Ch. 4-6

Adjustments help to ensure that all ______ are recorded in the period in which they are earned. Multiple Choice A) revenues B) cash transactions C) closing entries D) journal entries

A

When existing assets are used up in the ordinary course of business: Multiple Choice A) an expense is recorded. B) Deferred revenue is recorded. C) accrual is recorded. D) a prepaid expense is recorded.

A

A company started the year with $3,750 of supplies on hand. During the year the company purchased additional supplies of $2,000 and recorded them as an increase to the supplies asset. At the end of the year the company determined that only $750 of supplies are still on hand. What is the adjusting journal entry to be made at the end of the period? Multiple Choice Debit Supplies Expense and credit Supplies for $5,000 Debit Supplies and credit Supplies Expense for $750 Debit Supplies Expense and credit Supplies for $3,000 Debit Supplies and credit Supplies Expense for $2,500

A Supplies expense (used) = Beginning balance + Supplies purchased − Supplies on hand at end of period = $3,750 + $2,000 − $750 = $5,000

Purchased Discount

A cash discount received for prompt payment of a purchase on account

Sales Discount

A cash discount received for prompt payment of purchase on account

Gross Profit Percentage

A ratio indicating the percentage of profit earned on each dollar of sales, after considering the cost of products sold.

Purchased returns and allowences

A reduction in the cost of inventory purchases associated with unsatisfactory goods

sales discount

A sales price reduction given to customers for prompt payment of their account balance

FOB destination

A term of sale indicating deliver to the buyer

FOB shipping point

A term of sale indicating goods are owned by the buyer the moment they leave the sells premises

A strong system of internal ______ reduces the ______ to commit fraud. Multiple Choice A) controls; opportunity B) audits; rationalization C) financial statements; opportunity D) loan covenants; incentive

A)

After several months, HRC's materials/crew manager is arrested for having $20,000 of materials delivered to his home but charged to the company. Identify the internal control weakness that allowed this theft to occur. A) There was no way to independently verify that amounts charged by suppliers were for goods that had been delivered to authorized work sites. B) The materials/crew manager's order should have been verified by the department head. C) A copy of the purchase order was not sent to the repair site. D) Purchase orders were not prepared on the basis of prenumbered requisition forms.

A)

An attempt to deceive others for personal gain is known as: Multiple Choice A) fraud. B) larceny. C) opportunity. D) incentive.

A)

If a company hires an auditor to check that the work done by others within the company is supported by documentation, it is doing so under the principle of control activities referred to as: Multiple Choice A) independent verification. B) segregation of duties. C) restrict access. D) document procedures.

A) A business can perform independent verification in various ways. The most obvious is to hire someone (an auditor) to check that the work done by others within the company is appropriate and supported by documentation.

On July 31, 2018, a company purchased a two-year insurance policy for $27,000, paying cash and debiting Prepaid Insurance for the entire two-year premium amount. The adjusting entry on December 31, 2018 includes a: Multiple Choice A) credit to Prepaid Insurance $5,625. B) credit to Insurance Expense $5,625. C) debit to Prepaid Insurance $6,750. D) debit to Insurance expense $6,750.

A) Five of the 24 months of insurance coverage has expired (or been used). The adjusting entry will include a debit to Insurance Expense and a credit to Prepaid Insurance for $5,625 (or $27,000 × 5/24).

Inventory

Assets acquired for resale to customers

If an expense has been incurred but will be paid later, then: Multiple Choice A) nothing is recorded on the financial statements. B) a liability account is created or increased and an expense is recorded. C) an asset account is decreased or eliminated and an expense is recorded. D) a revenue and an expense are accrued.

B

Which of the following statements about the need for adjustments is not correct? Multiple Choice A) Without adjustments, the financial statements present an incomplete and misleading picture of the company. B) Adjusting entries are intended to change the operating results to reflect management's objectives for operating performance. C) Adjustments help the financial statements present the best picture of whether the company's activities were profitable for the period. D) Adjustments help the financial statements present the economic resources that the company owns and owes at the end of the period.

B

Considering current laws that deal with misstatements of financial results, which of the following statements is correct? Multiple Choice A) Managers found guilty can escape paying fines if they declare bankruptcy. B) Managers can be sentenced to maximum jail terms of up to 20 years for each violation. C) Managers found guilty may keep any bonuses or profits from the misrepresentation if their fines are less than such bonuses or profits. D) Whistleblowers who secretly submit concerns about questionable accounting practices will be fired.

B)

Which of the following would be deducted from the ending cash balance per books when performing a bank reconciliation? Multiple Choice A) Electronic fund transfers B) Service charges C) Deposits in transit D) Outstanding checks

B) Service charges are an expense to the company that was not known until the bank statement was received. Therefore, it is a deduction in updating the company's books.

If the Prepaid Rent account is not adjusted at the end of the period, what effect will this have on the financial statements? Multiple Choice A) Liabilities will be overstated and net income will be understated. B) Assets will be understated and net income will be understated. C) Assets will be overstated and net income will be overstated. D) Cash will be overstated and net income will be overstated.

C

A contra-account: Multiple Choice A) increases the original value of the account to which it relates. B) always appears in the same column of the trial balance as the account to which it relates. C) offsets, or reduces, another account. D) reduce the asset to its fair value.

C)

All of the following are goals of internal control except: Multiple Choice A) reducing the risk of fraud. B) producing reliable and timely accounting information for use by people internal and external to the organization. C) minimizing the amount of income taxes that must be paid. D) adhering to laws and regulations.

C)

The process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used is called: Multiple Choice A) accumulated allocation. B) deferred revenue. C) depreciation. D) prepaid expense.

C)

Which of the following was passed by Congress in response to financial statement frauds that occurred in the early 2000s? Multiple Choice A) Federal Accounting Standards Board Act B) Securities and Exchange Act C) Sarbanes-Oxley Act D) Clayton Act

C)

At the end of the year, accrual adjustments could include a: Multiple Choice A) debit to an expense and a credit to an asset. B) credit to revenue and a debit to an expense. C) debit to cash and a credit to Common Stock. D) debit to an asset and a credit to a revenue.

D

The fraud triangle contains three elements that must exist for accounting fraud to occur. The elements are: Multiple Choice A) fear, greed, and satisfaction. B) greed, larceny, and access. C) motive, opportunity, and means. D) incentive, opportunity, and rationalization.

D)

Which of the following is not a category of employee fraud? Multiple Choice A) Corruption B) Asset misappropriation C) Financial statement fraud D) Internal controls

D)

The purpose of internal controls includes all of the following except: Multiple Choice A) improving efficiency. B) producing timely accounting information. C) minimizing errors. D) completely eliminating fraud.

D) Internal controls can never completely prevent and detect errors and fraud for two reasons. First, an organization will implement internal controls only to the extent that their benefits exceed their costs. A second limitation is that internal controls can fail as a result of human error or fraud.

Cost of Goods sold equation

Express the relationship between inventory on hand, purchased, and sold; shown either BI+P- EL=CGS or BI+P-CGS=EL

purchase returns and allowances

Refunds and price reductions given to a customer after goods have been sold and found unsatisfactory

sales returns and allowances

Refunds and price reductions given to customers after goods have been sold and found unsatisfactory.

shrinkage

The cost of inventory lost to theft, fraud, and error.

Gross Profit (or gross Margin)

net sales minus cost of goods sold

multistep income statement

presents important subtotals, such as gross profit, to help distinguish core operating results from other, less significant items that affect net income

Goods Available for Sale

the sum of beginning inventory and purchases for the period