File:ch04,Chapter4:AccrualAccountingConcepts

MultipleChoice

1.Whatisthetimeperiodassumption?
a)Companiesshouldrecognizerevenueintheaccountingperiodinwhichitisearned.
b)Companiesshouldmatchexpenseswithrevenues.
c)Theeconomiclifeofabusinesscanbedividedintoartificialtimeperiods.
d)Thefiscalyearshouldcorrespondwiththecalendaryear.
Ans:c
ResponseA:Thisstatementdescribestherevenuerecognitionprinciple,notthetimeperiodassumption
ResponseB:Thisstatementdescribesthematchingprinciple,notthetimeperiodassumption.
ResponseC:Correct!
ResponseD:Thetimeperiodassumptionstatesthatthelifeofabusinesscanbedividedintoartificial
timeperiods,notthatthefiscalyearandcalendaryearmustcoincide.

2.Whichprincipledictatesthatefforts(expenses)berecordedwithaccomplishments(revenues)?
a)Matchingprinciple.
b)Costprinciple.
c)Periodicityprinciple.
d)Revenuerecognitionprinciple.
Ans:a
ResponseA:Correct!
ResponseB:Thecostprinciplestatesthatwhenassetsarepurchased,theyshouldberecordedatcost,
notthateffortsberecordedwithaccomplishments.
ResponseC:Theperiodicityprincipleisanothernameofthetimeperiodassumption.Itstatesthatthe
lifeofabusinesscanbedividedintoartificialtimeperiods,notthateffortsberecordedwith
accomplishments.
ResponseD:Therevenuerecognitionprinciplestatesthatrevenueshouldberecordedintheperiodin
whichitisearned,notthateffortsberecordedwithaccomplishments.

3.Adjustingentriesaremadetoensurethat:
a)expensesarerecognizedintheperiodinwhichtheyareincurred.
b)revenuesarerecordedintheperiodinwhichtheyareearned.

c)balancesheetandincomestatementaccountshavecorrectbalancesattheendofanaccounting
period.
d)Alloftheabove.
Ans:d
ResponseA:Adjustingentriesneedtobemadetoensurethatexpensesarerecognizedintheperiodin
whichtheyareincurred,butdisabetteranswer.
ResponseB:Adjustingentriesneedtobemadetoensurethatrevenuesarerecordedintheperiodin
whichtheyareearned,butdisabetteranswer.
ResponseC:Adjustingentriesneedtobemadeinordertoensurethatbalancesheetandincome
statementaccountshavethecorrectbalancesattheendoftheaccountingperiod,butdisabetter
answer.
ResponseD:Correct!

4.Eachofthefollowingisamajortype(orcategory)ofadjustingentryexcept:
a)prepaidexpenses.
b)accruedrevenues.
c)accruedexpenses.
d)earnedexpenses.
Ans:d
ResponseA:Prepaidexpensesisoneofthemajortypesofadjustingentries.
ResponseB:Accruedrevenuesisoneofthemajortypesofadjustingentries.
ResponseC:Accruedexpensesisoneofthemajortypesofadjustingentries.
ResponseD:Correct!

5.ThetrialbalanceshowsSupplies$1,350andSuppliesExpense$0.If$600ofsuppliesareonhandat
theendoftheperiod,theadjustingentryis:
a)Supplies
600
SuppliesExpense 600
b)Supplies
750
SuppliesExpense 750
c)SuppliesExpense 750
Supplies
750
d)SuppliesExpense 600
Supplies
600
Ans:c
ResponseA:Thisentryhasanincorrectamountandthewrongaccountsaredebitedandcredited.Ifthis
entrywereposted,theSuppliesaccountwouldhaveabalanceof$1,950andtheexpenseaccountwould

haveacreditbalanceof$600.Thesebalancesdonotaccuratelyreflectthesituationattheendofthe
period.
ResponseB:Thisentryhasthecorrectamount,butthewrongaccountsaredebitedandcredited.Ifthis
entrywereposted,theSuppliesaccountwouldhaveabalanceof$2,100andtheexpenseaccountwould
haveacreditbalanceof$750.Thesebalancesdonotaccuratelyreflectthesituationattheendofthe
period.
ResponseC:Correct!
ResponseD:Thisentryhasthecorrectaccountdebitedandcredited,buttheamountisincorrect.Ifthis
entrywereposted,theendingbalanceintheSuppliesaccountwouldbe$750andtheamountofexpense
recordedwouldbe$600.Thesebalancesdonotaccuratelyreflectthesituationattheendoftheperiod.

6.Adjustmentsforunearnedrevenues:
a)decreaseliabilitiesandincreaserevenues.
b)increaseliabilitiesandincreaserevenues.
c)increaseassetsandincreaserevenues.
d)decreaserevenuesanddecreaseassets.
Ans:a
ResponseA:Correct!
ResponseB:Whenunearnedrevenueaccountsareadjustedtheunearnedrevenueaccount,aliability
account,isdecreased,notincreased,andtherelatedrevenueaccountisincreased.Thisadjustment
reflectsthatthefirmwiththeobligationtoprovidetheproductorservicehasfullyorpartiallyfulfilled
theirobligation.
ResponseC:Whenunearnedrevenueaccountsareadjusted,assetaccountsarenotinvolved.The
unearnedrevenueaccount,aliabilityaccount,isdecreasedandtherelatedrevenueaccountisincreased.
Thisadjustmentreflectsthatthefirmwiththeobligationtoprovidetheproductorservicehasfullyor
partiallyfulfilledtheirobligation.
ResponseD:Whenunearnedrevenueaccountsareadjusted,assetaccountsarenotinvolved.The
unearnedrevenueaccount,aliabilityaccount,isdecreasedandtherelatedrevenueaccountisincreased,
notdecreased.Thisadjustmentreflectsthatthefirmwiththeobligationtoprovidetheproductor
servicehasfullyorpartiallyfulfilledtheirobligation.

7.Adjustmentsforaccruedrevenues:
a)increaseassetsandincreaseliabilities.
b)increaseassetsandincreaserevenues.
c)decreaseassetsanddecreaserevenues.
d)decreaseliabilitiesandincreaserevenues.
Ans:b

ResponseA:Whentheadjustmentismadeforaccruedrevenues,anassetaccount(usuallyAccounts
Receivable)isincreasedandarevenueaccount,notaliabilityaccountisincreased.Thisadjustingentry
recordsrevenuethathasbeenearned,butthathasnotyetbeenenteredintheaccountingrecords.
ResponseB:Correct!
ResponseC:Whentheadjustmentismadeforaccruedrevenues,anassetaccount(usuallyAccounts
Receivable)isincreased,notdecreased.Arevenueaccountisalsoincreased,notdecreased.This
adjustingentryrecordsrevenuethathasbeenearned,butthathasnotyetbeenenteredintheaccounting
records.
ResponseD:Whentheadjustmentismadeforaccruedrevenues,noliabilityaccountisinvolved.An
assetaccount(usuallyAccountsReceivable)isincreasedandarevenueaccountisalsoincreased.This
adjustingentryrecordsrevenuethathasbeenearned,butthathasnotyetbeenenteredintheaccounting
records.

8.ColleenMooneyearnedasalaryof$400forthelastweekofSeptember.ShewillbepaidonOctober
1.TheadjustingentryforColleensemployeratSeptember30is:
a) No entry is required.
b) Salaries Expense 400
Salaries Payable
400
c) Salaries Expense 400
.... Cash
400
d) Salaries Payable 400
.... Cash
400
Ans:b
ResponseA:Anadjustingentryisrequiredinthissituation.Ifnoentryismade,theamountofexpense
forSeptemberwillbetoolowandtheliabilitiesshownintheemployersaccountingrecordswillalsobe
toolow.
ResponseB:Correct!
ResponseC:ThisadjustingentrycorrectlyrecordstheexpenseinSeptember,butdoesnotrecordthe
liabilitytheemployerhastoEmilyattheendofSeptember.
ResponseD:ThisistheentrytheemployerwouldmakewhenpaymentismadeonOctober1.The
adjustingentryneedstorecordexpenseandaliability,asshowninanswerb.

9.Whichstatementisincorrectconcerningtheadjustedtrialbalance?
a)Anadjustedtrialbalanceprovestheequalityofthetotaldebitbalancesandthetotalcredit
balancesintheledgerafteralladjustmentsaremade.
b)Theadjustedtrialbalanceprovidestheprimarybasisforthepreparationoffinancialstatements.
c)Theadjustedtrialbalanceliststheaccountbalancessegregatedbyassetsandliabilities.
d)Thecompanypreparestheadjustedtrialbalanceafterithasjournalizedandpostedtheadjusting
entries.

Ans:c
ResponseA:Thisisanaccuratestatementabouttheadjustedtrialbalance.
ResponseB:Thisisanaccuratestatementabouttheadjustedtrialbalance.
ResponseC:Correct!
ResponseD:Thisisanaccuratestatementabouttheadjustedtrialbalance.

10.Whichoneofthesestatementsabouttheaccrualbasisofaccountingisfalse?
a)Companiesrecordintheperiodsinwhichtheeventsoccureventsthatchangeacompanysfinancial
statements.
b)Companiesrecognizerevenueintheperiodinwhichitisearned.
c)Thisbasisisinaccordwithgenerallyacceptedaccountingprinciples.
d)Companiesrecordrevenueonlywhentheyreceivecash,andrecordexpenseonlywhentheypayout
cash.
Ans:d
ResponseA:Thisisacorrectstatementabouttheaccrualbasisofaccounting.
ResponseB:Thisisacorrectstatementabouttheaccrualbasisofaccounting.
ResponseC:Thisisacorrectstatementabouttheaccrualbasisofaccounting.
ResponseD:Correct!

11.Whichaccountwillhaveazerobalanceafteracompanyhasjournalizedandpostedclosingentries?
a)ServiceRevenue.
b)AdvertisingSupplies.
c)PrepaidInsurance.
d)AccumulatedDepreciation.
Ans:a
ResponseA:Correct!
ResponseB:AdvertisingSuppliesisanasset,orpermanentaccountandwillnotbeclosedattheendof
theyear.
ResponseC:PrepaidInsuranceisanasset,orpermanentaccountandwillnotbeclosedattheendofthe
year.
ResponseD:AccumulatedDepreciationisacontraassetaccount.Contraassetaccountsarepermanent
accountsandarenotclosedattheendoftheyear.

12.Whichtypesofaccountswillappearinthepostclosingtrialbalance?
a)Permanentaccounts.

b)Temporaryaccounts.
c)Accountsshownintheincomestatementcolumnsofaworksheet.
d)Noneoftheabove.
Ans:a
ResponseA:Correct!
ResponseB:Permanentaccounts,nottemporaryaccounts,aretheonlytypeofaccountsthatwillappear
inthepostclosingtrialbalancebecausetheyarenotclosedattheendoftheaccountingperiod.
ResponseC:Accountsshownintheincomestatementcolumnsofaworksheetaretemporaryaccounts
andwillnotbeincludedinthepostclosingtrialbalancebecausetheyallhaveazerobalancebecause
theywereclosed.
ResponseD:Becauseansweraiscorrect,thisanswercannotbecorrect.

13.Allofthefollowingarerequiredstepsintheaccountingcycleexcept:
a)journalizingandpostingclosingentries.
b)preparinganadjustedtrialbalance.
c)preparingapostclosingtrialbalance.
d)preparingaworksheet.
Ans:d
ResponseA:Journalizingandpostingclosingentriesisarequiredstepintheaccountingcycle.
ResponseB:Preparinganadjustedtrialbalanceisarequiredstepintheaccountingcycle.
ResponseC:Preparingapostclosingtrialbalanceisarequiredstepintheaccountingcycle.
ResponseD:Correct!