Chapter 3—Accrual Accounting Key
1. When a company recognizes the portion of supplies used during a year, the effect is to decrease net income.
2. Adjusting entries are prepared using the accrual basis of accounting for preparing financial statements.
3. Accrued revenue is recognized when cash is received.
4. A franchiser is permitted to recognize the revenue from the sale of a franchise whenever they wish under
accrual-basis accounting.
5. Most companies use the accrual basis of accounting because it is required under generally accepted
accounting principles.
6. Three months before its year-end, a company signed a $250,000, 12%, 8-month note. Principal and interest
will be paid at maturity. No interest should be accrued at year-end because the company has no obligation to
pay the interest until the note matures.
7. Matching requires expenses be recorded and reported in the same period as the revenue that it helped to
generate.
8. One effect of recognizing depreciation is to decrease net income.
9. A company that forgets to recognize depreciation for the year understates its income and assets.
10. The Cash account is never part of an adjusting entry.
11. A cost can be an asset or expense depending on whether or not the future economic benefits have expired.
12. When cash is paid before an expense is incurred, an accrual is necessary.
13. The amount of interest accrued is added to the note payable account and reported in the liabilities section of
the balance sheet.
14. Accumulated depreciation is a contra asset account.
15. Adjustments are recorded for all transactions involving outside entities.
16. When revenue is earned after the earlier receipt of cash, an adjustment that increases a revenue account and
decreases a liability account is recorded.
17. Every adjustment involves at least one income statement and one balance sheet account.
18. When an expense is incurred prior to the payment of cash for that expense, an adjustment that increases an
expense account and increases a liability is prepared.
19. The balance in the account, Rent Collected in Advance, is reported as a liability on the balance sheet of the
landlord.
20. Income Statement accounts are closed to the income summary.
21. Since dividends do not impact income, the dividends account is not closed to the income summary account.
22. Adjusting entries must be made prior to the preparation of financial statements.
23. Adjusting entries are recorded at the end of each accounting period so that net income is accurately reflected
in the financial statements for the period.
24. Closing entries are necessary to assure that the company’s net income for an accounting period is accurately
determined.
25. During the closing process, revenues, expenses, and dividends must be closed to the Income Summary
account.
26. If the Income Summary account has a credit balance just prior to closing it to retained earnings, the
company must have incurred a net income for the year.
27. Dividends, like expenses, are closed to the income summary account during the end-of-period closing
process.
28. Publicly traded companies must prepare an additional financial statement called The Worksheet.
29. In the worksheet, the first set of columns immediately following the account titles is for the Adjusted Trial
Balance
30. The worksheet facilitates preparation of the income statement, retained earnings statement and balance sheet
but not the cash flow statement.
31. On the worksheet, the retained earnings balance that gets transferred from the retained earnings statement
section of the worksheet to the balance sheet section is the beginning retained earnings balance.
32. The ____________________ principle determines when revenue is recorded and reported.
33. The difference between accrual-based revenue and accrual-based expenses in the period the activity
occurred is called ____________________.
34. Under the ____________________ basis of accounting, revenues are recognized when earned and expenses
when incurred.
35. According to the revenue recognition principle, revenues are recognized when they are
____________________ and ____________________.
36. The ____________________ principle attempts to associate the revenue of the period with all costs
necessary to generate that revenue.
37. ____________________ is the allocation of the cost of a tangible, long-term asset over its useful life to
expense.
38. The names of the four major types of adjusting entries are ____________________,
____________________, ____________________, and ____________________.
39. The adjustment necessary to record the expense and the associated increase in the company’s liabilities is
____________________.
40. ____________________ is the name given to revenue, expense, and dividend accounts because they are
closed at the end of the period.
41. ____________________ is the name given to balance sheet accounts because their balances are carried
forward from the current accounting period to future accounting periods.
42. ____________________ are journal entries made at the end of the accounting period to return the balance in
all temporary accounts to zero.
43. The ____________________ basis of accounting requires that revenues be recorded in the period they are
earned rather than in the period they are received.
44. The ____________ basis of accounting recognizes revenue when it is received regardless of when the
revenue is earned.
45. A(n) ____________________ revenue results when cash is received before it is earned and reported on the
income statement.
46. A ____________________ results when cash is paid before the related amount is reported on the income
statement.
47. An ____________________ revenue must be recorded when revenue is earned in advance of receiving
cash.
48. The ____________________ principle requires that expenses be recorded and reported in the same period
as the revenue that it helped to generate.
49. The six steps for preparing the worksheet are unadjusted trial balance, adjusting entries, adjusted trial
balance, ______________, retained earnings statement, and balance sheet.
50. An informal schedule called a ________________ is helpful for organizing and preparing the information
necessary to perform the end-of-period steps in the accounting cycle.
51. Once adjustments have been made, an ____________________ is prepared to ensure the accounting
equation is still in balance and to facilitate preparation of the financial statements.
52. The first step in the accounting cycle is to ________________ transactions.
53. The preparation of _______________ is necessary to get the account balances properly stated and up to
date.
54. Match each statement to the item listed below
1. A schedule that facilitates preparation of the financial
2. States that revenues and expenses are recorded in the
Time period
3. Without these, some of the account balances will not
be up-to-date at the time financial statements are
4. Refers to the process of assigning the cost of an asset
Cash basis
5. A listing of all the account balances immediately
Adjusted trial
6. Requires that expenses be recorded in the same period
7. Allows companies to artificially divide their
Matching
8. States that revenues should be recorded in the period
Accrual basis
55. Measurement of the economic effects on an entity involves each of the following except
56. Under accrual accounting when is revenue recognized?
57. A local tennis club sells season memberships for $1,000 each. During January 2013, 50 season memberships
were sold. As of March 31, 2013, only $25,000 of season membership fees had been collected from customers.
The tennis season runs for 6 months starting April 01, 2013. Which one of the following is an amount reported
on the Balance Sheet dated March 31, 2013?
58. Calmar Corporation sold merchandise to a customer for $30,000 on credit on July 15. The customer paid
Calmar Corporation the amount due on July 31. Under the accrual basis of accounting, how should Calmar
Corporation record the transaction?
59. Cambridge Cleaners started business on January 1, 2013, and immediately purchased $5,000 of supplies to
use in the business. At the end of the month, 30 percent of the supplies remains unpaid and 20% are still on
hand. What amounts should appear as an expense on the financial statements for January, 2013?
Income Statement Statement of Cash Flows
60. During December, Camp David, Inc. purchased $5,000 of supplies for use in its business. At the end of
December, 20% of the supplies were still on hand, but only 70% had been paid. What amounts will appear on
the company’s balance sheet on December 31?
Supplies on Hand Accounts Payable
61. Camper City started business on January 1, 2013. Stanton performed services for customers totaling
$250,000 of which 40% remain uncollected at the end of December. Under the accrual basis, what amounts
would appear on the company’s financial statements for 2013?
Income Statement Statement of Cash Flows
62. A tax service prepared tax returns for twenty clients at $200 each. By the end of June, the service had
collected from eight clients. Under the accrual basis, what amounts will be reported on the income statement
and the statement of cash flows for June?
Income Statement Statement of Cash Flows
63. Canterbury Cycles sells Harleys and pays each salesperson a commission of $800 for each cycle sold.
During the month of December, a salesperson sold 3 cycles. The company pays commissions on the 5th day of
the month following the sale. Which of the following statements is true?
64. When are revenues and expenses recognized in the same accounting period that cash receipts and payments
occur?
65. Which of the following concepts is important to accrual accounting?
66. Which statement presents financial information not based on accrual accounting?
67. When should a shipping company recognize revenue from its delivery service?
68. When is revenue from the sale of merchandise normally recognized?
69. A company that sells merchandise to customers should normally recognize
70. What does the phrase, “Revenue is recognized when earned” mean?
71. On December 31, 2013, a company signed a one-year contract to provide services to a particular customer
for $12,000. The customer will pay for the services during January 2014. Using the accrual basis of accounting,
when should the company recognize revenue?
72. Accrued expenses originate from
73. Which one of the following is not a proper method of recognizing assets as expenses in a particular
accounting period?
74. Expenses should be matched against revenue
75. Which of the following situations violates the matching principle during 2013 for a real estate company that
pays its agents on commission?
76. A manufacturing company purchased equipment on January 1, 2004 for $450,000. As of January 1, 2013,
depreciation of $202,500 had been recorded on this asset. Depreciation expense for 2013 is $22,500. After the
adjustments are recorded and posted at December 31, 2013, what are the balances for the Equipment and
Accumulated Depreciation?
Equipment Accumulated Depreciation
77. A tool company purchased equipment at a cost of $100,000 in January, 2004. As of January 1, 2013,
depreciation of $45,000 had been recorded on this asset. Depreciation expense for 2013 is $5,000. After the
adjustments are recorded and posted at December 31, 2013, what are the balances for the Depreciation Expense
and Accumulated Depreciation?
Depreciation Expense Accumulated Depreciation
78. Assets become expenses when?
79. Which one of the following is an example of a deferred revenue?
80. What effect does “recognizing accrued Interest Revenue at the end of the accounting period” have on the
accounting equation?
81. What effect does “recognizing revenue at the end of the accounting period for rent previously received in
advance” have on the accounting equation for the insurance company?
82. Carithers Cleaning Service received advance payments from customers during 2013 of $24,000. At
December 31, 2013, $5,000 of the advance payments still had not been earned. After the adjustments are
recorded and posted at December 31, 2013, the balances in the Unearned Service Revenue and Service Revenue
accounts will be:
Unearned Service Revenue Service Revenue
83. An insurance company received advance payments from clients during 2013 of $12,000. At December 31,
2013, $10,000 of the advance payments still had not been earned. After the adjustments are recorded and posted
at December 31, 2013, what will the balances be in the Unearned Insurance Revenue and Insurance Revenue
accounts?
Unearned Insurance Revenue Insurance Revenue
84. Carlock Systems received a 6-month, 12% note for $50,000 from a customer on November 1, 2013. The
note is due on April 30, 2014. Assuming the company’s accounting period ends on December 31, how much
interest revenue should be recognized during 2013 and 2014?
2013 2014
85. Carnegie Jewelers accepted a 9-month, 9% note for $100,000 from a customer on July 1, 2013. The note is
due on March 31, 2014. Assuming the company’s accounting period ends on December 31, 2013, how much
interest revenue should be recognized during 2013 and 2014?
2013 2014
86. Which one of the following is an example of an accrued liability?
87. Adjusting journal entries are made at the end of the period when
88. What happens to the accounting equation when the adjustment for depreciation expense for the accounting
period is recorded?
89. What happens to the accounting equation when the adjustment is recorded to recognize earned revenue
previously recorded as unearned revenue?
90. A particular company had $2,400 of supplies on hand at January 1. During the year, supplies with a cost of
$4,000 were purchased. At December 31, the actual supplies on hand amounted to $2,000. After the
adjustments are recorded and posted at December 31, what are the ending balances in the Supplies and Supplies
Expense accounts?
Supplies Supplies Expense
91. Carolina Truck Lines purchased a truck at a cost of $22,000 in 2008. As of January 1, 2013, depreciation of
$18,000 had been recorded on this asset. Depreciation expense for 2013 is $2,000. Before the adjustments are
recorded and posted at December 31, 2013, what is the truck’s book value?
92. Match Incorporated recorded salary expense of $120,000 in 2013. However, additional salaries of $9,000
had been earned, but not paid or recorded at December 31, 2013. After the adjustments are recorded and posted
at December 31, 2013, the balances in the Salaries Expense and Salaries Payable accounts will be
Salaries Expense Salaries Payable
93. On October 1, 2013, a company paid $9,000 rent in advance. The rent per month is $1,000. Assuming the
company’s accounting period ends on December 31, 2013, what will be reported on the financial statements?
94. Cozy Corporation purchased supplies at a cost of $15,000 during 2013. At January 1, 2013, supplies on
hand were $5,000. At December 31, 2013, supplies on hand are $2,000. Calculate supplies expense for 2013.
95. Carver Memorial Gardens purchased supplies for $14,500 during the year. At January 1, supplies on hand
were $1,000. At December 31, supplies on hand are $3,500. Determine the amount of supplies expense for the
year.
96. Cash Express had no supplies on January 1 but purchased $2,581 in supplies during the year. At December
31, supplies on hand are $1,492. What amount for supplies will be reported on the firm’s balance sheet?
97. A sporting goods chain purchased supplies at a cost of $11,000 during the year. At January 1, the beginning
balance in the supplies account was $3,000. At December 31, supplies on hand are $800. Determine supplies
expense for the year.
98. A law firm purchased supplies at a cost of $20,000 during 2013. At January 1, 2013, the beginning balance
in the supplies account was $1,300. For 2013, supplies expense was $11,200. How much “Supplies” are on hand
as of December 31, 2013?
99. Which one of the following adjustments will increase assets?
100. A company forgot to record four adjustments during 2013. Which one of the following omissions of
adjustments will understate net income?
101. A company forgot to record four adjustments during 2013. Which one of the following omissions of
adjustments will understate assets?
102. If the end-of-year supplies on hand totaled $200, and purchases totaled $300, and supplies on hand at the
beginning of the year amounted to $100, how much will be reported as supplies expense for the current year?
103. On October 1, 2013, a company borrowed $200,000 on a two-year, 12% note, with interest and principal to
be paid at maturity. How much interest expense will be reported on the income statement for the year ending
December 31, 2013?
104. A company borrowed $500,000 on a one-year, 10% note on October 1, 2013, with interest and principal to
be paid at maturity. How much interest should be reported on the income statement for the year ending
December 31, 2014?
105. A company borrowed $100,000 on a one-year, 10% note on September 1, 2013, with interest and principal
to be paid at maturity. How much interest payable will be reported on the balance sheet at November 30, 2013?
106. The university satellite office operates five days per week with a daily payroll of $5,000. Employees are
paid every Saturday for the workweek just completed (Monday through Friday). The last day of the month is
Wednesday, October 31. What is the effect of the correct adjustment at October 31?
107. Based on its income for the month, a company estimates that it will owe $23,000 of federal income taxes
for the month of May. What is the effect of the adjustment on the financial statements?
108. Which one of the following adjustments increases net income for the period?
109. A local medical clinic operates five days per week with a daily payroll of $100,000. Employees are paid
every Tuesday for the prior week’s work (Monday through Friday). The last day of the month is Tuesday, April
30. What effect does the accrual at April 30 have on the clinic’s net income?
110. Accumulated Depreciation
111. A landscaping company operates five days per week with a daily payroll of $16,000. Employees are paid
every Saturday for the workweek just completed (Monday through Friday). The last day of the month is
Wednesday, March 31. What is the amount of Wages Expense recorded on the next payday, Saturday, April 3?
112. Certified Electronics operates five days per week with a daily payroll of $40,000. Employees are paid
every Saturday for the work week just completed (Monday through Friday). The last day of the month is
Wednesday, May 31. The correct adjusting entry at May 31 is
113. A company rented office space to a tenant on January 1 and received a total of $90,000 for the first nine
months of rent. The amount was recorded as Rent Collected in Advance when received. Adjustments are
recorded only at the end of every quarter. What effect does the adjustment at March 31 have on the company’s
net income for the quarter ending March 31?
114. The supplies account has a balance of $1,000 on January 1. During January, the company purchased
$25,000 of supplies on account and the liability was appropriately recorded. A count of supplies at the end of
January indicates a balance of $3,000. Which one of the following is a correct amount to be reported on the
company’s financial statements for the month ending January 31?
115. Which of the following adjusting entries involves the cash account?
116. The asset account, Supplies, has a balance of $10,000 on January 1. During January, $22,000 of supplies
were purchased on account and the liability was appropriately recorded. A count of supplies at the end of
January indicates a balance of $2,000. What adjusting entry is necessary at January 31?
117. Which one of the following adjustments decreases net income for the period?
118. What is the effect on the accounting equation when a company recognizes rent as earned that had
previously been received in advance from customers?