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