Chapter 3 Questions

If an adjusting entry's debit is to an expense account, then the credit must be to which of the following?

- Prepaid expense - Liability

Adjusting entries:

- are needed before financial statement preparation - Update the accounts to the proper balances.

The information reported in the statement of cash flows is organized by these activities:

- investing - operating - financing

Accrual Basis Accounting

-Assets: we record at the time those resources are obtained - Liabilities: we record at the time those obligations occur - Revenues: we record at the time goods and services are provided to customers - Expenses: we record at the time costs are used in running the company

To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for changes created by ______________ entries.

Adjusting

Which of the following statements describes the effects that adjusting entries may have on liabilities?

Adjusting entries increase liabilities for the amount of any accrued and unpaid expenses at the end of the period

The entries that transfer the balances of all temporary accounts to retained earnings are referred to as

Closing entries

______________ 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, or unearned

Financial statements are typically prepared before completing the adjusted trial balance. TRUE/FALSE?

False

Under both accrual-basis and cash-basis accounting, all revenues and expenses are recorded at the same point in time? TRUE/FALSE

False

A primary purpose of adjusting entries is to record events that

Have occurred but that have not yet been recorded

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.

The adjusting entry for a deferred revenue includes a debit to a(n) _________ account and a credit to a(n) ___________ account.

Liability; revenue

The __________ is the average time between purchasing inventory and receiving cash proceeds from its sale.

Operating cycle

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

Which of the following is a temporary account?

Salaries Expense

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

Which financial statement would report all of the following information: begining 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

After the adjusting entries have been completed, the adjusting balance in the Deferred revenue account represents:

The amount of the sales or services still owed to the customer

The adjusted trial balance is used to verify that total debits equal total credits after account balances have been updated to reflect adjusting entries. TRUE/FALSE?

True

There is a cause-and-effect relationship between revenues and expenses that dictates:

When costs are recognized as expenses in the income statements.

A closing entry for salaries expense includes:

a debit to retained earnings

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.

at the beginning of the accounting period, the balances of all temporary accounts

are zero

Prepaid insurance is a(n):

asset in the balance sheet

Permanent accounts

assets, liabilities, equity

Supplies should be _________ and Supplies Expense should be _________ for the cost of supplies used up during the period.

decreased; increased

The process of allocating the cost of an asset to expenses over the useful life of the asset is called:

depreciation

If an adjusting entry's credit is to a liability account, then the debit must be to ______.

expense

A classified balance sheet ____________

groups asset and liabilities into current and long-term categories

Consistent with accrual-basis accounting, expenses should be recognized

in the period when the related revenue is generated

The expense that relates to a formal note payable and accumulates or accrues throughout the accounting period is referred to as _____ expense.

interest

Deferred revenue is a(n)

liability

Adjusting entries for accrued expenses ensures that liabilities are reported for all amounts _____________ at the end of the accounting period.

owed

Cash Basis Accounting

record transactions only at the time cash is received or paid

At year-end ,companies that utilize accrual-based accounting systems complete the measurement process through

recording of adjusted entries

2 major categories reported in the income statement are:

revenue and expense

Temporary accounts

revenues, expenses, dividends