Accounting Ch. 3 Self Test
Prior to adjustment for prepaid expenses, assets are understated and expenses are overstated.
False (Assets are overstated and expenses and understated prior to adjustment for prepaid expenses)
Prior to adjustment for unearned revenues, liabilities are understated and revenues are overstated
False (Liabilities are overstated and revenues are understated prior to adjustment for unearned revenues)
The revenue recognition principle dictates that companies recognize revenue in the accounting period before it is earned.
False (the revenue recognition principle dictates that companies recognize revenue in the accounting period in which it is earned)
On June 30, a printing shop proves $1,000 of services to a customer to custom print restaurant menus. The customer is sent a bill on July 5 for the amount due. A check in the amount of $1,000 is received from the customer on July 25. The printing shop follows GAAP and applies the revenue recognition principle. When is the $1,000 sale considered to be earned?
June 30 (Under GAAP using accrual basis accounting and the revenue recognition principle, companies recognize revenue in the period in which it is earned for a service company, revenues are considered to be earned at the time the service is performed)
The principle or assumption dictating that expenses be matched with revenues is the
expense recognition principle
The expense recognition principle matches
expenses and revenues
Accountants divide the economic life of a business into artificial time periods because of the time period assumption
True
An adjusting entry for accrued expenses increases an expense and also increases a liability account
True
Every adjusting entry affects one balance sheet account and one income statement account
True
The use of alternative adjusting entries does not apply to accrued revenues and accrued expenses.
True
Under cash-basis accounting, companies record revenue only when
cash is received
If unearned service revenues are initially recorded as service revenues, the adjusting entry to recognize unearned service revenues at the end of an accounting period will include a
debit to a service revenue account (service revenues would have to be decreased for the unearned portion)
Adjusting for prepaid expenses:
decrease assets and increase expenses.
The adjusting entry for unearned revenues affects
liabilities and revenues
If the adjusting entry for unearned revenue is not made
liabilities would be overstated (while revenues and net income will be understated)
Expenses paid in cash and recorded as assets before they are used are called
prepaid expenses
If unearned revenues are initially recorded in revenue accounts and have not all been earned at the end of the accounting period, then failure to make an adjusting entry will cause
revenues to be overstated (also understatement of liabilities)
The time period assumption states that
the economic life of a business can be divided into artificial time periods
What is the impact on the financial statements if the adjusting entries for prepaid expenses are omitted?
Balance sheet accounts are overstated and income statements accounts are understated (assets are overstated on the balance sheet and expenses are understated on the income statement)
White Laundry Company purchases $6,500 worth of laundry supplies of June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $3,000 on hand. It is the company's first period of operation. The adjusting entry that should be made by the company on June 30 is
Debit Laundry Supplies Expense, $3,500; Credit Laundry Supplies, $3,500
Alpha Company shows a balance in its Salaries and Wages Payable account of $45,000 at the end of the month. The next payroll amounting to $60,000 is to be paid in the following month. Which of the following represents the journal entry to record the payment of the salaries and wages?
Debit to Salaries and Wages Expense, $15,000, debit to Salaries and Wages Payable, $45,000, and credit to Cash, $60,000
Queenan Company computes depreciation on delivery equipment at $1,000 for the month of June. The Adjusting entry to record this depreciation is as follows:
Depreciation Expense $1,000 Accumulated Depreciation-- Delivery Equipment $1,000
Kathy Siska earned a salary of $400 for the last week of September. She will be paid on October 1. The adjusting entry for Kathy's employer at September 30 is
Salaries and Wages Expense 400 Salaries and Wages Payable 400
Which of the following statements is incorrect concerning the adjusted trial balance?
The adjusted trial balance lists the account balances segregated by assets and liabilities. (The accounts of the trial balance can be segregated by the balance in the account--either debit or credit-- not whether they are assets or liabilities. All accounts in the ledger are included in the adjusted trial balance, not just assets and liabilities.)
Cathy Cline, an employee of Merlin Company, will not receive her paycheck until April 2. Based on services performed from Mach 16 to March 31, her salary was $900. The adjusting entry for Merlin Company of March 31 includes
a debit to Salaries and Wages expense for $900 (The proper adjusting entry involves a debit to Salaries and Wages Expense and a credit to Salaries and Wages Payable for $900)
An accounting time period that is one year in length is referred to as
a fiscal year
An adjusting entry that debits and asset and credits a revenue account is necessary for
accrued revenues
The adjusted trail balance is prepared
after the adjusting entries are prepared and posted to the ledger
If a resource has been consumed but a bill has not been received at the end of the accounting period,
an adjusting entry should be made recognizing the expense (an expense should be recorded in the period that the resource is consumed; therefore, an adjusting entry should be prepared to recognize the expense and the corresponding liability.)
Each adjusting entry affects
both balance and income statement accounts
The Accumulated Depreciation account is a(n)
contra asset