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Vocabulary Quiz Name _______________
Chapter 4
1. Expenses paid in cash and recorded as assets before they are used or
consumed.
2. Entries at the end of an accounting period to transfer the balances of
temporary accounts to a permanent stockholders’ equity account,
Retained Earnings.
3. The process of allocating the cost of an asset to expense over its useful
life.
4. Cash received before a company earns revenues and recorded as a
liability until the services are performed.
5. The principle that dictates that efforts (expenses) be matched with
accomplishments (revenues).
6. Accounting basis in which companies record, in the periods in which the
events occur, transactions that change a company’s financial statements,
rather than in the periods in which the company receives or pays cash.
7. The principle that revenue be recognized in the accounting period in which
the services are performed.
8. Entries made at the end of an accounting period to ensure that the
revenue recognition and expense recognition principles are followed.
9. An account that is offset against an asset account on the balance sheet.
10. Expenses incurred but not yet received in cash or recorded.
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Solutions to Vocabulary Quiz
Chapter 4
1. Prepaid expenses
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Multiple Choice Quiz Name _______________
Chapter 4
1. Accountants have developed two principles to use as guidelines in determining the
amount of revenues and expenses to be reported in a given period. These principles
are the:
a. cash basis accounting principle.
b. revenue recognition principle.
c. expense recognition principle.
d. both cash basis accounting principle and revenue recognition principle are
correct.
2. Which of the following is NOT true concerning cash basis accounting?
a. Does not follow GAAP.
b. Records revenue when cash is received.
c. Matches expenses with the revenues they help to produce.
d. Records expenses when cash is paid.
3. In order for revenues to be recorded in the period in which the services are performed,
and for expenses to be recognized in the period in which they are incurred:
a. adjusting entries are made.
b. cash basis accounting is used.
c. closing entries are made.
d. none of these answer choices are correct.
4. Unearned revenues are:
a. deferrals.
b. liabilities.
c. temporary accounts.
d. both deferrals and liabilities are correct.
5. All of the following are examples of prepaid expenses except:
a. prepaid rent.
b. prepaid insurance.
c. supplies.
d. unearned revenues.
6. Depreciation is:
a. the wearing away of an asset.
b. the process of an asset becoming obsolete.
c. a valuation process.
d. The process of allocating the cost of an asset to expense over its useful life.
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7. Accumulated depreciation is a:
a. contra asset account.
b. contra revenue account.
c. unearned revenue account.
d. expense account.
8. Which of the following companies would probably not have unearned revenue:
a. Delta Airlines.
b. Hurst Publishing Company.
c. Poppa John’s Pizza.
d. All State Insurance Company.
9. Adjusting entries for accruals:
a. are required in order to record revenues for services performed and expenses
incurred in the current accounting period that have not been recognized through
daily entries and thus are not yet reflected in the accounts.
b. will increase both a balance sheet and an income statement account.
c. are not required under GAAP.
d. both are required in order to record revenues for services performed and
expenses incurred in the current accounting period that have not been
recognized through daily entries and thus are not yet reflected in the accounts
and will increase both a balance sheet and an income statement account are
correct.
10. An assumption that the economic life of a business can be divided into artificial time
periods is the:
a. cash basis assumption.
b. accrual assumption.
c. calendar year assumption.
d. periodicity assumption.
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Solutions to Multiple Choice Quiz
Chapter 4
1. d
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Exercise 1 – World Wide Web Research, Accrual Accounting, and Financial
Statement Analysis Activity
Chapter 4
Refer to the financial statements in the Annual Report of Target Corporation to answer the
following questions. If researching the Web, go to http://www.target.com, click on Investor
relations, and then Annual Reports. Go to the most recent Annual Report.
1. What is the date of the financial statements?
2. What is the exact title of Target’s income statement?
3. Which of the accounts found on the income statement and balance sheet (Statement of
Financial Position) have, most likely, been adjusted?
4. Which of the accounts found on the income statement and balance sheet have been
created as a result of adjusting entries?
5. What is the name of the accounting firm that conducted the external audit of Target?
6. What is meant by ‘consolidated’ in the titles of the financial statements?
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Exercise 2 – Accrual Accounting Activity
Chapter 4
Your roommate, an accounting major, is working part time at Modern Dry Cleaners. She just
came home from work and is complaining because the owner wants her to prepare year-end
adjusting entries. “Roomie” contends that because the business is relatively small and
because they will not make “too significant” an impact on the financial condition of the
business, adjusting entries should not be prepared.
Use the space provided to try to convince your roommate that adjusting entries should be
made.
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Chapter 4
Return to the financial statements prepared for the new business in Campus Town USA in
earlier chapters in answering the following questions:
1. Determine which accounts should be adjusted and make the necessary adjustments.
2. What would have been the consequences had you not made these entries? Be specific.
3. Make the required closing entries.
4. What would have been the consequences had you not made the closing entries?
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Exercise 4 – World Wide Web Research, Accrual Accounting, and Financial
Statements Activity
Chapter 4
Obtain an annual report for Tootsie Roll. If you are researching the Web go to
http://www.tootsie.com/. Using information found in the financial statements of the Annual
Report, make the following closing entries:
1. Make journal entries to close the revenue and expense accounts.
2. Make a journal entry to close the income summary account.
3. Make a journal entry to close the dividend account.
4. What is the date of the closing entries?
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Exercise 5 – Accrual Accounting and Creative Activity
Chapter 4
Refer to the income statement prepared for Joe’s Tees in the exercises for Chapter 2. Does
the income statement prepared in Chapter 2 violate rules of accrual accounting? (Pay
particular attention to the requirements of the expense recognition principle.)
1. Amend the income statement so that it better conforms to the practice of accrual
accounting.
2. Explain why the statements that you just prepared are superior to those you prepared in
Chapter 2.
Solutions
1. Revenues $8,000
Less Expenses:
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Exercise 6 – World Wide Web Research, Accrual Accounting
Chapter 4
Obtain an annual report for Tootsie Roll from your school library or on the World Wide Web. If
you are researching the Web go to http://www.tootsie.com/. Does Tootsie Roll use cash or
accrual accounting? Provide evidence to support your answer.
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Exercise 7 – Accrual Accounting and Ethics Activity
Chapter 4
You have just graduated from the local University and landed what you had thought was a
great job as an accountant for Crazy House Interiors, an upscale design studio. Your
apartment is wonderful and you have made a lot of new friends. However, you boss has just
asked you to “do him a favor.” Crazy House is planning to ask one of the local banks for a
loan. However, there is some concern because this year’s revenues are considerably lower
than the revenues of the previous year.
One of the more talented designers has just landed a contract for a large, profitable project.
Half of the fee for the project is to be collected when the contract is signed at the end of this
week, with the remainder of the money due when the project is completed. Work will begin on
the project when the contract is signed.
Your boss has asked you to record the initial payment of $125,000 as revenue at the time the
money is received. Not wanting to disappoint the boss, you originally agreed to record the
transaction as he requested. However, you are having second thoughts about recording the
transaction and your ethical responsibilities.
What should you do? Why?
Solution:
Refuse to record the $125,000 advance as revenue until the services have been
performed. The $125,000 should be recorded as unearned revenue, a liability account,
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Exercise 8 – Accounting Insights Activity
Chapter 4
1. Name at least three industries in which businesses would have unearned revenue?
2. What is the source of these unearned revenues? Be specific in the examples you cite.
3. When is the revenue recognized and what journal entry would be made at the time of
recognition?
Solutions:
1. Airlines, magazine publishers, and insurance companies.
2. Cash received for airline tickets purchased on June 1 for trips to be taken July 4
with a return on July 8, would be classified as unearned revenue.