510 Chapter 3. Adjusting Accounts for Financial Statements

The following categories are on a classified balance sheet. List them in the order that they would appear.

1. Current assets 2. long-term investments 3. plant assets 4. intangible assets 5. current liabilities 6. long-term liabilities

steps in the adjusting process

1. Determine what the current account balance is. 2. Determine what the correct account balance should be. 3. Record an adjusting entry.

Explain the required steps to complete a work sheet by placing the following steps in the correct order. (Put the first step at the top.)

1. enter unadjusted trial balance 2. enter adjustments 3. prepare adjusted trial balance 4. sort adjusted trial balance amounts to financial statements 5. total statement columns, compute income or loss, and balance columns

A calendar year-end reporting period is defined as a ______ (1 / 3 / 12) -month period which ends on _______ (December/January/March) 31st.

12; december

Recall the column headings of a work sheet used to prepare financial statements. Which of the following items are on a worksheet. (Check all that apply.)

Adjusted Trial Balance columns Balance Sheet columns Unadjusted Trial Balance columns Adjustment columns Income Statement columns

work sheet

An internal accounting aid which helps in preparing financial statements.

Describe an unclassified balance sheet.

An unclassified balance sheet is one whose items are broadly grouped into assets, liabilities, and equity.

Choose the statement below that explains what "closing" means.

Closing means to bring an account balance to zero.

What is a work sheet?

It can help with adjusting and closing accounts and with preparing financial statements.

Select the statement below that describes a post-closing trial balance.

It is a listing of all permanent accounts and their balances after closing.

When does the closing process take place?

at the end of an accounting period

Current assets are:

cash and other resources that are expected to be sold, collected or used within one year

Which of the following statements describes why accrual accounting better reflects a business's performance? (Check all that apply.)

Revenues are always recorded in the period in which they are earned. Expenses are always recognized in the period in which they are incurred. Comparability of financial statements is improved.

A reversing entry can be described as a(n): (Check all that apply.)

optional entry. entry that is used for adjusting entries involving accrued revenues and accrued expenses. entry that is the exact opposite of an accrual adjusting entry. entry whose purpose is to simplify a company's record keeping.

Closing means to transfer account balances from _____ (asset/liability/permanent/temporary) accounts so that they will start with a ______ (contra/larger/zero) balance at the beginning of the next period.

temporary; zero

On December 1, a company pays $3,600 for a 36-month insurance policy. After one month, accrual accounting requires $ _____ (100/3,600) of insurance expense be reported on the income statement ending December 31. However, if cash basis accounting is used, $ ______ (100/3,600) of insurance expense would be reported at the time of purchase.

$100 $3600

Cash Basis Accounting

Accounting system that recognizes revenues when cash is received and records expenses when cash is paid.

Accrual basis accounting

Accounting system that recognizes revenues when goods or services are provided and expenses when incurred; the basis for GAAP.

Which of the statements below is correct regarding the difference between a temporary account and a permanent account?

A temporary account will not appear on a post-closing trial balance.

Mouse Inc. uses the alternative method of accounting for prepayments and purchased a $1,200, 6-month insurance policy. The company immediately debited the Insurance expense account. By the end of the period, $400 of the policy had expired. Demonstrate the required adjustment needed at the end of the period.

Debit Prepaid insurance $800. (Reason: Under the alternative method of recording prepayments as expenses, the amount still remaining as an asset needs to be debited to the asset account. $800 still remains of the policy, so debit Prepaid insurance for $800.)

On December 31, AB Consulting recorded two days' wages of $100 in an adjusting entry which included a debit to Salaries Expense and a credit to Salaries Payable. On January 1, the accountant prepared a reversing entry which included which of the following?

Debit Salaries Payable $100; credit Salaries Expense $100. (Reason: A reversing entry reverses the previously recorded adjusting entry, so there would be a debit to Salaries Payable and a credit to Salaries Expense.)

Which of the following is correct regarding a work sheet?

Each set of column totals must balance on the Trial Balance columns, Adjustments columns and the Adjusted Trial Balance columns.

Which of the following statements describes the expense recognition (matching) principle? (Check all that apply.)

Expenses should be matched in the same accounting period as the revenues that are recognized as a result of those expenses. Matching of expenses with revenues is a major part of the adjusting process.

Identify which of the accounts below would be classified as a current asset. (Check all that apply.)

Office supplies Accounts receivable Cash Prepaid rent

Select the statements below that describe the purpose of a post-closing trial balance. (Check all that apply.)

One purpose is to verify that total debits equal total credit for permanent accounts. One purpose is to verify that all temporary accounts have zero balances.

Expense recognition (or matching) principle

Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

Rather than debiting an asset account, which of the following statements explains an alternate recording procedure to journalize prepaid expenses, such as prepaid rent or supplies. (Check all that apply.)

Record all prepaid expenses with debits to expense accounts. Any unused prepaids existing at end of period are transferred to asset accounts.

balance sheet

Reports a business's assets, liabilities and equity on a specific date.

Income Statement

Reports a business's revenues and expenses for a period of time.

Statement of cash flows

Reports the inflows and outflows of cash during a period of time.

Which of the accounts below would appear in the equity section of a classified balance sheet?

Retained Earnings

Which statements below are true regarding permanent and temporary accounts? (Check all that apply.)

Temporary accounts have a balance for one period only. Temporary accounts are reported on the income statement. Permanent accounts are reported on the balance sheet. Permanent accounts will appear on a post-closing trial balance. Retained Earnings is a permanent account, but Dividends is a temporary account.

Which of the statements below explains the accounting cycle?

The accounting cycle is repeated each reporting period and refers to the steps taken in preparing financial statements.

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.

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

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

Which of the statements below is (are) correct regarding the accounting cycle? (Check all that apply.)

The cycle contains steps for adjusting and closing accounts. The accounting cycle contains 10 steps. The accounting cycle refers to steps followed by a company to prepare its financial statements. The accounting cycle is a series of steps repeated each reporting period.

Describe the final step in the adjusting process.

The final step is to create an adjusting journal entry to get from step 1 to step 2.

All of the following are on an unclassified balance sheet: (Check all that apply).

Total liabilities Total assets

Trial Balance

a list of accounts and their balances at a given time

Before sorting/transferring amounts to the financial statement columns on a worksheet, the Trial Balance, (Income Statement, Adjustments) and Adjusted Trial Balance columns must (balance, clear).

adjustments; balance

The closing process takes place at the ______ (end/beginning) of an accounting period, after the _____ (adjusted/unadjusted) trial balance is prepared and ________(after/before) the financial statements are prepared.

end; adjusted; after

Illustrate your understanding of how to use the adjusted trial balance to prepare a statement of retained earnings by completing the following sentence. In order to prepare the statement of retained earnings, the balance of the ______ (Retained earnings / Cash) account balance as well as any debit balance in the _______ (Dividends / Supplies) account is transferred from the adjusted trial balance and is used along with the reported net income (loss) from the Income statement.

retained earnings dividends

The revenue recognition principle states that revenue:

should be recorded when goods or services are provided to customers at an amount expected to be received