 6, 3, 1, 8, 5, 7
74. Which of the following steps occurs last in the accounting cycle?
a.
prepare income statement
b.
close revenue and expense accounts to retained earnings
c.
preparation of the balance sheet and statement of cash flows
d.
prepare summary of accunt balances
108 ♦ Chapter 3
MATCHING
For each of the following items, select the letter of the financial statement in which it is reported.
a.
Income statement
b.
Balance sheet
c.
Statement of cash flows
1. Sales revenue
2. Cash collected from customers
3. Amount owed to company by customers
4. Depreciation expense
5. Accumulated depreciation
6. Cash paid for equipment
7. Merchandise inventory
8. Cost of goods sold
9. Cash paid for merchandise
10. Retained earnings
