Smartbook Ch 3
Which of the following transactions would normally be recorded as an asset when cash is paid?
Rent paid in advance
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
On a classified balance sheet, total liabilities represent the sum of _____ and and long-term liabilities
current
Which of the following accounts should be classified as stockholders' equity?
- common stock - retained earnings
Supplies that are not used immediately are recorded as a(n) ______ when purchased.
asset
Which of the following transactions are examples of prepayments that will require an adjustment at the end of the accounting period on December 31? (Select all that apply.)
- 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.
Which of the following would be referred to as "accruals?" (Select all that apply.)
- Expenses incurred, not yet paid - Goods and services provided, not yet collected
Which of the following statements regarding the statement of cash flows are correct?
- Reports cash disbursements - Reports cash receipts - The final financial statement that is typically prepared
On April 1, Katie Inc. collected $2,400 from a customer for a 12-month membership starting on that date. On December 31, Katie Inc. should credit:
- Service revenue for $1,800 Reason: Katie already provided service for 9 months; $2,400/12 x 9/12
Taggert Company paid $1,800 for a 6-month insurance premium on December 1. Which of the following statements are correct regarding the accounting for this insurance over the six-month period? (Select all that apply.)
- Taggert will debit Prepaid Insurance for $1,800 on Dec. 1. - Taggert will debit Insurance Expense for $300 on Dec. 31. - Taggert will credit Prepaid Insurance for $300 on Dec. 31.
Adjusting entries: (Select all that apply.) Multiple choice. - are needed before financial statement preparation. - are prepared at the beginning of the period. - are required in cash-basis accounting only. - update the accounts to their proper balances.
- are needed before financial statement preparation. - update the accounts to their proper balances.
When recording an adjustment for the cost of using equipment during the current accounting period, which two accounts are affected?
Accumulated Depreciation and Depreciation Expense
A classified balance sheet shows subtotals for current and current . (Enter one word per blank)
Blank 1: assets Blank 2: liabilities
The adjusting entry for supplies used requires a _____ to Supplies and a _____ to Supplies Expense.
Blank 1: credit, or decrease Blank 2: debit, or increase
The post-closing trial balance checks that total _____ equal total _____ at the end of the period. (Enter only one word per blank.)
Blank 1: debits Blank 2: credits
typically is the most liquid asset reported on the balance sheet.
Cash
Which of the following expressions correctly calculates "total assets?"
Current assets plus long-term assets
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: Total assets must always be equal to total liabilities less stockholders' equity
False
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 Reason: Adjustments remove the value of assets that have been used up or expired during the period, leaving a balance that represents the economic benefit remaining in the account.
True or false: A contra-asset account, such as Accumulated Depreciation, will have a normal debit balance.
False Reason: While Accumulated Depreciation is listed in the asset section, it is a contra or negative asset. Therefore, it will have a normal credit balance since the true assets have a debit balance.
When should supplies be recorded as an expense?
In the period the supplies are used, regardless of when they were purchased
Consistent with accrual-basis accounting, expenses should be recognized
In the period when the related revenue is generated
Which of the following statements is true?
Income statement accounts are temporary accounts, while balance sheet accounts are permanent accounts.
How do temporary accounts differ from permanent accounts?
Only temporary accounts are cleared out at the end of the accounting period.
Which of the following statements is correct regarding a long-lived asset such as a building?
The original cost in the building account will not change when an adjusting entry is recorded for depreciation.
Which of the following relationships is correct?
Total assets = total liabilities plus stockholders' equity
What are the effects on the accounting equation when an adjusting entry is made for goods or services provided during the accounting period related to an amount previously received in advance from a customer?
Total liabilities will decrease and total stockholders' equity will increase.
Which of the following statements is correct regarding a long-lived asset such as equipment?
When adjusting entries are recorded, the original cost in the Equipment account will not change. Reason: The adjustment for use of the asset is entered in the Accumulated Depreciation account rather than directly into the Equipment account. So, the Equipment account will not change. Depreciation, however, does cause the carrying value to decrease during the adjustment process.
In an adjusting entry for expenses incurred but not yet paid Blank______.
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. (Enter only one word.)
accruals
To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for changes created by entries.
adjusting
Revenue in the income statement for the year ended December 31, 2021 equals the:
amount earned by selling goods or services to customers during 2021.
Deferred revenue appears on the Blank______.
balance sheet as a liability
Reporting revenues only when cash is received and expenses only when cash is paid is called ________ the basis of accounting. (Enter one word per blank.)
cash
The entries that transfer the balances of all temporary accounts to retained earnings are referred to as
closing entries
Depreciation is an allocation of the of buildings, vehicles, and equipment to expense over time as they are used. (Enter one word per blank.)
cost
If an asset account such as Equipment has a normal debit balance, the associated contra account should have a normal balance. (Enter one word per blank.)
credit
Assets that will be used up or converted to cash within the next year are _____ assets.
current
Assets that will be used up or converted to cash within the next year are _______ assets.
current
The adjusting entry for equipment depreciation includes a debit to Blank______ and a credit to Blank______.
depreciation expense; accumulated depreciation
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. (Only one word per blank)
expense
The adjusting entry for a prepaid expense includes a debit to a(n)______ account and a credit to a(n)______ account.
expense; asset
A classified balance sheet Blank______.
groups asset and liabilities into current and long-term categories
An adjusting entry is necessary to record interest expense at year-end because the interest:
has already been incurred
A long-term liability:
is not due within the next year
Deferred revenue is reported on the balance sheet as a current
liability
Which of these is a long-term liability?
mortgage payable due in 20 years
Adjusting entries for accrued expenses ensure that liabilities are reported for all amounts Blank______ at the end of the accounting period.
owed
Costs of assets acquired in one period that will be recorded as expense in a future period are referred to as ______ and are initially recorded as ______.
prepaid expenses; assets
The adjusting entry for supplies used during the period will result in a debit to the Blank______ account and a credit to the Blank______ account.
supplies expense; supplies
Closing entries move the balances from the ______ accounts into the Retained Earnings account.
temporary
Match the accounts with the correct terms.
temporary - revenues, expenses, dividends permanent - assets, liabilities, equity
After the adjusting entries have been completed, the adjusted balance in the Deferred Revenue account represents:
the amount of the sales or services still owed to the customer.
Cash typically is the first current asset reported on the balance sheet because it is:
the most liquid asset
Which of the following situations matches a journal entry that debits Deferred Revenue and credits Service Revenue?
Goods or services, for which cash was collected in advance, were provided during the current period.
An asset that can quickly be turned into cash has the characteristic of
liquidity
The sum of current and long-term assets reported on the balance sheet is referred to as
Blank 1: total Blank 2: assets
When Pizza Company sells three $100 gift cards at the beginning of the month, it should record a $300 debit to Blank______ and a $300 credit to Blank______.
Cash; Deferred Revenue
On August 1, 2022, a firm prepaid $53,520 for 2 years' rent of an office building. On March 1, 2023, the firm prepaid $34,800 for 2 years' rent of a warehouse. The rent agreements on both buildings went into effect on the dates the rents were prepaid. What amount will be shown for prepaid rent on the December 31, 2023 balance sheet?
$35,910 Reason: (($53,520/24 months) x 7 months remaining)+(($34,800/240 months) x 14 months remaining). Note that the question is asking for the Prepaid rent on the balance sheet on December 31, 2023 and not the expense on the income statement.
What are the effects on the accounting equation from the adjustment for salaries incurred but not yet paid during the accounting period?
- Total liabilities will increase and total stockholders' equity will decrease.
The information reported in the statement of cash flows is organized by these activities:
- operating - investing - financing
The post-closing trial balance helps to verify that: (Select all that apply.) - the accounts are ready for next period's transactions - we prepared and posted adjusting entries correctly - the company was profitable during the current period - we prepared and posted closing entries correctly
- the accounts are ready for next period's transactions - we prepared and posted closing entries correctly
The adjusting entry for prepaid rent requires a(n) BLANK to Rent Expense and a(n) BLANK to Prepaid Rent.
Blank 1: debit, or increase Blank 2: credit, or decrease
As the balance in the Accumulated Depreciation increases, total assets because Accumulated Depreciation is a(n) account.
Blank 1: decreases, reduce, lessen, decreased, or reduced Blank 2: contra, negative, contra-asset, credit, or CR
is defined as the "cost of borrowing money." (Enter one word per blank)
Interest
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.
Stockholders' equity consists of two main components, common stock and Blank______.
Retained earnings
After the adjusting entries have been completed, the adjusted balance in the Prepaid Rent account represents the ______.
amount of the prepayment that remains towards future rental periods
The adjusting entry for supplies used during the period will result in ______ to the Supplies Expense account.
an increase
A prepayment such as "Prepaid Insurance" is originally recorded as a(n) ________ when an insurance policy is purchased and will later be expensed in the period used.
asset
Adjusting entries ensure that ______ balances are reported at amounts representing the economic benefits that remain at the end of the period.
asset
Neumann Corporation purchases supplies that will be used during the following quarter. At the time of purchase, the supplies should be recorded as a(n)
asset
After the adjusting entries have been completed, the balance in the Rent Expense account represents the:
cost of rent for the accounting period
Accumulated Depreciation has a normal balance which indicates that it reduces total assets.
credit
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 Reason: The asset value is decreasing as the benefit of the prepayment is being used. Consequently, the expense account is increasing by the value of the benefit used.
Prepaid expenses should be ______ by the cost of the asset used during the accounting period. - decreased - increased - unaffected
decreased
Supplies should be ______ and Supplies Expense should be ______ for the cost of supplies used up during the period.
decreased; increased
If an adjusting entry's credit is to a liability account, then the debit must be to Blank______.
expense
A primary purpose of adjusting entries is to record events that
have occurred but that have not yet been recorded.
Under the accrual basis of accounting, costs used to generate revenue are recorded as expenses:
in the same period as related revenue.
Revenues and expenses are reported in the:
income statement
Deferred revenue is a(n) Blank______.
liability
Assets that provide benefits for more than one year are classified as
long-term
Long-term assets are expected to provide benefits for
more than one year
After the adjusting entries have been completed, the adjusted balance in the Supplies account represents:
the cost of supplies remaining at the end of the accounting period
On a classified balance sheet, the sum of current and long-term liabilities refers to liabilities. (Enter one word per blank)
total
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
An adjusting entry for accrued expenses involves: (Select all that apply.)
- credit to a liability - debit to an expense
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
The statement of stockholders' equity includes these amounts: (Select all that apply.)
- ending balance retained earnings - net income - dividends for the period
The two major categories reported in the income statement are:
- expense - revenue
Under cash-basis accounting, (Select all that apply.)
- expenses are recorded when cash is paid. - revenues are recorded when cash is received.
Munster Inc. debits Deferred Revenue and credits Service Revenue. As a result of this adjusting entry, Munster's: (Select all that apply.)
- liabilities will decrease - equity will increase
is the amount earned from selling goods or services to customers. (Enter one word per blank)
Revenue
On November 1, 2022, Movers, Inc., paid $24,000 for 2 years' rent beginning on November 1. The Prepaid rent balance at December 31, 2022 equals ______.
$22,000 Reason: Prepaid Rent started with $24,000 on November 1. After 2 months of use (November 1 through December 31), Prepaid Rent only has 22 months left with a balance of $22,000 (or $24,000/24 months times 22 months).
The adjusting entry for an accrued revenue always includes: (Select all that apply.)
- a credit to a revenue account - a debit to an asset account
On a classified balance sheet, total liabilities represent the sum of _____ , and long-term liabilities. (Enter only one word.)
current
What are current assets?
Assets that provide benefits within the next year.
At year-end, companies that utilize accrual-based accounting systems complete the measurement process through
recording of adjusting entries
is an allocation of the cost of buildings, vehicles, and equipment to expense over time as they are used. (Enter one word per blank.)
Depreciation
On July 1, Book Palace prepaid 12 months' fire insurance with coverage starting the following month. The adjusting entry on December 31 includes: (Select all that apply.)
- credit to Prepaid Insurance - debit to Insurance Expense
Sabrina Company recorded an adjusting entry for salaries owed to employees at the end of the year. As a result of this entry, Sabrina Company's: (Select all that apply.)
- liabilities increase - equity decreases
With respect to current assets, _____ refers to how quickly an asset can be converted to cash. (Enter only one word.)
liquidity