SB3

Show your understanding of the steps involved in preparing financial statements by placing the following steps in the correct order of preparation.

#1 Prepare an income statement using revenue and expense accounts from trial balance. #2 Prepare statement of owner's equity from trial balance; pull net income. #3 Prepare balance sheet from trial balance, pull updated capital balance #4 Prepare statement of cash flow

What is a plant asset?

A plant asset refers to a long-term tangible asset used to produce and sell products or services.

At the end of the previous year, a customer owed Days Company $400. On February 1 of the current year, the customer paid $600 total, which included the $400 owed plus $200 owed through February 1st. The journal entry on February 1 is? (Check all that apply.)

Accounts receivable will be credited for $400. Service revenue would be credited for $200. Cash will be debited for $600.

On December 27, a business completed a $400 service that had not yet been billed or recorded as of December 31. Demonstrate the required adjusting entry of the business by completing the following sentence. The required adjusting entry would be to debit the (Blank 1) account and (Blank 2) the (Blank 3) account.

Blank 1: Accounts receivable Blank 2: credit Blank 3: Service revenue

Explain a contra account by filling in the following blanks. A contra account is an account that is linked with another (Blank 1) It has a(n) (Blank 2) balance and is (Blank 3) (added/subtracted) to/from the other account's balance.

Blank 1: account Blank 2: opposite Blank 3: subtracted

An adjusting journal entry is made at the (Blank 1) of an accounting period.

Blank 1: end

A company borrowed $10,000 from the bank at 5% interest. The loan has been outstanding for 45 days. Demonstrate the required adjusting entry for this company by completing the following sentence. The required adjusting entry would be to debit the Interest (Blank 1) account and (Blank 2) the Interest (Blank 3) account.

Blank 1: expense Blank 2: credit Blank 3: payable

For the current year, a business has earned (but not recorded or received) $200 of interest from investments. Demonstrate the required adjusting entry by completing the following sentence. The required adjusting entry would be to debit the (Blank 1) account and (Blank 2) the (Blank 3) account.

Blank 1: interest receivable Blank 2: credit Blank 3: interest revenue

The formula to compute the profit margin of a company is (Blank 1) divided by (Blank 2).

Blank 1: net income Blank 2: net sales

Cash basis accounting recognizes (Blank 1) when cash is received and records (Blank 2) when cash is paid.

Blank 1: revenues Blank 2: expenses

Accrual basis accounting recognizes (Blank 1) when the service or product is delivered and records (Blank 2) when (Blank 3) in order to adhere to the matching principle.

Blank 1: revenues Blank 2: expenses Blank 3: incurred

Which of the following lists of assets would be classified as plant assets?

Buildings, Equipment

For the current year, Bubbles Office Supply had earned $600 of interest on investments. As of December 31, none of this interest had been received or recorded. Demonstrate the required half of the adjusting entry by choosing the correct statement below.

Debit Interest receivable for $600.

By the end of the accounting period, employees have earned salaries of $500, but they will not be paid until the following pay period. Which of the following is the proper adjusting entry?

Debit Salaries expense for $500.

An advance payment of $1,000 for services was received on December 1 and was recorded as a liability. By the end of the year, $400 had been earned. Demonstrate the December 31 adjusting entry by choosing the correct statement below.

Debit Unearned revenues for $400.

Chimney Sweeps provided chimney cleaning services to several clients during the month of February. Chimney's customers have not yet been billed. Chimney's customers owe $2,000 to Chimney. How will Chimney Sweeps record this adjusting entry?

Debit accounts receivable and credit services revenue

Sheldon Company had $500 for one day of accrued salaries on December 31 of the prior year. On January 4 of the current year, total salaries for the five-day week are paid. The journal entry to record the payment of salaries on January 4 includes:

Debit to Salaries Payable for $500; Debit to Salaries Expense for $2,000 [Reason: On the payday, the journal entry will include a debit to Salaries Payable for $500, a debit to Salaries Expense for (4 days) $2,000, and a credit to Cash for $2,500.]

Able Company owes interest on a note for a loan. The note is dated December 1 and is due on February 1. On December 31, interest expense should be accrued for the following period:

December 1 to December 31

A plant asset can be defined by which of the following statements? (Check all that apply.)

Its cost (minus any salvage value) is gradually reported as expenses over its useful life. Provide benefits for greater than one period. It is reported on the balance sheet. It is a tangible long-term asset.

Which of the following accounts would be considered a prepaid expense or prepaid asset account? (Check all that apply.)

Prepaid insurance Prepaid rent Supplies

$1,000 of supplies were purchased at the beginning of the month. $300 were used during the month. (The Supplies account was increased at the time of the initial purchase.) Demonstrate the required adjusting journal entry by selecting from the choices below. (Check all that apply.)

Supplies expense would be debited for $300. Supplies would be credited for $300.

What is the purpose of the Accumulated Depreciation account?

The account allows both the original cost of plant assets and the total depreciation taken to be shown simultaneously.

Explain the difference between the unadjusted and the adjusted trial balance.

The adjusted trial balance is prepared after adjusting entries have been recorded and posted.

Explain what unearned revenues are by choosing the correct statement below.

Unearned revenues refer to cash received in advance of providing a service or product.

Explain what a contra account is by choosing the statement(s) below that correctly describe(s) a contra account. (Check all that apply.)

[A contra account is subtracted from another account.] [A contra account is linked with another account.] [A contra account has an opposite normal balance than its linked account.] [Accumulated Depreciation is an example of a contra account.]

What is the difference between an adjusted trial balance and an unadjusted trial balance? (Check all that apply.)

[The adjusted trial balance is a list of accounts and their balances after adjusting entries have been posted.] [The adjusted trial balance generally has more accounts listed than the unadjusted trial balance.] [The adjusted trial balance is used to prepare financial statements.]

Explain what unearned revenues are by selecting the statements below which are correct. (Check all that apply.)

[They are a liability.] [They are reported on a balance sheet.] [They refer to cash received in advance of performing a service or product.] [They are also called deferred revenues.]

$1,000 of cash was received in advance of performing services. By the end of the period, $300 had not yet been earned. (The Unearned revenue account was increased at the time of the initial cash receipt.) Demonstrate the required adjusting journal entry by selecting from the choices below. (Check all that apply.)

[Unearned revenue would be debited for $700.] [Service revenue would be credited for $700.]

Not recording an accrued expense will have the following effect on the financial statements: (Check all that apply).

[expenses on the income statement will be understated.] [liabilities on the balance sheet will be understated.]

The formula for figuring interest expense is:

amount owed x interest rate x fraction of the year since last payment

Cash basis accounting is defined as:

an accounting system which recognizes revenues when cash is received and records expenses when cash is paid

A 12-month insurance policy was purchased on Dec. 1 for $4,800 and the Prepaid insurance account was initially increased for the payment. The required adjusting journal entry on December 31 includes a: (Check all that apply.)

credit to Prepaid insurance for $400. debit to Insurance expense for $400.

StoryBook Company provided services to several customers during the month of December. These services have not yet been paid by the customers. StoryBook should record the following adjusting entry at the end of December: (Check all that apply).

debit accounts receivable credit services revenue

$21,000 of equipment is purchased on December 1. It is estimated that it will have a life of 5 years and zero salvage value. Calculate depreciation expense for one month, as of December 31, of the first year using the straight-line method.

$350 [Reason: $21,000/60mos=$350 per month. December 1 - December 31 = 1 month.]

At the end of the previous year, a customer owed Chocolates R US $500. On January 31 of the current year, the customer paid $900 total, which included the $500 owed plus $400 owed for the current month of January. What would be the journal entry on January 31 that reflects this? (Check all that apply.)

Cash will be debited for $900. Accounts receivable will be credited for $500. Service revenue would be credited for $400.

On December 28, I. M. Greasy, Catering completed $600 of catering services. As of December 31, the customer had not been billed nor had the transaction been recorded. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Accounts receivable for $600.

Which of the accounts below would be classified as a plant asset? (Check all that apply.)

Equipment Building Vehicles

A 12-month insurance policy was purchased on Dec. 1 for $3,600 and the Prepaid insurance account was increased for the payment. Demonstrate the required adjusting journal entry on Dec. 31 by selecting from the choices below.

Insurance expense would be debited for $300. [Reason: 3,600/12 months equals $300.]

McDarrel's records $500 of accrued salaries on December 31. Three days later, on January 3, total salaries of $4,000 (including the $500 accrued at year end) are paid. Demonstrate the required journal entry on January 3 by selecting from the choices below. (Check all that apply.)

Salaries expense would be debited for $3,500. Cash would be credited for $4,000. Salaries payable will be debited for $500.

Which of the following accounts is considered a prepaid expense?

Supplies

The Fish Aquarium obtained funds from a bank and owes interest on a note at the end of the month. The required adjusting journal entry will

debit interest expense and credit interest payable

Demonstrate your knowledge of preparing an adjusted trial balance by selecting the correct statement below.

An adjusted trial balance is prepared after adjustments are posted, so new accounts may need to be added.

Define an adjusting journal entry.

An adjusting journal entry is made at the end of an accounting period to reflect a transaction or event that is not yet recorded.

Explain a contra account by filling in the following blanks. A contra account is an account that is linked with another (Blank 1). It has a(n) (Blank 2) balance and is (Blank 3) to/from the other account's balance.

Blank 1: account Blank 2: opposite Blank 3: subtracted

Illustrate your understanding of how to use the adjusted trial balance to prepare a statement of owner's equity by completing the following sentence. In order to prepare the statement of owner's equity, the Owner (Blank 1) account balance as well as any debit balance in the (Blank 2) account is transferred from the adjusted trial balance and is used along with the reported net income (loss) from the Income statement.

Blank 1: capital Blank 2: withdrawals

Demonstrate your knowledge of a depreciation adjusting entry by completing the following sentence. A depreciation adjustment would include a debit to (Blank 1) and (Blank 2) to (Blank 3).

Blank 1: depreciation expense Blank 2: credit Blank 3: accumulated depreciation

By the end of the accounting period, employees have earned salaries of $650, but they will not be paid until the following pay period. Demonstrate the required adjusting entry by completing the following sentence. The required adjusting entry would be to debit the Salaries (Blank 1)_account and (Blank 2)_the Salaries (Blank 3)_account.

Blank 1: expense or expenses Blank 2: credit Blank 3: payable

Choose the statement below that demonstrates the correct adjusting entry to recognize depreciation expense on a building.

Debit Depreciation expense; credit Accumulated depreciation.

$800 of supplies were purchased at the beginning of the month and the Supplies account was increased. As of the end of the period, $200 of supplies still remain. Which of the following is the correct adjusting entry?

Supplies expense would be debited for $600. [Reason: 800-200= $600 of supplies used.]

Which of the following is (are) true regarding timeliness and the importance of periodic reporting? (Check all that apply.)

[Businesses report financial information at regular intervals to ensure timeliness of data.] [The value of information is often linked to its timeliness.] [Useful information must reach decision makers frequently.]

What is the effect of an accrued expense (such as salaries expense) adjustment on the income statement and the balance sheet? (Check all that apply.)

[Expenses are increased.] [Net income is reduced.] [A liability (such as salaries payable) will be increased.]

Review the following statements and determine which is (are) correct regarding an adjusted trial balance and how it is used In preparing financial statements. (Check all that apply.)

[Financial statements are prepared more easily using the adjusted trial balance than with the general ledger.] [The ending Owner, Capital account balance on the balance sheet is transferred from the statement of owner's equity.] [The adjusted trial balance includes all accounts and balances appearing in financial statements.] [The income statement is the first financial statement prepared after preparing the adjusted trial balance.]

Which of the following statements correctly define(s) profit margin? (Check all that apply.)

[Profit margin is the ratio of a business's net income to its net sales.] [Profit margin is also called return on sales.] [Profit margin is a useful measure of a business's operating results.]

Which of the following statements about the Accumulated depreciation account is (are) correct? (Check all that apply.)

[The Accumulated depreciation account allows the original cost of the asset to remain in the plant asset account.] [Accumulated depreciation is a contra account.] [Accumulated depreciation accumulates the total depreciation taken on an asset since its purchase.] [Accumulated depreciation is subtracted from its plant asset on the balance sheet.]

Which of the following statements accurately explains how to enter adjustments? (Check all that apply.)

[The adjusted balance is computed by taking that account's amount from the Unadjusted Trial Balance column and adding or subtracting adjustments.] [Each adjustment is identified by a letter in parentheses that serves as a cross-reference to the debit and credit side of the adjustment.] [Adjustments are entered in a middle column titled Adjustments.]

Accrual basis accounting is defined as: (Check all that apply.)

[an accounting system that uses the matching principle to determine when to recognize revenues and expenses.] [an accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred.]

A $300,000 building was purchased on December 1. It is estimated that it will have a life of 20 years and zero salvage value. Calculate depreciation expense for the month of December using straight-line depreciation.

$1,250 [Reason: $300,000/20 years = $15,000 per year. $15,000/12 months= 1250.]

A business has a $10,000 loan from a bank at 8% annual interest. Calculate the amount of interest to accrue if the loan has been outstanding for 45 days. Use a 360 day year.

$100 [Reason: $10,000 x.08 x 45/360.]

A company borrowed $4,000 from the bank at an interest rate of 9%. By the end of the accounting period, the loan had been outstanding for 30 days. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Interest expense for $30. Reason: Debit Interest expense for $30. [$4,000 x .09 x 30/360 = $30.]

Which of the following could be a logical or realistic accounting period for a business when preparing their financial statements? (Check all that apply.)

One-year period One-month period Six-month period

Which of the following refers to the preparation of an adjusted trial balance? (Check all that apply.)

[An adjusted trial balance is prepared after adjustments have been posted.] [New accounts may need to be added because of the adjusting process.] [Accounts are generally listed in the same order as listed in the chart of accounts.] [An adjusted trial balance has one debit column and one credit column.] [The debit and credit column totals must balance.]