Ch 3- act 210

If a company incorrectly records a payment as an asset instead of an expense, how will this error affect net income in the current period?

Net income will be too high.

Which of the following pre-payments requires an adjusting entry at the end of the year?

On November 1, the company pays rent for the next six months.

Which of the following are results of closing entries? (Select all that apply.)

Retained earnings includes current year income less dividends Balances in temporary accounts are zero

A classified _____ indicates whether or not a company can meet its obligations in the near future.

balance sheet

When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records which two of the following?

credit to Revenue debit to Deferred Revenue

Under the accrual basis of accounting, costs used to generate revenue are recorded as expenses

in the same period as related revenue.

Identify all transactions that do not require adjusting entries.

transactions that result in revenues or expenses being recorded at the same time as the cash flow transactions that do not involve revenue or expense activities

Adam Corporation uses the cash-basis of accounting. Adam Corporation should record expenses when:

paid

The retaining earnings balance shown in an adjusted trial balance is the account's Blank 1 of 1 balance.

beginning

The adjusting entry to record interest owed on obligations at the end of the accounting period includes a debit to "Interest Blank 1 of 2" and a credit to "Interest Blank 2 of 2."

Blank 1: Expense Blank 2: Payable

To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for changes created by Blank 1 of 1 entries.

Blank 1: adjusting, adjusted, adjust, or adjustment

After the adjusting entries have been completed, the balance in the Rent Expense account represents the:

cost of rent for the accounting period

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The adjusting entry to record supplies used during the period includes a:

Debit to supplies expense

Adjusting entries: (Select all that apply.)

are needed before financial statement preparation. update the accounts to their proper balances.

The adjusting entry to record the supplies used during the period will result in a(n) ______.

decrease to Supplies and an increase to Supplies Expense

Supplies should be ______ and Supplies Expense should be ______ for the cost of supplies used up during the period.

decreased; increased

The adjusting entry for equipment depreciation includes a debit to _____ and a credit to _____.

depreciation expense; accumulated depreciation

Consistent with accrual-basis accounting, expenses should be recognized

in the period when the related revenue is generated

During the year, a company had $100,000 in revenues, $40,000 in expenses, and paid $3,000 in dividends. These items caused retained earnings to:

increase by $57,000 Reason: Revenues increase while expenses and dividends decrease retained earnings. $100,000-40,000-3,000=$57,000

During the year, a company had $100,000 in revenues, $40,000 in expenses, and paid $3,000 in dividends. The net of these items caused total stockholders' equity to ______.

increase by $57,000 Reason: Revenues increase, while expenses and dividends decrease stockholders' equity.

Which of the following account balances are shown in the adjusted trial balance and the income statement?

interest expense depreciation expense

The statement of stockholders' equity includes these amounts:

net income dividends for the period ending balance retained earnings

Transactions that do not involve revenues or expenses and transactions that result in revenues and expenses being recorded at the same time as the cash flows

never require adjusting entries.

At year-end, companies that utilize accrual-based accounting systems complete the measurement process through

recording of adjusting entries

Which of the following account balances are shown in the adjusted trial balance and reported in the income statement?

supplies expense service revenue

Blank 1 of 1 occur when the cash flow occurs after either the expense is incurred or the revenue is earned. (Enter only one word.)

Accruals

In May, Sea the World Cruises, Inc. collected $1,000 cash in advance from a customer for services to be performed in June. Which of the following is true assuming accrual accounting?

$1,000 of revenue should be recorded in June. Reason: Revenue should be recorded when services are performed, regardless of when the cash is collected. The entry in May was a debit to Cash and credit to Deferred Revenue. The entry in June was a debit to Deferred Revenue and credit to Revenue.

In May, Just In Thyme, Inc. billed a customer $1,000 for services performed in May. In June, Just In Thyme collected the $1,000. Which of the following is true assuming accrual accounting?

$1,000 of revenue should be recorded in May.

Klein Corporation's retained earnings account showed a balance of $200 at 1/1/18. During the year, the company earned revenues of $5,000 and incurred expenses of $3,000. Dividends declared were $500. The amount of retained earnings reported on the 12/31/18 balance sheet will be

$1,700 Reason: $200+$5,000-$3,000-$500

Burrow, Inc. borrowed $20,000 with an annual rate of 6%, the note and interest are due at the end of two years. Calculate the interest for a three-month period.

$300 Reason: $20,000 * 0.06 *3/12 = $300

When recording an adjustment for the cost of using equipment during the current accounting period, which two accounts are affected?

Accumulated Depreciation and Depreciation Expense

The adjusting entry for supplies used requires a Blank 1 of 2 to Supplies and a Blank 2 of 2 to Supplies Expense.

Blank 1: credit or CR Blank 2: debit or DR

Preparing a(n) Blank 1 of 2- Blank 2 of 2 trial balance is the last step in the accounting cycle and occurs after all accounts have been updated with closing journal entries. (Enter one word per blank.)

Blank 1: post Blank 2: closing

Which of the following accounts will never be affected by an adjusting entry?

Cash

Identify the entries needed for the closing process.

Credit Dividends Declared and debit Retained Earnings. Debit each revenue, credit each expense, and record the difference in Retained Earnings.

In which type of liability does the company fulfill its current obligation to its customers by providing services in the future?

Deferred revenue

Which of the following would be referred to as "accruals?" (Select all that apply.)

Goods and services provided, not yet collected Expenses incurred, not yet paid

The revenue recognition principle states that companies typically record revenue:

In the period in which we provide goods and services to customers.

Under cash-basis accounting, companies typically record revenue:

In the period in which we received cash from customers for goods and services.

Under accrual-basis accounting, companies typically report expenses:

In the same period as the revenue they help to generate.

On November 15, Meier Company received $3,000 cash from a customer for services that were performed on November 1. On which date should the revenue be recorded under cash-basis accounting?

November 15.

How do temporary accounts differ from permanent accounts?

Only temporary accounts are cleared out at the end of the accounting period.

On September 9, Clearmore Services receives a request for services from a customer. The service is scheduled for September 15. On September 15, the service is provided, and the customer pays one week later on September 22. Using accrual-basis accounting, on which date should Clearmore Services record service revenue?

September 15 (date of service).

Which of the following statements is correct regarding a long-lived asset such as a building?

The original cost in the building account will not change when an adjusting entry is recorded for depreciation. Reason: The adjustment for use of the asset is entered in the Accumulated Depreciation account rather than directly into the building account. So, the building account will not change. Depreciation, however, does cause the carrying value to decrease during the adjustment process.

Which of the following statements is true regarding the post-closing trial balance?

The post-closing trial balance is an internal report prepared as the last step in the accounting cycle. Reason: While a post-closing trial balance does show that debits equal credits, it does not verify that all entries were correct. It only verifies that amounts entered on the debit side of an account match those entered on the credit side. It does not detect when an entry is made to the wrong account or when an entry is omitted altogether.

Dividends have _____ on the stockholders' equity of a company.

a negative effect

Deferred revenue appears on the ______.

balance sheet as a liability

Beverly Company incurred interest on its bank loan; interest is due and will be paid at the beginning of next year. On December 31, Beverly Company should

debit interest expense and credit interest payable Reason: a debit to interest expense and a credit to interest payable are necessary

A primary purpose of adjusting entries is to record events that

have occurred but that have not yet been recorded.

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The adjusted trial balance provides account balances reported in which financial statements?

statement of stockholders' equity balance sheet income statement

There is a cause-and-effect relationship between revenues and expenses that dictates:

when costs are recognized as expenses in the income statement Reason: dictates when expenses, not revenues, are recognized in the income statement.

Which of the following transactions are examples of prepayments that will require an adjustment at the end of the accounting period on December 31? (Select all that apply.)

A company pays for 4 months of advertising in the Wall Street Journal on November 1. A company pays a 6-month insurance premium at the beginning of October. Reason: This is an example of a daily transaction. There will be no need to adjust any of the accounts at the end of the period.

Burrow, Inc. borrowed $20,000 with an annual rate of 6%, the note and interest are due at the end of two years. By the end of the first month, the interest incurred equals $Blank 1 of 1.

Blank 1: 100

Blank 1 of 1 Expense should be recorded to recognize the the cost of using long-lived assets, such as equipment, during the accounting period. (Enter one word per blank.)

Blank 1: Depreciation

Adjusting entries are made at the Blank 1 of 1 of the accounting period, while daily transactions are made throughout the accounting period. (Enter one word per blank.)

Blank 1: end, closing, or close

Unpaid interest should be credited to Blank 1 of 1 payable.

Blank 1: interest

Deferred revenue is reported on the balance sheet as a current Blank 1 of 1.

Blank 1: liability

The adjusting entry for a deferred revenue includes a debit to a(n) Blank 1 of 2 account and a credit to a(n) Blank 2 of 2account. (Enter only one word per blank.)

Blank 1: liability or liabilities Blank 2: revenue

With respect to current assets, Blank 1 of 1 refers to how quickly an asset can be converted to cash. (Enter only one word.)

Blank 1: liquidity or liquid

_____ are recorded in the period that goods and services are provided to customers and _____ are recorded in the period that costs are incurred while providing those goods and services.

Revenues; expenses

Which activities are part of the operating cycle?

Selling goods and services Collecting cash from customers Paying cash to suppliers

On April 1, Katie Inc. collected $2,400 from a customer for a 12-month membership starting on that date. On December 31, Katie Inc. should credit:

Service revenue for $1,800 Reason: Katie already provided service for 9 months; $2,400 * 9/12

Which financial statement would report all of the following information: beginning balances for common stock and retained earnings; current period net income or loss; current period dividends; common stock issued during the year; ending balances of common stock and retained earnings?

Statement of stockholders' equity

Which of the following statements most accurately describes the purposes of the closing entries?

To establish zero balances in the income statement and dividend accounts and to transfer net income and dividends into retained earnings To establish zero balances in the income statement and dividend accounts and to transfer net income and dividends into retained earnings

What are the effects on the accounting equation when dividends are declared and paid?

Total assets decrease and total stockholders' equity decreases. Reason: Cash is paid resulting in a decrease to total assets. Dividends reduce retained earnings resulting in a decrease to stockholders' equity.

What are the effects on the accounting equation from an adjusting entry for revenues earned, but not yet collected, during the accounting period?

Total assets will increase and total stockholders' equity will increase. Reason: The value of the revenue earned, but not recorded or collected during the current period, should be added to Accounts Receivable and added to the revenue account. The increase in revenues results in an increase to stockholders' equity.

True or false: The adjusting entry to record depreciation does not directly reduce the long-lived asset accounts, such as Equipment, so that the original cost of the asset remains unchanged.

True Reason: The reduction to the asset account is taken through the Accumulated Depreciation account rather than directly through the long-lived asset account. The long-lived asset account is not affected and, therefore, keeps its original balance until it is sold or discarded.

Which of the following statements is correct regarding a long-lived asset such as equipment?

When adjusting entries are recorded, the original cost in the Equipment account will not change. Reason: The adjustment for use of the asset is entered in the Accumulated Depreciation account rather than directly into the Equipment account. So, the Equipment account will not change. Depreciation, however, does cause the carrying value to decrease during the adjustment process.

Consistent with the Blank 1 of 1-basis of accounting, we record revenue when we provide goods and services to customers, and we record expenses in the period that costs are used to provide those goods and services.

accrual

Reporting revenues when goods or services are provided and expenses in the period they are incurred to generate related revenues is referred to as Blank 1 of 1 -basis accounting. (Enter only one word.)

accrual

After the adjusting entries have been completed, the adjusted balance in the Prepaid Rent account represents the ______.

amount of the prepayment that remains towards future rental periods

After posting adjusting entries to the general ledger, a company typically prepares:

an adjusted trial balance

Long-lived assets, such as equipment, are reported at their ______ value in the balance sheet.

book

Long-lived assets are reported in the balance sheet at _____ value, which is equal to its original cost less _____.

book; accumulated depreciation

Adjusting entries never affect the asset account called Blank 1 of 1. (Enter only one word.)

cash

Reporting revenues only when cash is received and expenses only when cash is paid is called the Blank 1 of 1 basis of accounting. (Enter one word per blank.)

cash

Sabrina Company recorded an adjusting entry for salaries owed to employees at the end of the year. As a result of this entry, Sabrina Company's: (Select all that apply.)

equity decreases liabilities increase

Norbert Company debits Accounts Receivable and credits Service Revenue. As a result of this adjusting entry, Norbert Company's: (Select all that apply.)

equity increases assets increase

On December 31, Mueller Inc., makes an adjusting entry to accrue salaries expense. As a result of this entry, Mueller's: (Select all that apply.)

equity will decrease liabilities will increase

An advantage of a classified balance sheet is that it is easy to see ______.

if current assets are large enough to pay current liabilities

The difference between cash-basis and accrual-basis accounting is the Blank 1 of 1 of when revenues and expenses are recorded.

timing

Which of these asset accounts would typically appear first on a company's balance sheet?

Cash

The adjusted trial balance should be prepared ______ the financial statements are prepared in order to prove the ______ of the debits and credits.

before; equality Reason: The trial balance is prepared before the financial statements to prove that total debits equal total credits. A post-closing trial balance is prepared to show that all temporary accounts, revenues, expenses and dividends, were properly zeroed out.

Which of the following would be included (added or subtracted) in the calculation of retained earnings? (Select all that apply.)

beginning balance retained earnings expenses revenues dividends declared

Adjusting entries help to ensure that all ______ are recorded in the period in which they are incurred.

expenses Reason: Adjustments, which are journal entries, ensure that all expenses are recorded in the period incurred.

In the closing process, ______ are zeroed out by crediting each account and ______ are zeroed out by debiting each account.

expenses and dividends; revenues Reason: revenues are closed using a debit and expenses are closed using a credit

Under cash-basis accounting, (Select all that apply.)

expenses are recorded when cash is paid. revenues are recorded when cash is received.

Accrual basis accounting differs from cash basis accounting in that accrual basis accounting records ______. (Select all that apply.)

expenses in the period incurred, even though cash has not yet been paid revenues in the period when the revenue is earned, even though the cash has not yet been collected

Which of the following current liabilities does not involve the future payment of cash?

Deferred revenue

When should supplies be recorded as an expense?

In the period the supplies are used, regardless of when they were purchased Reason: Supplies are recorded as an asset when purchased and later expensed as they are used up.

The adjusted trial balance typically is used to prepare which financial statements?

Income statement Balance sheet Statement of stockholders' equity Reason: usually prepared from income statement and balance sheet

Which of the following statements is true?

Income statement accounts are temporary accounts, while balance sheet accounts are permanent accounts. Reason: The balance sheet reports amounts at a specific point in time, i.e. the end of the accounting period. It does not report the activity of only the current accounting period.

In January, Pizza Company bought pizza ingredients on account for $100, with payment due to the supplier in April. The pizza ingredients were used for pizzas made in January. In which month should Pizza Company record the cost of the pizza ingredients as an expense?

January Reason: The pizza ingredients are expensed in the month the ingredients are used (January), not in the month when the payment is made.

If a company incorrectly records cash received for services to be provided in the future with a debit to Cash and a credit to Sales Revenue, how will this error affect net income for the current period?

Net income will be too high. Reason: Net income will be too high because the credit should have been to Deferred Revenue, a liability, and not to Sales Revenue which makes net income too high.

What are the effects on the accounting equation from the adjustment for salaries incurred but not yet paid during the accounting period?

Total liabilities will increase and total stockholders' equity will decrease. Reason: The amount of salaries incurred but not paid during the current period should be recorded as Salaries Payable and should also increase the Salaries Expense account. An increase in an expense account results in a decrease to stockholders' equity.

What are the effects on the accounting equation from the adjusting entry for interest expense accrued, but not paid, at the end of the accounting period?

Total liabilities will increase and total stockholders' equity will decrease. Reason: The amount of interest accrued, but not paid, during the current period should be recorded as Interest Payable and should also increase the Interest Expense account. An increase in an expense account results in a decrease to stockholders' equity.

The accounting basis that records revenues in the period that goods and services are provided to customers is referred to as

accrual-basis accounting. Reason: GAAP requires accrual accounting, but the correct term is "accrual-basis accounting."

The Blank 1 of 1 trial balance shows a list of all accounts and their balances after we have updated account balances for adjusting entries. (Enter only one word.)

adjusted

The income statement, statement of stockholders' equity, and balance sheet typically are prepared utilizing information shown in the

adjusted trial balance.

An adjusted trial balance shows all accounts and their balances _____ the accounts have been updated for for adjusting entries.

after

An asset that can quickly be turned into cash has the characteristic of

liquidity

After the adjusting entries have been completed, the adjusted balance in the Supplies Expense account represents the cost of supplies:

used during the accounting period Reason: This amount would be found in the Supplies account. The supplies remaining in a company's possession are an asset for the company.

Blank 1 of 1-basis accounting helps measure and report revenues and expenses in a way that clearly represents the net income of the company. (Enter only one word.)

Accrual

True or false: The adjusting entry to record interest owed for the period will cause the balance in the Note Payable account to increase.

False Reason: Accrued interest increases the Interest Payable account. The amount does not affect the Note Payable account. Only principal payments on the note will affect the balance in the Note Payable account.

Under accrual-basis accounting, which of the following result in an expense being recorded in May? (Select all that apply.)

The company pays cash in June for salaries earned in May. The company pays cash in April for supplies used in May. Reason: The question is asking about expense being recorded in MAY. Under accrual accounting, expenses are recorded in the period when related revenue is generated. Supplies used in May will generate revenue in May.

True or false: The adjusted trial balance presents the ending balance of retained earnings.

False Reason: The amount shown is the beginning of period balance because revenues, expenses, and dividends were not yet closed to retained earnings.