Ch. 3 Adjusting the Accounts

The trial balance shows Supplies $0 and Supplies Expense $1,500. If $800 of supplies are on hand at the end of the period, the adjusting entry is:

Debit Supplies $800 and credit Supplies Expense $800.

True or False: The revenue recognition principle dictates that companies recognize revenue in the accounting period before the service is performed.

False

The length of service of a long-lived asset.

Useful life

Information that is available to decision-makers before it loses its capacity to influence decisions.

Timely

True or False: An adjusting entry for accrued expenses increases an expense and also increases a liability account.

True

True or False: Assets are overstated and expenses are understated prior to adjustment for prepaid expenses.

True

True or False: Cash-basis accounting is not permissible under IFRS or GAAP.

True

True or False: Companies can prepare financial statements directly from an adjusted trial balance.

True

True or False: The use of alternative adjusting entries does not apply to accrued revenues and accrued expenses.

True

Which of the following statements is incorrect concerning the adjusted trial balance? (a) An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. (b) The adjusted trial balance provides the primary basis for the preparation of financial statements. (c) The adjusted trial balance lists the account balances segregated by assets and liabilities. (d) The adjusted trial balance is prepared after the adjusting entries have been journalized and posted.

(c) The adjusted trial balance lists the account balances segregated by assets and liabilities.

Adjusting entries are made to ensure that: (a) expenses are recognized in the period in which they are incurred. (b) revenues are recorded in the period in which services are performed. (c) balance sheet and income statement accounts have correct balances at the end of an accounting period. (d) All the responses above are correct.

(d) All the responses above are correct.

Which of the following statements about the accrual basis of accounting is false? (a) Events that change a company's financial statements are recorded in the periods in which the events occur. (b) Revenue is recognized in the period in which services are performed. (c) This basis is in accord with generally accepted accounting principles. (d) Revenue is recorded only when cash is received, and expense is recorded only when cash is paid.

(d) Revenue is recorded only when cash is received, and expense is recorded only when cash is paid.

Each of the following is a major type (or category) of adjusting entries except: (a) prepaid expenses. (b) accrued revenues. (c) accrued expenses. (d) recognized revenues.

(d) recognized revenues

Accounting basis in which companies record transactions that change a company's financial statements in the periods in which the events occur.

Accrual-basis accounting

Adjusting entries for either accrued revenues or accrued expenses

Accruals

Expenses incurred but not yet paid in cash or recorded.

Accrued expenses

Revenues for services performed but not yet received in cash or recorded.

Accrued revenues

A list of accounts and their balances after the company has made all adjustments.

Adjusted trial balance

Entries made at the end of an accounting period to ensure that companies follow the revenue recognition and expense recognition principles.

Adjusting entries

The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is:

Answer is C

The difference between the cost of a depreciable asset and its related accumulated depreciation.

Book value

An account offset against an asset account on the balance sheet.

Contra asset account

An accounting period that extends from January 1 to December 31.

Calendar year

Accounting basis in which companies record revenue when they receive cash and an expense when they pay cash.

Cash-basis accounting

Ability to compare the accounting information of different companies because they use the same accounting principles.

Comparability

Use of the same accounting principles and methods from year to year within a company.

Consistency

Which item is a constraint in financial accounting?

Cost

Constraint that weighs the cost that companies will incur to provide the information against the benefit that financial statement users will gain from having the information available.

Cost constraint

Adjusting entries for either prepaid expenses or unearned revenues.

Deferrals

The process of allocating the cost of an asset to expense over its useful life.

Depreciation

An assumption that every economic entity can be separately identified and accounted for.

Economic entity assumption

Efforts (expenses) should be matched with results (revenues).

Expense recognition principle

The principle that companies match efforts (expenses) with accomplishments (revenues).

Expense recognition principle

Assets and liabilities should be reported at fair value (the price received to sell an asset or settle a liability).

Fair value principle

Neutrality is an ingredient of:

Faithful Representation: Yes Relevance: No

Information that accurately depicts what really happened.

Faithful representation

An accounting period that is one year in length.

Fiscal year

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users.

Full disclosure principle

The assumption that the company will continue in operation for the foreseeable future.

Going concern assumption

An accounting principle that states that companies should record assets at their cost.

Historical cost principle

Monthly or quarterly accounting time periods

Interim periods

A company-specific aspect of relevance. An item is material when its size makes it likely to influence the decision of an investor or creditor.

Materiality

An assumption that requires that only those things that can be expressed in money are included in the accounting records.

Monetary unit assumption

An assumption that accountants can divide the economic life of a business into artificial time periods.

Time period assumption

Expenses paid in cash before they are used or consumed.

Prepaid expenses

The quality of information that indicates the information makes a difference in a decision.

Relevance

Companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Revenue recognition principle

The principle that companies recognize revenue in the accounting period in which the performance obligation is satisfied.

Revenue recognition principle

An assumption that the life of a business can be divided into artificial time periods and that useful reports covering those periods can be prepared for the business.

Time period assumption

True or False: Going concern is the qualitative characteristic of accounting information that allows a statement reader to compare a company's performance from one year to the next.

This statement is false. The going concern assumption states that the business will remain in operations for the foreseeable future.

True or False: A company must make adjusting entries every time it prepares financial statements.

True

True or False: Accountants divide the economic life of a business into artificial time periods because of the time period assumption.

True

True or False: Depreciation based on revaluation of items such as buildings is permitted under IFRS.

True. IFRS allow depreciation based on revaluation of assets, which is not permitted under GAAP.

Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning.

Understandability

A liability recorded for cash received before services are performed.

Unearned revenues

The quality of information that occurs when independent observers, using the same methods, obtain similar results.

Verifiable

Accumulated Depreciation is:

a contra asset account.

Adjustments for prepaid expenses:

decrease assets and increase expenses.

Adjustments for unearned revenues:

decrease liabilities and increase revenues.

The principle or assumption dictating that efforts (expenses) be matched with accomplishments (revenues) is the:

expense recognition principle.

Adjustments for accrued revenues:

have an assets and revenues account relationship.

The revenue recognition principle states that:

revenue should be recognized in the accounting period in which a performance obligation is satisfied.

The time period assumption states that:

the economic life of a business can be divided into artificial time periods.