Financial Accounting Fundamentals Wild 7th Edition- Test Bank

 

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Sample Test

Financial Accounting Fundamentals, 7e (Wild)

Chapter 3   Adjusting Accounts for Financial Statements

 

1) A company’s fiscal year must correspond with the calendar year.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

2) The time period assumption assumes that an organization’s activities can be divided into specific time periods such as months, quarters, or years.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

3) Interim financial statements report a company’s business activities for a one-year period.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

 

 

4) A fiscal year refers to an organization’s accounting period that spans twelve consecutive months or 52 weeks.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

5) Adjusting entries are made after the preparation of financial statements.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

6) Adjusting entries result in a better matching of revenues and expenses for the period.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

7) Two main accounting principles used in accrual accounting are expense recognition and full closure.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

8) Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly reported.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Accrued Expense; Deferral of Revenue; Accrued Revenue; Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.; 03-P2 Prepare adjusting entries for deferral of revenues.; 03-P3 Prepare adjusting entries for accrued expenses.; 03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

9) The expense recognition (matching) principle does not aim to record expenses in the same accounting period as the revenue earned as a result of these expenses.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

10) The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

11) The cash basis of accounting commonly increases the comparability of financial statements from period to period.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

12) Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

13) Since the revenue recognition principle requires that revenues be recorded when earned, there are no unearned revenues in accrual accounting.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

14) The expense recognition (matching) principle requires that expenses get recorded in the same accounting period as the revenues that are earned as a result of the expenses, not necessarily when cash is paid.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

15)   The cash basis of accounting is a system in which revenues are recorded when earned and expenses are recorded when incurred.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

16) The cash basis of accounting recognizes revenues when cash payments from customers are received.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

17) The accrual basis of accounting recognizes revenues when cash is received from customers, regardless of when the goods or services are provided.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

18) The accrual basis of accounting recognizes expenses when cash is paid.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

19) Recording revenues early overstates current-period income; recording revenues late understates current period income.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

20) Recording expenses early overstates current-period income; recording expenses late understates current period income.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

21) Prior to recording adjusting entries at the end of an accounting period, some accounts may not show correct balances even though all transactions were properly recorded.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

22) A company paid $9,000 for a twelve-month insurance policy on February 1. The policy coverage began on February 1. On February 28, $750 of insurance expense must be recorded.

 

Answer:  TRUE

Explanation:  Expense = $9,000/12 = $750

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

23) On October 15, a company received $15,000 cash as a down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the services required by the contract were completed. The company will record consulting revenue of $1,500 from this contract for October.

 

Answer:  TRUE

Explanation:  Revenue = $15,000 × 10% = $1,500

Difficulty: 3 Hard

Topic:  Deferral of Revenue

Learning Objective:  03-P2 Prepare adjusting entries for deferral of revenues.

Bloom’s:  Apply

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

24) The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when cash is received.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

25) The accrual basis of accounting requires adjustments to recognize revenues in the periods they are earned and to match expenses with revenues.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

26) Adjusting entries are designed primarily to correct accounting errors.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Accrued Expense; Deferral of Revenue; Accrued Revenue; Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.; 03-P2 Prepare adjusting entries for deferral of revenues.; 03-P3 Prepare adjusting entries for accrued expenses.; 03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

27) Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Accrued Expense; Deferral of Revenue; Accrued Revenue; Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.; 03-P2 Prepare adjusting entries for deferral of revenues.; 03-P3 Prepare adjusting entries for accrued expenses.; 03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

28) Each adjusting entry will affect a balance sheet account.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Accrued Expense; Deferral of Revenue; Accrued Revenue; Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.; 03-P2 Prepare adjusting entries for deferral of revenues.; 03-P3 Prepare adjusting entries for accrued expenses.; 03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

29) Adjusting entries always affect the cash account.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Accrued Expense; Deferral of Revenue; Accrued Revenue; Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.; 03-P2 Prepare adjusting entries for deferral of revenues.; 03-P3 Prepare adjusting entries for accrued expenses.; 03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

30) Accrued expenses at the end of one accounting period are expected to result in cash payments in a future period.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Accrued Expense

Learning Objective:  03-P3 Prepare adjusting entries for accrued expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

31) Accrued revenues at the end of one accounting period are expected to result in cash receipts in a future period.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Accrued Revenue

Learning Objective:  03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

32) Each adjusting entry affects one or more income statement account, one or more balance sheet account, and never cash.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Accrued Expense; Deferral of Revenue; Accrued Revenue; Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.; 03-P2 Prepare adjusting entries for deferral of revenues.; 03-P3 Prepare adjusting entries for accrued expenses.; 03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

33) Accrued expenses reflect transactions where cash is paid before a related expense is recognized.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Accrued Expense

Learning Objective:  03-P3 Prepare adjusting entries for accrued expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

34) Under the accrual basis of accounting, adjustments are often made for prepaid expenses and unearned revenues.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deferral of Revenue; Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.; 03-P2 Prepare adjusting entries for deferral of revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

35) The entry to record a cash receipt from a customer when the service is to be provided in a future period involves a debit to an unearned revenue account.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Deferral of Revenue

Learning Objective:  03-P2 Prepare adjusting entries for deferral of revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

36) Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Accrued Expense

Learning Objective:  03-P3 Prepare adjusting entries for accrued expenses.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

37) An adjusting entry often includes an entry to Cash.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Accrued Expense; Deferral of Revenue; Accrued Revenue; Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.; 03-P2 Prepare adjusting entries for deferral of revenues.; 03-P3 Prepare adjusting entries for accrued expenses.; 03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

38) Before an adjusting entry is made to recognize the cost of expired insurance for the period, Prepaid Insurance and Insurance Expense are both overstated.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

39) Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Accrued Expense

Learning Objective:  03-P3 Prepare adjusting entries for accrued expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

40) Failure to record depreciation expense will overstate assets and understate expenses.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

41) A company’s month-end adjusting entry for Insurance Expense is $1,000. If this entry is not made then expenses are understated by $1,000 and net income is overstated by $1,000.

 

Answer:  TRUE

Difficulty: 3 Hard

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Apply

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

42) Profit margin can also be called return on sales.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Profit Margin

Learning Objective:  03-A1 Compute profit margin and describe its use in analyzing company performance.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Resource Management; FN Decision Making

 

 

 

43) Profit margin measures the relation of debt to assets.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Profit Margin

Learning Objective:  03-A1 Compute profit margin and describe its use in analyzing company performance.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Resource Management; FN Decision Making

 

44) Profit margin reflects the percent of profit in each dollar of revenue.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Profit Margin

Learning Objective:  03-A1 Compute profit margin and describe its use in analyzing company performance.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Resource Management; FN Decision Making

 

45) Profit margin is calculated by dividing net sales by net income.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Profit Margin

Learning Objective:  03-A1 Compute profit margin and describe its use in analyzing company performance.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Resource Management; FN Decision Making

 

46) Truman had total assets of $149,501,000, net income of $6,276,090, and net sales of $209,203,000. Its profit margin was 3%.

 

Answer:  TRUE

Explanation:  Profit Margin = Net Income/Net Sales

Profit Margin = $6,276,090/$209,203,000 = 3%

Difficulty: 3 Hard

Topic:  Profit Margin

Learning Objective:  03-A1 Compute profit margin and describe its use in analyzing company performance.

Bloom’s:  Apply

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Resource Management; FN Decision Making

 

47) A contra account is an account linked with another account; it is added to that account to show the proper amount for the item recorded in the associated account.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

48) If a company reporting on a calendar year basis, paid $18,000 cash on January 1 for one year of rent in advance (lease beginning January 1), and adjusting entries are made at the end of each month, the balance remaining in Prepaid Rent on December 1 should be $1,500.

 

Answer:  TRUE

Explanation:  $18,000 × 1/12 = $1,500

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

49) Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

50) A salary owed to employees is an example of an accrued expense.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Accrued Expense

Learning Objective:  03-P3 Prepare adjusting entries for accrued expenses.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

51) In accrual accounting, accrued revenues are recorded as liabilities.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Accrued Revenue

Learning Objective:  03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

52) Depreciation expense is an example of an accrued expense.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

53) Earned but unrecorded revenues are recorded during the adjusting process with a credit to a revenue account and a debit to an expense account.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Accrued Revenue

Learning Objective:  03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

54) Depreciation expense for a period is the portion of a plant asset’s cost that is allocated to that period.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

55) All plant assets, including land, are depreciated.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

56) Net income for a period will be understated if accrued revenues are not recorded at the end of the accounting period.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Accrued Revenue

Learning Objective:  03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

57) Depreciation measures the decline in market value of an asset.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

58) A company owes its employees $5,000 for the year ended December 31. It will pay employees on January 6 for the previous two weeks’ salaries. The year-end adjusting entry on December 31 will include a debit to Salaries Expense and a credit to Cash.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Accrued Expense

Learning Objective:  03-P3 Prepare adjusting entries for accrued expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

59) A company had no supplies available at the beginning of August. A company purchased $6,000 worth of supplies in August and recorded the purchase in the Supplies account. On August 31, the fiscal year-end, the physical count of supplies indicates the cost of unused supplies is $3,200. The adjusting entry would include a $2,800 debit to Supplies.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Deferral of Expense

Learning Objective:  03-P1 Prepare adjusting entries for deferral of expenses.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

60) A company performs 20 days of work on a 30-day contract before the end of the year. The total contract is valued at $6,000 and payment is not due until the contract is fully completed. The required adjusting entry includes a $4,000 debit to Unearned Revenue.

 

Answer:  FALSE

Difficulty: 3 Hard

Topic:  Deferral of Revenue

Learning Objective:  03-P2 Prepare adjusting entries for deferral of revenues.

Bloom’s:  Apply

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

61) A company performs 20 days of work on a 30-day contract before the end of the year. The total contract is valued at $6,000, with payment received in advance. The $6,000 cash receipt was initially recorded as Unearned Revenue. The required adjusting entry includes a $4,000 debit to Unearned Revenue.

 

Answer:  TRUE

Difficulty: 3 Hard

Topic:  Deferral of Revenue

Learning Objective:  03-P2 Prepare adjusting entries for deferral of revenues.

Bloom’s:  Apply

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

62) A company entered into a 2-month contract for $50,000 on April 1. It earned $25,000 of the contract services in April and billed the customer. The company should recognize the revenue when it receives the customer’s check.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  The Accounting Period

Learning Objective:  03-C1 Explain the importance of periodic reporting and the role of accrual accounting.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

63) The adjusted trial balance must be prepared before the adjusting entries are made.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Adjusted Trial Balance

Learning Objective:  03-P5 Explain and prepare an adjusted trial balance.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

64) An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Adjusted Trial Balance

Learning Objective:  03-P5 Explain and prepare an adjusted trial balance.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

65) Financial statements can be prepared directly from the information in the adjusted trial balance.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Preparing Financial Statements

Learning Objective:  03-P6 Prepare financial statements from an adjusted trial balance.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

 

 

66) Asset and liability balances are transferred from the adjusted trial balance to the income statement.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Preparing Financial Statements

Learning Objective:  03-P6 Prepare financial statements from an adjusted trial balance.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

67) Asset and liability balances are transferred from the adjusted trial balance to the balance sheet.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Preparing Financial Statements

Learning Objective:  03-P6 Prepare financial statements from an adjusted trial balance.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

68) Revenue and expense balances are transferred from the adjusted trial balance to the income statement.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Preparing Financial Statements

Learning Objective:  03-P6 Prepare financial statements from an adjusted trial balance.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

69) In preparing statements from the adjusted trial balance, the balance sheet must be prepared first.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Preparing Financial Statements

Learning Objective:  03-P6 Prepare financial statements from an adjusted trial balance.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

 

 

70) It is acceptable to record prepayment of expenses as debits to expense accounts if an adjusting entry is made at the end of the period to bring the asset account balance to the correct unused or unexpired amount.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Alternative Accounting for Prepayments

Learning Objective:  03-P9 Appendix 3A-Explain the alternatives in accounting for prepaids.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

71) It is acceptable to record cash received in advance of providing products or services to revenue accounts if an adjusting entry is made at the end of the period to bring the liability account balance to the correct unearned amount.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Alternative Accounting for Prepayments

Learning Objective:  03-P9 Appendix 3A-Explain the alternatives in accounting for prepaids.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

72) Accounts that appear in the balance sheet are often called temporary (nominal) accounts.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

73) Income Summary is a temporary account only used for the closing process.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

 

 

74) Revenue accounts are temporary accounts that should begin each accounting period with zero balances.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

75) Closing revenue and expense accounts at the end of the accounting period serves to make the revenue and expense accounts ready for use in the next period.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

76) The closing process takes place before financial statements have been prepared.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Cycle

Learning Objective:  03-P4 Prepare adjusting entries for accrued revenues.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

77) Revenue and expense accounts are permanent (real) accounts and should not be closed at the end of the accounting period.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

 

 

78) Closing entries result in the Dividends account being transferred into net income or net loss for the period ending.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

79) The closing process is a step in the accounting cycle that prepares accounts for the next accounting period.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

80) Closing entries are required at the end of each accounting period to close all ledger accounts.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

81) Closing entries are designed to transfer the end-of-period balances in the revenue accounts, the expense accounts, and the dividends account to retained earnings.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Understand

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

 

 

82) The Income Summary account is a permanent account that will be carried forward period after period.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

83) Closing entries are necessary so that retained earnings will begin each period with a zero balance.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

84) Permanent accounts carry their balances into the next accounting period.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

85) If a company plans to continue business into the future, closing entries are not required.

 

Answer:  FALSE

Difficulty: 2 Medium

Topic:  Closing Process

Learning Objective:  03-P7 Describe and prepare closing entries.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

 

 

86) The first step in the accounting cycle is to analyze transactions and events to prepare for journalizing.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  The Accounting Cycle

Learning Objective:  03-C2 Identify steps in the accounting cycle.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

87) The accounting cycle refers to the sequence of steps used in preparing the work sheet.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Cycle

Learning Objective:  03-C2 Identify steps in the accounting cycle.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

88) The first five steps in the accounting cycle include analyzing transactions, journalizing, posting, preparing an unadjusted trial balance, and recording adjusting entries.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  The Accounting Cycle

Learning Objective:  03-C2 Identify steps in the accounting cycle.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

89) The last four steps in the accounting cycle include preparing the adjusted trial balance, preparing financial statements, and recording closing and adjusting entries.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  The Accounting Cycle

Learning Objective:  03-C2 Identify steps in the accounting cycle.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

 

 

90) A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Decision Making

 

91) An unclassified balance sheet provides more information to users than a classified balance sheet.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

92) Current assets and current liabilities are expected to be used up or come due within one year or the company’s operating cycle whichever is longer.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

93) Intangible assets are long-term resources that benefit business operations that usually lack physical form and have uncertain benefits.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

 

 

94) Assets are often classified into current assets, long-term investments, plant assets, and intangible assets.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

95) Current liabilities are cash and other resources that are expected to be sold, collected or used within one year or the company’s operating cycle whichever is longer.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

96) Long-term investments can include land held for future expansion.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

97) Intangible assets are assets that are long-term, have physical form, and are used to produce or sell products and services.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

 

 

98) Current liabilities include accounts receivable, unearned revenues, and salaries payable.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

99) Cash and office supplies are both classified as current assets.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

100) Plant assets are usually listed in order by how quickly they can be converted to cash.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Classified Balance Sheet

Learning Objective:  03-C3 Explain and prepare a classified balance sheet.

Bloom’s:  Remember

AACSB/Accessibility:  Communication/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

101) The current ratio is used to help assess a company’s ability to pay its debts in the near future.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Current Ratio

Learning Objective:  03-A2 Compute the current ratio and describe what it reveals about a company’s financial condition.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

 

 

102) The current ratio is computed by dividing current liabilities by current assets.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Current Ratio

Learning Objective:  03-A2 Compute the current ratio and describe what it reveals about a company’s financial condition.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Risk Analysis

 

103) Trekker Bikes’ current assets are $300 million and its current liabilities are $125 million. Its current ratio is 0.417.

 

Answer:  FALSE

Explanation:  Current Ratio = Current Assets/Current Liabilities

Current Ratio = $300 million/$125 million = 2.4

Difficulty: 2 Medium

Topic:  Current Ratio

Learning Objective:  03-A2 Compute the current ratio and describe what it reveals about a company’s financial condition.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Risk Analysis

 

104) If a company has current assets of $15,000 and current liabilities of $9,500, its current ratio is 1.6

 

Answer:  TRUE

Explanation:  Current Ratio = Current Assets/Current Liabilities

Current Ratio = $15,000/$9,500 = 1.6

Difficulty: 2 Medium

Topic:  Current Ratio

Learning Objective:  03-A2 Compute the current ratio and describe what it reveals about a company’s financial condition.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Risk Analysis

 

 

 

105) Flo’s Flowers’ current ratio is 1.3. The industry average for the current ratio is 1.2. This indicates that Flo’s can cover its short-term liabilities with its short-term assets.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Current Ratio

Learning Objective:  03-A2 Compute the current ratio and describe what it reveals about a company’s financial condition.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Risk Analysis

 

106) A benefit of using a work sheet is that it aids in the preparation of the financial statements.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Benefits of a Work Sheet

Learning Objective:  03-P10 Appendix 3B-Prepare a work sheet and explain its usefulness.

Bloom’s:  Remember

AACSB/Accessibility:  Technology/Keyboard Navigation

AICPA:  BB Industry; FN Risk Analysis

 

107) Adjustments must be entered in the journal and posted to the ledger after the work sheet is prepared.

 

Answer:  TRUE

Difficulty: 1 Easy

Topic:  Benefits of a Work Sheet

Learning Objective:  03-P10 Appendix 3B-Prepare a work sheet and explain its usefulness.

Bloom’s:  Remember

AACSB/Accessibility:  Technology/Keyboard Navigation

AICPA:  BB Industry; FN Risk Analysis

 

108) The work sheet is a required report made available to external decision makers.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Benefits of a Work Sheet

Learning Objective:  03-P10 Appendix 3B-Prepare a work sheet and explain its usefulness.

Bloom’s:  Remember

AACSB/Accessibility:  Technology/Keyboard Navigation

AICPA:  BB Industry; FN Leveraging Technology

 

 

 

109) A work sheet contains all of the balances for each account and therefore may be used as a substitute for the set of financial statements.

 

Answer:  FALSE

Difficulty: 1 Easy

Topic:  Benefits of a Work Sheet

Learning Objective:  03-P10 Appendix 3B-Prepare a work sheet and explain its usefulness.

Bloom’s:  Remember

AACSB/Accessibility:  Technology/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

110) All necessary amounts needed to prepare the income statement can be taken from the income statement columns of the work sheet, including the net income or net loss.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Benefits of a Work Sheet

Learning Objective:  03-P10 Appendix 3B-Prepare a work sheet and explain its usefulness.

Bloom’s:  Understand

AACSB/Accessibility:  Technology/Keyboard Navigation

AICPA:  BB Industry; FN Reporting

 

111) On a work sheet, if the Debit total exceeds the Credit total of the Income Statement columns, a net loss is indicated.

 

Answer:  TRUE

Difficulty: 2 Medium

Topic:  Benefits of a Work Sheet

Learning Objective:  03-P10 Appendix 3B-Prepare a work sheet and explain its usefulness.

Bloom’s:  Understand

AACSB/Accessibility:  Analytical Thinking/Keyboard Navigation

AICPA:  BB Industry; FN Reporting