Accounting chapter 3
ABC, Inc.'s income statement shows Service revenue of $40,000, Wages expense of $25,000 and Net income of $1,000. The other expenses on ABC's income statement must equal__________.
$14,000
Which of the following line items appear in an income statement?
- Salaries expense - Sales revenue
Andy records an adjusting entry for deferred revenue. Andy should:
- debit a liability account - credit a revenue account
When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records which two of the following?
- debit to deferred revenue - credit to revenue
Which of the following would be referred to as "accruals?"
-Expenses incurred, not yet paid -Goods and services provided, not yet collected
Which of the following transactions are examples of prepayments that will require an adjustment at the end of the accounting period on December 31?
-a company pays a 6-month insurance premium at the beginning of October -a company pays for 4 months of advertising in the Wall Street Journal on November 1.
Adjusting entries:
-are needed before financial statement preparation -update the accounts to their proper balances
An adjusting entry for accrued expenses involves:
-credit to a liability -debit to an expense
The statement of stockholders' equity includes these amounts:
-ending balance retained earnings -net income -dividends for the period
If an adjusting entry's debit is to an expense account, then the credit must be to which of the following?
-prepaid expense -liability
Which of the following statements regarding the statement of cash flows are correct?
-reports cash receipts - the final financial statement that is typically prepared - reports cash disbursements
The post-closing trial balance helps to verify that:
-we prepared and posted closing entries correctly -the accounts are ready for next period's transactions
How do adjusting entries for accrued expenses affect liabilities and expenses?
Adjusting entries for accrued expenses can increase liabilities and increase expenses.
During December, Mainzel Interior Design Corporation redecorated the reception areas of a local hotel. The project was completed on December 31 with payment due in 30 days. Payment was received on January 21 of the following year. When should Mainzel recognize the related revenue using accrual accounting?
December 31
True or False: Adjusting entries ensure that assets in the balance sheet are reported at amounts that have been used up or expired during the period
False
When should supplies be recorded as an expense?
In the period the supplies are used, regardless of when they were purchased
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 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
In an adjusting entry for expenses incurred but not yet paid_________
a liability is increasing since cash will be paid in the future due to the expense incurred
_______ occur when the cash flow occurs after either the expense is incurred or the revenue is earned
accruals
To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for changes created by
adjusting
In recording an accrual adjusting entry to account for revenues earned but not yet collected, ____________
an asset is increased since cash will be collected at a later date
At the beginning of the accounting period, the balances of temporary accounts
are zero
Adjusting entries ensure that ________ balances are reported at amounts representing the economic benefits that remain at the end of the period
asset
Prepaid insurance is a(n)
asset on the balance sheet
A classified balance sheet shows subtotals for current ___________ and current _____________.
assets liabilities
Prepaid rent appears in the ________
balance sheet because it is an asset
The entries that transfer the balances of all temporary accounts to retained earnings are referred to as
closing entries
A prepayment is originally recorded as an asset. An adjusting entry at the end of the accounting period results in a(n) ________ in the asset account and a(n) ___________ in the expense account
decrease; increase
Prepaid expenses should be _________ by the cost of the asset used during the accounting period
decreased
Supplies should be ________ and Supplies Expense should be _________ for the cost of supplies used up during the period
decreased; increased
___________ revenue arises when a business receives cash in one period, but does not provide all of the related goods or services until a later period.
deferred
The process of allocating the cost of an asset to expense over the useful life of the asset is called
depreciation
__________ is an allocation of the cost of buildings, vehicles, and equipment to expense over time as they are used
depreciation
Adjusting entries are made at the _________ of the accounting period, while daily transactions are made throughout the accounting period
end
If an adjusting entry's credit is to a liability account, then the debit must be to ___________
expense
Initially a prepayment for items such as rent or insurance are recorded as assets and later are recorded as a(n)_________ in the period the benefit expires
expense
The primary components of net income are:
expenses and revenues
A classified balance sheet ______________
groups asset and liabilities into current and long-term categories
Consistent with the accrual-basis accounting, expenses should be recognized
in the period when the related revenue is generated
Revenues and Expenses are reported in the:
income statement
The expense that relates to a formal note payable and accumulates or accrues throughout the accounting period is referred to as__________
interest expense
Which of the following statements is correct regarding the adjusting entry to record interest accrued on a note payable?
interest on the note payable is classified as an expense since it is a cost of borrowing
Deferred Revenue is a(n)
liability
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
How do temporary accounts differ from permanent accounts?
only temporary accounts are cleared out at the end of the accounting period
The information reported in the statement of cash flows is organized by these activities:
operating investing financing
At year-end, companies that utilize accrual-based accounting systems complete the measurement process through
recording of adjusting entries
The two major categories reported in the income statement are:
revenue and expense
Closing entries move the balances from the ___________ accounts into the Retained Earnings account
temporary
The difference between cash-basis and accrual-basis accounting is the ___________ of when revenues and expenses are recorded
timing
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