Fundamental Accounting Principles John Wild 24th Edition-Test Bank

 

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Sample Test

Fundamental Accounting Principles, 24e (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 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:  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 requires that revenue be recorded when goods or services are provided, and at an amount expected to be received.

 

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 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.

 

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:  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

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:  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

 

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

 

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

 

 

 

29) Adjusting entries always affect the cash account.

 

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

 

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 collections 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:  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

 

 

 

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:  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

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:  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

 

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:  The Accounting Period

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

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) Torsten had total assets of $149,501,000, net income of $6,242,000, and net sales of $209,203,000. Its profit margin was 2.98%.

 

Answer:  TRUE

Explanation:  Profit Margin = Net Income/Net Sales

Profit Margin = $6,242,000/$209,203,000 = 2.98%

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:  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

 

 

 

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 uncollected 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 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 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 credit to Unearned Revenue.

 

Answer:  FALSE

Difficulty: 3 Hard

Topic:  Accrued Revenue

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

 

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-P7 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-P7 Appendix 3A – Explain the alternatives in accounting for prepaids.

Bloom’s:  Remember

AACSB/Accessibility:  Analytical Thinking / Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

 

72) The time period assumption assumes that an organization’s activities may be divided into specific reporting time periods including all of the following except:

1.   A) Months.

2.   B) Quarters.

3.   C) Fiscal years.

4.   D) Calendar years.

5.   E) Days.

 

Answer:  E

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

73) A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters, or years is the:

1.   A) Operating cycle of a business.

2.   B) Time period assumption.

3.   C) Going-concern assumption.

4.   D) Expense recognition (matching) principle.

5.   E) Accrual basis of accounting.

 

Answer:  B

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

 

 

 

74) Interim financial statements refer to financial reports:

1.   A) That cover less than one year, usually spanning one, three, or six-month periods.

2.   B) That are prepared before any adjustments have been recorded.

3.   C) That show the assets above the liabilities and the liabilities above the equity.

4.   D) Where revenues are reported on the income statement when cash is received and expenses are reported when cash is paid.

5.   E) Where the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues.

 

Answer:  A

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 Reporting

75) The 12-month period that ends when a company’s sales activities are at their lowest level is called the:

1.   A) Fiscal year.

2.   B) Calendar year.

3.   C) Natural business year.

4.   D) Accounting period.

5.   E) Interim period.

 

Answer:  C

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

 

 

 

76) The length of time covered by a set of periodic financial statements, primarily a year for most companies, is referred to as the:

1.   A) Fiscal year.

2.   B) Natural business year.

3.   C) Accounting period.

4.   D) Business cycle.

5.   E) Calendar year.

 

Answer:  C

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

77) The accounting principle that requires revenue to be recorded when earned is the:

1.   A) Expense recognition (matching) principle.

2.   B) Revenue recognition principle.

3.   C) Time period assumption.

4.   D) Accrual reporting principle.

5.   E) Going-concern assumption.

 

Answer:  B

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

 

 

 

78) Adjusting entries:

1.   A) Affect only income statement accounts.

2.   B) Affect only balance sheet accounts.

3.   C) Affect both income statement and balance sheet accounts.

4.   D) Affect cash accounts.

5.   E) Affect only equity accounts.

 

Answer:  C

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:  Analytical Thinking / Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

79) The main purpose of adjusting entries is to:

1.   A) Record external transactions and events.

2.   B) Record internal transactions and events.

3.   C) Recognize assets purchased during the period.

4.   D) Recognize debts paid during the period.

5.   E) Correct errors in the accounting records.

 

Answer:  B

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

 

 

80) The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses is the:

1.   A) Recognition principle.

2.   B) Cost principle.

3.   C) Cash basis of accounting.

4.   D) Expense recognition (Matching) principle.

5.   E) Time period principle.

 

Answer:  D

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:  Analytical Thinking / Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

81) The system of preparing financial statements based on recognizing revenues when the cash is received and reporting expenses when the cash is paid is called:

1.   A) Accrual basis accounting.

2.   B) Operating cycle accounting.

3.   C) Cash basis accounting.

4.   D) Revenue recognition accounting.

5.   E) Current basis accounting.

 

Answer:  C

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:  Analytical Thinking / Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

82) Adjusting entries made at the end of an accounting period accomplish all of the following except:

1.   A) Updating liability and asset accounts to their proper balances.

2.   B) Assigning revenues to the periods in which they are earned.

3.   C) Assigning expenses to the periods in which they are incurred.

4.   D) Assuring that financial statements reflect the revenues earned and the expenses incurred.

5.   E) Assuring that external transaction amounts remain unchanged.

 

Answer:  E

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

 

83) The approach to preparing financial statements based on recognizing revenues when they are earned and matching expenses to those revenues is:

1.   A) Cash basis accounting.

2.   B) The expense recognition (matching) principle.

3.   C) The time period assumption.

4.   D) Accrual basis accounting.

5.   E) Revenue basis accounting.

 

Answer:  D

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:  Analytical Thinking / Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

 

84) Prepaid expenses, depreciation expense, accrued expenses, unearned revenues, and accrued revenues are all examples of:

1.   A) Items that require contra accounts.

2.   B) Items that require adjusting entries.

3.   C)  Asset and equity accounts.

4.   D) Asset accounts.

5.   E) Income statement accounts.

 

Answer:  B

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

 

85) The accrual basis of accounting:

1.   A) Is generally accepted for external reporting because it is more useful than cash basis for most business decisions.

2.   B) Is flawed because it gives complete information about cash flows.

3.   C) Recognizes revenues when received in cash.

4.   D) Recognizes expenses when paid in cash.

5.   E) Eliminates the need for adjusting entries at the end of each period.

 

Answer:  A

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

 

 

86) In its first year of operations, Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers); incurred expenses of $35,000 ($31,000 cash paid toward them); prepaid $8,000 cash for costs that will not be expensed until next year. Net income under the accrual basis of accounting is:

1.   A) $17,000.

2.   B) $21,000.

3.   C) $13,000.

4.   D) $25,000.

5.   E) None of these choices are correct.

 

Answer:  D

Explanation:  Revenues, $60,000, minus expenses, $35,000, equals accrual-basis income, $25,000.

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

 

87) In its first year of operations, Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers); incurred expenses of $35,000 ($31,000 cash paid toward them); prepaid $8,000 cash for costs that will not be expensed until next year. Net income under the cash basis of accounting is:

1.   A) $17,000.

2.   B) $21,000.

3.   C) $13,000.

4.   D) $25,000.

5.   E) None of these choices are correct.

 

Answer:  C

Explanation:  Cash received, $52,000, minus cash paid for expenses, $39,000 ($31,000 + $8,000), equals cash-basis income, $13,000.

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

 

 

88) Which of the following statements is incorrect?

1.   A) Adjustments to prepaid expenses and unearned revenues involve previously recorded assets and liabilities.

2.   B) Accrued expenses and accrued revenues involve assets and liabilities that had not previously been recorded.

3.   C) Adjusting entries can be used to record both accrued expenses and accrued revenues.

4.   D) Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to record the effects of the passage of time.

5.   E) Adjusting entries affect only balance sheet accounts.

 

Answer:  E

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

 

89) An adjusting entry could be made for each of the following except:

1.   A) Prepaid expenses.

2.   B) Depreciation.

3.   C) Owner investments.

4.   D) Unearned revenues.

5.   E) Accrued expenses.

 

Answer:  C

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

 

 

90) A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on December 31. This oversight would:

1.   A) Understate net income by $28,000.

2.   B) Overstate net income by $28,000.

3.   C) Have no effect on net income.

4.   D) Overstate assets by $28,000.

5.   E) Understate assets by $28,000.

 

Answer:  B

Difficulty: 3 Hard

Topic:  Accrued Expense

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

Bloom’s:  Apply

AACSB/Accessibility:  Analytical Thinking / Keyboard Navigation

AICPA:  BB Industry; FN Measurement

 

91) If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting period, the financial statements prepared at that time would show:

1.   A) Assets overstated and equity understated.

2.   B) Assets and equity both understated.

3.   C) Assets overstated, net income understated, and equity overstated.

4.   D) Assets, net income, and equity understated.

5.   E) Assets, net income, and equity overstated.

 

Answer:  E

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