21 Jan Includes only permanent—balance

ACC556 Financial Accounting for Managers

CHAPTER 4 EXERCISE

Question 1 An adjusting entry to a prepaid expense is required to recognize expired expenses.

Answers:

True

False

Question 2 Management usually wants ________ financial statements and the IRS requires all businesses to file _________ tax returns.

Answers:

annual, annual

monthly, annual

quarterly, monthly

monthly, monthly

Question 3 Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

Answers:

True

False

Question 4 Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting.

Cash received from customers $48,000

Accounts receivable 12,000

Cash paid for expenses 26,000

Accounts payable (related to expenses) 3,000

Prepaid rent for next period 7,000

Answers:

$22,000

$31,000

$24,000

$15,000

Question 5 Which statement is Correct ?

Answers:

As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.

The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.

The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.

As long as management is ethical, there are no problems with using the cash basis of accounting.

Question 6 A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be recognized?

Answers:

December 5

December 10

November 30

December 1

Question 7 Depreciation is the process of:

Answers:

valuing an asset at its fair value.

increasing the value of an asset over its useful life in a rational and systematic manner.

allocating the cost of an asset to expense over its useful life in a rational and systematic manner.

writing down an asset to its real value each accounting period.

Question 8 If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month’s financial statements?

Answers:

Failure to make an adjustment does not affect the financial statements.

Expenses will be overstated and net income and stockholders’ equity will be under- stated.

Assets will be overstated and net income and stockholders’ equity will be understated.

Assets will be overstated and net income and stockholders’ equity will be overstated.

Question 9 Why do generally accepted accounting principles require the application of the revenue recognition principle?

Answers:

Failure to apply the revenue recognition principle could lead to a misstatement of revenue.

It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve.

Recording revenue when cash is received is an objective application of the revenue recognition principle.

Accounting software has made the revenue recognition easy to apply.

Question 10 Accrued expenses are:

Answers:

incurred but not yet paid or recorded.

paid and recorded in an asset account after they are used or consumed.

paid and recorded in an asset account before they are used or consumed.

incurred and already paid or recorded.

Question 11 If a resource has been consumed but a bill has not been received at the end of the accounting period, then:

Answers:

an expense should be recorded when the bill is received.

an expense should be recorded when the cash is paid out.

an adjusting entry should be made recognizing the expense.

it is optional whether to record the expense before the bill is received.

Question 12 Can financial statements be prepared directly from the adjusted trial balance?

Answers:

They cannot. The general ledger must be used.

Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts.

No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose.

They can because that is the only reason that an adjusted trial balance is prepared.

Question 13 Which of the following would not result in unearned revenue?

Answers:

Rent collected in advance from tenants.

Services performed on account.

Sale of season tickets to football games.

Sale of two-year magazine subscriptions.

Question 14 When closing entries are prepared, each income statement account is closed directly to retained earnings.

Answers:

True

False

Question 15 Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause:

Answers:

net income to be understated.

an overstatement of assets and an overstatement of liabilities.

an understatement of expenses and an understatement of liabilities.

an overstatement of expenses and an overstatement of liabilities.

Question 16 Which statement is concerning the adjusted trial balance?

Answers:

An adjusted trail balance eliminates the need for the preparation of financial statements.

The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger.

An adjusted trial balance will contain only permanent—balance sheet—accounts.

The adjusted trial balance is prepared after the adjusting entries have been journalized but before they have been posted.

Question 17 Match the items below by entering the appropriate code letter in the space provided.

Question

Selected Match

Periodicity assumption

The economic life of a business can be divided into artificial time periods

Cash basis

Events recorded only in periods the company receives or pays cash

Revenue recognition principle

Revenue is recognized when the performance obligation is satisfied.

Prepaid expenses

Expenses paid before they are incurred

Expense recognition principle

Efforts are related to accomplishments

Accrued revenues

Revenues earned but not yet received

Depreciation

A cost allocation process

Post-closing trial balance

Includes only permanent—balance sheet—accounts

Accrued expenses

Expenses incurred but not yet paid

Question 18 The revenue recognition principle dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied.

Answers:

True

False