Exam 2 Chapter 8 review

Adjustments for prepaid expenses: (a)decrease assets and increase revenues. (b)decrease expenses and increase assets. (c)decrease assets and increase expenses. (d)decrease revenues and increase assets.

(c)decrease assets and increase expenses. Adjustments for prepaid expenses decrease assets and increase expenses. The other choices are therefore incorrect.

Which account will have a zero balance after a company has journalized and posted closing entries? (a)Service Revenue. (b)Supplies. (c)Prepaid Insurance. (d)Accumulated Depreciation.

(a) Service Revenue. Service Revenue will have a zero balance after a company has journalized and posted closing entries.

Decision Tools Review: Expenses

Decision Checkpoints: At what point should the company record expenses? Info Needed for Decision: Need to understand the nature of the company's business Tool to Use for Decision Expenses should "follow" revenues—that is, match the effort (expense) with the result (revenue). How to Evaluate Results Recognizing expenses too early overstates current period expense; recognizing them too late understates current period expense.

Decision Tools Review: Revenue

Decision Checkpoints: At what point should the company record revenue? Info Needed for Decision: Need to understand the nature of the company's business Tool to Use for Decision: Record revenue in the period in which the performance obligation is satisfied. How to Evaluate Results: Recognizing revenue too early overstates current period revenue; recognizing it too late understates current period revenue.

Prepare adjusting entries for deferrals.

Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals at the statement date to record the portion of the deferred item that represents the expense incurred or the revenue for services performed in the current accounting period.

Which types of accounts will appear in the post-closing trial balance? (a)Permanent accounts. (b)Temporary accounts. (c)Expense accounts. (d)None of the above.

(a) Permanent accounts. Permanent accounts are the only type of accounts that appear in the post-closing trial balance because they are not closed at the end of the accounting period. Choices (b) and (c) are temporary accounts.

Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? (a)Expense recognition principle. (b)Historical cost principle. (c)Periodicity principle. (d)Revenue recognition principle.

(a)Expense recognition principle. The expense recognition principle dictates that efforts (expenses) be recorded with accomplishments (revenues). The other choices are incorrect because (b) the historical cost principle states that when assets are purchased, they should be recorded at cost; (c) the periodicity assumption states that the life of a business can be divided into artificial time periods; and (d) the revenue recognition principle states that revenue should be recorded in the period in which the performance obligation is satisfied.

Adjustments for unearned revenues: (a)decrease liabilities and increase revenues. (b)increase liabilities and increase revenues. (c)increase assets and increase revenues. (d)decrease revenues and decrease assets.

(a)decrease liabilities and increase revenues. Adjustments for unearned revenues decrease liabilities and increase revenues. The other choices are therefore incorrect.

Colleen Mooney earned a salary of $400 for the last week of September. She will be paid on October 1. The adjusting entry for Colleen's employer at September 30 is: (a)No entry is required. (b)Salaries and Wages Expense 400 Salaries and Wages Payable 400 (c)Salaries and Wages Expense 400 Cash 400 (d)Salaries and Wages Payable 400 Cash 400

(b) Salaries and Wages Expense 400 Salaries and Wages Payable 400 The adjusting entry should be to debit Salaries and Wages Expense $400 and credit Salaries and Wages Payable for $400.

Adjustments for accrued revenues: (a)increase assets and increase liabilities. (b)increase assets and increase revenues. (c)decrease assets and decrease revenues. (d)decrease liabilities and increase revenues.

(b) increase assets and increase revenues. When the adjustment is made for accrued revenues, an asset account (usually Accounts Receivable) is increased and a revenue account is increased

Queenan Company computes depreciation on delivery equipment at $1,000 for the month of June. The adjusting entry to record this depreciation is as follows: (a)Depreciation Expense 1,000 Accumulated Depreciation—Queenan Company 1,000 (b)Depreciation Expense 1,000 Equipment 1,000 (c)Depreciation Expense 1,000 Accumulated Depreciation—Equipment 1,000 (d)Equipment Expense 1,000 Accumulated Depreciation—Equipment 1,000

(c) Depreciation Expense 1,000 Accumulated Depreciation—Equipment 1,000 The adjusting entry is to debit Depreciation Expense and credit Accumulation Depreciation—Equipment. The other choices are incorrect because (a) the contra asset account title includes the asset being depreciated, not the company name; (b) the credit should be to the contra asset account, not the asset; and (d) the debit should be to Depreciation Expense, not Equipment Expense.

The trial balance shows Supplies $1,350 and Supplies Expense $0. If $600 of supplies are on hand at the end of the period, the adjusting entry is: (a)Supplies 600 Supplies Expense 600 (b)Supplies 750 Supplies Expense 750 (c)Supplies Expense 750 Supplies 750 (d)Supplies Expense 600 Supplies 600

(c) Supplies Expense 750 Supplies 750 The adjusting entry is to debit Supplies Expense for $750 ($1,350 − $600) and credit Supplies for $750.

Which statement is incorrect concerning the adjusted trial balance? (a)An adjusted trial balance proves the equality of the total debit balances and the total credit balances in the ledger after all adjustments are made. (b)The adjusted trial balance provides the primary basis for the preparation of financial statements. (c)The adjusted trial balance does not list temporary accounts. (d)The company prepares the adjusted trial balance after it has journalized and posted the adjusting entries.

(c) The adjusted trial balance does not list temporary accounts. The adjusted trial balance does list temporary accounts

What is the periodicity assumption? (a)Companies should recognize revenue in the accounting period in which services are performed. (b)Companies should match expenses with revenues. (c)The economic life of a business can be divided into artificial time periods. (d)The fiscal year should correspond with the calendar year.

(c)The economic life of a business can be divided into artificial time periods. The periodicity assumption states that the economic life of a business can be divided into artificial time periods. The other choices are incorrect because (a) this statement describes the revenue recognition principle, (b) this statement describes the expense recognition principle, and (d) the periodicity assumption states that the life of a business can be divided into artificial time periods, not that the fiscal year and calendar year must coincide

What are the first step and the final step in the revenue recognition process? (a)The first step is identify the contract with customers, and the final step is allocate the transaction price to the separate performance obligations. (b)The first step is identify the separate performance obligations in the contract, and the final step is determine the transaction price. (c)The first step is identify the contract with customers, and the final step is recognize revenue when each performance obligation is satisfied. (d)The first step is determine the transaction price, and the final step is identify the separate performance obligations in the contract.

(c)The first step is identify the contract with customers, and the final step is recognize revenue when each performance obligation is satisfied. In the revenue recognition process, the first step is identify the contract with customers, and the final step is recognize revenue when each performance obligation is satisfied. The other choices are incorrect because the five steps in the process in order are (1) Identify the contract with customers, (2) identify the separate performance obligations in the contract, (3) determine the transaction price, (4) allocate the transaction price to the separate performance obligations, and (5) recognize revenue when each performance obligation is satisfied.

Which one of these statements about the accrual basis of accounting is false? (a)Companies record events that change their financial statements in the period in which events occur, even if cash was not exchanged. (b)Companies recognize revenue in the period in which the performance obligation is satisfied. (c)This basis is in accordance with generally accepted accounting principles. (d)Companies record revenue only when they receive cash and record expense only when they pay out cash.

(d) Companies record revenue only when they receive cash and record expense only when they pay out cash. If companies record revenue only when they receive cash and record expense only when they pay out cash, they are using the cash basis of accounting. The other choices are true statements about accrual-basis accounting.

All of the following are required steps in the accounting cycle except: (a)journalizing and posting closing entries. (b)preparing an adjusted trial balance. (c)preparing a post-closing trial balance. (d)prepare financial statements from the unadjusted trial balance.

(d) prepare financial statements from the unadjusted trial balance. Financial statements are prepared from the adjusted trial balance, not the unadjusted trial balance. The other choices are incorrect because (a) journalizing and posting closing entries, (b) preparing an adjusted trial balance, and (c) preparing a post-closing trial balance are all required steps in the accounting cycle.

Adjusting entries are made to ensure that: (a)expenses are recognized in the period in which they are incurred. (b)revenues are recorded in the period in which the performance obligation is satisfied. (c)balance sheet and income statement accounts have correct balances at the end of an accounting period. (d)All of the above.

(d)All of the above. Adjusting entries are made to ensure that expenses are recognized in the period in which they are incurred, that revenues are recorded in the period in which the performance obligation is satisfied, and that balance sheet and income statement accounts have correct balances at the end of an accounting period. Although choices (a), (b), and (c) are correct, choice (d) is the better answer.

Each of the following is a major type (or category) of adjusting entry except: (a)prepaid expenses. (b)accrued revenues. (c)accrued expenses. (d)unearned expenses.

(d)unearned expenses. Unearned expenses are not a major type of adjusting entry. Choices (a) prepaid expenses, (b) accrued revenues, and (c) accrued expenses are all a major type of adjusting entry.

Prepare adjusting entries for accruals.

Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals record revenues for services performed and expenses incurred in the current accounting period that have not been recognized through daily entries.

Prepare an adjusted trial balance and closing entries.

An adjusted trial balance is a trial balance that shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. The purpose of an adjusted trial balance is to show the effects of all financial events that have occurred during the accounting period. One purpose of closing entries is to transfer net income or net loss for the period to Retained Earnings. A second purpose is to "zero-out" all temporary accounts (revenue accounts, expense accounts, and Dividends) so that they start each new period with a zero balance. To accomplish this, companies "close" all temporary accounts at the end of an accounting period. They make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed. The required steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance.

Explain the accrual basis of accounting and the reasons for adjusting entries.

The revenue recognition principle dictates that companies recognize revenue when a performance obligation has been satisfied. The expense recognition principle dictates that companies recognize expenses in the period when the company makes efforts to generate those revenues. Under the cash basis, companies record events only in the periods in which the company receives or pays cash. Accrual-based accounting means that companies record, in the periods in which the events occur, events that change a company's financial statements even if cash has not been exchanged. Companies make adjusting entries at the end of an accounting period. These entries ensure that companies record revenues in the period in which the performance obligation is satisfied and that companies recognize expenses in the period in which they are incurred. The major types of adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses.

Describe the purpose and the basic form of a worksheet.

The worksheet is a device to make it easier to prepare adjusting entries and the financial statements. Companies often prepare a worksheet using a computer spreadsheet. The sets of columns of the worksheet are, from left to right, the unadjusted trial balance, adjustments, adjusted trial balance, income statement, and balance sheet.