MGMT 200 Chapter 3

In May, Sea the World Cruises, Inc. collected $1,000 cash in advance from a customer for services to be performed in June. Which of the following is true assuming accrual accounting?

$1,000 of revenue should be recorded in June.

Reporting revenues when goods or services are provided and expenses in the period they are incurred to generate related revenues is referred to as _________-basis accounting.

Accrual

_________-basis accounting helps measure and report revenues and expenses in a way that clearly represents the net income of the company.

Accrual

Which of the following is (are) permitted under current U.S. GAAP?

Accrual-basis accounting

_________ occur when the cash flow occurs after either the expense is incurred or the revenue is earned.

Accruals

occur when the cash flow occurs after either the expense is incurred or the revenue is earned.

Accruals

Long-lived assets, such as equipment, are reported at their ______ value in the balance sheet.

Book

Which of the following accounts will never be affected by an adjusting entry?

Cash

During December, Mainzel Interior Design Corporation redecorated the reception areas of a local hotel. The project was completed on December 31 with payment due in 30 days. Payment was received on January 21 of the following year. When should Mainzel recognize the related revenue using accrual accounting?

December 31

_______ is an allocation of the cost of buildings, vehicles, and equipment to expense over time as they are used.

Depreciation

Which of the following would be referred to as "accruals?" (Select all that apply.)

Goods and services provided, not yet collected Expenses incurred, not yet paid

Under cash-basis accounting, companies typically record revenue:

In the period in which the company receives cash from customers for goods and services.

The revenue recognition principle states that companies typically record revenue:

In the period in which we provide goods and services to customers.

Which of the following transactions requires an adjusting entry for accrued revenue?

Interest earned, but not yet collected, on a note receivable

On December 1, Emilia Company borrowed $100,000 and signed a promissory note. The principal and interest are due on May 1 of the following year. On December 31, the company accrues interest for the month of December. The company's bookkeeper should debit interest expense and credit

Interest payable

In January, Pizza Company bought pizza ingredients on account for $100, with payment due to the supplier in April. The pizza ingredients were used for pizzas made in January. In which month should Pizza Company record the cost of the pizza ingredients as an expense?

January

Closing entries are:

Made to transfer the balances of temporary accounts to retained earnings.

Which of the following describes the information reported in the statement of cash flows?

Net cash flows from operating, investing, and financing activities.

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 paid in advance

Which of the following statements is correct regarding an adjusting entry for salaries accrued but not paid at the end of the accounting period?

Salaries Expense will increase by the amount of the unpaid salaries.

Which of the following accounts is listed in a post-closing trial balance?

Salaries Payable.

Which of the following statements is correct regarding a long-lived asset such as equipment?

When adjusting entries are recorded, the original cost in the Equipment account will not change.

The adjusting entry for an accrued revenue always includes: (Select all that apply.)

a debit to an asset account a credit to a revenue account

Egon Inc. delivered goods and services during December. Payment is expected during the first week of January. An adjusting entry at the end of the period should consist of a debit to ______ and a credit to ______.

accounts receivable; service revenue

The accounting basis that records revenues in the period that goods and services are provided to customers is referred to as

accrual-basis accounting.

The _____ trial balance shows a list of all accounts and their balances after we have updated account balances for adjusting entries.

adjusted

An adjusted trial balance shows all accounts and their balances ______ the accounts have been updated for for adjusting entries.

after

After posting adjusting entries to the general ledger, a company typically prepares:

an adjusted trial balance

Adjusting entries: (Select all that apply.)

are needed before financial statement preparation. update the accounts to their proper balances.

Supplies that are not used immediately are recorded as a(n) ______ when purchased.

asset

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

The adjusted trial balance should be prepared ______ the financial statements are prepared in order to prove the ______ of the debits and credits.

before; equality

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

cash

After the adjusting entries have been completed, the balance in the Rent Expense account represents the:

cost of rent for the accounting period

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

When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records which two of the following?

credit to Revenue debit to Deferred Revenue

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

debit credit

Andy records an adjusting entry for deferred revenue. Andy should: (Select all that apply.)

debit a liability account credit a revenue account

As the balance in the Accumulated Depreciation increases, total assets ______ because Accumulated Depreciation is a(n) ______ account.

decrease contra

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

decreased; increased

______ 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

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

depreciation.

Adjusting entries are made at the _______ of the accounting period, while daily transactions are made throughout the accounting period.

end

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

expense

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.

expense

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.

expense

The two major categories reported in the income statement are:

expense revenue

The primary components of net income are:

expenses revenues

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

has already been incurred

Revenues and expenses are reported in the:

income statement

Besides sales or service revenue, which of the following is another common example of a transaction that is recorded as an accrued revenue.

interest revenue

After the adjusting entries have been completed, the adjusted balance in the Interest Payable account represents:

interest that has accrued, but has not been paid, at the end of the period

Deferred revenue is reported on the balance sheet as a current _____.

liability

Zweig Company's adjusting entries include a debit to accounts receivable and a credit to service revenue. This means that Zweig:

provided services for which it did not yet receive payment

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

recording of adjusting entries

After the adjusting entries have been completed, the ending balance in the Supplies account represents the cost of supplies ______.

remaining at the end of the accounting period

Which of the following account balances are shown in the adjusted trial balance and reported in the income statement?

service revenue supplies expense

The adjusted trial balance provides account balances reported in which financial statements?

statement of stockholders' equity balance sheet income statement

The adjusting entry for supplies used during the period will result in a debit to the k______ account and a credit to the ______ account.

supplies expense; supplies

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.

The difference between cash-basis and accrual-basis accounting is the ________ of when revenues and expenses are recorded.

timing

After the adjusting entries have been completed, the adjusted balance in the Interest Expense account represents:

total interest that has been paid or accrued during the period

After the adjusting entries have been completed, the balance in the "Salaries Expense" account represents:

total salaries, paid and unpaid, that have been incurred 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.

Accumulated Depreciation has a normal _____ balance which indicates that it reduces total assets.

credit

Accumulated Depreciation has a normal ______ balance which indicates that it reduces total assets.

credit

In May, Just In Thyme, Inc. billed a customer $1,000 for services performed in May. In June, Just In Thyme collected the $1,000. Which of the following is true assuming accrual accounting?

$1,000 of revenue should be recorded in May.

Which of the following entries records the adjustment for revenue earned, but not yet collected?

Debit Accounts receivable and credit Sales revenue.

Recording salaries owed to employees that will not be paid by the company until the following accounting period is an example of a(n):

Accrued expense.

When recording an adjustment for the cost of using equipment during the current accounting period, which two accounts are affected?

Accumulated Depreciation and Depreciation Expense

Financial statements are prepared from which of the following trial balances?

Adjusted trial balance.

Which of the following describes the information reported in the statement of stockholders' equity?

Change in stockholders' equity through changes in common stock and retained earnings.

On November 1, a company receives cash of $6,000 from a customer for services to be provided evenly over the next six months. Deferred revenue is recorded at that time. Which of the following adjusting entries is needed on December 31 (two months later)?

Debit Deferred Revenue for $2,000; Credit Service Revenue for $2,000.

The adjusting entry to record supplies used during the period includes a:

Debit to Supplies Expense

On December 10, a company pays $500 for advertising to appear on December 20. On which date should the expense be recorded under accrual-basis accounting?

December 20.

Which of the following transactions do not require an adjusting journal entry for Mueller Corporation on December 31? (Select all that apply.)

During December, Mueller Corporation sold stock to shareholders On December 21, Mueller Corporation declared and paid dividends.

The balance of retained earnings in the adjusted trial balance:

Equals the balance of retained earnings at the beginning of the accounting period.

Norbert Company debits Accounts Receivable and credits Service Revenue. As a result of this adjusting entry, Norbert Company's: (Select all that apply.)

Equity Increase Assets increase

The adjusting entry to record interest owed on obligations at the end of the accounting period includes a debit to "Interest _____" and a credit to "Interest _____."

Expense Payable

True or false: The adjusting entry to record interest owed for the period will cause the balance in the Note Payable account to increase.

False

Depreciation is an allocation of the of buildings, vehicles, and equipment to expense over time as they are used.

Goods or services, for which cash was collected in advance, were provided during the current period.

Which of the following situations matches a journal entry that debits Deferred Revenue and credits Service Revenue?

Goods or services, for which cash was collected in advance, were provided during the current period.

Adam Corporation uses the cash-basis of accounting. Adam Corporation should record expenses when:

Paid

Which of the following is an example of an accrued revenue?

Providing services to a customer without having yet collected the cash.

Taggert Company paid $1,800 for a 6-month insurance premium on December 1. Which of the following statements are correct regarding the accounting for this insurance over the six-month period? (Select all that apply.)

Taggert will debit Prepaid Insurance for $1,800 on Dec. 1. Taggert will debit Insurance Expense for $300 on Dec. 31. Taggert will credit Prepaid Insurance for $300 on Dec. 31.

As of December 31, $400 of revenues related to services provided during the period were not collected nor recorded. What adjusting entry is necessary at the end of the period?

The Accounts Receivable account should be increased by $400 and the Service Revenue account should be increased by $400.

In a classified balance sheet, liabilities are separated into two categories based on

The length of time until the obligation is expected to be satisfied—less than one year versus more than one year.

What are the effects on the accounting equation from an adjusting entry for revenues earned, but not yet collected, during the accounting period?

Total assets will increase and total stockholders' equity will increase.

What are the effects on the accounting equation from the adjusting entry for interest expense accrued, but not paid, at the end of the accounting period?

Total liabilities will increase and total stockholders' equity will decrease.

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

adjusted

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.

After the adjusting entries have been completed, the adjusted balance in the Prepaid Rent account represents the ______.

amount of the prepayment that remains towards future rental periods

The adjusting entry for supplies used during the period will result in ______ to the Supplies Expense account.

an increase

Long-lived assets are reported in the balance sheet at ______ value, which is equal to its original cost less ______.

book; accumulated depreciation

Adjusting entries never affect the asset account called _____.

cash

If an asset account such as Equipment has a normal debit balance, the associated contra account should have a normal balance.

credit

Peter Inc. earned interest on its bank deposit. The interest will be received at the beginning of next year. On December 31, Peter should

debit interest receivable and credit interest revenue

______ Expense should be recorded to recognize the cost of using long-lived assets, such as equipment, during the accounting period.

depreciation

Which of the following account balances are shown in the adjusted trial balance and the income statement?

depreciation expense interest expense

The adjusting entry for a prepaid expense includes a debit to a(n) ______ account and a credit to a(n) ______ account.

expense; asset

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

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

Accrual basis accounting differs from cash basis accounting in that accrual basis accounting records Blank______. (Select all that apply.)

expenses in the period incurred, even though cash has not yet been paid revenues in the period when the revenue is earned, even though the cash has not yet been collected

Cash-basis accounting Blank______. (Select all that apply.)

is generally not accepted in preparing financial statements records revenues when collected and expenses when paid

The Accounts Receivable account should be _____ by an adjusting entry at the end of the period for any revenues that have been earned but not yet collected or recorded.

increased

On December 31, Mueller Inc., makes an adjusting entry to accrue interest expense. As a result of this entry, Mueller's: (Select all that apply.)

liabilities will increase equity will decrease

Transactions that do not involve revenues or expenses and transactions that result in revenues and expenses being recorded at the same time as the cash flows

never require adjusting entries.

Identify all transactions that do not require adjusting entries.

transactions that result in revenues or expenses being recorded at the same time as the cash flow transactions that do not involve revenue or expense activities

On December 30, Superior Strategies, Inc., collected $10,000 in advance from clients relating to consulting engagements to be performed during January of the following year. Under cash-basis accounting, revenues recorded in December will equal:

$10,000

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

On May 1, Cut Above, Inc., collected $3,000 from customers to mow their lawns in June. Under cash-basis accounting, revenues in May will equal:

$3,000

Burrow, Inc. borrowed $20,000 with an annual rate of 6%, the note and interest are due at the end of two years. Calculate the interest for a three-month period.

$300

On August 1, 2022, a firm prepaid $53,520 for 2 years' rent of an office building. On March 1, 2023, the firm prepaid $34,800 for 2 years' rent of a warehouse. The rent agreements on both buildings went into effect on the dates the rents were prepaid. What amount will be shown for prepaid rent on the December 31, 2023 balance sheet?

$35,910

Burrow, Inc. borrowed $20,000 with an annual rate of 6%, the note and interest are due at the end of two years. By the end of the first month, the interest incurred equals $_____.

100

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 company pays a 6-month insurance premium at the beginning of October. A company pays for 4 months of advertising in the Wall Street Journal on November 1.

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

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

Which of the following statements describes the effect 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.

When Pizza Company sells three $100 gift cards at the beginning of the month, it should record a $300 debit to ______ and a $300 credit to ______.

Cash; Deferred Revenue

True or false: A contra-asset account, such as Accumulated Depreciation, will have a normal debit balance.

False

True or false: Accumulated Depreciation is a contra-account to a long-lived asset account, such as Equipment. This means that it is added to and increases the balance of the long-lived asset in the balance sheet.

False

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

True or false: Salaries Receivable is the account used to record salaries owed to employees for work performed during the current period.

False

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

Interest

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.

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.)

Prepaid rent of $22,000 Rent expense of $2,000

______ are recorded in the period that goods and services are provided to customers and ______ are recorded in the period that costs are incurred while providing those goods and services.

Revenues; expenses

Under accrual-basis accounting, which of the following result in an expense being recorded in May? (Select all that apply.)

The company pays cash in April for supplies used in May. The company pays cash in June for salaries earned in May.

What are the effects on the accounting equation when an adjusting entry is made for goods or services provided during the accounting period related to an amount previously received in advance from a customer?

Total liabilities will decrease and total stockholders' equity will increase.

What are the effects on the accounting equation from the adjustment for salaries incurred but not yet paid during the accounting period?

Total liabilities will increase and total stockholders' equity will decrease.

True or false: The adjusting entry to record depreciation does not directly reduce the long-lived asset accounts, such as Equipment, so that the original cost of the asset remains unchanged.

True

Utility costs that relate to current year's operations but are not paid until the following year require: (Select all that apply.)

a credit to Utilities Payable a debit to Utilities Expense

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

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

asset

Neumann Corporation purchases supplies that will be used during the following quarter. At the time of purchase, the supplies should be recorded as a(n)

asset

Prepaid insurance is a(n)

asset in the balance sheet

Deferred revenue appears on the ______.

balance sheet as a liability

Prepaid rent appears in the

balance sheet because it is an asset

Depreciation is an allocation of the ______ of buildings, vehicles, and equipment to expense over time as they are used.

cost

An adjusting entry for accrued expenses involves: (Select all that apply.)

credit to a liability debit to an expense

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

debit credit

At the end of December, Berber Company receives a utility bill for $920 associated with its December operations. Berber will pay the bill on January 5. On December 31, Berber should

debit Utilities Expense and credit Utilities Payable

Beverly Company incurred interest on its bank loan; interest is due and will be paid at the beginning of next year. On December 31, Beverly Company should

debit interest expense and credit interest payable

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

decreased

Sabrina Company recorded an adjusting entry for salaries owed to employees at the end of the year. As a result of this entry, Sabrina Company's: (Select all that apply.)

equity decreases liabilities increase

The adjusting entry to record salaries owed to employees at the end of the accounting period includes a debit to "Salaries _____" and a credit to "Salaries _____."

expense payable

Consistent with accrual-basis accounting, expenses should be recognized

in the period when the related revenue is generated

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

in the same period as related revenue.

Munster Inc. debits Deferred Revenue and credits Service Revenue. As a result of this adjusting entry, Munster's: (Select all that apply.)

liabilities will decrease equity will increase

After the adjusting entries have been completed, the adjusted balance in the Salaries Payable account represents wages earned by employees, but not yet _____ by the company.

paid

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.)

prepaid expense liability

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