ACCT Chapter 4
Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Cash received from customers $45,000 Accounts receivable 12,000 Cash paid for expenses 26,000 Accounts payable (related to expenses) 3,000 Prepaid rent for next period 7,000 a. $19,000 b. $28,000 c. $21,000 d. $12,000
d. $12,000 Solution: $45,000 - $26,000 - $7,000 = $12,000 (Cash rec'd. - Cash pd - Prepd. rent)
La More Company had the following transactions during 2022: · Sales of $9,000 on account · Collected $4,000 for services to be performed in 2023 · Paid $3,750 cash in salaries for 2017 · Purchased airline tickets for $500 in December for a trip to take place in 2023 What is La More's 2022 net income using accrual accounting? a. $5,750 b. $9,750 c. $9,250 d. $5,250
d. $5,250 Solution: $9,000 - $3,750 = $5,250 (Sales - Salaries)
Wang Company had the following transactions during 2022: · Sales of $10,800 on account · Collected $4,800 for services to be performed in 2023 · Paid $2,600 cash in salaries for 2017 · Purchased airline tickets for $600 in December for a trip to take place in 2023 What is Wang's 2022 net income using accrual accounting? a. $8,800 b. $13,600 c. $13,000 d. $8,200
d. $8,200 Solution: $10,800 - $2,600 = $8,200 (Sales - Salaries)
a More Company had the following transactions during 2022. · Sales of $9,000 on account · Collected $4,000 for services to be performed in 2023 · Paid $2,650 cash in salaries · Purchased airline tickets for $500 in December for a trip to take place in 2023 What is La More's 2022 net income using cash basis accounting? a. $10,350 b. $1,350 c. $9,850 d. $850
d. $850 Solution: $4,000 - $2,650 - $500 = $850 (Cash collected − Salaries pd. − Purch. airline ticket)
Which of the following items describe the two classifications of adjustments? a. Postponements and advances. b. Accruals and advances. c. Deferrals and postponements. d. Accruals and deferrals.
d. Accruals and deferrals. Accruals occur when the exchange of cash follows the delivery of goods or services (accrued expense & accounts receivable). Deferrals occur when the exchange of cash precedes the delivery of goods and services (prepaid expense & deferred revenue). In order for revenues and expenses to be reported in the time period in which they are earned or incurred, adjusting entries must be made at the end of the accounting period. Adjusting entries are made so the revenue recognition and matching principles are followed.
Which one of the following is not a justification for for adjustments? a. Adjustments are necessary to ensure that the revenue recognition principle is followed. b. Adjustments are necessary to ensure that the expense recognition principle is followed. c. Adjustments are necessary to enable financial statements to be in conformity with GAAP. d. Adjustments are necessary to bring the accounts in line with the budget.
d. Adjustments are necessary to bring the accounts in line with the budget.
Adjusting entries are made to ensure that: a. expense are recognized in the period in which they are incurred. b. revenues are recorded in the period in which the performance obligation is satisfied. c. balance sheet and income statement accounts have correct balances at the end of an accounting period. d. All of these answer choices are correct.
d. All of these answer choices are correct.
If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be overstated and net income and stockholders' equity will be under- staed. c. Assets will be overstated and net income and stockholders' equity will be understated. d. Assets will be overstated and net income and stockholders' equity will be overstated.
d. Assets will be overstated and net income and stockholders' equity will be overstated. Overstated: the amount that is reported on the financial statement is more than it should be
On April 1, 2013, nPropel Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. nPropel records depreciation expense of $48,000 for the calendar year ending December 31, 2013. Which accounting principle has been violated? a. Depreciation principle. b. No principle has been violated. c. Cash principle. d. Expense recognition principle.
d. Expense recognition principle. The expense recognition principle involves expenses being recognized and recorded in the same period as the revenues associated with those expenses (under accrual accounting).
Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? a. Cost principle. b. Periodicity principle. c. Revenue recognition principle. d. Expense recognition principle.
d. Expense recognition principle. The expense recognition principle states that expenses should be recognized in the same period as the revenues to which they relate. Example: A business pays $100,000 for merchandise, which it sells in the following month for $150,000. Under the expense recognition principle, the $100,000 cost should not be recognized as expense until the following month, when the related revenue is also recognized. Otherwise, expenses will be overstated by $100,000 in the current month, and understated by $100,000 in the following month. Understated: the amount that is reported on the financial statement is less than it should be Overstated: the amount that is reported on the financial statement is more than it should be
A company spends $20 million dollars for an office building. Over what period should the cost be written off? a. When the $20 million is expended in cash. b. All in the first year. c. After $20 million in revenue is earned. d. None of these answer choices are correct.
d. None of these answer choices are correct. Correct Answer: Over the useful life of the building.
The general term employed to indicate an expense that has not been paid or revenue that has not been received and has not yet been recognized in the accounts is: a. contra asset. b. prepayment. c. asset. d. accrued.
d. accrued. Accruals are amounts of money that have been earned or spent, but not yet paid. Businesses use accruals to keep tabs on what's owed. It may be money that's going to come in, such as payment from a customer. Or an amount that's going to go out, such as money owed to a supplier, employee, or the tax office.
If a company fails to adjust for accrued revenues: a. liabilities will be understated and revenues will be understated. b. liabilities will be overstated and revenues will be understated. c. assets will be overstated and revenues will be understated. d. assets will be understated and revenues will be understated.
d. assets will be understated and revenues will be understated. Understated: the amount that is reported on the financial statement is less than it should be
Accumulated Depreciation is a(n): a. expense account. b. stockholders' equity account. c. liability account. d. contra asset account.
d. contra asset account. Accumulated depreciation accounts are asset accounts with a credit balance (known as a contra asset account). It is considered a contra asset account because it contains a negative balance that intended to offset the asset account with which it is paired, resulting in a net book value.
The balance in the prepaid rent account before adjustment at the end of the year is $12,000 and represents three months rent paid on December 1. The adjustment required on December 31 is: a. increase Prepaid Rent, $4,000; decrease Rent Expense $4,000. b. increase Prepaid Rent, $8,000; decrease Rent Expense, $8,000. c. increase Rent Expense, $12,000; decrease Prepaid Rent, $12,000. d. increase Rent Expense, $4,000; decrease Prepaid Rent, $4,000.
d. increase Rent Expense, $4,000; decrease Prepaid Rent, $4,000. Solution: $12,000 x 1/3 = $4,000 (Prepd. rent bal. x 1/3)
The Vintage Laundry Company purchased $8,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $1,500 on hand. The adjustment that should be made by the company on June 30 is: a. increase Supplies Expense, $1,500; decrease Supplies, $1,500. b. increase Supplies, $7,000; decrease Supplies Expense, $7,000. c. increase Supplies, $1,500; decrease Supplies Expense, $1,500. d. increase Supplies Expense, $7,000; decrease Supplies, $7,000.
d. increase Supplies Expense, $7,000; decrease Supplies, $7,000. Solution: $8,500 - $1,500 = $7,000 (Supp. purch. - Supp. on hand)
Unearned revenue is classified as a(n): a. asset account. b. revenue account. c. contra revenue account. d. liability.
d. liability. Unearned revenue is money received by an individual or company for a service or product that has yet to be provided or delivered. It is recorded on a company's balance sheet as a liability because it represents a debt owed to the customer.
Adjustments would not be necessary if financial statements were prepared to reflect net income from: a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations.
d. lifetime operations.
The primary difference between accrued revenues and unearned revenues is that accrued revenues have: a. not been recognized and accrued revenues have been. b. been paid and unearned revenues have not. c. been recorded and unearned revenues have not. d. not been recorded and unearned revenues have.
d. not been recorded and unearned revenues have. Accrued revenue represents revenue that you have earned and for which you are yet to receive payment. Unearned revenue, also referred to as deferred revenue, refers to payments you have received for services you are yet to render (provide or deliver).
Adjusting entries affect at least: a. one revenue and one expense account. b. one asset and one liability account. c. one revenue and one balance sheet account. d. one income statement account and one balance sheet account.
d. one income statement account and one balance sheet account. *KNOW THIS
A law firm received $2,000 cash for legal services to be rendered in the future. The full amount increased the liability account Unearned Service Revenue. If the legal services have been rendered at the end of the accounting period and no adjustment is made, this would cause: a. expenses to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.
d. revenues to be understated. Revenue is money coming into the business (income). If you don't record the revenue in the period the services are provided, then the revenues with be understated (the amount that is reported on the financial statement is less than it should be).
An architecture firm earned $2,000 for architecture services provided with the fee to be paid in the future. Nothing was recorded at the time the service was provided. If the fee has not been paid by the end of the accounting period and no adjustment is made, this would cause: a. revenues to be overstated. b. net income to be overstated. c. liabilities to be understated. d. revenues to be understated.
d. revenues to be understated. Revenue is money coming into the business (income). If you don't record the revenue in the period the services are provided, then the revenues with be understated (the amount that is reported on the financial statement is less than it should be).
A company usually determines the amount of supplies used during a period by: a. adding the supplies on hand to the balance of the Supplies account. b. summing the amount of supplies purchased during the period. c. taking the difference between the supplies purchased and the supplies paid for during the period. d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.
d. taking the difference between the balance of the Supplies account and the cost of supplies on hand.
The periodicity assumption states that: a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods.
d. the economic life of a business can be divided into artificial time periods.
Adjustment Entry Types and Definitions
Prepaid Expense: Prepaid expenses are future expenses that are paid in advance, such as rent or insurance. Unearned Revenue: Unearned revenue, also referred to as deferred revenue, refers to payments you have received for services you are yet to render (provide or deliver). An example is a subscription. Accrued Revenue: Accrued revenue is revenue that has been earned by providing a good or service, but for which no cash has been received. For example, a construction company will work on one project for many months. It needs to recognize a portion of the revenue for the contract in each month as services are rendered, rather than waiting until the end of the contract to recognize the full revenue. Accrued Expense: An accrued expense is an expense that has been incurred (goods or services have been consumed) before the cash payment has been made. Examples include utility bills, salaries and taxes, which are usually charged in a later period after they have been incurred.
Wang Company had the following transactions during 2022: · Sales of $10,800 on account · Collected $4,800 for services to be performed in 2023 · Paid $2,600 cash in salaries · Purchased airline tickets for $600 in December for a trip to take place in 2023 What is Wang's 2022 net income using cash basis accounting? a. $1,600 b. $2,800 c. $13,000 d. $2,200
a. $1,600 Solution: $4,800 - $2,600 - $600 = $1,600 (Cash collected − Salaries pd, − Purch. Airline ticket)
Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Revenue recognized $19,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $11,750 b. $14,000 c. $9,500 d. $12,200
a. $11,750 Solution: $19,000 - $7,250 = $11,750 (Rev. recog. - exp. incur.)
At December 31, 2022, before any year-end adjustments, Dallis Company's Prepaid Insurance account had a balance of $5,800. It was determined that $2,600 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be: a. $2,600. b. $3,200. c. $5,800. d. $2,800.
a. $2,600.
Which of the following is not generally an accounting time period? a. A week. b. A month. c. A quarter. d. A year.
a. A week.
Otto's Tune-Up Shop follows the revenue recognition principle. Otto services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized? a. August 31 b. August 1 c. September 5 d. September 6
a. August 31 Because the service was performed on August 31. The revenue recognition principle means that companies' revenues are recognized when the service or product is considered delivered to the customer — not when the cash is received.
What includes information about a company's assets and liabilities. a. Balance Sheet b. Income Statement
a. Balance Sheet
Why do generally accepted accounting principles require the application of the revenue recognition principle? a. Failure to apply the revenue recognition principle could lead to a misstatement of revenue. b. It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve. c. Recording revenue when cash is received is an objective application of the revenue recognition principle. d. Accounting software has made the revenue recognition easy to apply.
a. Failure to apply the revenue recognition principle could lead to a misstatement of revenue.
Which of the following describes an accrued expense? a. Incurred but not yet paid or recorded. b. Paid and recorded in an asset account after they are used or consumed. c. Paid and recorded in an asset account before they are used or consumed. d. Incurred and already paid or recorded.
a. Incurred but not yet paid or recorded. An accrued expense is an expense that has been incurred (goods or services have been consumed) before the cash payment has been made. Examples include utility bills, salaries and taxes, which are usually charged in a later period after they have been incurred.
A furniture factory's employees work overtime to finish an order that is sold on January 31. The office sends a statement to the customer in early February and payment is received by mid-February. The overtime wages should be expensed in: a. January. b. February. c. the period when the workers receive their checks. d. either January or February depending on when the pay period ends.
a. January. The revenue recognition principle means that companies' revenues are recognized when the service or product is considered delivered to the customer — not when the cash is received.
At the end of the fiscal year, the usual adjustment for depreciation on equipment was omitted. Which of the following statements is true? a. Net income will be overstated for the current year. b. Total assets will be understated at the end of the current year. c. The balance sheet and income statement will be misstated but the Retained Earnings statement will be correct for the current year. d. Total expenses will be overstated at the end of the current year.
a. Net income will be overstated for the current year. Overstated: the amount that is reported on the financial statement is more than it should be
An accounting time period that is one year in length is called: a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period.
a. a fiscal year.
Adjustments are required: a. because some costs expire with the passage of time and have not yet been recorded. b. when the company's profits are below the budget. c. when expenses are recorded in the period in which they are earned. d. None of these answer choices are correct.
a. because some costs expire with the passage of time and have not yet been recorded. Adjustments are necessary to ensure that the revenue recognition principle is followed. Adjustments are necessary to ensure that the expense recognition principle is followed. Adjustments are necessary to enable financial statements to be in conformity with GAAP. Adjustments NEVER bring accounts in line with the budget.
Leyland Realty Company received a check for $18,000 on July 1, which represents a 6-month advance payment of rent on a building it rents to a client. Unearned Rent Revenue was increased for the full $18,000. Financial statements will be prepared on July 31. Leyland Realty should make the following adjustment on July 31: a. decrease Unearned Rent Revenue, $3,000; increase Rent Revenue, $3,000. b. decrease Rent Revenue, $3,000; increase Unearned Rent Revenue, $3,000. c. decrease Unearned Rent Revenue, $18,000; increase Rent Revenue, $18,000. d. increase Cash, $18,000; increase Rent Revenue, $18,000.
a. decrease Unearned Rent Revenue, $3,000; increase Rent Revenue, $3,000. Solution: $18,000 ¸ 6 = $3,000 (Rent pd. ¸ 6)
Adjustments for unearned revenue: a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets.
a. decrease liabilities and increase revenues. An unearned revenue journal entry is used to record additions to the unearned revenue account. There are many services a business might provide that generate unearned revenue, such as a cleaning service. Using this as an example, unearned revenue is recorded if the buyer has purchased the cleaning service but not yet received it. The journal entry would reflect both the total amount paid and how that amount will be earned over time. For instance, say that the buyer has purchased $1,000 worth of cleaning services over five months. The first journal entry would reflect that $1,000 was paid, forming the company's $1,000 worth of debit, or the total amount of money paid to the business but not yet earned.
The adjustment to an unearned revenue account will a. decrease liabilities and increase revenues. b. increase liabilities and increase revenues. c. increase assets and increase revenues. d. decrease revenues and decrease assets.
a. decrease liabilities and increase revenues. An unearned revenue journal entry is used to record additions to the unearned revenue account. There are many services a business might provide that generate unearned revenue, such as a cleaning service. Using this as an example, unearned revenue is recorded if the buyer has purchased the cleaning service but not yet received it. The journal entry would reflect both the total amount paid and how that amount will be earned over time. For instance, say that the buyer has purchased $1,000 worth of cleaning services over five months. The first journal entry would reflect that $1,000 was paid, forming the company's $1,000 worth of debit, or the total amount of money paid to the business but not yet earned.
Each of the following is a major type (or category) of adjusting entry except: a. earned expenses. b. prepaid expenses. c. accrued expenses. d. accrued revenues.
a. earned expenses. Major Adjusting Entries are: a. Prepaid Expense b. Unearned Revenue c. Accrued Revenue d. Accrued Expense
One of the accounting concepts upon which adjustments for prepayments and accruals are based is: a. expense recognition. b. cost. c. monetary unit. d. economic entity.
a. expense recognition.
Boyce Company purchased office supplies costing $7,000 and increased Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,800 still on hand. The appropriate adjustment to be made at the end of the period would be: a. increase Supplies Expense, $5,200; decrease Supplies, $5,200. b. increase Supplies, $1,800; decrease Supplies Expense, $1,800. c. increase Supplies Expense, $1,800; decrease Supplies, $1,800. d. increase Supplies, $5,200; decrease Supplies Expense, $5,200.
a. increase Supplies Expense, $5,200; decrease Supplies, $5,200. Solution: $7,000 - $1,800 = $5,200 (Supp. purch. - Supp. on hand)
If Equipment has an unadjusted balance of $4,000 and Accumulated Depreciation's unadjusted balance at December 30, 2022 and estimated annual depreciation is $300, the year-end adjustment would contain a(n): a. increase to Accumulated Depreciation, Equipment for $300. b. decrease to Depreciation Expense, Equipment for $300. c. decrease to Accumulated Depreciation, Equipment for $300. d. decrease to Equipment for $300.
a. increase to Accumulated Depreciation, Equipment for $300.
Prepaid expenses are: a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d.incurred and already paid or recorded
a. paid and recorded in an asset account before they are used or consumed. Prepaid expenses are future expenses that are paid in advance, such as rent or insurance. On the balance sheet, prepaid expenses are first recorded as an asset. As the benefits of the assets are realized over time, the amount is then recorded as an expense.
Goods purchased for future use in the business, such as supplies, are called: a. prepaid expenses. b. revenues. c. stockholders' equity. d. liabilities.
a. prepaid expenses. Prepaid expenses are future expenses that are paid in advance, such as rent or insurance. On the balance sheet, prepaid expenses are first recorded as an asset. As the benefits of the assets are realized over time, the amount is then recorded as an expense.
Unearned revenues are: a. received and recorded as liabilities before they are recognized. b. recognized and recorded as liabilities before they are received. c. recognized but not yet received or recorded. d. recognized and already received and recorded.
a. received and recorded as liabilities before they are recognized. Unearned revenue is recorded on a company's balance sheet as a liability. It is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer.
Under the cash basis of accounting, an amount received from a customer in advance of providing the services would be reported as a(n): a. revenue. b. liability. c. expense. d. prepaid expense.
a. revenue. Revenue, also called income, is the amount of money brought into the company, typically by selling goods, products, or services
Expenses are recognized when: a. they contribute to the production of revenue. b. they are paid. c. they are billed by the supplier. d. the invoice is received.
a. they contribute to the production of revenue.
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.
a. when they are incurred whether or not cash is paid. The expense recognition principle is a core element of the accrual basis of accounting, which holds that revenues are recognized when earned and expenses when consumed (incurred).
At December 31, 2022, before any year-end adjustments, Janus Company's Prepaid Insurance account had a balance of $4,200. It was determined that $1,800 of the Prepaid Insurance had expired. The adjusted balance for Prepaid Insurance for the year would be: a. $1,800. b. $2,400. c. $5,700. d. $4,200.
b. $2,400. Solution: $4,200 - $1,800 = $2,400 (Prepd. Ins. bal. - ins. expired)
The following is selected information from L Corporation for the fiscal year ending October 31, 2022. Cash received from customers: $300,000 Revenue recognized: 440,000 Cash paid for expenses: 170,000 Cash paid for computers on November 1, 2021 that will be used for 3 years: 48,000 Expenses incurred including any depreciation: 216,000 Proceeds from a bank loan, part of which was used to pay for the computers: 100,000 Based on the accrual basis of accounting, what is L Corporation's net income for the year ending October 31, 2022? a. $254,000 b. $224,000 c. $208,000 d. $270,000
b. $224,000 Solution: $440,000 - $216,000 = $224,000 (Rev. recog. - exp. incur.)
Given the data below for a firm in its first year of operation, determine net income under the accrual basis of accounting. Cash received from customers $45,000 Accounts receivable 12,000 Cash paid for expenses 26,000 Accounts payable (related to expenses) 3,000 Prepaid rent for next period 7,000 a. $19,000 b. $28,000 c. $21,000 d. $12,000
b. $28,000 Solution: $45,000 + $12,000 - $26,000 - $3,000 = $28,000 (Cash rec'd. + accts. rec. - cash pd. - accts. pay.)
Which is not an application of revenue recognition? a. Recording revenue as an adjusting entry on the last day of the accounting period. b. Accepting cash from an established customer for services to be performed over the next three months. c. Billing customers on June 30 for services completed during June. d. Receiving cash for services performed.
b. Accepting cash from an established customer for services to be performed over the next three months.
Why was Apple required to spread their iPhone revenues over a two year period? a. Because of its newness, their returns might exceed the normal level of returns. b. Because they were required to provide software updates over that two year period. c. Because that was the estimated life of the iPhone. d. Because they needed to defer revenue recognition since they had a swap program available for future models.
b. Because they were required to provide software updates over that two year period.
If a company fails to adjust for accrued expenses, what effect will this have on that month's financial statements? a. Failure to make an adjustment does not affect the financial statements. b. Expenses will be understated and net income and stockholders' equity will be overstated. c. Assets will be overstated and net income and stockholders' equity will be under-stated. d. Assets will be overstated and net income and stockholders' equity will be overstated.
b. Expenses will be understated and net income and stockholders' equity will be overstated. Understated: the amount that is reported on the financial statement is less than it should be Overstated: the amount that is reported on the financial statement is more than it should be
What includes revenue, expenses, and net income? a. Balance Sheet b. Income Statement
b. Income Statement
Which statement is correct? a. As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use. b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles. c. The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received. d. As long as management is ethical, there are no problems with using the cash basis of accounting.
b. The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.
Adjustments can be classified as: a. postponements and advances. b. accruals and deferrals. c. deferrals and postponements. d. accruals and advances.
b. accruals and deferrals. Accruals occur when the exchange of cash follows the delivery of goods or services (accrued expense & accounts receivable). Deferrals occur when the exchange of cash precedes the delivery of goods and services (prepaid expense & deferred revenue). In order for revenues and expenses to be reported in the time period in which they are earned or incurred, adjusting entries must be made at the end of the accounting period. Adjusting entries are made so the revenue recognition and matching principles are followed.
If a business has received cash in advance of services performed and increases a liability account, the adjustment needed after the services are performed will be: a. decrease Unearned Service Revenue and decrease Cash. b. decrease Unearned Service Revenue and increase Service Revenue. c. decrease Unearned Service Revenue and decrease Prepaid Expense. d. decrease Unearned Service Revenue and decrease Accounts Receivable.
b. decrease Unearned Service Revenue and increase Service Revenue.
The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that: a. assets should be matched with liabilities. b. efforts should be matched with accomplishments. c. dividends should be matched with stockholder investments. d. cash payments should be matched with cash receipts.
b. efforts should be matched with accomplishments. The expense recognition principle states that expenses should be recognized in the same period as the revenues to which they relate. Example: A business pays $100,000 for merchandise, which it sells in the following month for $150,000. Under the expense recognition principle, the $100,000 cost should not be recognized as expense until the following month, when the related revenue is also recognized. Otherwise, expenses will be overstated by $100,000 in the current month, and understated by $100,000 in the following month. Understated: the amount that is reported on the financial statement is less than it should be Overstated: the amount that is reported on the financial statement is more than it should be
If a company fails to make an adjustment to record supplies expense, then: a. stockholders' equity will be understated. b. expense will be understated. c. assets will be understated. d. net income will be understated.
b. expense will be understated. Understated: the amount that is reported on the financial statement is less than it should be
The expense recognition principle matches: a. customers with businesses. b. expenses with revenues. c. assets with liabilities. d. creditors with businesses.
b. expenses with revenues. The expense recognition principle states that expenses should be recognized in the same period as the revenues to which they relate. Example: A business pays $100,000 for merchandise, which it sells in the following month for $150,000. Under the expense recognition principle, the $100,000 cost should not be recognized as expense until the following month, when the related revenue is also recognized. Otherwise, expenses will be overstated by $100,000 in the current month, and understated by $100,000 in the following month. Understated: the amount that is reported on the financial statement is less than it should be Overstated: the amount that is reported on the financial statement is more than it should be
The Harris Company purchased equipment for $15,000 on December 1. It is estimated that annual depreciation on the computer will be $3,000. If financial statements are to be prepared on December 31, the company should make the following adjustment: a. increase Depreciation Expense, $3,000; increase Accumulated Depreciation, $3,000. b. increase Depreciation Expense, $250; increase Accumulated Depreciation, $250. c. increase Depreciation Expense, $12,000; increase Accumulated Depreciation, $12,000. d. increase Equipment, $15,000; increase Accumulated Depreciation, $15,000.
b. increase Depreciation Expense, $250; increase Accumulated Depreciation, $250. Solution: $3,000 ¸ 12 = $250 (Ann. depr. ¸ 12)
As prepaid expenses expire with the passage of time, the correct adjustment will be a(n): a. increase an asset account and a decrease an expense account. b. increase an expense account and a decrease an asset account. c. increase an asset account and a decrease an asset account. d. increase an expense account and a decrease an expense account.
b. increase an expense account and a decrease an asset account. C and D are wrong because you never increase and decrease the same account - this would result in an unbalanced entry. To recognize prepaid expenses that become actual expenses, use adjusting entries. As you use the prepaid item, increase an expense account and decrease an asset account (prepaid expense is an asset). This creates a prepaid expense adjusting entry.
Accounts often need to be adjusted because: a. there are never enough accounts to record all the transactions. b. many transactions affect more than one time period. c. there are always errors made in recording transactions. d. management can't decide what they want to report.
b. many transactions affect more than one time period. Adjusting journal entries are used to adjust a company's financial statements and bring them into compliance with relevant accounting standards, such as generally accepted accounting principles (GAAP) or International Financial Reporting Standards (IFRS). The activity of adjusting journal entries is routinely performed by accountants to allocate income and expenses to the actual period in which the income or expense occurred or earned—a feature of accrual accounting.
Management usually wants ________ financial statements and the IRS requires all businesses to file _________ tax returns. a. annual, annual b. monthly, annual c. quarterly, monthly d. monthly, monthly
b. monthly, annual
Adjustments are: a. the same as corrections. b. needed to ensure that the expense recognition principle is followed. c. optional. d. rarely needed.
b. needed to ensure that the expense recognition principle is followed.
The preparation of adjustments is: a. straightforward because the accounts that need adjustment will be out of balance. b. needed to ensure that the expense recognition principle is followed. c. only required for accounts that do not have a normal balance. d. optional when financial statements are prepared.
b. needed to ensure that the expense recognition principle is followed.
Adjustments are: a. not necessary if the accounting system is operating properly. b. usually required before financial statements are prepared. c. made whenever management desires to change an account balance. d. made to balance sheet accounts only.
b. usually required before financial statements are prepared.
The revenue recognition principle dictates that revenue should be recognized in the accounting records: a. when cash is received. b. when the performance obligation is satisfied. c. at the end of the month. d. in the period that income taxes are paid.
b. when the performance obligation is satisfied. The revenue recognition principle means that companies' revenues are recognized when the service or product is considered delivered to the customer — not when the cash is received.
The following is selected information from C Corporation for the fiscal year ending October 31, 2022. Cash received from customers: $150,000 Revenue recognized: 225,000 Cash paid for expenses: 85,000 Cash paid for computers on November 1, 2021 that will be used for 3 years: 24,000 Expenses incurred including any depreciation: 119,000 Proceeds from a bank loan, part of which was used to pay for the computers: 50,000 Based on the accrual basis of accounting, what is C Corporation's net income for the year ending October 31, 2022? a. $132,000 b. $116,000 c. $106,000 d. $140,000
c. $106,000 Solution: $225,000 - $119,000 = $106,000 (Rev. recog. - exp. incur.)
On January 1, 2021, Leardon Inc. purchased equipment for $25,000. The company is depreciating the equipment at the rate of $1,000 per month. At January 31, 2022, the balance in Accumulated Depreciation is: a. $1,000. b. $12,000. c. $13,000. d. $62,000.
c. $13,000. Solution: $1,000 x 13 mon. = $13,000 (Depr./mon. x 13)
On January 1, 2022, M. Johanson Company purchased equipment for $54,000. The company is depreciating the equipment at the rate of $750 per month. The book value of the equipment at December 31, 2022 is: a. $0. b. $9,000. c. $45,000. d. $54,000.
c. $45,000. Solution: $54,000 - ($750 x 12) = $45,000 [Cost of equip. - (dept./month x 12)]
Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting. Revenue recognized $19,000 Accounts receivable 3,000 Expenses incurred 7,250 Accounts payable (related to expenses) 750 Supplies purchased with cash 1,800 a. $9,500 b. $14,000 c. $7,700 d. $9,950
c. $7,700 Solution: ($19,000 - $3,000) - ($7,250 - $750) - $1,800 = $7,700 [(Rev. recog. - accts. rec.) - (exp. incur. - accts. pay.) - supp.]
If a company fails to adjust an Unearned Rent Revenue account for rent that has been recognized, what effect will this have on that month's financial statements? a. Assets will be understated and revenues will be understated. b. Liabilities will be understated and revenues will be understated. c. Liabilities will be overstated and revenues will be understated. d. Assets will be overstated and revenues will be understated.
c. Liabilities will be overstated and revenues will be understated. Understated: the amount that is reported on the financial statement is less than it should be
A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be recognized? a. December 5 b. December 10 c. November 30 d. December 1
c. November 30 The revenue recognition principle means that companies' revenues are recognized when the service or product is considered delivered to the customer — not when the cash is received.
Which of the following is an example of a deferral adjustment? a. Accrued expense b. Accrued revenue c. Prepaid expense d. All of these choices are correct.
c. Prepaid expense A deferral adjusting entry pertains to a transaction that has already been recorded in the general ledger accounts. However, at the time that the transaction was recorded, part of the amount must be reported as 1) revenue in a future period, or 2) expense in a future period. The deferral adjusting entry makes certain that the correct amounts will be reported on a company's balance sheets and income statements. An example is paying insurance in advance (prepaid expense).
Which of the following would be unethical? a. Recording accrued salaries and wages expense. b. Recording accrued interest revenue. c. Recording backdated revenue. d. Recording prepaid expense adjustments.
c. Recording backdated revenue.
Which of the following would not be an application of the revenue recognition or expense recognition principle? a. Recording accrued salaries and wages expense. b. Recording accrued interest revenue. c. Recording the collection of an advance customer payment as revenue. d. Recording prepaid expense adjustments.
c. Recording the collection of an advance customer payment as revenue. Revenue and Expense recognition both state that revenue and expenses are recognized when they are incurred whether or not cash is paid Revenue, also called income, is the amount of money brought into the company, typically by selling goods, products, or services
According to some U.S. companies what gives foreign firms a competitive advantage in the capital market? a. The foreign companies don't have standards similar to GAAP. b. The foreign companies don't have strict ethical codes. c. The Sarbanes-Oxley Act which requires more stringent internal controls on U.S. firms. d. The foreign companies don't have to be audited.
c. The Sarbanes-Oxley Act which requires more stringent internal controls on U.S. firms.
An adjustment: a. affects two balance sheet accounts. b. affects two income statement accounts. c. affects a balance sheet account and an income statement account. d. always involves three accounts.
c. affects a balance sheet account and an income statement account. *KNOW THIS
If a resource has been consumed but a bill has not been received at the end of the accounting period, then: a. an expense should be recorded when the bill is received. b. an expense should be recorded when the cash is paid out. c. an adjusting entry should be made recognizing the expense. d. it is optional whether to record the expense before the bill is received.
c. an adjusting entry should be made recognizing the expense.
The primary difference between prepaid and accrued expenses is that prepaid expenses have: a. been incurred and accrued expenses have not. b. not been paid and accrued expenses have. c. been recorded and accrued expenses have not. d. not been recorded and accrued expenses have.
c. been recorded and accrued expenses have not. Accrued expenses are the opposite of prepaid expenses. Accrued expenses:assets are used and then paid for. With Prepaid expenses: assets are paid for in advance and then used.
Under the cash basis of accounting: a. revenue is recognized when services are performed. b. expenses are matched with the revenue that is produced. c. cash must be received before revenue is recognized. d. a promise to pay is sufficient to recognize revenue.
c. cash must be received before revenue is recognized. Cash basis refers to a major accounting method that recognizes revenues and expenses at the time cash is received or paid out. This contrasts accrual accounting, which recognizes income at the time the revenue is earned and records expenses when liabilities are incurred regardless of when cash is received or paid.
An adjustment can include a(n): a. increase to an asset and an increase to a liability. b. decrease to a revenue and a decrease to an asset. c. decrease to a liability and an increase to a revenue. d. increase to an expense and an increase to a revenue.
c. decrease to a liability and an increase to a revenue. Each adjusting entry usually affects: one income statement account (a revenue or expense account) and one balance sheet account (an asset or liability account).
Under the accrual basis of accounting: a. cash must be received before revenue is recognized. b. net income is calculated by matching cash outflows against cash inflows. c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.
c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. Accrual accounting recognizes income at the time the revenue is earned and records expenses when liabilities are incurred regardless of when cash is received or paid. This contrasts the cash basis accounting, which recognizes revenues and expenses at the time cash is received or paid out.
A small company may be able to justify using a cash basis of accounting if they have: a. sales under $1,000,000. b. no accountants on staff. c. few receivables and payables. d. all sales and purchases on account.
c. few receivables and payables. Cash basis accounting is a method where revenue is recorded when the cash is actually received; likewise, expenses are recorded when they are paid. Cash accounting does not acknowledge or track accounts receivable or accounts payable. For that reason, the method is best for small businesses that do not stock inventory.
On July 1 the Fisher Shoe Store paid $24,000 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was increased for the full amount. If financial statements are prepared on July 31, the adjustment to be made by the Fisher Shoe Store is: a. increase Rent Expense, $24,000; decrease Prepaid Rent, $4,000. b. increase Prepaid Rent, $4,000; decrease Rent Expense, $4,000. c. increase Rent Expense, $4,000; decrease Prepaid Rent, $4,000. d. increase Rent Expense, $24,000; decrease Prepaid Rent, $20,000.
c. increase Rent Expense, $4,000; decrease Prepaid Rent, $4,000. Solution: $24,000 x 1/6 = $4,000 (Rent pd. x 1/6)
A company purchased office supplies costing $5,000 and increased Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. The appropriate adjustment to be made at the end of the period would be: a. increase Supplies Expense, $5,900; Supplies, $5,900. b. increase Supplies, $900; Supplies Expense, $900. c. increase Supplies Expense, $4,100; Supplies, $4,100. d. increase Supplies, $4,100; Supplies Expense, $4,100.
c. increase Supplies Expense, $4,100; Supplies, $4,100. Solution: $5,000 - $900 = $4,100 (Supp. purch. - Supp. on hand)
Greese Company purchased office supplies costing $7,000 and increase Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $2,500 still on hand. The appropriate adjustment to be made at the end of the period would be: a. increase Supplies Expense, $2,500; decrease Supplies, $2,500. b. increase Supplies, $4,500; decrease Supplies Expense, $4,500. c. increase Supplies Expense, $4,500; decrease Supplies, $4,500. d. increase Supplies, $2,500; decrease Supplies Expense, $2,500.
c. increase Supplies Expense, $4,100; Supplies, $4,100. Solution: $5,000 - $900 = $4,100 (Supp. purch. - Supp. on hand)
If Prepaid Insurance has an $82 unadjusted balance at December 31, 2022 and the insurance still unexpired amounted to $20, the year-end adjustment would contain a(n): a. increase to Prepaid Insurance for $62. b. decrease to Prepaid Insurance for $20. c. increase to Insurance Expense for $62. d. increase to Prepaid Insurance for $20.
c. increase to Insurance Expense for $62. Solution: $82 - $20 = $62 (Prepd. ins. bal. - unexpired ins.)
If Supplies has a $180 unadjusted balance at December 31, 2022 and supplies on hand are $40, the year-end adjustment would contain a(n): a. increase to Supplies for $40. b. decrease to Supplies for $40. c. increase to Supplies Expense for $140. d. decrease to Supplies Expense for $140.
c. increase to Supplies Expense for $140. Solution: $180 - $40 = $140 (Supp. bal. - Supp. on hand)
Accrued expenses are: a. paid and recorded in an asset account before they are used or consumed. b. paid and recorded in an asset account after they are used or consumed. c. incurred but not yet paid or recorded. d. incurred and already paid or recorded.
c. incurred but not yet paid or recorded. An accrued expense is an expense that has been incurred (goods or services have been consumed) before the cash payment has been made. Examples include utility bills, salaries and taxes, which are usually charged in a later period after they have been incurred.
An asset-expense relationship exists with: a. liability accounts. b. revenue accounts. c. prepaid expense adjustments. d. accrued expense adjustments.
c. prepaid expense adjustments. Prepaid expenses are future expenses that are paid in advance, such as rent or insurance. On the balance sheet, prepaid expenses are first recorded as an asset. As the benefits of the assets are realized over time, the amount is then recorded as an expense.
Payments of expenses that will benefit more than one accounting period are identified as: a. expenses. b. revenues. c. prepaid expenses. d. liabilities.
c. prepaid expenses.
Accrued revenues are: a. received and recorded as liabilities before they are recognized. b. recognized and recorded as liabilities before they are received. c. recognized but not yet received or recorded. d. recognized and already received and recorded.
c. recognized but not yet received or recorded. Accrued revenue is revenue that has been earned by providing a good or service, but for which no cash has been received. For example, a construction company will work on one project for many months. It needs to recognize a portion of the revenue for the contract in each month as services are rendered, rather than waiting until the end of the contract to recognize the full revenue. Another example: Landlords may book accrued revenue if they record a tenant's rent payment at the first of the month but receive the rent at the end of the month.
A liability-revenue relationship exists with: a. asset accounts. b. revenue accounts. c. unearned revenue adjustments. d. accrued expense adjustments.
c. unearned revenue adjustments. Unearned revenue is recorded on a company's balance sheet as a liability. It is treated as a liability because the revenue has still not been earned and represents products or services owed to a customer.
Supplies are recorded as assets when purchased. Therefore, the decrease to the supplies account in the adjustment is for the amount of supplies: a. remaining. b. purchased. c. used. d. either used or remaining.
c. used.
In a service-type business, revenue is recognized: a. at the end of the month. b. at the end of the year. c. when the service is performed. d. when cash is received.
c. when the service is performed.