Accounting Exam #2

2% discount is available if the invoice is paid within 10 days; or the total balance of the invoice is due in 30.

2/10, n30

discounts taken are a reduction of Sales Revenue

gross method

Some of the steps in the accounting cycle are listed below. Select the choice that places these steps in the correct order. 1 . Prepare a pos t -closing trial balance . 2 . Pre p are a trial balance . 3. Journalize and post accounting transactions. 4 . Journalize and post adjusting entries . 5 . Pre p are financial statements . Answer 2, 3, 4, 5, and 1 3, 2, 4, 5, and 1 3, 2, 4, 1, and 5 3, 2, 5, 4, and 1

3, 2, 4, 5, and 1

What happens to the accounting equation when the adjustment for depreciation expense for the accounting period is recorded? Assets and stockholders' equity decrease Assets and stockholders' equity increase Assets and liabilities decrease Liabilities increase and stockholders' equity decreases

Assets and stockholders' equity decrease

What effect does "recognizing accrued interest revenue at the end of the accounting period" have on the accounting equation? Answer Assets increase and stockholders' equity decreases. Assets increase and stockholders' equity increases. Assets decrease and liabilities decrease. Liabilities increase and stockholders' equity decreases

Assets increase and stockholders' equity increases.

FedZ is a local package delivery service. If FedZ uses accrual basis of accounting, when should it recognize revenue from its package delivery service? Answer At the date the customer places the order At the date the packages are delivered At the date the invoice is mailed to the customer At the date the customer's payment is received

At the date the packages are delivered

Joe's Auto Company uses the accrual basis of accounting. Which situation violates the matching principle during 2012? Answer Sales commissions are charged to expense in 2012 on all sales revenue recognized in 2012 even though some of the commissions have not been paid. Insurance expense is recognized for the total cost of a 1-year policy purchased in May, 2012. Rent expenses are recognized as expenses in 2012 even thou gh the last bill received in 2012 will not be paid until 2013. Sales commissions paid in 2012 for 2013 commissions are recorded as prepaid expenses for 2012

Insurance expense is recognized for the total cost of a 1-year policy purchased in May, 2012.

Which one of the following is an example of an accrued liability? Answer Rent that has been incurred, but have not been paid at the end of the period. Equipment that will benefit several periods has been purchased. An insurance policy that expires in a future period has been acquired. Supplies are purchased and used over several months.

Rent that has been incurred, but have not been paid at the end of the period.

Which of the following entries properly closes a temporary account? Answer Retained Earnings 20,000 Service Revenue 20,000 Dividends 200 Retained Earnings 200 Accumulated Depreciation 1,600 Retained Earnings 1,600 Retained Earnings 400 Salaries Expense 400

Retained Earnings 400 Salaries Expense 400

Glass Corporation sold merchandise to a customer for $30,000 on credit on July 15. The customer paid Glass the amount due on July 31. Under the accrual basis of accounting, how should Glass record the transaction? Answer Glass should recognize the revenue on July 31. The July 15th transaction increases revenue, but has no effect on assets because cash has not been received. Revenue is recognized after the cost of the merchandise sold has been paid by Glass Corporation Revenue is recognized on July 15. The July 31st transaction has no effect on total assets under the accrual basis.

Revenue is recognized on July 15. The July 31st transaction has no effect on total assets under the accrual basis

What does the phrase, "Revenue is recognized when earned" mean? Answer Revenue is recorded in the accounting records when the goods are received from a supplier, and reported on the income statement when sold to the customer. Revenue is recorded in the accounting records and reported on the income statement when the cash is received from the customer. Revenue is recorded in the accounting records when the goods are sold to a customer, and reported on the income statement when the cash payment is received from the customer. Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer

Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer

The ________ maintains that revenue is realized or realizable and earned when the following criteria are met:◦Persuasive evidence of an arrangement exists (e.g., a contract or other proof of the details of the exchange).◦Delivery has occurred or services have been provided.The seller's price to the buyer is fixed and determinable.◦Collectability is reasonably assured.

SEC

Suppose a company received a $2,500 utility bill for the month of March but has not yet recorded the transaction or paid the bill. What adjusting entry is necessary at March 31? Answer Utilities Expense 2,500 Utilities Payable 2,500 Utilities Expense 2,500 Cash 2,500 Utilities Payable 2,500 Utilities Expense 2,500 No Entr

Utilities Expense 2,500 Utilities Payable 2,500

is an alternative to cash-basis accounting that is required by generally accepted accounting principles. Under _______________, transactions are recorded when they occur. ___________________ is superior to cash-basis because it links income measurement to selling, the principle activity of the company. That is, revenue is recognized as the company satisfies its performance obligations by delivering goods or providing services; expenses are recognized when they are incurred. In contrast to cash-basis accounting, ___________________ is a more complex system that records both cash and noncash transactions.

accrual accounting

are journal entries made at the end of an accounting period to record the completed portion of partially completed transactions. __________________ are necessary to apply the revenue recognition and expense recognition principles and ensure that a company's financial statements include the proper amount for revenues, expenses, assets, liabilities, and stockholders' equity.

adjusting entries

Therefore, all adjusting entries will affect at least one income statement account and one balance sheet account. _______ is never affected by adjustments.

cash

revenue is recorded when cash is received, regardless of when it is actually earned

cash basis accounting

The key idea is that an expense is recorded when it is incurred, regardless of when

cash is paid

The appropriate amount of revenue to recognize is generally the.........

cash received or cash equivalent of the receivable

permanent accounts

cash, land, prepaid insurance, unearned revenue, salaries payable

The entry to close the Insurance Expense account at the end of the accounting period is to: Answer debit Retained Earnings and credit Prepaid Insurance debit Prepaid Insurance and credit Retained Earnings debit Insurance Expense and credit Retained Earnings debit Retained Earnings and credit Insurance Expense

debit Retained Earnings and credit Insurance Expense

Therefore, cash-basis accounting does not link recognition of revenues and expenses to the actual business activity but rather the

exchange of cash

Under accrual accounting, expenses are recognized following the ____________________, which requires that expenses be recorded and reported in the same period as the revenue that it helped to generate. Expenses for an accounting period should include only those costs used to earn revenue that was recognized in the accounting period. Expenses for an accounting period should exclude those costs used to earn revenue in an earlier period and those costs that will be used to earn revenue in a later period. Thus, the key to expense recognition is matching the expense with revenue.

expense recognition principle

here are three closing entries. The first one is to close ____, the second one is to close ____, and the last one is to close Answer revenues, expenses, dividends expenses, assets, capital stock capital stock, dividends, assets dividends, expenses, assets

revenues, expenses, dividends

uppose that a business purchases a 6-month general liability insurance policy for $24,000 on January 1. To record this transaction, the company debits "Prepaid Insurance" for $24,000 and credits "Cash" for $24,000. As of January 31, the company has consumed one month of insurance. What adjusting entry is necessary at January 31? Answer Insurance Expense 24,000 Prepaid Insurance 24,000 Insurance Expense 4,000 Cash 4,000 Prepaid Insurance 24,000 Insurance Expense 24,000 Insurance Expense 4,000 Prepaid Insurance 4,000

Insurance Expense 4,000 Prepaid Insurance 4,000

Which one of the following is an example of a deferred revenue? Answer Sales are made to customers on credit. Revenue has been earned but not yet recorded. Payments are received prior to providing the services to customers. Cash sales are made to customers.

Payments are received prior to providing the services to customers.

Which of the following entries properly closes a temporary account? Answer Service Revenues 20,000 Retained Earnings 20,000 Unearned Revenue 10,200 Retained Earnings 10,200 Accumulated Depreciation 1,600 Retained Earnings 1,600 Dividends 400 Retained Earnings 400

Service Revenues 20,000 Retained Earnings . 20,000

he accounting cycle requires three trial balances be prepared. In what order are they prepared? Answer Post-closing, unadjusted, and adjusted Unadjusted, post-closing, and adjusted Unadjusted, adjusted, and post-closing Post-closing, adjusted, and unadjuste

Unadjusted, adjusted, and post-closing

Suppose that a business sells 6-month subscriptions to its monthly magazine. On January 1, the company receives a total of $600 for 10 subscriptions. To record this transaction, the company debits "Cash" for $600 and credits "Unearned Subscription Revenue" for $600. As of January 31, the company has provided one month of magazines and has earned one month of revenue. What adjusting entry is necessary at January 31? Answer Unearned Subscription Revenue 600 Subscription Revenue 600 Subscription Revenue 100 Unearned Subscription Revenue 100 Unearned Subscription Revenue 100 Subscription Revenue 100 Subscription Revenue 600 Unearned Subscription Revenue 600

Unearned Subscription Revenue 100 Subscription Revenue 100

Liabilities arising from expenses that have been incurred but not yet paid in cash

accrued expenses

Assets resulting from revenues that have been earned but for which no cash has yet been received

accrued revenues

Assets arising from the payment of cash which have not been used or consumed by the end of the period

deferred (unearned) expenses

Liabilities arising from the receipt of cash for which revenue has not yet been earned

deferred (unearned) revenues

Three changes to sales revenues include:

discounts, returns, and allowances

temporary accounts

rent revenue, deprication expense, supplies expense

determines when revenue is recorded and reported. Under this principle, revenue is recognized, or recorded, in the period in which a company satisfies its performance obligation, or promise within a contract.

revenue recognition principle

net income =

revenues - expenses

This discount is a reduction of the normal selling price and is attractive to both the seller and the buyer.For the buyer, it is a reduction to the cost of the goods and services. For the seller, the cash is more quickly available and collection costs are reduced.

sales discount

Under accrual accounting, revenue is recognized: when cash is received, and expenses, when cash is paid. when cash is received, and expenses, when they are incurred. when it is earned, and expenses, when the costs are incurred. When it is earned, and expenses when cash is paid.

when it is earned, and expenses, when the costs are incurred.

Pine Corporation makes adjusting entries monthly. Property, Plant, and Equipment depreciates at a rate of $9,000 per month. No entry for depreciation has been recorded in the month of March. What adjusting entry is necessary at March 31? Answer Accumulated Depreciation 750 Property, Plant, & Equipment 750 Depreciation Expense 9,000 Accumulated Depreciation 9,000 Property, Plant & Equipment 750 Depreciation Expense 750 Depreciation Expense 9,000 Property, Plant & Equipment 9,000

Depreciation Expense 9,000 Accumulated Depreciation 9,000

The adjustment process under _____ is the same as the adjustment process under U.S. GAAP.

IFRS

Which one of the following is the last step in the accounting cycle? Answer Journalizing and posting accounting transactions Journalizing and posting adjusting entries Preparing a post-closing trial balance Preparing financial statements

Preparing a post-closing trial balance

Under which accounting method are revenues and expenses recognized in the same accounting period that cash receipts and payments occur? Answer Under the cash basis of accounting Under the accrual basis of accounting Under the percentage of sales method of accounting Under the direct write-off method of accounting

Under the cash basis of accounting

he Dividend account is a(n): Answer temporary account asset account real account liability accoun

temporary accounts

result from sale of goods/services

trade receivables

Accrued expenses originate from: previously unrecorded expenses that have been incurred but not yet paid in cash. items paid in advance, but not incurred. collecting cash from customers. paying off liabilities

previously unrecorded expenses that have been incurred but not yet paid in cash.

Which of the following concepts is important to accrual accounting? Answer Time period, because accrual accounting divides earnings into time periods. Market basis, because inflation is a big factor in the environment. Cash basis, because if cash is not received, revenue is not accrued. Entity concept, because personal transactions must be separated from business transactions

Time period, because accrual accounting divides earnings into time periods.

Which one of the following steps in the accounting cycle is completed only at the end of an accounting period? Answer Business transactions are analyzed Adjustments are recorded Transactions are journalized Journal entries are posted to the ledge

Adjustments are recorded

GMC sells cars and pays each salesperson a commission of $800 for each car sold. During the month of December, a salesperson, Tom, sold 3 new cars. GMC pays commissions on the 5th day of the month following the sale. Tom operates on the cas h basis; the car dealer operates on the accrual basis. Which of the following statements is true? Tom will recognize commission revenue earned in the amount of $2,400 in December. GMC will recognize commission expense in the amount of $2,400 in December. Tom will recognize commission expense in the amount of $2,400 in January. Tom will recognize revenue in the same month that the car dealer recognizes expense

GMC will recognize commission expense in the amount of $2,400 in December.

Suppose that a business purchases a 6-month general liability insurance policy for $24,000 on January 1. To record this transaction, the company debits "Prepaid Insurance" for $24,000 and credits "Cash" for $24,000. As of January 31, the company has consumed one month of insurance. What adjusting entry is necessary at January 31? Answer Insurance Expense 24,000 Prepaid Insurance 24,000 Insurance Expense 4,000 Cash 4,000 Prepaid Insurance 24,000 Insurance Expense 24,000 Insurance Expense 4,000 Prepaid Insurance 4,000

Insurance Expense 4,000 Prepaid Insurance 4,000

Which of the following does not occur during the closing process? Answer Journal entries are made to return the balance in all temporary accounts to zero. Journal entries are made to transfer the net income or loss to retained earnings. Journal entries are made to return the balance in all permanent accounts to zero. Journal entries are made to transfer the dividends to retained earnings

Journal entries are made to return the balance in all permanent accounts to zero.

Question What happens to the accounting equation when the adjustment is recorded to recognize earned revenue previously recorded as unearned revenue? Assets and liabilities increase Liabilities decrease and stockholders' equity increases Assets and liabilities decrease Stockholders' equity increases and decreases by the same amoun

Liabilities decrease and stockholders' equity increases

What effect does "recognizing revenue at the end of the accounting period for rent previously received in advance" have on the accounting equation for the insurance company? Answer Assets increase and liabilities decrease. Assets increase and stockholders' equity increases. Assets decrease and liabilities decrease. Liabilities decrease and stockholders' equity increases

Liabilities decrease and stockholders' equity increases

Adjustments for which of the following involves the cash account? Answer Deferred revenues Accrued expenses Deferred liabilities None of these

None of these

Using the accrual basis of accounting, when is revenue from the sale of merchandise normally recognized? Answer On the date the sale is made. On the date the customer pays for the merchandise. Either on the date on which the sale occurs, or the date on which the customer pays. When the merchandise is sold, if sold for cash, or when payment is received, if sold on credit

On the date the sale is made.

Pine Corporation makes adjusting entries monthly. As of March 31, the general ledger shows Prepaid Rent to have a debit balance of $6,000. Rent expires at a rate of $1,200 per month. No entry for rent has been recorded in the month of March. What adjusting entry is necessary at March 31? Answer Prepaid Rent 500 Cash 500 Rent Expense 1,200 Cash 1,200 Rent Expense 1,200 Prepaid Rent 1,200 Prepaid Rent 6,000 Rent Expense 6,000

Rent Expense 1,200 Prepaid Rent 1,200

Which one of the following adjustments will increase assets? Answer Interest incurred on money borrowed during the period but not yet paid to the bank. Rent revenue is recorded for amounts owed by a tenant but not yet paid. The use of supplies is recorded. Depreciation for the period is recorded

Rent revenue is recorded for amounts owed by a tenant but not yet paid.

Which of the following accounts will appear in a post-closing trial balance? Answer Dividends Retained Earnings Operating Expense Fees Earned

Retained Earnings

Which of the following statements present financial information based on the cash basis of accounting? Answer Balance Sheet Income Statement Statement of Retained Earnings Statement of Cash Flow

Statement of Cash Flow

Income statement accounts are also known as which of the following? Answer Temporary accounts Real accounts Permanent accounts Asset accounts

Temporary accounts

accounting recognizes revenue when a performance obligation or promise under a contract is satisfied. We have earned the revenue because either:◦goods have been delivered; OR◦a service has been performed.

accrual basis accounting

he post-closing trial balance differs from the adjusted trial balance in that it: Answer does not take into account closing entries. does not take into account adjusting entries. does not include balance sheet accounts. does not include income statement accounts

does not include income statement accounts

Under accrual basis of accounting, expenses are be matched against revenue: Answer if the earnings process is not complete. when cash is collected from the sale of products. in the same period as the revenue that it helped to generate. when payment is made for costs related to revenue

in the same period as the revenue that it helped to generate

Accumulated Depreciation: Answer increases with a debit. decreases with a credit. increases with a credit. is an adjunct account

increases with a credit.

sales are recorded net of discount

net method

arise from transactions not involving inventory.

non trade receivables

Brooks Company sells merchandise to customers. Under the accrual basis of accounting, Brooks should normally recognize: Answer revenue and the related expenses in the same accounting period as earned, whether payment is received or not. revenue when cash is collected and expenses when Brooks pays its creditor for the merchandise. revenue and expenses after all payments are made. expenses in the period the merchandise is sold and defer revenue recognition until the customer pays for the merchandise

revenue and the related expenses in the same accounting period as earned, whether payment is received or not.

This usually occurs when goods have been delivered to a customer or when services have been performed for a customer. At this point, the risks and rewards of ownership usually have been transferred from the seller to the buyer and the revenue is considered to be earned. Notice that revenue is recorded when a performance obligation is satisfied, regardless of when cash is received.

revenue recognition principle

To encourage prompt payment, businesses may offer a

sales discount

contra revenue account that is subtracted from sales when calculating "Net Sales"

sales discount

The financial statements are prepared immediately after: Answer business transactions are recorded. adjustments are recorded. the accounts are closed. the adjusted trial balance is prepared

the adjusted trial balance is prepared

Assets become expenses when: purchased for cash or on credit. asset is delivered. they are paid for in cash. their economic benefits expire

their economic benefits expire

allows companies to artificially divide their operations into time periods so they can satisfy users' demands for information.

time period assumption

are due from customers purchasing inventory in the ordinary course of business; represent Sales Revenues that have been recognized but not realized in cash.

trade receivables