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Financial and Managerial Accounting, 8e (Wild) Chapter 3 Adjusting Accounts for Financial Statements 1) A company's fiscal year must correspond with the calendar year. 2) The time period assumption assumes that an organization's activities can be divided into specific time periods such as months, quarters, or years. 3) Interim financial statements report a company's business activities for a one-year period. 4) A fiscal year refers to an organization's accounting period that spans twelve consecutive months or 52 weeks. 5) Adjusting entries are made after the preparation of financial statements. 6) Adjusting entries result in a better matching of revenues and expenses for the period. 7) Two main accounting principles used in accrual accounting are expense recognition and full closure. 8) Adjusting entries are necessary so that asset, liability, revenue, and expense account balances are correctly reported. 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. 10) The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues. 11) The cash basis of accounting commonly increases the comparability of financial statements from period to period. 12) Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items. 13) Since the revenue recognition principle requires that revenues be recorded when earned, there are no unearned revenues in accrual accounting. 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. 15) The cash basis of accounting is a system in which revenues are recorded when earned and expenses are recorded when incurred. 16) The cash basis of accounting recognizes revenues when cash payments from customers are received. 1 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

17) The accrual basis of accounting recognizes revenues when cash is received from customers, regardless of when the goods or services are provided. 18) The accrual basis of accounting recognizes expenses when cash is paid. 19) Recording revenues early overstates current-period income; recording revenues late understates current period income. 20) Recording expenses early overstates current-period income; recording expenses late understates current period income. 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. 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. 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. 24) The accrual basis of accounting reflects the principle that revenue is recorded when it is earned, not when cash is received. 25) The accrual basis of accounting requires adjustments to recognize revenues in the periods they are earned and to match expenses with revenues. 26) Adjusting entries are designed primarily to correct accounting errors. 27) Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account. 28) Each adjusting entry will affect a balance sheet account. 29) Adjusting entries always affect the cash account. 30) Accrued expenses at the end of one accounting period are expected to result in cash payments in a future period. 31) Accrued revenues at the end of one accounting period are expected to result in cash receipts in a future period. 32) Each adjusting entry affects one or more income statement account, one or more balance sheet account, and never cash. 2 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

33) Accrued expenses reflect transactions where cash is paid before a related expense is recognized. 34) Under the accrual basis of accounting, adjustments are often made for prepaid expenses and unearned revenues. 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. 36) Costs incurred during an accounting period but unpaid and unrecorded are accrued expenses. 37) An adjusting entry often includes an entry to Cash. 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. 39) Before an adjusting entry is made to accrue employee salaries, Salaries Expense and Salaries Payable are both understated. 40) Failure to record depreciation expense will overstate assets and understate expenses. 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. 42) Profit margin can also be called return on sales. 43) Profit margin measures the relation of debt to assets. 44) Profit margin reflects the percent of profit in each dollar of revenue. 45) Profit margin is calculated by dividing net sales by net income. 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%. 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. 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. 49) Accumulated depreciation is shown on the balance sheet as a subtraction from the cost of its related asset. 50) A salary owed to employees is an example of an accrued expense. 3 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

51) In accrual accounting, accrued revenues are recorded as liabilities. 52) Depreciation expense is an example of an accrued expense. 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. 54) Depreciation expense for a period is the portion of a plant asset's cost that is allocated to that period. 55) All plant assets, including land, are depreciated. 56) Net income for a period will be understated if accrued revenues are not recorded at the end of the accounting period. 57) Depreciation measures the decline in market value of an asset. 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. 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. 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. 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. 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. 63) The adjusted trial balance must be prepared before the adjusting entries are made. 64) An unadjusted trial balance is a list of accounts and balances prepared before adjustments are recorded. 65) Financial statements can be prepared directly from the information in the adjusted trial balance. 4 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

66) Asset and liability balances are transferred from the adjusted trial balance to the income statement. 67) Asset and liability balances are transferred from the adjusted trial balance to the balance sheet. 68) Revenue and expense balances are transferred from the adjusted trial balance to the income statement. 69) In preparing statements from the adjusted trial balance, the balance sheet must be prepared first. 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. 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. 72) Accounts that appear in the balance sheet are often called temporary (nominal) accounts. 73) Income Summary is a temporary account only used for the closing process. 74) Revenue accounts are temporary accounts that should begin each accounting period with zero balances. 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. 76) The closing process takes place before financial statements have been prepared. 77) Revenue and expense accounts are permanent (real) accounts and should not be closed at the end of the accounting period. 78) Closing entries result in the Dividends account being transferred into net income or net loss for the period ending. 79) The closing process is a step in the accounting cycle that prepares accounts for the next accounting period. 80) Closing entries are required at the end of each accounting period to close all ledger accounts. 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.

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82) The Income Summary account is a permanent account that will be carried forward period after period. 83) Closing entries are necessary so that retained earnings will begin each period with a zero balance. 84) Permanent accounts carry their balances into the next accounting period. 85) If a company plans to continue business into the future, closing entries are not required. 86) The first step in the accounting cycle is to analyze transactions and events to prepare for journalizing. 87) The accounting cycle refers to the sequence of steps used in preparing the work sheet. 88) The first five steps in the accounting cycle include analyzing transactions, journalizing, posting, preparing an unadjusted trial balance, and recording adjusting entries. 89) The last four steps in the accounting cycle include preparing the adjusted trial balance, preparing financial statements, and recording closing and adjusting entries. 90) A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers. 91) An unclassified balance sheet provides more information to users than a classified balance sheet. 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. 93) Intangible assets are long-term resources that benefit business operations that usually lack physical form and have uncertain benefits. 94) Assets are often classified into current assets, long-term investments, plant assets, and intangible assets. 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. 96) Long-term investments can include land held for future expansion. 97) Intangible assets are assets that are long-term, have physical form, and are used to produce or sell products and services. 98) Current liabilities include accounts receivable, unearned revenues, and salaries payable. 99) Cash and office supplies are both classified as current assets. 6 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

100) Plant assets are usually listed in order by how quickly they can be converted to cash. 101) The current ratio is used to help assess a company's ability to pay its debts in the near future. 102) The current ratio is computed by dividing current liabilities by current assets. 103) Trekker Bikes' current assets are $300 million and its current liabilities are $125 million. Its current ratio is 0.417. 104) If a company has current assets of $15,000 and current liabilities of $9,500, its current ratio is 1.6 105) 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. 106) A benefit of using a work sheet is that it aids in the preparation of the financial statements. 107) Adjustments must be entered in the journal and posted to the ledger after the work sheet is prepared. 108) The work sheet is a required report made available to external decision makers. 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. 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. 111) On a work sheet, if the Debit total exceeds the Credit total of the Income Statement columns, a net loss is indicated. 112) If all columns of a completed work sheet balance, you can be sure that no errors were made in its preparation. 113) Normally closing entries are first entered in the general journal and then posted to the work sheet. 114) Adjusting entries are usually entered in the work sheet before they are entered in the general journal. 115) On a work sheet, the adjusted balances of revenues and expenses are sorted to the Income Statement columns of the work sheet. 116) On the work sheet, net income is entered in the Income Statement Credit column as well as the Balance Sheet or Statement of Retained Earnings Credit column. 7 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

117) All necessary amounts to prepare the balance sheet, including ending retained earnings, can be found in the Balance Sheet columns of the work sheet. 118) A worksheet can be helpful in showing the effects of proposed or "what if" transactions but not in helping to prepare interim financial statements. 119) Because it is a necessary financial statement, the work sheet must be prepared according to specified accounting procedures. 120) An expense account is normally closed by debiting Income Summary and crediting the expense account. 121) The Dividends account is normally closed by debiting it. 122) After posting the entries to close all revenue and expense accounts, the Income Summary account of Cleaver Auto Services has a $4,000 debit balance. This result implies that Cleaver earned a net income of $4,000. 123) After posting the entries to close all revenue and expense accounts, Marker Company's Income Summary account has a credit balance of $6,000, and its Dividends account has a debit balance of $2,500. These balances indicate that net income for the current accounting period amounted to $3,500. 124) When there is a net loss, the Income Summary account would have a credit balance. 125) The Income Summary account is used to close the permanent accounts at the end of an accounting period. 126) The steps in the closing process are (1) close credit balances in revenue accounts to Income Summary; (2) close debit balances in expense accounts to Income Summary; (3) close Income Summary to Retained Earnings; (4) close Dividends to Retained Earnings. 127) During the closing process, Retained Earnings is closed to the Dividends account. 128) A post-closing trial balance is a list of permanent accounts and their balances from the ledger after all closing entries are journalized and posted. 129) The aim of a post-closing trial balance is to verify that (1) total debits equal total credits for temporary accounts, and (2) all temporary accounts have zero balances. 130) A company's post-closing trial balance has total debits of $40,560 and total credits of $40,650. Accordingly, the company should review for errors in the closing process. 131) Reversing entries are optional.

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132) Reversing entries are recorded in response to external transactions that were created in error during the prior accounting period. 133) Reversing entries overcome the disadvantage of more complex entries to pay accrued liabilities and collect accrued receivables from the previous accounting period. 134) The time period assumption assumes that an organization's activities may be divided into specific reporting time periods including all of the following except: A) Months. B) Quarters. C) Fiscal years. D) Calendar years. E) Days. 135) A broad principle that requires identifying the activities of a business with specific time periods such as months, quarters, or years is the: A) Operating cycle of a business. B) Time period assumption. C) Going-concern assumption. D) Expense recognition (matching) principle. E) Accrual basis of accounting. 136) Interim financial statements refer to financial reports: A) That cover less than one year, usually spanning one, three, or six-month periods. B) That are prepared before any adjustments have been recorded. C) That show the assets above the liabilities and the liabilities above the equity. D) Where revenues are reported on the income statement when cash is received and expenses are reported when cash is paid. E) Where the adjustment process is used to assign revenues to the periods in which they are earned and to match expenses with revenues. 137) The 12-month period that ends when a company's sales activities are at their lowest level is called the: A) Fiscal year. B) Calendar year. C) Natural business year. D) Accounting period. E) Interim period. 138) The length of time covered by a set of periodic financial statements, primarily a year for most companies, is referred to as the: A) Fiscal year. B) Natural business year. C) Accounting period. D) Business cycle. E) Calendar year. 9 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written onsent of McGraw-Hill Education.

139) The accounting principle that requires revenue to be recorded when earned is the: A) Expense recognition (matching) principle. B) Revenue recognition principle. C) Time pe...