Chapter 4

At December 31, 2013, before any year-end adjustments, Macarty Company's Prepaid Insurance account had a balance of $2,700. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be

$1,500.

Adjusting entries are made to ensure that

- expenses are recognized in the period in which they are incurred. - revenues are recorded in the period in which the performance obligation is satisfied. - balance sheet and income statement accounts have correct balances at the end of an accounting period.

If revenues are recognized only when a customer pays, what method of accounting is being used?

Cash-basis

Which statement is correct?

The use of the cash-basis of accounting violates both the revenue recognition and expense recognition principles.

Cash received before services are performed which is recorded as a debit to a Cash account and a credit to a liability account is called

an unearned revenue.

The difference between an asset's cost and its accumulated depreciation is called

book value

Adjustments for prepaid expenses

decrease assets and increase expenses

Adjustments for unearned revenues

decrease liabilities and increase revenues.

Each of the following is a major type (or category) of adjusting entry EXCEPT

except: earned expenses. included: - accrued expenses. - accrued revenues. - prepaid expenses.

Accrued expenses are expenses that have already been paid.

false

The cash-basis of accounting is in accordance with generally accepted accounting principles.

false

The expense recognition principle requires that expenses be recognized in the same period that they are paid.

false

What is the periodicity assumption?

The economic life of a business can be divided into artificial time periods.

Cash received before services are performed are recorded as

liabilities

Which principle dictates that efforts (expenses) be matched with results (revenues)?

Expense recognition principle

The revenue recognition principle dictates that revenue is recognized in the period in which the cash is received.

false

Which one of these statements about the accrual-basis of accounting is FALSE?

false: Companies record revenue only when they receive cash, and record expense only when they pay out cash. true: - Companies record events that change a company's financial statements in the periods in which the events occur. - Companies recognize revenue in the period in which the performance obligation is satisfied. - This basis is in accord with generally accepted accounting principles.

Which one of the following is NOT a justification for adjusting entries?

is NOT: Adjusting entries are necessary to bring the general ledger accounts in line with the budget. is: - Adjusting entries are necessary to ensure that the revenue recognition principle is followed. - Adjusting entries are necessary to ensure that the expense recognition principle is followed. - Adjusting entries are necessary to enable financial statements to be in conformity with GAAP.

Which of the following is NOT a type of adjusting entry?

is NOT: Earned revenues is: - Prepaid expenses - Accrued revenues - Accrued expenses

Which of the following is NOT a typical example of a prepaid expense?

is NOT: Wages is: - supplies - insurance - rent

If the adjusting entry is NOT made for unearned revenues the result will be to

is NOT: overstate liabilities and understate revenues. is: - overstate assets and understate liabilities. - understate net income and overstate retained earnings. - understate retained earnings and overstate revenues.

In 2013, Costello Company performs work for a customer and bills the customer $10,000; it also pays expenses of $3,000. The customer pays Costello in 2014. If Costello uses the accrual-basis of accounting, then Costello will report

revenue of $10,000 in 2013.

The generally accepted accounting principle which dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied is the

revenue recognition principle.

Book value is equal to cost minus accumulated depreciation.

true

Prior to an accrual adjustment, the revenue account (and the related asset account) or the expense account (and the related liability account) is understated.

true