Ch 3: The Accounting Cycle: End of the Period
During the year, Pizza Company, Inc. had $100,000 in revenues, $40,000 in expenses, and paid $3,000 in dividends. Net income equals ______.
$60,000
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
Long-term productive assets used in the normal course of business are classified as
Property, plant, and equipment
Which of the following statements regarding the statement of cash flows are correct?
The financial statement that is typically prepared last Reports cash receipts Reports cash disbursements
Which of the following statements is correct regarding a long-lived asset such as a building?
The original cost in the building account will not change when an adjusting entry is recorded for depreciation.
Which of the following statements is true regarding the post-closing trial balance?
The post-closing trial balance is an internal report prepared as the last step in the accounting cycle.
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
The retaining earnings balance shown in an adjusted trial balance is the account's _____ balance.
beginning
A classified balance sheet _____.
groups asset and liabilities into current and long-term categories
Closing entries may affect the following permanent account(s):
retained earnings
Which activities are part of the operating cycle?
selling goods and services
Temporary accounts are found in:
the income statement
Quartz Instruments had retained earnings of $145,000 at December 31, 2018. Net income for 2019 was $90,000, and dividends for 2019 were $30,000. What amount of retained earnings should be reported at December 31, 2019?
$205,000
X Company began the month with $500 in retained earnings. During the month, X Company had revenues of $800, expenses of $600 and dividends of $50. Retained earnings at the end of the month equals $
650
Which of the following are commonly classified as current liabilities?
Accounts payable Salaries payable Deferred revenue
Reporting revenues only when cash is received and expenses only when cash is paid is called the _____ basis of accounting.
Cash
Which of the following expressions correctly calculates "total assets?"
Current assets plus long-term assets
Which of the following would be referred to as "accruals?"
Goods and services provided, but not yet collected. Expenses Incurred, not yet paid.
An advantage of a classified balance sheet is that it is easy to see
If current assets are large enough to pay current liabilities
Which of the following transactions requires an adjusting entry for accrued revenue?
Interest earned, but not yet collected, on a note receivable
_____ 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?
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 dividends are declared and paid?
Total assets decrease and total stockholders' equity decreases.
Dividends have _____ on the stockholders' equity of a company.
a negative effect
An adjusted trial balance shows all accounts and their balances _____ the accounts have been updated for for adjusting entries.
after
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
Prepaid insurance is a(n) ______.
asset in the balance sheet
Deferred revenue appears on the ______.
balance sheet as a liability
A closing entry may include a ______.
credit to wages expense
When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records a:
debit to Deferred Revenue credit to Revenue
The _________ represents the cumulative total of net income less dividends over the life of the company.
ending balance of retained earnings
Revenues and expenses are reported in the:
income statement
Unpaid interest should be credited to _____ payable
interest
Long-term assets are expected to provide benefits for
more than one year
Stockholders' equity consists of two main components, common stock and ______.
retained earnings
_____ is the price earned from selling goods or services to customers.
revenue
Which of the following account balances are shown in the adjusted trial balance and reported in the income statement?
service revenue; supplies expense
The adjusting entry for supplies used during the period will result in a debit to the ______ account and a credit to the ______ account.
supplies expense; supplies
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
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
Which of the following statements is true?
Income statement accounts are temporary accounts, while balance sheet accounts are permanent accounts.
Which of the following transactions would normally be recorded as an asset when cash is paid?
Rent paid in advance
The adjusting entry for supplies used during the period will result in ______ to the Supplies Expense account.
an increase
During the closing process, the closing entries to individual expense accounts will be recorded with a ______ journal entry in order to reduce the account balance to zero.
credit
On December 31, Mueller Inc., makes an adjusting entry to accrue salaries expense. As a result of this entry, Mueller's:
liabilities will increase, equity will decrease
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.
Long-lived assets are reported in the balance sheet at _____ value, which is equal to its original cost less _____.
book; accumulated depreciation
Wald Corporation's adjusted trial balance shows the following temporary accounts: service revenue: $20,000; salaries expense $8,000; insurance expense: $2,000; utilities expense: $3,000; interest expense $200; and depreciation expense: $1,400. As part of the the closing process, Wald should debit retained earnings for:
$14,600
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
True or false: Total assets must always be equal to total liabilities less stockholders' equity
False
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.
True or false: After the closing entries have been posted, the new balance in the Retained Earnings account will equal the Retained Earnings reported in the balance sheet.
True
The _____ trial balance shows a list of all accounts and their balances after we have updated account balances for adjusting entries.
adjusted
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
The adjusting entry for a prepaid expense includes a debit to a(n) ______ account and a credit to a(n) ____ account.
expense; asset
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
Depreciation is an allocation of the _____ of buildings, vehicles, and equipment to expense over time as they are used.
cost
Wald Corporation's adjusted trial balance shows the following temporary accounts: service revenue: $20,000; salaries expense $8,000; insurance expense: $2,000; utilities expense: $3,000; interest expense $200; and depreciation expense: $1,400. As part of the the closing process, Wald should credit retained earnings for:
$20,000
On August 1, 2019, a firm prepaid $53,520 for 2 years' rent of an office building. On March 1, 2020, 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, 2020 balance sheet?
$35,910 ($53,520/24 months*7 months remaining)+($34,800/24 months*14 months remaining) Note that the question is asking for the Prepaid rent on the balance sheet on December 31, 2020 and not the expense on the income statement.
Closing entries move the balances from the ______ accounts into the Retained Earnings account.
temporary
Which of the following statements most accurately describes the purposes of the closing entries?
To establish zero balances in the income statement and dividend accounts and to transfer net income and dividends into retained earnings
Which of the following current liabilities does not involve the future payment of cash?
deferred revenue
After the adjusting entries have been completed, the balance in the Rent Expense account represents the:
cost of rent for the accounting period
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
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.
Klein Corporation's retained earnings account showed a balance of $200 at 1/1/18. During the year, the company earned revenues of $5,000 and incurred expenses of $3,000. Dividends declared were $500. The amount of retained earnings reported on the 12/31/18 balance sheet will be
$1,700
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
Creative Advertising Company had retained earnings of $100,000 at December 31, 2018. Net income for 2019 was $150,000, and dividends for 2019 were $80,000. What amount of retained earnings should be reported at December 31, 2019?
$170,000
On November 1, 2019, Movers, Inc., paid $24,000 for 2 years' rent beginning on November 1. The Prepaid rent balance at December 31, 2019 equals ______.
$22,000 Prepaid rent started with $24,000 on November 1. After 2 months of use (November 1 through December 31), Prepaid rent only has 22 months left with a balance of $22,000 (or $24,000/24 months times 22 months).
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
Selected items reported on Gunter Company's balance sheet are as follows: accounts payable: $10,000; notes payable: $15,000; common stock: $50,000; retained earnings: $25,000; equipment: $30,000; accumulated depreciation: (5,000). Total stockholders' equity reported on Gunter Company's balance sheet should be:
$75,000 Rationale: $50,000 (common stock)+$25,000 (retained earnings)
If revenues equal $100,000 and expenses equal $120,000, then net income (loss) must equal ______.
($20,000)
_____-basis accounting helps measure and report revenues and expenses in a way that clearly represents the net income of the company.
Accrual
The accounting basis that records revenues in the period that goods and services are provided to customers is referred to as _____
Accrual-basis accounting
_____ occur when the cash flow occurs after either the expense is incurred or the revenue is earned.
Accruals
How do adjusting entries for accrued expenses affect liabilities and expenses?
Adjusting entries for accrued expenses can increase liabilities and increase expenses.
_____ typically is the most liquid asset reported on the balance sheet.
Cash
Show the order in which these asset accounts would appear on a company's balance sheet.
Cash, accounts receivable, equipment
Identify the entries needed for the closing process.
Credit Dividends Declared and debit Retained Earnings. Debit each revenue, credit each expense, and record the difference in Retained Earnings.
On July 1, Book Palace prepaid 12 months' fire insurance with coverage starting the following month. The adjusting entry on December 31 includes:
Credit to prepaid insurance debit to insurance expense
Which of the following would be reported as "property, plant, and equipment" on a classified balance sheet?
Currently used manufacturing facility Land on which office building is located
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
_____ 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
Which of the following would be included (added or subtracted) in the calculation of retained earnings?
Dividends declared Expenses Beginning balance retained earnings Revenues
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 the balance of the long-lived asset in the balance sheet.
False
True or false: Since Retained Earnings is involved in the closing process, it is classified as a temporary account.
False
True or false: The adjusted trial balance presents the ending balance of retained earnings.
False
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.
During the year, a company had $100,000 in revenues, $40,000 in expenses, and paid $3,000 in dividends. These items caused retained earnings to:
Increase by $57,000
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.
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
On November 1, 2019, 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, 2019 will show:
Rent expense of $2,000 Prepaid rent of $22,000
Which activities are part of the operating cycle?
Selling goods and services Paying cash to suppliers Collecting cash from customers
On April 1, Katie Inc. collected $2,400 from a customer for a 12-month membership starting on that date. On December 31, Katie Inc. should credit:
Service revenue for $1,800
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
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.
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
The income statement, statement of stockholders' equity, and balance sheet typically are prepared utilizing information shown in the
adjusted trial balance
To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for _____ entries.
adjusting
Revenue in the income statement for the year ended December 31, 2018 equals the ______.
amount earned by selling goods or services to customers during 2018
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
After posting adjusting entries to the general ledger, a company typically prepares:
an adjusted trial balance
The adjusted trial balance provides account balances reported in which financial statements?
balance sheet income statement statement of stockholders' equity
Prepaid rent appears in the ______.
balance sheet because it is an asset
Long-lived assets, such as equipment, are reported at their ______ value in the balance sheet.
book
The entries that transfer the balances of all temporary accounts to retained earnings are referred to as
closing entries
If an asset account such as Equipment has a normal debit balance, the associated contra account should have a normal _____ balance.
credit
The adjusting entry for supplies used requires a _____ to Supplies and a _____to Supplies Expense.
credit; debit
On a classified balance sheet, total liabilities represent the sum of _____ and long-term liabilities.
current
Interest payable, salaries payable, and accounts payable are common examples of items classified as
current liabilities
As part of the closing process, dividends are closed to retained earnings. In the closing entry, correctly match the accounts with the appropriate debit/credit.
debit - retained earnings credit - dividends
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
Supplies should be ______ and Supplies Expense should be ______ for the cost of supplies used up during the period.
decreased; increased
Adjusting entries help to ensure that all ______ are recorded in the period in which they are incurred.
expenses
Accrual basis accounting differs from cash basis accounting in that accrual basis accounting records ______.
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
The information reported in the statement of cash flows is organized by these activities:
financing, operating, investing
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.
On a classified balance sheet, long-term assets may be reported in these sub-categories:
intangible assets; Property, plant, and equipment; long term investments
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
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
With respect to current assets, _____ refers to how quickly an asset can be converted to cash.
liquidity
Property, plant, and equipment and intangible assets are typically classified as _____ assets.
long-term
At year-end, companies that utilize accrual-based accounting systems complete the measurement process through
recording of adjusting entries
The journal entry to close dividends _____ retained earnings.
reduces
Which of the following transactions do not require an adjusting journal entry for Mueller Corporation on December 31?
shipping expense for december is paid in cash service is provided during december for cash.
The post-closing trial balance helps to verify that:
the accounts are ready for next period's transactions we prepared and posted closing entries correctly
A company may properly classify an asset that provides benefits for 15 months as a current asset if
the company's operating cycle is longer than one year
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
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.
A closing entry includes a ______.
debit to sales revenue
The adjusting entry for prepaid rent requires a(n) _____ to Rent Expense and a(n) _____ to Prepaid Rent.
debit; credit
During the closing process, the closing entry to reduce the sales revenue normal account balance to zero requires the revenue account be
debited
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
A long-term liability:
is not due within the next year
Deferred revenue is reported on the balance sheet as a current _____.
liability
Which of the following items would be reported as intangible assets on a classified balance sheet?
patents; trademarks; copyrights
The ending balance of retained earnings represents ______.
the cumulative total of net income less dividends over the life of the company.
On a classified balance sheet, the sum of current and long-term liabilities refers to _____ liabilities.
total
The sum of current and long-term assets reported on the balance sheet is referred to as _____ _____.
total assets
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
The closing entry for dividends involves a debit to Retained Earnings and a credit to Dividends Declared. The debit to Retained Earnings causes a(n) _____ in the balance of the account.
decrease
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
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
_____ is an allocation of the cost of buildings, vehicles, and equipment to expense over time as they are used.
Depreciation
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
Supplies that are not used immediately are recorded as a(n) ______ when purchased.
asset
Norbert Company debits Accounts Receivable and credits Service Revenue. As a result of this adjusting entry, Norbert Company's:
assets increase; equity increases
Accumulated Depreciation has a normal _____ balance which indicates that it _____ total assets.
credit; decreases
Assets that will be used up or converted to cash within the next year are _____ assets.
current
Andy records an adjusting entry for deferred revenue. Andy should:
debit a liability account credit a revenue account
During the year, Smite Company declared and paid dividends in the amount of $50,000. As part of the closing process, Smite should
debit retained earnings and credit dividend
As the balance in the Accumulated Depreciation increases, total assets _____ because Accumulated Depreciation is a(n) _____ account.
decrease; contra
In which type of liability does the company fulfill its current obligation to its customers by providing services in the future?
deferred revenue
The statement of stockholders' equity includes these amounts:
dividends for the period ending balance retained earnings net income
Current liabilities are ______.
due within the next year
The adjusting entry to record salaries owed to employees at the end of the accounting period includes a debit to "_____" and a credit to "_____".
expense; payable
An adjusting entry is necessary to record interest expense at year-end because the interest:
has already been incurred
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:
liability increase; equity decrease
Investments in another company's debt expected to be held for five years are reported on a classified balance sheet under this category.
long-term investments
Investments in another company's stock expected to be held for five years are reported on a classified balance sheet under this category.
long-term investments
The primary components of net income are:
revenues and expenses
As of December 31, the end of the accounting period, $700 of salaries to employees have been incurred but not paid. The employees will be paid on January 5. On December 31, which two of the following will occur?
salaries payable will increase by $700 salaries expense will increase by $700
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 adjusting entry for equipment depreciation includes a debit to _____ and a credit to _____.
depreciation expense; accumulated depreciation
Which of the following account balances are shown in the adjusted trial balance and the income statement?
depreciation expense; interest expense
In the closing process, ______ are zeroed out by crediting each account and ______ are zeroed out by debiting each account.
expenses and dividends; revenues
Cash typically is the first current asset reported on the balance sheet because it is:
most liquid asset
If a company incorrectly records cash received for services to be provided in the future with a debit to Cash and a credit to Sales Revenue, how will this error affect net income for the current period?
net income will be too high
Adjusting entries for accrued expenses ensure that liabilities are reported for all amounts ______ at the end of the accounting period.
owed
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
Retained earnings is an example of a ____ account, meaning its balance is carried forward from one period to the next.
permenant
Costs of assets acquired in one period that will be recorded as expense in a future period are referred to as ______ and are initially recorded as _____.
prepaid expenses; assets
Wald Corporation's adjusted trial balance shows the following temporary accounts: service revenue: $20,000; salaries expense $8,000; insurance expense: $2,000; utilities expense: $3,000; interest expense $200; and depreciation expense: $1,400. As part of the the closing process, Wald should debit
service revenue
After the adjusting entries have been completed, the adjusted balance in the Supplies account represents:
the cost of supplies remaining at the end of the accounting period
The adjusted trial balance typically is used to prepare which financial statements?
Income statement; balance sheet; statement of stockholders equity
Adjusting entries never affect the asset account called _____
cash
Which of the following are results of closing entries?
Balances in temporary accounts are zero Retained earnings includes current year income less dividends
The adjusted trial balance should be prepared ______ the financial statements are prepared in order to prove the ______ of the debits and credits.
before; equality
Which of the following are reported as stockholders' equity on a classified balance sheet?
common stock; retained earnings
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?
Taggert will debit Insurance Expense for $300 on Dec. 31. Taggert will debit Prepaid Insurance for $1,800 on Dec. 1. Taggert will credit Prepaid Insurance for $300 on Dec. 31.
Adjusting entries are made at the _____ of the accounting period, while daily transactions are made throughout the accounting period.
end
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
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