Financial Accounting Chapter 3 Smartbook

A primary purpose of adjusting entries is to record events that

Have occurred, but not yet recorded

is the amount earned from selling goods or services to

revenue

If an adjusting entry's debit is to an expense account, then the credit must be to which of the following? (Select all that apply.)

Liability and Prepaid expense

Which of the following financial statements typically is prepared last?

Statement of cash flows

Revenues and expenses are reported in the:

income statement

On July 1, Book Palace prepaid 12 months' fire insurance with coverage starting the following month. The adjusting entry on December 31 includes: (Select all that apply.)

- credit to prepaid insurance - debit to insurance expense

___________ occur when the cash flow occurs after either the expense is incurred or the revenue is earned. (Enter only one word.)

accruals

Depreciation is an allocation of the _______ of buildings, vehicles, and equipment to expense over time as they are used. (Enter one word per blank.)

cost

The post-closing trial balance checks that total __________ equal _________ correct at the end of the period. (Enter only one word per blank.)

debits and credits

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

operating financing investing

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

recording of adjusting entries

Temporary Permanent

-revenues, expenses, dividends -assets, liabilities, equity

On November 1, 2022, Movers, Inc., paid $24,000 for 2 years' rent beginning on November 1. The Prepaid rent balance at December 31, 2022 equals ______.

$22,000

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

A classified balance sheet shows subtotals for current ____________ and current ___________.

assets and liabilities

A prepayment that is originally recorded as an asset will be ________.

allocated to future accounting periods based on the cost of the asset used during the period

Revenue in the income statement for the year ended December 31, 2021 equals the:

amount earned by selling goods or services to customers during 2021.

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

The statement of stockholders' equity includes these amounts: (Select all that apply.)

-dividends for the period -ending balance retained earnings -net income

Which of the following would be referred to as "accruals?" (Select all that apply.) A. Goods and services provided, not yet collected B. Expenses incurred, not yet paid C. Cash paid prior to expenses being incurred D. Cash collected prior to goods or services being provided

A and B

On November 1, 2022, Movers, Inc., paid $24,000 for 2 years' rent beginning on November 1 (assume rent is the same amount each month). Movers' year-end financial statements as of December 31, 2022 will show: (Select all that apply.) a. Prepaid rent of $24,000 b. Rent expense of $2,000 c. Rent expense of $1,000 d. Rent expense of $24,000 e. Prepaid rent of $22,000

B and E

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 of the following transactions would normally be recorded as an asset when cash is paid?

Rent is paid in advance

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 ___________ entries.

adjusting

Adjusting entries ensure that ______ balances are reported at amounts representing the economic benefits that remain at the end of the period.

asset

Prepaid expenses should be ________ by the cost of the asset used during the accounting period.

decreased

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. (Only one word per blank)

expense

A classified balance sheet ______.

groups asset and liabilities into current and long-term categories

An adjusting entry is necessary to record interest expense at year-end because the interest:

has already been incurred

Under the accrual basis of accounting, costs used to generate revenue are recorded as expenses:

in the same period as related revenue.

_____________ is defined as the "cost of borrowing money." (Enter one word per blank)

interest

Deferred revenue is a(n)________

liability

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

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

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

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

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

when costs are recognized as expenses in the income statement

Under cash-basis accounting, (Select all that apply.)

-expenses are recorded when cash is paid. -revenues are recorded when cash is received.

Which of the following transactions are examples of prepayments that will require an adjustment at the end of the accounting period on December 31? (Select all that apply.) A. A company pays for 4 months of advertising in the Wall Street Journal on November 1. B. A company records interest expense that has accrued but will not be paid until next year. C. A company pays a utility bill for charges incurred in the previous month. D. A company pays a 6-month insurance premium at the beginning of October.

A and D

A prepayment such as "Prepaid Insurance" is originally recorded as a(n) ____________ when an insurance policy is purchased and will later be expensed in the period used.

Asset or debit

Andy records an adjusting entry for deferred revenue. Andy should: (Select all that apply.) A. debit revenue account B. credit a revenue account C. debit a liability account D. credit a liability account

B and C

How do temporary accounts differ from permanent accounts?

Only temporary accounts are cleared out at the end of the accounting period.

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

Reporting revenues only when cash is received and expenses only when cash is paid is called the _______basis of accounting.

cash

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

closing entries

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

liability and revenue

At the beginning of the accounting period, the balances of temporary accounts

are zero

Norbert Inc. delivered goods and services during December. Payment is expected during the first week of January. The related adjusting entry should consist of a debit to a(n) ____ account and a credit to a(n) _____ account.

asset, revenue

Prepaid rent appears in the ______.

balance sheet because it is an asset

The adjusting entry for prepaid rent requires a(n) __________ to Rent Expense and a(n) ________ to Prepaid Rent

debit and credit or increase and decrease

How do adjusting entries for accrued expenses affect liabilities and expenses?

Adjusting entries for accrued expenses can increase liabilities and increase expenses.

Adjusting entries: (Select all that apply.) A. are required in cash-basis accounting only. B. are prepared at the beginning of the period. C. update the accounts to their proper balances. D. are needed before financial statement preparation.

C and D

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

expense