Chapter 4 Orion - Accounting

Companies usually make reversing entries ____ a new accounting period.

at the beginning of

Notes payable appears on the

balance sheet

The ________ includes entries for cash and accounts receivable based on the adjusted trial balance.

balance sheet

Which of the following statements can be prepared from the adjusted trial balance

balance sheet

An adjusted trial balance is used for preparing financial statement

because the accounts contain all the data required for financial statements

Cash must be received before revenue is recognized under the

cash basis of accounting

All the following journal entries are considered closing entries EXCEPT

closing accounts receivable to income summary

Which of the following includes net income as an addition?

retained earnings

Kipling Corporation issued a one-year 9%, $50,000 note on April 30th, 2014. Interest expense for the year ended December 31st, 2014 was

$3,000 Solution: $50,000 x 0.09 x 8/12 = $3,000

Huffing Corporation issued a one-year 9%, $100,000 note on April 30th, 2014. Interest expense for the year ended December 31st, 2014 was

$6,000 Solution: $100,000 x 0.09 x 8/12 = $6,000

Bluing Corporation issued a one-year 9%, $150,000 note on April 30th, 2014. Interest expense for the year ended December 31st, 2014 was

$9,000 Solution: $150,000 × .09 × 8/12 = $9,000

Which of the following are applications of revenue recognition? Select all that apply.

- Recording revenue as an adjusting entry on the last day of the accounting period - Billing customers on June 30th for services completed during June - Receiving cash for services performed

Which of the following are major parts of a balance sheet? Select all that apply.

- assets - liabilities

Which of the following are required steps in the accounting cycle? Select all that apply.

- journalizing and posting closing entries - preparing a post-closing trial balance - preparing an adjusted trial balance

Which of the following statements about the accrual basis of accounting is true? - Cash must be received before revenue is recognized. - 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. - Net income is calculated by matching cash outflows against cash inflows. - The ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

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

Which one of the following is not correct regarding adjusting entries? - Balance sheet and income statement accounts have correct balances at the end of an accounting period - Expenses are recorded in the period in which they are earned - Expenses are recognized in the period in which they are incurred - Revenues are recorded in the period in which the performance obligation is satisfied

Expenses are recorded in the period in which they are earned

At the end of the fiscal year, the usual adjusting entry for accrued salaries owed to employees was omitted. This will lead to assets at the end of the year being understated

False

Companies usually create a post-closing trial balance at the end of each month.

False

Owen Clark, CPA, has billed his clients for services performed. He subsequently receives payments from his clients. While making the entry he will debit Accounts Receivable and credit Cash.

False

Without an adjusting entry for accrued interest expense, net income and stockholders' equity are understated

False

Which of the following statements is true? - In a service-type business, revenue is recognized at the end of the month - In a service-type business, revenue is recognized when the service is performed - In a service-type business, revenue is recognized at the end of the year - In a service-type business, revenue is recognized when cash is received

In a service-type business, revenue is recognized when the service is performed

Prepaid expenses have been recorded, while accrued expenses have not.

True

The last of the required steps in the accounting cycle is to prepare a post-closing trial balance.

True

The preparation of adjusting entries is needed to ensure that the expense recognition principle is followed

True

The total of an adjusted trial balance is equal on both sides

True

Which of the following statements is true? - Accrual basis accounting is less complicated than cash basis accounting and therefore is used by most companies. - Under accrual basis accounting, a company does not recognize revenue until they have been paid for services. - Under cash basis accounting, revenues and expenses are recorded in the period in which transaction occurred even if cash has not been paid. - Under accrual basis accounting, a company recognizes revenue when they perform services even if the cash is not received.

Under accrual basis accounting, a company recognizes revenue when they perform services even if the cash is not received

Ringo Music purchased equipment for $9,000 on December 1st. The store estimated that annual depreciation on the equipment will be $1,200. If financial statements are to be prepared on December 31st, which of the following is an adjusting entry that should be made by Ringo Music?

debit Depreciation Expense, $100; credit Accumulated Depreciation, $100 Solution: $1,200 ÷ 12 = $100

The Harris Company purchased equipment for $9,000 on December 1st. It is estimated that annual depreciation on the computer will be $1,800. If financial statements are prepared on December 31st, the adjustment entry is

debit Depreciation Expense, $150; credit Accumulated Depreciation, $150 Solution: $1,800 ÷ 12 = $150

On July 1st the Fisher Shoe Store paid $18,000 to Acme Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31st, which of the following is an adjusting entry that should be made by the company?

debit Rent Expense, $3,000; credit Prepaid Rent, $3,000 Solution: $18,000 ÷ 6 = $3,000

A company purchased office supplies costing $3,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $900 still on hand. Which of the following is an adjusting entry that should be made by the company?

debit Supplies Expense, $2,100; credit Supplies, $2,100 Solution: $3,000 - $900 = $2,100

Under the cash basis of accounting, when is revenue is recognized

when cash has been received

When are expenses recorded and reported under accrual accounting?

when they are incurred, whether or not cash is paid

A company would be justified in using the cash basis of accounting if

it always receives payment when it performs services

Changes in the retained earning account balance will occur between the adjusted trial balance and the post-closing trial balance due to

net profit/loss of the year

Retained earnings is a(n)

permanent account

A post closing trial balance will show

permanent accounts to be carried forward to the next accounting period

Temporary accounts are closed so as to

prepare the income summary statement

Which of the following results are shown by the adjusted trial balance at the end of the accounting period?

the balance of all accounts

How many steps in the accounting cycle involve preparing some kind of trial balance?

three

If a business does not make an adjusting entry to record accrued revenue it will result in an

understated asset and an understated revenue

When is revenue recognized in a service-type business?

when the service is performed

Diane Vasquez, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. While making the entry she will debit Cash and credit

Accounts Receivable

The adjusted trial balance is prepared after the preparation of the financial statements

False

A company purchased office supplies costing $2,000 and debited Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $500 still on hand ________ will be an adjustment by the company

Debit Supplies expense, $1,500; credit Supplies, $1,500 Solution: $2,000 - $500 = $1,500

A furniture factory's employees work overtime to finish an order that is sold on December 31st. The office sends a statement to the customer in early January and payment is received by mid-February. The overtime wages should be expensed in

December

Adjusting entries are classified as revenues.

False

_______ accounts will appear in a post-closing trial balance.

Permanent

On an adjusted trial balance, the ____ account will reflect the account's beginning balance

Retained earnings

Which of the following statements is true? - The periodicity assumption states that the economic life of a business can be divided into artificial time periods - The periodicity assumption states that a transaction can only affect one period of time - The periodicity assumption states that estimates should not be made if a transaction affects more than one time period - The periodicity assumption states that adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations

The periodicity assumption states that the economic life of a business can be divided into artificial time periods

A flower shop makes a large sale for $1,000 on January 31st. The customer is sent a statement on February 5th and a check is received on February 10th. The flower shop follows GAAP and applies the revenue recognition principle. The shop recognizes the revenue on January 31st. Is this right?

True

An adjusting entry can result in a revenue or expense

True

Assets are debit amounts on an adjusted trial balance and liabilities are credit amounts on an adjusted trial balance

True

The balance in the prepaid rent account before adjustment at the end of the year is $15,000 and represents three months rent paid on December 1st. The adjustment entry is

debit Rent Expense, $5,000; credit Prepaid Rent, $5,000 Solution: $15,000 ÷ 3 = $5,000

In addition to income statements, accountants can use a period's adjusted trial balance for a period to prepare which of the following?

retained earnings statement

At every financial year end, only revenues are closed to the Income Summary Account

False

When do companies usually create a post-closing trial balance?

at the end of the fiscal year

Adjusting entries for prepaid expenses exist in

asset accounts

A toy factory's employees work overtime to finish an order that is sold on November 30. The office sends a statement to the customer in early December and payment is received by mid-December. The overtime wages were expensed in November. The toy factory correctly accounted for the overtime wages

True

Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause an understatement of expenses and an understatement of liabilities.

True

Under accrual accounting, expenses are recorded and reported when they are incurred whether or not cash is paid

True

Under the accrual basis of accounting, 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

True

Which of the following shows the ledger account balances?

adjusted trial balance

All of the following are examples of adjusting entries EXCEPT

advances

A new bookkeeper at TLC Pet Clinic posts transactions to ledger accounts and then journalizes and posts adjusting entries. What step of the accounting cycle did she overlook

preparation of a trial balance

Healing Corporation issued a one-year 9%, $25,000 note on April 30th, 2014. Interest expense for the year ended December 31st, 2014 was

$1,500 Solution: $25,000 x 0.09 x 8/12 = $1,500

A furniture factory's employees work overtime to finish an order that is sold on April 30th. The office sends a statement to the customer in early May and payment is received by June. The overtime wages should be expensed in the month of

April

Adjusting entries are necessary to bring the general ledger accounts in line with the budget

False

A flower shop makes a large sale for $1,500 on June 30th. The customer is sent a statement on July 5th and a check is received on July 10th. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,500 considered to be recognized?

June 30th

On April 1st, 2013, Fun Corporation paid $15,000 cash for equipment that will be used in business operations. The equipment will be used for four years. Fun records depreciation expense of $15,000 for the calendar year ending December 31st, 2013. Fun Corporation has violated the expense recognition principle

True

Which of the following statements is true? - Under the cash basis of accounting, a promise to pay is sufficient to recognize revenue - Under the cash basis of accounting, cash must be received before revenue is recognized - Under the cash basis of accounting, revenue is recognized when services are performed - Under the cash basis of accounting, expenses are matched with the revenue that is produced

Under the cash basis of accounting, cash must be received before revenue is recognized

Which of the following is a permanent account?

accounts payable

Which of the following accounts does not have any impact on the balance of the income summary statement?

accounts receivable

Under the ______ basis of accounting, transactions are entered in the period in which they occurred even if cash was not received

accrual

Under the ______ basis of accounting, cash must be received before revenue is recognized.

cash

On July 1st The Knit Shop paid $9,000 to Townsend Realty for 6 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31st, the adjustment entry is

debit Rent Expense, $1,500; credit Prepaid Rent, $1,500

An adjusting entry to a prepaid expense is required to recognize

expired expenses

A baker wants to determine the amount of supplies used during one period. What should the baker do?

find the difference between the balance of the Supplies account and the cost of supplies on hand

Under accrual basis accounting, when are transactions recorded?

in the period in which they occurred