Chapter 3 – The Adjusting Process
1. Even though GAAP requires the accrual basis of accounting, some businesses prefer using the cash basis of accounting.
a.
True
b.
False
2. Generally accepted accounting principles require accrual-basis accounting.
a.
True
b.
False
3. The revenue recognition principle states that revenue should be recorded in the same period as the cash is received.
a.
True
b.
False
4. The system of accounting where revenues are recorded when they are earned and expenses are recorded when they are
incurred is called the cash basis of accounting.
a.
True
b.
False
Chapter 3 – The Adjusting Process
5. The matching principle requires expenses be recorded in the same period that the related revenue is recorded.
a.
True
b.
False
6. For most large businesses, the cash basis of accounting will provide accurate financial statements for user needs.
a.
True
b.
False
7. An example of deferred revenue is Unearned Rent.
a.
True
b.
False
8. Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has been earned.
a.
True
b.
False
Chapter 3 – The Adjusting Process
9. If the debit portion of an adjusting entry is to an asset account, then the credit portion must be to a liability account.
a.
True
b.
False
10. The revenue recognition principle requires that the reporting of revenue be included in the period when cash for the
service is received.
a.
True
b.
False
11. Revenues and expenses should be recorded in the same period to which they relate.
a.
True
b.
False
Chapter 3 – The Adjusting Process
12. The matching principle supports matching expenses with the related revenues.
a.
True
b.
False
13. The updating of accounts when financial statements are prepared is called the adjusting process.
a.
True
b.
False
14. Adjusting entries affect balance sheet accounts to the exclusion of income statement accounts.
a.
True
b.
False
15. Adjusting entries affect only expense and asset accounts.
a.
True
b.
False
Chapter 3 – The Adjusting Process
16. An adjusting entry would adjust revenue so it is reported when earned and not when cash is received.
a.
True
b.
False
17. An adjusting entry would adjust an expense account so the expense is reported when incurred.
a.
True
b.
False
18. An adjusting entry to accrue an incurred expense will affect total liabilities.
a.
True
b.
False
19. The difference between deferred revenue and accrued revenue is that accrued revenue has been recorded and needs
adjusting and deferred revenue has never been recorded.
a.
True
b.
False
Chapter 3 – The Adjusting Process
20. Deferrals are recorded transactions that delay the recognition of an expense or revenue.
a.
True
b.
False
21. Adjustments for accruals are needed to record a revenue that has been earned or an expense that has been incurred but
not recorded.
a.
True
b.
False
22. Unearned revenue is a liability.
a.
True
b.
False
23. The systematic allocation of land’s cost to expense is called depreciation.
a.
True
b.
False
Chapter 3 – The Adjusting Process
24. The difference between the balance of a fixed asset account and the balance of its related accumulated depreciation
account is termed the book value of the asset.
a.
True
b.
False
25. The balance in the accumulated depreciation account is the sum of the depreciation expense recorded in past periods.
a.
True
b.
False
26. Accumulated depreciation accounts are liability accounts.
a.
True
b.
False
27. Accumulated depreciation is reported on the income statement.
a.
True
b.
False
Chapter 3 – The Adjusting Process
28. A contra asset account for Land will normally appear on the balance sheet.
a.
True
b.
False
29. Depreciation Expense is reported on the balance sheet as an addition to the related asset.
a.
True
b.
False
30. A company pays $36,000 for twelve months’ rent on October 1, recording the prepayment as an asset. The adjusting
entry on December 31 is a debit to Rent Expense, $9,000, and a credit to Prepaid Rent, $9,000.
a.
True
b.
False
Debit
Credit
9,000
Chapter 3 – The Adjusting Process
31. A company receives $360 for a 12-month trade magazine subscription on August 1. The adjusting entry on December
31 is a debit to Unearned Subscription Revenue, $150, and a credit to Subscription Revenue, $150.
a.
True
b.
False
32. A company depreciates its equipment $500 a year. The adjusting entry on December 31 is a debit to Depreciation
Expense, $500, and a credit to Equipment, $500.
a.
True
b.
False
33. A company pays an employee $3,000 for a five-day work week, Monday–Friday. The adjusting entry on December
31, which is a Wednesday, is a debit to Wages Expense, $1,800, and a credit to Wages Payable, $1,800.
a.
True
b.
False
Chapter 3 – The Adjusting Process
34. A company receives $6,500 for two season tickets sold on September 1. If $2,500 is earned by December 31, the
adjusting entry made at that time is a debit to Cash, $2,500, and a credit to Ticket Revenue, $2,500.
a.
True
b.
False
35. A company realizes that the last two days’ revenue for the month was billed but not recorded. The adjusting entry on
December 31 is a debit to Accounts Receivable and a credit to Fees Earned.
a.
True
b.
False
36. At year-end, the balance in the prepaid insurance account, prior to any adjustments, is $6,000. The amount of the
journal entry required to record insurance expense will be $4,000 if the amount of unexpired insurance applicable to
future periods is $2,000.
a.
True
b.
False
37. A fixed asset’s market value is reflected on the balance sheet.
a.
True
b.
False
Chapter 3 – The Adjusting Process
38. If the adjustment for accrued salaries at the end of the period is inadvertently omitted, both liabilities and stockholders’
equity will be understated for the period.
a.
True
b.
False
39. If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted, the assets at the end
of the period will be understated.
a.
True
b.
False
40. If the adjustment of the unearned rent account at the end of the period to recognize the amount of rent earned is
inadvertently omitted, the net income for the period will be understated.
a.
True
b.
False
Chapter 3 – The Adjusting Process
41. If the adjustment for depreciation for the year is inadvertently omitted, the assets on the balance sheet at the end of the
period will be understated.
a.
True
b.
False
42. Adjusting journal entries are dated on the last day of the period.
a.
True
b.
False
43. By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will always be
overstated.
a.
True
b.
False
44. The financial statements are prepared from the unadjusted trial balance.
a.
True
b.
False
Chapter 3 – The Adjusting Process
45. The adjustment for accrued fees was debited to Accounts Payable instead of Accounts Receivable. This error will be
detected when the adjusted trial balance is prepared.
a.
True
b.
False
46. The adjusted trial balance verifies that total debits equals total credits before the adjusting entries are prepared.
a.
True
b.
False
47. Vertical analysis compares each item in a financial statement with a total amount from the same statement.
a.
True
b.
False
48. When preparing an income statement vertical analysis, each revenue and expense is expressed as a percent of net
income.
a.
True
b.
False
Chapter 3 – The Adjusting Process
49. Vertical analysis is useful for analyzing financial statement changes over time.
a.
True
b.
False
50. The revenue recognition principle
a.
is not in conflict with the cash method of accounting
b.
determines when revenue is credited to a revenue account
c.
states that revenue is not recorded until the cash is received
d.
controls all revenue reporting for the cash basis of accounting
51. The matching principle
a.
addresses the relationship between the journal and the balance sheet
b.
determines whether the normal balance of an account is a debit or credit
c.
requires that the dollar amount of debits equal the dollar amount of credits on a trial balance
d.
states that the revenues and related expenses should be reported in the same period
52. Using accrual accounting, revenue is recorded and reported only
a.
when cash is received without regard to when the services are rendered
b.
when the services are rendered without regard to when cash is received
c.
when cash is received at the time services are rendered
d.
if cash is received after the services are rendered
Chapter 3 – The Adjusting Process
53. Using accrual accounting, expenses are recorded and reported only
a.
when they are incurred, whether or not cash is paid
b.
when they are incurred and paid at the same time
c.
if they are paid before they are incurred
d.
if they are paid after they are incurred
54. The accounting principle upon which deferrals and accruals are based is
a.
matching
b.
cost
c.
price-level adjustment
d.
conservatism
55. If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which of the
following describes the effect of the credit portion of the entry?
a.
decreases the balance of an stockholders’ equity account
b.
increases the balance of a liability account
c.
increases the balance of an asset account
d.
decreases the balance of an expense account
Chapter 3 – The Adjusting Process
56. If the effect of the credit portion of an adjusting entry is to increase the balance of a liability account, which of the
following describes the effect of the debit portion of the entry?
a.
increases the balance of a contra asset account
b.
increases the balance of an asset account
c.
decreases the balance of an stockholders’ equity account
d.
increases the balance of an expense account
57. Prior to the adjusting process, accrued expenses have
a.
not yet been incurred, paid, or recorded
b.
been incurred, not paid, but have been recorded
c.
been incurred, not paid, and not recorded
d.
been paid but have not yet been incurred
58. Prior to the adjusting process, accrued revenue has
a.
been earned and cash received
b.
been earned and not recorded as revenue
c.
not been earned but recorded as revenue
d.
not been recorded as revenue but cash has been received
Chapter 3 – The Adjusting Process
59. Prepaid expenses have
a.
not yet been recorded as expenses but have been paid
b.
been recorded as expenses and paid
c.
been incurred and paid
d.
not yet been recorded as expenses
60. Deferred revenue is revenue that is
a.
earned and the cash has been received
b.
earned but the cash has not been received
c.
not earned and the cash has not been received
d.
not earned but the cash has been received
61. Adjusting entries are
a.
the same as correcting entries
b.
needed to bring accounts up to date and match revenue and expense
c.
optional under generally accepted accounting principles
d.
rarely needed in large companies
Chapter 3 – The Adjusting Process
62. Adjusting entries affect at least one
a.
income statement account and one balance sheet account
b.
revenue and the dividends account
c.
asset and one stockholders’ equity account
d.
revenue and one stockholders’ equity account
63. The term used to describe an expense that has not been paid and has not yet been recognized in the accounts by a
routine entry is
a.
prepaid
b.
deferred
c.
accrued
d.
matched
64. Which of the following is not a characteristic of the accrual basis of accounting?
a.
revenues and expenses are reported in the period in which cash is received or paid
b.
revenues are reported on the income statement in the period in which they are earned
c.
accrual basis of accounting supports the matching concept
d.
expenses are reported in the same period as the revenues to which they relate
Chapter 3 – The Adjusting Process
65. Generally accepted accounting principles require that companies use the ____ of accounting.
a.
cash basis
b.
deferral basis
c.
accrual basis
d.
account basis
66. The cash basis of accounting records revenues and expenses when the cash is exchanged while the accrual basis of
accounting
a.
records revenues when they are earned and expenses when they are paid
b.
records revenues and expenses when they are incurred
c.
records revenues when cash is received and expenses when they are incurred
d.
records revenues and expenses when the company needs to apply for a loan
67. By matching revenue earned during the accounting period to related incurred expenses
a.
net income or loss will always be underestimated
b.
net income or loss will always be overestimated
c.
net income or loss will be properly reported on the income statement
d.
net income or loss will not be determined
Chapter 3 – The Adjusting Process
68. Adjusting entries always include
a.
only income statement accounts
b.
only balance sheet accounts
c.
the cash account
d.
at least one income statement account and one balance sheet account
69. Prepaid expenses are eventually expected to become
a.
expenses when their future economic value expires or is used up
b.
revenues when services are performed
c.
expenses in the period when they are paid
d.
revenues when the liability is no longer owed
70. Which of the following is considered to be unearned revenue?
a.
theater tickets sold last month for yesterday’s performance
b.
theater tickets sold yesterday on credit for yesterday’s performance
c.
theater tickets that were not sold for the current performance
d.
theater tickets sold for next month’s performance