ORION - Chapter 3

Which of the following describes a similarity between an income statement and a statement of cash flows?

Both statements summarize activities that took place during an accounting period.

Spartan Sporting Goods' adjusted trial balance for the year shows retained earnings of $550,000 and dividends of $15,000. If you want to complete Spartan's statement of retained earnings for the year, what other information will you need?

Spartan's net income, as reported on its income statement.

Which of the following events would not be recorded as part of the accounting cycle?

a 10% increase in the size of the workforce

What is Deferred Expense?

a cost that has already been incurred, but which has not yet been consumed

Assuming all other entries on its adjusted trial balance and income statement remain constant, as a firm's cost of goods sold decreases, its

net income and retained earnings will both increase.

When reviewing her adjusted trial balance for February, Cathy calculates that her cupcake shop had total expenses of $8,250 and total revenues of $14,657. Given this information, Cathy's income statement should show a

net income of $6,407.

An accrued expense can best be described as an amount

not paid and currently matched with earnings.

What is Deferred Revenue?

occur when a company receives cash in advance from customers, the service has yet to be provided

A prepaid expense can best be described as an amount

paid and not currently matched with earnings.

Which of the following is an example of an accrued liability?

property taxes incurred during the year, to be paid in the first quarter of the subsequent year

The balance of the ______ account will change between the adjusted trial balance and the post-closing trial balance.

retained earnings

The difference between the accounting process and the accounting cycle is

the accounting process represents the steps taken to accomplish the accounting cycle.

A trial balance prepared at year end showed Puccinelli Co.'s debit total exceeding the credit total by $6,300. This discrepancy could have been caused by

the balance of $700 in the Equipment account being entered as a debit of $7,000.

Which of the following items is reflected on the balance sheet but not on the adjusted trial balance?

the ending retained earnings balance

The accounting equation (A = L + SE) must remain in balance

throughout each step in the accounting cycle.

Last month, Shiloh Shoes had net sales of $40,000. If the firm's cost of goods sold was $28,000, then

Shiloh's gross profit on sales was $12,000.

What is the Difference Between Cash and Accrual Base Accounting?

1) Cash base accounting is not accepted by GAAP 2)Cash-Basis accounting does not include non-cash transactions, accrual does

Henry Hardware had the same net sales amount in both September and October. However, the company's cost of goods sold was $5,000 higher in September than in October, and its total administrative expenses were $7,250 higher in October than in September. Assuming all other aspects of the firm's income statement are the same for both months, we can conclude that Henry's net income in September was

$2,250 higher than its net income in October.

Jane is creating a balance sheet for Tim's Toys. According to her calculations, Tim's has current assets of $25,000 and property, plant, and equipment of $45,000. However, Jane's supervisor reminds her that these numbers fail to account for $1,200 in accumulated depreciation on the company's equipment. With this information in mind, Jane should calculate that Tim's Toys' total assets are equal to

$68,800.

Which of the following is an effect of failure to accrue an expense? A) Net income is overstated B) Cash is overstated C) Liabilities are overstated D) Gross profit is overstated

A) Net income is overstated

Which of the following is not considered to be an accrued revenue/ expense? A) Rent payable B) Prepaid insurance C) Prepaid taxes D) Unearned revenue

A) Rent Payable

Which of the following accounts is not listed in a post-closing trial balance? A) Service Revenue. B) Accounts Receivable. C) Equipment. D) Interest Payable.

A) Service Revenue

Which of the following concepts is important to accrual accounting? A) Time period, because accrual accounting divides earnings into time periods B) Monetary unit, because inflation is a big factor in the environment C) Cash basis, because if cash is not received, revenue is not accrued D) Entity concept, because personal transactions must be separated from business transactions

A) Time period, because accrual accounting divides earnings into time periods

Torresdale Pizza borrowed $5,000 from the bank on October 1, 2012. The note carried a 1 year term and 12% rate of interest. The adjusting entry on Torresdale's books to record accrued interest expense on Dec 31st, 2012 is: A) Debit to interest expense and credit to interest payable for $600 B) Debit to interest expense and credit to interest payable for $150 C) Debit to interest expense and credit to cash for $150 D) Debit to interest expense for $600 and credit to interest payable for $150

B) Debit to interest expense and credit to interest payable for $150

On December 10, a company pays $500 for advertising to appear on December 20. On which date should the expense be recorded under accrual-basis accounting? A) December 10 B) December 20 C) One-Half on each date D) Neither

B) December 20

The entry to close the expense accounts includes: A) A credit to Retained Earnings. B) A debit to all expense accounts. C) A debit to Retained Earnings. D) Answers A and B are correct

C) A debit to Retained Earnings

Recording salaries owed to employees that will not be paid by the company until the following accounting period is an example of a(n): A) Prepaid Expense B) Unearned Revenue C) Accrued Expense D) Accrued Revenue

C) Accrued Expense

The adjusting entry to record supplies used during the period includes a: A) Debit to Supplies B) Credit to Service Revenue C) Debit to Supplies Expense D) Credit to Cash

C) Debit to Supplies Expense

A restaurant collects $12,000 from selling gift cards that will be given as Christmas gifts. From Dec 26th to 30th, the restaurant collects $2,000 of revenue from receivers of gift cards. Which of the following will be recorded as a balance after year-end adjustments on Dec 31st. A) Revenue of $12,000 B) Account Receivable of $10,000 C) Unearned revenue of $10,000 D) Cash of $2,000

C) Unearned revenue of $10,000

When are revenues recognized under the accrual basis of accounting? A) When cash is received, and expenses when cash is paid B) When cash is received, and expenses when the costs are incurred C) When earned, and expenses when the costs are incurred D) When earned, and expenses when cash is paid

C) When earned, and expenses when the cost are incurred

A journal entry recorded by a company for a payment received from a customer on account will include which of the following?

Credit to Accounts Receivable

Financial statements are prepared from which of the following trial balances? A) Unadjusted trial balance B) Financial trial balance C) Post-Closing trial balance D) Adjusted trial balance

D) Adjusted trial balance

Which one of the following best describes the characteristics of adjusting entries? A) Adjusting entries reduce the balance of revenue, expense, and dividend accounts to zero. B) Adjusting entries allow for the proper recognition of cash flows. C) Adjusting entries allow for the proper recognition of investments from and distributions to stockholders. D) Adjusting entries allow for the proper recognition of revenue and expenses.

D) Adjusting entries allow for the proper recognition of revenue and expenses.

Which of the following is an example of an accrued revenue? A) Prepaying insurance coverage for the next 12 months B) Delaying the payment of interest on an outstanding loan until next year C) Receiving cash in advance of a service to be provided to a customer D) Providing services to a customer without having yet collected the cash

D) Providing services to a customer without having yet collected the cash

Which of the following statements does not present financial information based on the accrual basis? a. Balance Sheet b. Income Statement c. Statement of Retained Earnings d. Statement of cash flows

D) Statement of cash flows

Which of the following journal entries is appropriate when a company receives payment in advance for goods or services?

Debit cash and credit a liability account or a revenue account.

As a corporation increases the percentage of its net income that it retains in the business, it __________ the percentage of its net income that it pays out in the form of stockholder dividends.

Decreases

Which of the following accounts will contain a zero balance after the post-closing trial balance is completed?

Dividends

Which of the following is not a principal purpose of an unadjusted trial balance?

It proves that debits and credits were properly entered in the ledger accounts.

On its balance sheet, Jersey Jackets lists a $12,000 allowance for doubtful accounts. On its balance sheet, Carolina Coats lists a $10,000 allowance for doubtful accounts. Assuming all other entries on the assets portion of their balance sheets are identical, which of the following statements is accurate?

Jersey Jackets' total assets amount is less than Carolina Coats.

If expenses are greater than revenues, the Income Summary account will be closed by a debit to

Retained Earnings and a credit to Income Summary.

Which of the following best describes the difference between the financial statements for a merchandising company compared to those for a service company?

The merchandising company's statements must account for gross profit on sales, while the service company's statements do not.

The general journal for Wells Tech includes the entry below. Based on the information in this entry, which of the following can you determine about the corresponding general ledger entries?

The rent expense of $650 was debited to account 500 and the cash paid was credited to account 600.

Which of the following best describes the difference in the accounting cycle performed by a merchandising company compared to the accounting cycle performed by a service company?

There is no difference in the way the accounting cycle is performed by the merchandising company and the service company.

Which of the following is a characteristic of nominal accounts?

They are periodically closed by companies.

Which of the following statements best describes the purpose of closing entries?

They reduce the balances of revenue and expense accounts to zero so that the accounts can be used to accumulate the revenues and expenses of the next period.

Owens Industries is trying to increase its profile in the community. As part of this effort, Owens sponsors a Little League baseball team. The cost of sponsorship is $850. How should Owens record this transaction in order to maintain a balanced accounting equation (A = L + SE)?

They should credit $850 to assets and debit $850 to stockholders' equity.

Ransdell Corporation has determined that it has $15,000 in uncollectible accounts to record during this accounting period. Where will these bad debts be reflected in Ransdell's financial statements?

They will be reflected on Ransdell's income statement.

You are filling out Azalea Industries' balance sheet for the month that recently ended. You have just finished compiling the liabilities and stockholders' equity section of the sheet, which shows a total value of $87,000. In order for Azalea's balance sheet to actually balance, which portion of the sheet must also show a total value of $87,000?

Total assets section.

A firm's income statement is prepared from the revenue and expense accounts on its adjusted trial balance.

True

Changes in a firm's income statement ______ have an effect on the firm's retained earnings statement.

Usually

What is an Accrued Revenue?

When a company product or service to customers but hasn't received cash, hasn't been billed yet

Which of the following is not a principal purpose of an unadjusted trial balance?

Which of the following is not a principal purpose of an unadjusted trial balance?

According to their balance sheets, both Widgets Inc. and Sprockets Inc. have total assets of $1.2 million. However, Widgets has total liabilities of $350,000, while Sprockets has total liabilities of $500,000. Assuming both firms' balance sheets correctly balance, which of the following statements is accurate?

Widgets' total stockholders' equity is greater than Sprockets.

What is an Accrued Expense

are recorded when a company has a cost that is sued to help produce revenue but hasn't yet paid cash for that cost

As a corporation increases the percentage of its net income that it retains in the business, it ____________ the percentage of its net income that it pays out in the form of stockholder dividends.

decreases

Last year, Potter Paints had total advertising expenses of $12,000. When compiling the income statement for the year, Potter should

deduct this $12,000 from the firm's gross profit on sales amount.

An error that will cause an imbalance in the trial balance is

listing the balance of an account with a debit balance in the credit column of the trial balance.