Financial Accounting 4th Edition by Robert Libby, Patricia Libby , Daniel G Short -Test Bank
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Sample Test
ch03
Student: ___________________________________________________________________________
1. The operating cycle is the time it takes for a company to purchase goods,
pay for the goods, sell them to
customers, and collect the cash from the customers.
True False
2. According to the periodicity assumption, to measure and report financial
information periodically, we
assume the long life of the company can be cut into shorter periods.
True False
3. The operating cycle is of a similar duration for most companies.
True False
4. The division of business activities into a series of equal periods for
accounting purposes is known as the
periodicity assumption.
True False
5. The income statement provides investors with information about a company’s
investing activities.
True False
6. A Taco Bell restaurant would most likely have a longer operating cycle than
Walmart.
True False
7. When a growing company finds they need to buy more inventory before cash has
been collected from
customers, they often use short term credit such as accounts or notes payable
to finance the inventory
purchases.
True False
8. Revenues are decreases in assets or settlements of liabilities from ongoing
operations.
True False
9. The net income of a business is computed by subtracting revenues from
expenses.
True False
10. Losses are decreases in assets or increases in liabilities from peripheral
activities.
True False
11. Income tax expense will appear on the balance sheet.
True False
12. A common source of revenue for a restaurant chain such as Arby’s is franchise
royalties and fees.
True False
13. A gain causes an increase in income as a result of normal operating
activities.
True False
14. Cost of sales is usually the largest expense for manufacturing or
merchandising companies.
True False
15. Accrual basis accounting records revenues when earned and expenses when
incurred, regardless of when
the related cash is received or paid.
True False
16. Using the accrual basis of accounting, a company recognizes expenses when
they are paid.
True False
17. The revenue principle recognizes revenues when the earnings process is
complete or nearly complete, an
exchange has taken place, and collection is probable.
True False
18. Cash basis accounting is often adequate for very small businesses such as a
small retail store or a doctor’s
office.
True False
19. Accrual basis accounting recognizes revenues when cash is received from the
customer.
True False
20. Expenses incurred, but not yet paid, create a receivable (i.e., an asset)
until payment occurs.
True False
21. Accrued in the case of expenses means paid in advance, and deferred in the
case of expenses means not
yet paid.
True False
22. Deferred in the case of revenues means collected in advance of being earned
and accrued in the case of
revenues means not yet collected.
True False
23. Expenses are recognized when an exchange takes place of productive assets,
the earnings process is
complete or nearly complete, and collection is likely.
True False
24. The matching process recognizes liabilities when incurred in earning revenue.
True False
25. Transactions where cash is received before being earned often result in
adjusting entries at the end of the
period to record income in the proper period.
True False
26. The revenue principle recognizes revenue from the sale of goods when
ownership passes from the seller
to the buyer. In the sale of services, revenue is recognized when the services
are completed.
True False
27. The sale of merchandise on credit and the collection from the customer ten
days later constitutes one
transaction for accounting purposes.
True False
28. Revenue recognition most commonly occurs at the point of delivery of goods
or services to the
customer.
True False
29. A company that ships product to its customers in January 20B but records
them as revenue in December
20A has not violated the revenue principle because they were manufactured and
ready for sale before the
accounting year end.
True False
30. We record insurance as an expense when we pay for a three year policy.
True False
31. Shareholders’ equity is increased by investments of the owners and is
decreased by net income.
True False
32. Revenue collected in advance of being earned represents a liability until
it is earned.
True False
33. Utilities expense and wages payable are both elements of the income statement.
True False
34. The sale of merchandise for cash usually will increase assets.
True False
35. Revenues increase shareholders’ equity, so they are recorded with credits.
True False
36. Revenues earned decrease assets and shareholders’ equity.
True False
37. Expenses incurred but not paid decrease assets and shareholders’ equity.
True False
38. The balance sheet is affected by the sale of merchandise for cash.
True False
39. An increase in revenue represents an increase in shareholders’ equity.
True False
40. An increase in expenses represents an increase in shareholders’ equity.
True False
41. When the board of directors declares a cash dividend to be paid to
shareholders, shareholders’ equity
increases.
True False
42. Revenue accounts normally have debit balances because they represent assets
received while expense
accounts normally have credit balances because they represent assets used.
True False
43. Usually, the market price of shares is not adversely affected by lower than
expected quarterly
earnings.
True False
44. Collection of a customer’s account has an impact on total assets.
True False
45. The income statement reports income or loss at a point in time.
True False
46. A company can experience difficulty even if it does not report a loss.
True False
47. Unadjusted financial statements do not reflect revenues earned or expenses
incurred in the accounting
period if the receipt or payment of cash occurs in a different period.
True False
48. Profit differs from cash flow from operations because the revenue
recognition and matching processes
result in the recognition of revenues and related expenses that are independent
of the timing of cash
receipts and payments.
True False
49. A high asset turnover signifies efficient management of assets; a low asset
turnover ratio signifies less
efficient management.
True False
50. In a well-run business, creditors expect the total asset turnover ratio to
fluctuate due to seasonal upswings
and downturns.
True False
51. The periodicity assumption is the basis for which of the following?
A. dividing the activities of a business into a series of time periods for
accounting and reporting purposes.
B. the cut-off of revenue recognition only.
C. keeping the company’s transactions separate from the owners’ transactions.
D. the cut-off of expense recognition only.
52. Financial analysts look to the income statement to determine which of the
following?
A. whether the company has generated income from operations
B. if the company has invested too much cash in its inventory
C. whether the company has generated sufficient cash to pay its bills
D. if the company is collecting its receivables on time
53. The operating cycle of a business is best defined as which of the
following?
A. the period of time for which we prepare our financial statements
B.
the length of time over which our plant and equipment assets are expected to be
used by the company
in generating revenues
C.
the time it takes for a company to purchase and pay for goods or services from
suppliers, sell those
goods or services to customers and collect cash from the customers
D. one year
54. Which of the following businesses would most likely have the shortest
operating cycle?
A. A retail chain such as Walmart
B. A jewellery manufacturer such as Mappins
C. A grocery chain such as Loblaws
D. A pizza franchise such as Pizza Pizza
55. If total revenues are the same as total expenses, then a company has which
of the following?
A. a net loss.
B. a net profit.
C. neither a profit nor a loss.
D. negative net income.
56. Which of the following costs is most likely to be the largest expense item
on the income statement of a
merchandising chain such as Walmart?
A. Wage, salary and benefits expense
B. Advertising
C. Cost of Sales
D. Income tax expense
57. Which of the following is not considered an asset?
A. Equipment
B. Dividends
C. Accounts receivable
D. Inventory
58. Calculate the effective tax rate for a company that reports an income tax
expense of $3.0 million, net
income of $7.5 million, and income before taxes of $10.5 million.
A. 28.5%
B. 35%
C. 40%
D. It cannot be computed with the above information
59. Which of the following activities will most likely result in a reported
loss on the income statement?
A. The sale of inventory to customers
B. The sale of old equipment
C. The wages and benefits paid to employees
D. Interest expense
60. Which of the following expenses is usually listed last on the income
statement?
A. Advertising expense
B. Cost of sales
C. General administrative expenses
D. Income tax expense
61. Why is the cash basis of accounting not appropriate for use by publicly
traded corporations?
A. the OSC (Ontario Securities Commission) does not allow its use
B.
no assets or liabilities other than cash would ever appear on the balance
sheet, giving a distorted picture
of financial position
C.
the income reported could not be distorted if a large customer paid for goods
in advance or we
postponed paying for goods or services until the next accounting period
D. the cash basis is not permitted for tax purposes
62. The matching principle states that expenses should be matched with revenues
because
A. efforts should be matched with accomplishments.
B. dividends should be matched with shareholder investments.
C. cash payments should be matched with cash receipts.
D. assets should be matched with liabilities.
63. During 20B, New Company earned service revenues amounting to $200,000, of
which $120,000 were
collected in cash; the balance will be collected in January 20C. The 20B income
statement of the
company should report which of the following amounts for service revenues?
A. $80,000.
B. $120,000.
C. $200,000.
D. $320,000.
64. At the end of December, the owner of an apartment complex realized that the
December rent had not been
collected from one of the tenants. December 31 was the end of the accounting
year; therefore, the owner
made the appropriate adjusting entry at that time. When the December rent was
collected in January of
the following year, the entry made by the apartment owner should include which
of the following?
A. debit to Rent revenue receivable.
B. credit to Rent revenue receivable.
C. debit to Rent revenue collected in advance.
D. credit to Rent revenue.
65. Under the accrual basis of accounting
A. cash must be received before revenue is recognized.
B. net earnings are calculated by matching cash outflows against cash inflows.
C
.
the ledger accounts must be adjusted to reflect a cash basis of accounting
before financial statements are
prepared under generally accepted accounting principles.
D.
events that change a company’s financial statements are recognized in the
period they occur rather than
in the period in which cash is paid or received.
66. Accrued expenses which must be recorded in adjusting entries represent
which of the following?
A. expenses incurred but not yet paid.
B. expenses incurred but not recorded or paid.
C. expenses paid in advance.
D. expenses paid in advance and not recorded.
67. Revenue is always recognized when which of the following occurs?
A. expenses are paid.
B. cash is collected.
C. it is earned.
D. the end of the period arrives.
68. Which of the following is not an example of the application of the revenue
principle?
A. Recording the sale of merchandise on credit in sales revenue.
B. Recording rent received in advance in unearned rent revenue.
C. Recording interest collected on unearned rent revenue.
D.
Reducing the service revenue account for service revenue collected but not yet
performed at the end of
the accounting period.
69. In applying the revenue principle to a given transaction, the most
important moment or period in time is
when which of the following happens?
A. related cash inflows occur.
B. related expenses are incurred.
C. sales transaction is completed (i.e., ownership passes) or services are
rendered.
D. the service contract is signed regarding service to be performed.
70. Which principle holds that all of the expenses incurred in earning revenue
should be identified with the
revenue recognized and reported for the same period?
A. revenue principle.
B. matching principle.
C. timing principle.
D. liability principle.
71. During the accounting period, Luxor Company had the following data:
Sales of products:
Expenses:
This is the first year of business.
What were the sales revenue and expenses?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
72. Which of the following is not normally a condition that must be met for
revenue to be recognized
(recorded) under the revenue principle?
A. The earnings process is complete or nearly complete
B. The promise to perform an exchange in the future has been made
C. Collection of receivables from credit sales is reasonably assured
D. All cash must be received in advance of exchanging the goods
73. Which of the following liability accounts is likely to be satisfied with
other than payment of cash?
A. Wages payable
B. Deferred subscriptions revenue
C. Accounts Payable
D. Income taxes payable
74. Tony’s Tune-Up Shop Ltd. follows the revenue recognition principle. Tony
services a car on May 31.
The customer picks up the vehicle on June 1 and mails the payment to Tony on
June 5. Tony receives the
cheque in the mail on June 6. When should Tony show that the revenue was
earned?
A. May 31
B. June 5
C. June 1
D. June 6
75. A company receives a $25,000 cash deposit from a customer on March 15 but
will not deliver the goods
until April 20. Which of the following statements is false?
A. Cash will be reported on the statement of cash flows for the month of March
B. Revenue will be recorded and reported on the income statement for April
C. A liability will be reported on the balance sheet at the end of March
D. Revenue will be recorded and reported on the income statement for March
76. Which of the following activities does not violate the revenue recognition
principle?
A. Recording revenue in December 2009 for units manufactured but not yet sold
to customers
B. Recording cash received in advance from customers as revenue when the
product is not yet shipped
C. Not recording interest earned in 2009 until the cash is received in 2010
D. Recording cash received in advance from customers as a liability when the
product is not yet shipped
77. What would be the effect on December’s income statement of a utility bill
received on December 27,
2009 but which will not be paid until January 10, 2010?
A. No expense will be recognized until the bill is paid in January
B. We would cause an increase in income by recording the expense in December
C. Recording the expense in December when it is incurred will increase expenses
D. Income will be decreased when we pay the bill in January
78. Which group of accounts contains only those that normally have a debit
balance?
A. Accounts receivable; Accumulated depreciation; Fees earned.
B. Bond investment; Cash; Share capital.
C. Cash; Inventory; Prepaid insurance.
D. Notes receivable; Wages payable; Operating expenses.
79. During 20B, Blue Corporation incurred operating expenses amounting to
$100,000, of which $75,000
were paid in cash; the balance will be paid in January 20C. Transaction
analysis of operating expenses for
20B, should reflect which of the following?
A. decrease shareholders’ equity, $75,000; decrease assets, $75,000.
B. decrease assets, $100,000; decrease shareholders’ equity, $100,000.
C. decrease assets, $100,000; increase liabilities, $25,000; decrease
shareholders’ equity, $100,000.
D. decrease shareholders’ equity, $100,000; decrease assets, $75,000; increase
liabilities, $25,000.
80. Which of the following phases of the accounting information processing
cycle is performed at the end of
the accounting period?
A. Adjusting entries.
B. Peer reviews.
C. Liquidation.
D. Transaction entries.
81. When a corporation pays a dividend, the
A. expense account will be increased with a debit.
B. dividends account will be increased with a credit.
C. retained Earnings account will be directly increased with a debit.
D. dividends account will be increased with a debit.
82. If Global Company paid $500 for the telephone bill, this would do which of
the following?
A. decrease assets.
B. increase assets.
C. decrease expenses.
D. increase liabilities.
83. If Golden Corporation declared a dividend to its shareholders which has not
been paid, this would
A. increase liabilities.
B. increase shareholders’ equity.
C. decrease liabilities.
D. increase assets.
84. Which of the following items has no effect on retained earnings?
A. dividends
B. revenue
C. hiring a new employee
D. expense
85. During 20B, Melon Company incurred operating expenses amounting to
$250,000, of which $120,000
were paid in cash; the balance will be paid in January 20C. On the 20B income
statement of the company,
what amount should be reported for operating expenses?
A. $120,000.
B. $130,000.
C. $250,000.
D. $370,000.
86. With respect to shareholders’ equity, indicate which one of the following
statements is correct.
A.
Revenues are recorded as credits to the revenue accounts and expenses are
recorded as debits to the
expense accounts.
B.
Revenues are recorded as debits to the revenue accounts and expenses are
recorded as credits to the
expense accounts.
C. Contributions (investments) by owners are recorded as debits to the share
capital accounts.
D. Withdrawals by owners are recorded as credits to the share capital accounts.
87. Hill’s Copy Service performed photocopy services during December, 20A, but
had not collected any cash
(or other assets) from its customers by the end of the accounting period,
December 31, 20A. What effect
did performing these services have on the fundamental accounting model?
A. Increased assets and increased liabilities.
B. Increased assets and increased shareholders’ equity.
C. Increased assets and decreased shareholders’ equity.
D. Decreased liabilities and decreased shareholders’ equity.
88. The statement of retained earnings is dependent on the results of
A. the balance sheet.
B. the income statement.
C. a company’s share capital.
D. the cash flow statement.
89. On December 31, 20A, Ted Corporation paid $2,000 for next year’s insurance
coverage. How should this
transaction be recorded by Ted Corporation?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
90. On January 1, 20B, Grover Inc., started the year with a $22,000 credit
balance in its retained earnings
account. During 20B, the company earned net income of $40,000 and declared and
paid dividends
of $10,000. Also, the company received cash of $15,000 as an additional
investment by its owners.
Therefore, the balance in retained earnings on December 31, 20B, would be which
of the following?
A. $42,000.
B. $52,000.
C. $57,000.
D. $67,000.
91. Golden Company had these transactions during the accounting period.
Sold merchandise for $600; its cost was $400.
Collected $400 from an account receivable. The account was established in the
previous year.
Used office supplies of $50.
Golden’s net income for the period would be which of the following?
A. $50.
B. $150.
C. $600.
D. $900.
92. Cash receipts from interest and dividends are classified as
A. financing activities.
B. investing activities.
C. operating activities.
D. either financing or investing activities.
93. The category that is generally considered to be the best measure of a
company’s ability to continue as a
going concern is
A. cash flows from investing activities.
B. cash flows from operating activities.
C. cash flows from financing activities.
D. usually different from year to year.
94. For a merchandising company, the largest operating cash outflow would
result from which of the
following?
A. payments to suppliers from whom we have purchased inventory on credit
B. payment of wages and benefits to employees
C. payment of taxes to the various government entities
D. payment of interest on notes payable
95. Operating cash inflows and outflows are primarily connected to which of the
following?
A. acquisitions and sale of long lived assets
B. the sale of goods and services to customers and costs incurred to operate
the business
C. issuance of shares, bank borrowings and repayments, and dividend payments
D. purchase and sale of long-term investments
96. Asset turnover measures
A. how often a company replaces its assets.
B. how efficiently a company uses its assets to generate sales.
C. the portion of the assets that have been financed by creditors.
D. the overall rate of return on assets.
97. A company reports sales revenue of $120 million this year and $110 million
last year. Their total assets
in the current year are $80 million and last year’s total assets were $75
million. What is the current year’s
asset turnover ratio?
A. 1.46
B. 1.50
C. 1.55
D. 1.61
98. If Pizza Pizza reports an asset turnover ratio of 2.34 for 2010 and their
competitor Pizza Hut reports 3.79
for their 2010 ratio, it means which of the following?
A. Pizza Pizza is better able to pay their current obligations with their
current assets
B. Pizza Pizza has been more effective in managing the use and level of its
assets
C. Pizza Pizza has been less effective in managing the use and level of its
assets
D. Pizza Pizza is less able to pay off their current obligations with their
current assets
99. The Upton Country Store had the following transactions in April:
a. Sold $25,000 of goods to customers and received $22,000 in cash and the rest
are on account
b. The cost of the inventory sold was $13,000
c. The store purchased $8,000 of inventory and paid for $4,000 in cash and the
rest were bought on
account
d. They paid $7,000 in wages for the month
e. Received a $600 bill for utilities for the month that will not be paid until
May
f. Received rent for the adjacent store front for the months of April and May
in the amount of $3,000
Complete the following statements:
Cash Basis
Income Statement
Revenues:
Accrual Basis
Income Statement
Revenues:
100.Small Company rendered services to customers amounting to $6,000 during
20A; the related cash was
collected as follows: $4,000 in 20A; $2,000 in 20B. During 20A, $3,000 was
incurred for wages expense;
the related cash payments were made as follows: $1,200 in 20A; in 20B, $1,800.
Based only on these
data, provide the following amounts:
101.Explain why a $500 revenue collected in advance for service would be
recorded as a debit to cash and a
credit to a liability account.
102.Why might managers be tempted to violate the revenue principle and the
matching principle in financial
reporting?
103.Complete the chart below for McRae Corporation by entering check marks in
the appropriate
spaces.
104.Indicate the sequential order of the following steps in the accounting
information processing cycle by
entering numbers to the left. The earliest step will be 1 and the last step
will be 6. ______ Analyzing
transactions ______ Preparing financial statements ______ Developing a trial
balance ______ Collecting
original data ______ Posting to the accounts ______ Journalizing transactions
105.Part A. Perform transaction analysis for Cress Company regarding the
following transactions for May.
Indicate an increase (+) or decrease (-) to the account in front of the amount.
Part B. Determine whether the transactions (A)-(F) above affected cash flows.
If so, determine the type of
activity as an operating activity, an investing activity, or a financing
activity. If cash is not affected
use “no effect.” Place a check mark under the appropriate column for each
transaction
106.Immediately after the adjusting entries were journalized and posted for
the 20B year, the accounts of Way Corporation showed the following
balances:
107.The following accounts for Juliet Enterprises, Inc., are listed in
alphabetical order. Enter the number
associated with each to identify the accounts that would be used in the journal
entry for each transaction
given below.
108.On June 1, 20A, Global Services, Inc., was started with $50,000 invested by
the
owners as share capital. On June 30, the accounting records contained the
following
amounts:
109.Explain why the net income reported on the income statement is usually not
equal to net cash flows from
operating activities on the statement of cash flows.
110.The following data is from Gauthier Machine
Shop:
Compute Gauthier Machine Shop’s asset turnover ratio for the two most recent
years
(a) 20C __________
(b) 20B __________
111.Match the following statements with the terms given below by entering the
appropriate letter in the blank
space.
1. Deferred
expense
An expense incurred, but not yet recorded nor
paid.
____
2. Accrued
revenue
An expense paid, but not yet incurred. ____
3. Deferred
revenue
revenue earned, but not yet recorded nor
collected.
____
4. Accrued
expense
A revenue collected, but not yet earned. ____
ch03 Key
1. TRUE
2. TRUE
3. FALSE
4. TRUE
5. FALSE
6. FALSE
7. TRUE
8. FALSE
9. FALSE
10. TRUE
11. FALSE
12. TRUE
13. FALSE
14. TRUE
15. TRUE
16. FALSE
17. TRUE
18. TRUE
19. FALSE
20. FALSE
21. FALSE
22. TRUE
23. FALSE
24. FALSE
25. TRUE
26. TRUE
27. FALSE
28. TRUE
29. FALSE
30. FALSE
31. FALSE
32. TRUE
33. FALSE
34. TRUE
35. TRUE
36. FALSE
37. FALSE
38. TRUE
39. TRUE
40. FALSE
41. FALSE
42. FALSE
43. FALSE
44. FALSE
45. FALSE
46. TRUE
47. TRUE
48. TRUE
49. TRUE
50. TRUE
51. A
52. A
53. C
54. D
55. C
56. C
57. B
58. A
59. B
60. D
61. B
62. A
63. C
64. B
65. D
66. B
67. C
68. C
69. C
70. B
71. D
72. B
73. B
74. A
75. D
76. D
77. C
78. C
79. D
80. A
81. D
82. A
83. A
84. C
85. C
86. A
87. B
88. B
89. D
90. B
91. B
92. C
93. B
94. A
95. B
96. B
97. C
98. C
99. (a) $22,000, (b) $3,000, (c) $4,000, (d) $7,000, (e) $14,000, (f) $25,000,
(g) $1,500, (h) $13,000, (i) $7,000, (j) $600, (k) $5,900
100.
101. A debit is recorded to cash because a receipt of cash increases this asset
account. A corresponding credit to a liability account (unearned
revenue) is appropriate because the customer is “owed” services in the future.
If the services are not performed, the customer would get a refund.
102. Managers want their companies to appear successful when financial
statements are issued. With revenues as high as possible and expenses
as low as possible, net income will be elevated. Managers might be tempted to
report revenues even though the earnings process is not complete.
Also, if some expenses can be put off until a later time, net income will
appear larger. Many times manager bonuses are calculated based on net
income. Lower net income could cause an adverse reaction in the market place
regarding share prices. This could cause some managers to lose
their jobs.
103.
104. 2-6-5-1-4-3
105.
106.
107.
108.
109. Net income on the income statement is an application of the accrual basis
of accounting. Revenues are reported when earned and expenses
incurred are matched to those earned revenues. The net cash flows from
operating activities on the statement of cash flows are reported on the cash
basis of accounting. That is, amounts received from customers and amounts paid
for expenses are on the statement of cash flows. Therefore, the
difference in net income and net cash from operating activities is a timing
issue.
110. (a) 2.05, (b) 1.95
111. Accrued expense :: An expense incurred, but not yet recorded nor paid. and
Deferred expense :: An expense paid, but not yet
incurred. and Accrued revenue :: revenue earned, but not yet recorded nor
collected. and Deferred revenue :: A revenue collected, but not yet
earned.
ch03 Summary
Category # of Questions
Difficulty: Easy 18
Difficulty: Hard 15
Difficulty: Medium 78
Learning Objective: 1 11
Learning Objective: 2 14
Learning Objective: 3 37
Learning Objective: 4 33
Learning Objective: 5 10
Learning Objective: 6 6
Libby – Chapter 03 111
ch04
Student: ___________________________________________________________________________
1. The journal contains information that has been posted from the ledger.
True False
2. The trial balance, prepared immediately after all transactions of the period
have been recorded and
posted, should show all account balances that are in the ledger (T-accounts).
True False
3. The primary purpose of a trial balance is to determine the equality of
debits and credits in the ledger
accounts (or T-accounts).
True False
4. Deferred expenses are previously recorded liabilities that must be adjusted
for the amount of expense
incurred during the period.
True False
5. Adjusting entries are necessary at the end of the accounting period to
measure income properly and to
provide appropriate amounts for financial statement accounts.
True False
6. At the end of the accounting period, wages earned by employees but not yet
recorded nor paid amounted
to $400; therefore, the adjusting entry should be: Debit–Wages payable; Credit–
Wages expense.
True False
7. A trial balance is a list of all accounts with their debit or credit
balances indicated in the appropriate
column to provide a check on the equality of the debits and credits.
True False
8. To compute amortization expense using the straight-line formula, the cost of
a depreciable asset (i.e.,
equipment) must be reduced by any estimated residual or salvage value.
True False
9. The unadjusted trial balance does not reflect adjusting entries.
True False
10. Expenses paid in advance of the use of services or goods give rise to an
asset until the goods and services
are used, consumed, or expired.
True False
11. Each adjusting entry affects at least one income statement account and at
least one balance sheet
account.
True False
12. An expense incurred, but not yet recorded nor paid, creates a liability until
the payment is made.
True False
13. Usually, adjusting entries are entered in the accounts at the end of the
accounting period.
True False
14. Adjusting entries are used to update income statement accounts and balance
sheet accounts.
True False
15. Rent of $150 collected in advance was credited to rent revenue. At the end
of the accounting period it was
still unearned. The related adjusting entry should be: Debit– Rent revenue,
$150; Credit–Unearned rent
revenue, $150.
True False
16. Service revenue earned but not yet collected by the end of the period was
$200; therefore, the adjusting
entry should be: Debit–Service revenue receivable, $200; Credit–Unearned
service revenue, $200.
True False
17. During the accounting period, an expense paid in advance and debited to
prepaid expense was $180;
therefore, the adjusting entry for the expiration of this item should be to
debit an expense account for
$180 and credit a prepaid expense account for $180.
True False
18. On July 1, 20A, Liz Company borrowed $5,000 cash and signed a one year note
payable, interest 10
percent, payable on the maturity date, June 30, 20B. The accounting period ends
on December 31;
therefore, the required adjusting entry on December 31, 20A would be:
Debit–Interest payable, $250;
Credit–Interest expense, $250.
True False
19. Adjusting entries are recorded in the journal (i.e., journalized) but they
are not posted to the ledger.
True False
20. Both the adjusting entries and the closing entries usually are dated as of
the last day of the accounting
period.
True False
21. An adjusted trial balance is usually developed to show the balances in all
of the accounts after the effects
of the adjusting and closing entries.
True False
22. Amortization expense is an example of the need for accountants to make
estimates in order to record
adjustments.
True False
23. Those firms that make relatively conservative estimates for their accrued
and deferred adjustments are
said to have financial reports disclosing a higher quality of earnings.
True False
24. Amortization attempts to adjust the value of the assets to reflect the
market value of those assets on the
balance sheet.
True False
25. External auditors closely examine the adjustment process of a company
because adjustments are the most
complex part of the accounting process and therefore most error prone.
True False
26. The cash flow statement is designed to explain the causes of changes in the
cash account during the
period that resulted from the inflows and outflows of cash.
True False
27. The beginning and ending retained earnings balances for the accounting
period will appear on the balance
sheet.
True False
28. Earnings per share (EPS) amounts must be reported on the balance sheet of
corporations.
True False
29. Analysts, investors, and creditors use these same statements to evaluate
performance as part of their share
valuation and credit evaluation judgments.
True False
30. The three sections of the cash flow statement are operating, investing, and
financing activities.
True False
31. The cash flow statement shows the cash inflows, cash outflows, and change
in cash for a period.
True False
32. Earnings Per Share is widely used in evaluating the operating performance
and profitability of a
company and is the only ratio required to be disclosed on the statement or in
the notes to the financial
statements.
True False
33. Net income under accrual timing is subject to more distortion than cash
flow from operations because of
large accruals and deferrals that can impact reported income.
True False
34. The net profit margin ratio (Profit ÷ Net Sales) measures how much profit
is earned as a percentage of
revenues generated during the period.
True False
35. The return on equity measures how well management used shareholders’
investment to generate revenue
during the period.
True False
36. Temporary accounts are closed to a zero balance at the end of the
accounting period to allow for the
accumulation of profit items in the following period.
True False
37. The dividends declared account should be closed to retained earnings at
year-end.
True False
38. Revenue and expense accounts often are called temporary (nominal) accounts
because their balances are
closed out at the end of the accounting year.
True False
39. To close temporary accounts, credit each revenue and gain account, debit
each expense and loss account,
and record the difference to Retained Earnings.
True False
40. Closing entries are required by generally accepted accounting principles,
while adjusting entries are
optional.
True False
41. Income tax payable is a temporary account; therefore, it is closed at the
end of the accounting period.
True False
42. At the end of the accounting period, the balances in the nominal accounts
are closed while the balances in
the real accounts are carried forward to the next period.
True False
43. A post-closing trial balance is the last trial balance that is prepared
before the start of the next accounting
period.
True False
44. An adjusted trial balance
A. is prepared after the financial statements are completed.
B.
proves the equality of the total debit balances and total credit balances of
ledger accounts after all
adjustments have been made.
C. is a required financial statement under generally accepted accounting
principles.
D. cannot be used to prepare financial statements.
45. Joe Company purchased supplies inventory for $5,000. Due to an error in
posting, the inventory account
was debited for only $500 when accounts payable was credited for $5,000. During
which phase of the
accounting information cycle would this error be discovered?
A. Recording transaction in the journal.
B. Preparation of the financial statements.
C. Preparation of the trial balance.
D. Analysis of each transaction.
46. Which is the correct order of the steps in the accounting cycle during the
accounting period?
A. Transaction analysis, journal entries, trial balance
B. Transaction analysis, posting to the accounts, journal entries
C. Transaction analysis, posting to the accounts, adjusting the accounts
D. Transaction analysis, journal entries, posting to the accounts
47. The process that begins with analyzing transactions and ends with the
preparation of a post-closing trial
balance is called
A. the fiscal period.
B. the business cycle.
C. the accounting period.
D. the accounting cycle.
48. On January 1, 20A, Thomas Company paid $1,000 for a two-year insurance
policy on the building. The
accounting period ends December 31. At the end of 20A, the financial statements
should report which of
the following?
A. Choice A
B. Choice B
C. Choice C
D. Choice D
49. On March 1, 20A, the premium on a two-year insurance policy on equipment
was paid amounting to
$1,800. At the end of 20A (end of the accounting period), the financial
statements for 20A, would report
which of the following?
A. Insurance expense, $0; Prepaid insurance $1,800.
B. Insurance expense, $750; Prepaid insurance $1,050.
C. Insurance expense, $900; Prepaid insurance $900.
D. Insurance expense, $1,800; Prepaid insurance $0.
50. On April 1, 20A, Allen Company signed a $12,000, one-year, 10 percent note
payable. At due date,
April 1, 20B, the principal and interest will be paid. Interest expense should
be reported on the income
statement (for the year ended December 31, 20A) as which of the following?
A. $ 700.
B. $ 800.
C. $ 900.
D. $ 1,200.
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