ACC 201 Ch. 3 Practice Questions
A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account.
False
Adjusting entries are made after the preparation of financial statements.
False
Adjusting entries are normally entered in the general journal prior to being posted to the work sheet.
False
Before an adjusting entry is made to recognize insurance expired, Prepaid Insurance and Insurance Expense are both overstated.
False
Closing entries are normally entered in the general journal and then posted to the work sheet.
False
Current liabilities include accounts receivable, unearned revenues and salaries payable.
False
Depreciation expense is an example of an accrued expense.
False
Earned but uncollected revenues that are recorded during the adjusting process with a credit to a revenue account and a debit to an expense account are referred to as accrued expenses.
False
If all columns balance upon completion of a work sheet, you can be sure that no errors were made in preparing the work sheet.
False
In accrual accounting, accrued revenues are recorded as liabilities.
False
In preparing statements from the adjusted trial balance, the balance sheet must be prepared first.
False
Interim statements report a company's business activities for a 1-year period.
False
On the work sheet, net income is entered in the Income Statement Credit column as well as the Balance Sheet Debit column.
False
Profit margin is calculated by dividing net sales by net income.
False
Since it is an important financial statement, the trial balance must be prepared according to specified accounting procedures.
False
Since the revenue recognition principle requires that revenues be earned, there are no unearned revenues in accrual accounting.
False
The Income Summary account is used to close the permanent accounts at the end of an accounting period.
False
The accrual basis of accounting is an accounting system in which revenues are reported as earned when cash is received.
False
The current ratio is computed by dividing current liabilities by current assets.
False
The dividends account is normally closed by debiting it.
False
The last four steps in the accounting cycle include preparing the adjusted trial balance, preparing financial statements and recording closing and adjusting entries.
False
The matching principle and the full closure principle are the two main accounting principles used in accrual accounting.
False
The matching principle requires that revenue not be assigned to the accounting period in which it is earned.
False
When expenses exceed revenues, there is a net loss and the Income Summary account would have a credit balance.
False
The first five steps in the accounting cycle include analyzing transactions, journalizing, posting, preparing an unadjusted trial balance and recording adjusting entries.
True
The matching principle requires that expenses get recorded in the same accounting period as the revenues that are earned as a result of the expenses, not when cash is paid.
True
The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues.
True
The time period principle assumes that an organization's activities can be divided into specific time periods.
True
Under the cash basis of accounting, no adjustments are made for prepaid, unearned and accrued items.
True
Ben and Jerry's had total assets of $149,501,000, net income of $6,242,000 and net sales of $209,203,000. Its profit margin was 2.98%.
True $6,242,000/$209,203,000 = 2.98%
On October 15, a company received $15,000 cash as a down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the services required by the contract were completed. The company will record consulting revenue of $1,500 from this contract for October.
True Revenue = $15,000 x 10% = $1,500
Interim financial statements refer to financial reports: A. That cover less than one year, usually spanning one, three or six-month periods B. That are prepared before any adjustments have been recorded C. That show the assets above the liabilities and the liabilities above the equity D. Where revenues are reported on the income statement when cash is received and expenses are reported when cash is paid E. Where the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues
A
The accrual basis of accounting: A. Is generally accepted for external reporting since it is more useful for most business decisions B. Is flawed because it gives complete information about cash flows C. Recognizes revenues when received in cash D. Recognizes expenses when paid in cash E. Eliminates the need for adjusting entries at the end of each period
A
The asset section of a classified balance sheet usually includes: A. Current assets, investments, plant assets and intangible assets B. Current assets, long-term assets, revenues and intangible assets C. Current assets, investments, plant assets and equity D. Current liabilities, investments, plant assets and intangible assets E. Current assets, liabilities, plant assets and intangible assets
A
Which of the following is true of accrued revenues: A. At the end of one accounting period often result in cash receipts from customers in the next period B. At the end of one accounting period often result in cash payments in the next period C. Are also called unearned revenues D. Are listed on the balance sheet as liabilities E. Are recorded at the end of an accounting period because cash has already been received for revenues earned
A
On June 30, 2011, Apricot Co. paid $5,000 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. The adjusting entry on December 31, 2011 for Apricot would include: A. A debit to an expense for $1,250 B. A debit to a prepaid expense for $1,250 C. A credit to an expense for $3,750 D. A debit to a prepaid expense for $3,750 E. A credit to a liability for $1,250
A $5,000 x 6/24 = $1,250
A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters or years is the: A. Operating cycle of a business B. Time period principle C. Going-concern principle D. Matching principle E. Accrual basis of accounting
B
A classified balance sheet: A. Measures a company's ability to pay its bills on time B. Organizes assets and liabilities into important subgroups C. Presents revenues, expenses and net income D. Reports operating, investing and financing activities E. Reports the effect of profit and dividends on retained earnings
B
A company records the fees for legal services paid in advance by its clients in an account called Unearned Legal Fees. If the company fails to make the end-of-period adjusting entry to record the portion of these fees that has been earned, one effect will be: A. An overstatement of equity B. An understatement of equity C. An understatement of assets D. An understatement of liabilities E. An overstatement of assets
B
A publishing company records the subscriptions paid in advance by its customers in an account called Unearned Subscription Revenue. If the company fails to make the end-of-period adjusting entry to record the portion of the subscriptions that have been earned, one effect will be: A. An overstatement of equity B. An overstatement of liabilities C. An understatement of assets D. An understatement of liabilities E. An overstatement of assets
B
An account linked with another account that has an opposite normal balance and that is subtracted from the balance of the related account is a(n): A. Accrued expense B. Contra account C. Accrued revenue D. Intangible asset E. Adjunct account
B
Due to an oversight, a company made no adjusting entry for accrued and unpaid employee wages of $24,000 on December 31. This oversight would: A. Understate net income by $24,000 B. Overstate net income by $24,000 C. Have no effect on net income D. Overstate assets by $24,000 E. Understate assets by $24,000
B
Each letter below contains three of the steps found in the accounting cycle. Which presents the given steps in the proper sequence, first to last? A. Adjust, Analyze transactions, Close B. Analyze transactions, Adjust, Close C. Prepare post-closing trial balance, Prepare statements, Close D. Prepare statements, Post, Close E. Prepare adjusted trial balance, Journalize, Close
B
Prepaid expenses, depreciation, accrued expenses, unearned revenues and accrued revenues are all examples of: A. Items that require contra accounts B. Items that require adjusting entries C. Asset and equity D. Asset accounts E. Income statement accounts
B
The accounting principle that requires revenue to be reported when earned is the: A. Matching principle B. Revenue recognition principle C. Time period principle D. Accrual reporting principle E. Going-concern principle
B
The main purpose of adjusting entries is to: A. Record external transactions and events B. Record internal transactions and events C. Recognize assets purchased during the period D. Recognize debts paid during the period E. Correct errors
B
The total amount of depreciation recorded against an asset or group of assets during the entire time the asset or assets have been used in the day to day operations of the business: A. Is referred to as depreciation expense B. Is referred to as accumulated depreciation C. Is shown on the income statement of the final period D. Is only recorded when the asset is disposed of E. Is referred to as an accrued asset
B
A company earned $2,000 in net income for October. Its net sales for October were $10,000. Its profit margin is: A. 2% B. 20% C. 200% D. 500% E. $8,000
B $2,000/$10,000 = 20%
Adjusting entries: A. Affect only income statement accounts B. Affect only balance sheet accounts C. Affect both income statement and balance sheet accounts D. Affect only cash flow statement accounts E. Affect only equity accounts
C
If a company failed to make the end-of-period adjustment to remove the amount earned from the Unearned Management Fees account, there would be: A. An overstatement of net income B. An overstatement of assets C. An overstatement of liabilities D. An overstatement of equity E. An understatement of liabilities
C
Profit margin is defined as: A. Revenues divided by net sales B. Net sales divided by assets C. Net income divided by net sales D. Net income divided by assets E. Assets divided by net sales
C
The 12-month period that ends when a company's activities are at their lowest point is called the: A. Fiscal year B. Calendar year C. Natural business year D. Accounting period E. Interim period
C
The length of time covered by a set of periodic financial statements is referred to as the: A. Fiscal cycle B. Natural business year C. Accounting period D. Business cycle E. Operating cycle
C
The recurring steps performed each accounting period, starting with analyzing and recording transactions in the journal and continuing through the post-closing trial balance, are referred to as the: A. Accounting period B. Operating cycle C. Accounting cycle D. Closing cycle E. Natural business year
C
The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called: A. Accrual basis accounting B. Operating cycle accounting C. Cash basis accounting D. Revenue recognition accounting E. Current basis accounting
C
What is the difference between GAAP and IFRS presentations of the current assets section on the balance sheet? A. Under IFRS it is mandatory to present current assets first while under GAAP it is customary (but not required) to present noncurrent assets first. B. Both IFRS and GAAP require that current assets are listed first C. Under GAAP it is mandatory to present current assets first while under IFRS it is customary (but not required) to present noncurrent assets first. D. It is customary (but not required) under both IFRS and GAAP to present noncurrent assets first E. GAAP requires that current assets be presented first while IFRS requires that current assets be presented last
C
Which of the following accounts would be closed at the end of the accounting period? A. Accounts Receivable B. Unearned Consulting Fees C. Fees Earned D. Retained Earnings E. Land
C
Which of the following identifies the proper order of the accounting cycle? A. Analyze, Journalize, Unadjusted Trial Balance B. Analyze, Post, Unadjusted Trial Balance C. Journalize, Post, Adjusted Trial Balance D. Unadjusted Trial Balance, Adjusted Trial Balance, Close E. Adjusted Trial Balance, Adjustments, Financial Statements
C
Which of the following is the usual final step in the accounting cycle? A. Journalizing transactions B. Preparing an adjusted trial balance C. Preparing a post-closing trial balance D. Preparing the financial statements E. Preparing a work sheet
C
Prior to recording adjusting entries, the Office Supplies account had a $359 debit balance. A physical count of the supplies showed $105 of unused supplies available. The required adjusting entry is: A. Debit Office Supplies $105 and credit Office Supplies Expense $105 B. Debit Office Supplies Expense $105 and credit Office Supplies $105 C. Debit Office Supplies Expense $254 and credit Office Supplies $254 D. Debit Office Supplies $254 and credit Office Supplies Expense $254 E. Debit Office Supplies $105 and credit Supplies Expense $254
C $359 - $105 = $254 The amount which has been consumed.
A company had $7,000,000 in net income for the year. Its net sales were $11,200,000 for the same period. Calculate its profit margin. A. 17.5% B. 28% C. 62.5% D. 160% E. $18.2 million
C $7,000,000/$11,200,000 = 62.5%
On June 30, 2011, Apricot Co. paid $5,000 cash for management services to be performed over a two-year period. Apricot follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment. On June 30, 2011 Apricot should record: A. A credit to an expense for $5,000 B. A debit to an expense for $5,000 C. A credit to a prepaid expense for $5,000 D. A debit to a prepaid expense for $5,000 E. A debit to Cash for $5,000
D
The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is: A. Cash basis accounting B. The matching principle C. The time period principle D. Accrual basis accounting E. Revenue basis accounting
D
The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses is the: A. Recognition principle B. Cost principle C. Cash basis of accounting D. Matching principle E. Time period principle
D
The current ratio: A. Is used to measure a company's profitability B. Is used to measure the relation between assets and long-term debt C. Measures the effect of operating income on profit D. Is used to help evaluate a company's ability to pay its short-term obligations E. Is calculated by dividing current assets by equity
D
The periodic expense created by allocating the cost of plant and equipment to the periods in which they are used, representing the expense of using the assets is called: A. Accumulated depreciation B. A contra account C. The matching principle D. Depreciation E. An accrued account
D
Western Company has an annual reporting period that runs from July 1st through June 30th. Based on this information which of the following is a true statement? A. Western probably has little seasonal variation in their sales B. Western has violated the time period principle C. Western must prepare financial statements as of December 31 each year D. Western has adopted a fiscal year E. Western does not have an accountant
D
Which of the following accounts would not be impacted by adjusting journal entries? A. Accounts Receivable B. Consulting Fee Earned C. Unearned Consulting Fees D. Cash E. Wages Payable
D
Which of the following accounts would not be on the post closing trial balance? A. Accounts Payable B. Accounts Receivable C. Common Stock D. Dividends E. Retained Earnings
D
IFRS tends to be more principles-based compared to GAAP which is viewed as more rules-based. Which of the following is a true statement about a principles-based system? A. A principles-based system eliminates the need for internal controls B. A principles-based system is significantly weaker than a rules-based system C. A principles-based system will eliminate all fraud D. A principles-based system is a way to calculate interest receivable or payable E. A principles-based system depends heavily on control procedures to reduce the potential for fraud or misconduct.
E
If a company forgot to record depreciation on office equipment at the end of an accounting period, the financial statements prepared at that time would show: A. Assets overstated and equity understated B. Assets and equity both understated C. Assets overstated, net income understated and equity overstated D. Assets, net income and equity understated E. Assets, net income and equity overstated
E
Which of the following statements is incorrect? A. Prepaid expenses, depreciation and unearned revenues involve previously recorded assets and liabilities B. Accrued expenses and accrued revenues involve assets and liabilities that were not previously been recorded C. Adjusting entries can be used to record both accrued expenses and accrued revenues D. Prepaid expenses, depreciation and unearned revenues often require adjusting entries to record the effects of the passage of time E. Adjusting entries affect the cash account
E
A company paid $6,000 for a six-month insurance policy. The policy coverage began on February 1. On February 28, $100 of insurance expense must be recorded.
False
A company's fiscal year must correspond with the calendar year.
False
A classified balance sheet organizes assets and liabilities into important subgroups that are not found on an unclassified balance sheet.
True
A post-closing trial balance is a list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.
True
Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of an asset.
True
Adjusting entries are used to record the effects of internal economic (financial) transactions and events.
True
Adjusting entries result in a better matching of revenues and expenses.
True
Adjustments must be entered in the journal and posted to the ledger after the work sheet is prepared.
True
All necessary numbers to prepare the income statement can be taken from the income statement columns of the work sheet, including the net income or net loss.
True
An expense account is normally closed by debiting Income Summary and crediting the expense account.
True
An unadjusted trial balance is a listing of accounts and their balances prepared before adjustments are recorded.
True
Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated.
True
Current assets and current liabilities are expected to be used up or come due within one year or the company's operating cycle whichever is longer.
True
Failure to record depreciation expense will overstate the asset and understate the expense.
True
For a corporation, the equity section is divided into two main accounts: Common Stock and Retained Earnings.
True
Intangible assets are long-term resources that benefit business operations, usually lack physical form and have uncertain benefits.
True
It is acceptable to credit cash received in advance to revenue accounts when cash is received.
True
It is acceptable to record prepayment of expenses as debits to expense accounts.
True
Net income for a period will be overstated if accrued salaries are not recorded at the end of the accounting period
True
Plant assets and intangible assets are usually long-term assets that are used to produce or sell products and services.
True
Prior to recording adjusting entries at the end of an accounting period, some accounts may not show proper financial statement amounts even though all transactions were correctly recorded.
True
Profit margin can also be called return on sales.
True
Recording revenues before they are earned overstates current-period income; recording revenues in periods after they have been earned understates the recording period's income.
True
The Income Summary account is closed to the retained earnings account.
True
The account form of the balance sheet matches the accounting equation. That is, assets are on the left side of the statement and liabilities and equity are on the right side of the statement.
True
The accrual basis of accounting is a system of accounting in which the adjustments are needed to assign revenues to periods in which they are earned and to match expenses with revenues.
True
The cash basis of accounting is an accounting system in which revenues are reported when cash is received and expenses are reported when cash is paid.
True
The cash basis of accounting requires that revenues be recognized when cash payments from customers are received.
True
