Accounting Chapter 3

Orange Company sells an acre of land and receives a note from the buyer. The journal entry would include a debit to

Notes Receivable.

The trial balance is used to

verify that debits equal credits.

The basic purpose of the trial balance is to

verify that the total credits equal the total debits.

Revenue that a company has earned but not yet received is

Accrued revenue.

Which of the following is not a reason for preparing adjusting entries

To record the purchase of equipment

A(n) __________ involves the transfer or exchange of resources between the company and another party, such as the purchase of inventory from a supplier or the sale of a product or service to a customer

transaction

True or false: Entries in the general journal first list the accounts being debited.

true

In random order, the steps in the accounting cycle are as follows:

(1) Record the transactions, events, and arrangements in a journal; (2) post the journal entries to the accounts in the ledger; (3) prepare and post adjusting entries; (4) prepare the financial statements; and (5) prepare and post closing entries for the temporary accounts: revenues, expenses, gains, losses, and dividend accounts.

Which of the following is the correct accounting equation?

.Assets = Liabilities + Shareholders' Equity

Which of the following errors is not identified by the trial balance?

A transaction is accidentally recorded twice.

The components of shareholders' equity are

Accumulated other comprehensive income, retained earnings, and contributed capital.

In the double-entry system, which accounts are increased by debits?

All accounts on the left side of the accounting equation.

Depreciation is an example of

An estimate.

Noncurrent assets are listed on which statement?

Balance sheet.

The equation to calculate the ending balance in Retained Earnings is

Beginning Balance in Retained Earnings + Net Income - Dividends.

Assume that Jordan Corporation uses a periodic inventory system. Jordan had beginning and ending inventory of $25,000 and $30,000, respectively. Cost of Goods Available for Sale is equal to $90,000. Cost of goods sold is

Cost of Goods Sold = Cost of Goods Available for Sale - Ending Inventory, or $90,000 - $30,000 = $60,000.

Reversing entries are made for adjusting entries that _____ at the end of the accounting period for transactions that _____ during the next accounting period.

Create a new balance sheet account; will be completed.

Prepaid insurance requires which type of adjusting entry?

Deferral.

Which type of adjusting entry debits a liability account and credits a revenue account?

Deferred revenue.

Blue Company's board of directors declared dividends. The journal entry to record this declaration would include a credit to

Dividends Payable.

Which of the following is characteristic of cash-basis accounting?

Expenses are recorded when cash is paid for operations.

True or false: A journal entry has one debit and one credit.

False

True or false: The balance sheet is prepared before the income statement.

False

How is depreciation handled when moving from cash-basis to accrual-basis accounting?

Include depreciation expense in operating expenses.

Which of the following errors will be detected by a trial balance?

Incorrectly computing the balance of the Cash account

All of the following describe how accounting information flows through a company's accounting system except

It is reviewed in the general journal.

All of the following are noncurrent assets

Licenses, Investments & Natural resources.

The retained earnings account reflects changes in

Net income and dividends

When are reversing entries prepared and posted?

On the first day of the accounting period

Granite Company uses the cash basis of accounting to record transactions. Granite made $60,000 in payments to its suppliers for operating costs during the year. Granite's beginning prepaid expenses were $40,000, and its ending prepaid expenses were $30,000. In addition, Granite had beginning accrued expenses of $50,000 and ending accrued expenses of $70,000. What are Granite's operating expenses converted to the accrual basis of accounting?

Operating Costs + Beginning Prepaid Expenses - Ending Prepaid Expenses + Ending Accrued Expenses - Beginning Accrued Expenses = Operating Expenses = $60,000 + $40,000 - $30,000 + $70,000 - $50,000 = $90,000.

Which statement verifies that the debit balances total is equal to the credit balances total in the permanent accounts only?

Post-closing trial balance.

Which of the following is the first step in the accounting cycle?

Record transactions, events, and arrangements in the journal.

All of the following are temporary accounts

Revenue, Income Summary, &Dividends.

With closing entries, one would expect to find

Sales Revenue, Dividends, and Loss on Sale of Land are temporary accounts and are closed

All of the following are basic components of an accounting system:

The accounting equation, Records, Outputs, Source documents.

The effects of adjusting entries for deferred revenue include

The effect of an adjusting entry for deferred revenue includes a decrease in a liability account and an increase in a revenue account. A deferred revenue arises when customers pay in advance for future delivery of goods or performance of services.

Brown Corporation purchased a 1-year insurance policy on March 1 of the current year and paid the entire premium of $3,600 in advance. The payment was recorded to Prepaid Insurance, and Brown uses a calendar year. Which of the following is the correct adjusting entry for this transaction at the end of the current year?

The entry will include a debit to Insurance Expense and a credit to Prepaid Insurance.

Using a general journal helps prevent errors because

The equality of the debits and credits can be verified.

After posting

The general ledger includes the journal entry information within all of the accounts.

Green Company purchases a 2-year comprehensive insurance policy for $2,400. Which of the following journal entries would be used to record this transaction?

The journal entry will debit Prepaid Insurance for $2,400 and credit Cash for $2,400.

True or false: When a worksheet is used, adjusting and closing entries are still recorded in the general journal.

True

The journal entry consists of all of the following

a date column, a column to list the titles of the accounts affected by each entry, a column to list the account numbers, and a debit column and credit column to list the amounts recorded as a debit or credit to each account.

With closing entries, one would expect to find all of the following except

a debit to Unearned Rent and a credit to Income Summary.

Red Company has prepared its trial balance. The total of the debit column is $450,000, and the total of the credit column is $540,000. Red's accountant's first step is to investigate if

a number was transposed, If the totals of the debit and credit columns of the trial balance do not balance, first compute the difference between the debit and credit column totals and divide by 9 ($540,000 - $450,000 = $90,000. $90,000 ÷ 9 = $10,000). When the difference is evenly divisible by 9, a transposition or a slide may have occurred. A transposition is when two digits in a number are mistakenly reversed.

When preparing a journal entry, the standard format is to list all

accounts to be debited first.

Prior to preparing the organization's financial statements, the accountant prepares a(n)

adjusted trial balance.

Which of the following is a reason for preparing adjusting entries?

adjusting entries are prepared to match the consumption of prepaid assets against current revenues. Adjusting entries are also prepared to record estimated items, such as depreciation. A company must record adjusting entries so that all revenues and expenses are recorded in the appropriate period and all assets and liabilities have correct ending balances.

Under __________, a company records revenues when it collects cash from sales and records expenses when it pays cash for its operations.

cash-basis accounting

If the accrued salary expense journal entry is a debit to Salaries Expense and a credit to Salaries Payable for $1,000 on December 31, then the correct reversing entry on January 1 is a

debit to Salaries Payable and a credit to Salaries Expense for $1,000.

Adjusting entries may be classified into three broad categories:

deferrals, accruals, and estimates.

True or false: When a worksheet is used, financial statements are not prepared separately.

false

A __________ is the entire set of accounts for a company.

general ledger

Green Company purchases a truck for $30,000 on the first day of the year. Green Company uses straight-line depreciation and estimates the residual value on the truck to be $5,000. The truck's estimated service life is 5 years. What is the amount of depreciation expense for the first year the truck is in operation?

he correct formula is (Cost - Residual Value) ÷ Estimated Service Life, or ($30,000 - $5,000) ÷ 5 = $5,000.

A return of merchandise previously purchased could include a credit to which of the following two accounts?

he journal entry could include a credit to Purchase Returns and Allowances or Inventory depending on whether a contra account is used.

Orange Company purchased 5 acres of land for a building site, paying $5,000 per acre. The land and building had a fair market value of $6,000 per acre. Orange recorded this with a

he journal entry will debit Land for $25,000 and credit Cash for $25,000.

All of the following are advantages of using a general journal

help prevent errors, records information chronologically in one place, and helps during the audit process.

Current assets include all of the following except

intangible assets.

After companies prepare and post the closing entries, they prepare a(n)

post-closing trial balance.

After a company records its transactions, events, and arrangements in a general journal, it updates each account by __________ the date and debit and credit amounts from the journal entries to accounts in the general ledger.

posting

In converting cash-basis financial statements to accrual-basis, a company must adjust operating costs for the change in

prepaid and accrued expenses.

The purpose of closing entries is to

reduce all temporary accounts to zero.

A(n) __________ entry is an exact reverse of an adjusting entry with the purpose of simplifying the recording of subsequent transactions.

reversing

The accounting cycle begins with recording a transaction, event, or arrangement in a journal. This recording is based on information in a(n)

source document.

Why are reversing entries used?

to routinely record subsequent related transactions.