Test Bank for Fundamental Accounting Principles John Wild - 22nd Edition

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Fundamental-Accounting-Principles-John-Wild-22nd-Edition-Test-
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Chapter 03

Adjusting Accounts and Preparing Financial Statements

True / False Questions

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

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

True    False
 

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

True    False
 

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

True    False
 

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

True    False
 

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

True    False
 

7.
Two main accounting principles used in accrual accounting are
matching and full closure. 

True    False
 

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

True    False
 

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

True    False
 

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

True    False
 

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

True    False
 

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

True    False
 

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

True    False
 

14.
The 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. 

True    False
 
15.
The cash basis of accounting is an accounting system in which
revenues are recorded when earned and expenses are recorded
when incurred. 

True    False
 

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

True    False
 

17.
The accrual basis of accounting recognizes revenues when cash is
received from customers. 

True    False
 

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

True    False
 

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

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

True    False
 

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. 

True    False
 

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. 

True    False
 

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. 

True    False
 

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

True    False
 

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

True    False
 

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

True    False
 

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

True    False
 

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

True    False
 

29.
Accrued expenses at the end of one accounting period are expected
to result in cash payments in a future period. 

True    False
 

30.
Accrued revenues at the end of one accounting period are expected to
result in cash collections in a future period. 

True    False
 

31.
Each adjusting entry affects one or more income statements account,
one or more balance sheet account, and never cash. 

True    False
 

32.
Accrued expenses reflect transactions where cash is paid before a
related expense is recognized. 
True    False
 

33.
Under the accrual basis of accounting, adjustments are often made for
prepaid expenses and unearned revenues. 

True    False
 

34.
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. 

True    False
 

35.
Costs incurred during an accounting period but unpaid and
unrecorded are accrued expenses. 

True    False
 

36.
An adjusting entry often includes an entry to Cash. 

True    False
 
37.
Before an adjusting entry is made to recognize the cost of expired
insurance for the period, Prepaid Insurance and Insurance Expense
are both overstated. 

True    False
 

38.
Before an adjusting entry is made to accrue employee salaries,
Salaries Expense and Salaries Payable are both understated. 

True    False
 

39.
Failure to record depreciation expense will overstate assets and
understate expenses. 

True    False
 

40.
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. 

True    False
 

41.
Profit margin can also be called return on sales. 
True    False
 

42.
Profit margin measures the relation of debt to assets. 

True    False
 

43.
Profit margin reflects the percent of profit in each dollar of revenue. 

True    False
 

44.
Profit margin is calculated by dividing net sales by net income. 

True    False
 

45.
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%. 

True    False
 

46.
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. 

True    False
 

47.
If a company reporting on a calendar year basis, paid $18,000 cash
on January 1 for one year of rent in advance and adjusting entries are
made at the end of each month, the balance remaining in Prepaid
Rent on December 1 should be $1,500. 

True    False
 

48.
Accumulated depreciation is shown on the balance sheet as a
subtraction from the cost of its related asset. 

True    False
 

49.
A salary owed to employees is an example of an accrued expense. 

True    False
 

50.
In accrual accounting, accrued revenues are recorded as liabilities. 

True    False
 
51.
Depreciation expense is an example of an accrued expense. 

True    False
 

52.
Earned but uncollected revenues are recorded during the adjusting
process with a credit to a revenue account and a debit to an expense
account. 

True    False
 

53.
Depreciation expense for a period is the portion of a plant asset’s cost
that is allocated to that period. 

True    False
 

54.
All plant assets, including land, are depreciated. 

True    False
 

55.
Net income for a period will be understated if accrued revenues are
not recorded at the end of the accounting period. 
True    False
 

56.
Depreciation measures the decline in market value of an asset. 

True    False
 

57.
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. 

True    False
 

58.
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. 

True    False
 

59.
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 adjusting entry
includes a $4,000 debit to unearned revenue. 

True    False
 

60.
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. 

True    False
 

61.
The adjusted trial balance must be prepared before the adjusting
entries are made. 

True    False
 

62.
An unadjusted trial balance is a list of accounts and balances
prepared beforeadjustments are recorded. 

True    False
 

63.
Financial statements can be prepared directly from the information in
the adjusted trial balance. 
True    False
 

64.
Asset and liability balances are transferred from the adjusted trial
balance to the income statement. 

True    False
 

65.
Revenue and expense balances are transferred from the adjusted trial
balance to the income statement. 

True    False
 

66.
In preparing statements from the adjusted trial balance, the balance
sheet must be prepared first. 

True    False
 

67.
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. 

True    False
 
68.
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. 

True    False
 

Multiple Choice Questions

69.
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.
 

70.
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.
Matching principle.
 

E.
Accrual basis of accounting.
 

71.
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.
 

72.
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.
 

73.
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 cycle.
 

B.
Natural business year.
 

C.
Accounting period.
 

D.
Business cycle.
 

E.
Operating cycle.
 

74.
The accounting principle that requires revenue to be recorded when
earned is the: 

A.
Matching principle.
 

B.
Revenue recognition principle.
 

C.
Time period assumption.
 

D.
Accrual reporting principle.
 

E.
Going-concern assumption.
 

75.
Adjusting entries: 

A.
Affect only income statement accounts.
 

B.
Affect only balance sheet accounts.
 

C.
Affect both income statement and balance sheet accounts.
 

D.
Affect cash accounts.
 

E.
Affect only equity accounts.
 

76.
The main purpose of adjusting entries is to: 

A.
Record external transactions and events.
 
B.
Record internal transactions and events.
 

C.
Recognize assets purchased during the period.
 

D.
Recognize debts paid during the period.
 

E.
Correct errors in the accounting records.
 

77.
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: 

A.
Recognition principle.
 

B.
Cost principle.
 

C.
Cash basis of accounting.
 

D.
Expense recognition (Matching) principle.
 

E.
Time period principle.
 

78.
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: 

A.
Accrual basis accounting.
 

B.
Operating cycle accounting.
 

C.
Cash basis accounting.
 

D.
Revenue recognition accounting.
 

E.
Current basis accounting.
 

79.
Adjusting entries made at the end of an accounting period accomplish
all of the following except: 

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

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

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

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

E.
Assuring that external transaction amounts remain unchanged.
 

80.
The approach to preparing financial statements based on recognizing
revenues when they are earned and matching expenses to those
revenues is: 
A.
Cash basis accounting.
 

B.
The matching principle.
 

C.
The time period assumption.
 

D.
Accrual basis accounting.
 

E.
Revenue basis accounting.
 

81.
Prepaid expenses, depreciation, accrued expenses, unearned
revenues, and accrued revenues are all examples of: 

A.
Items that require contra accounts.
 

B.
Items that require adjusting entries.
 
C.
Asset and equity.
 

D.
Asset accounts.
 

E.
Income statement accounts.
 

82.
The accrual basis of accounting: 

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

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

C.
Recognizes revenues when received in cash.
 

D.
Recognizes expenses when paid in cash.
 
E.
Eliminates the need for adjusting entries at the end of each period.
 

83.
Which of the following statements is incorrect? 

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

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

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

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

E.
Adjusting entries affect only balance sheet accounts.
 
84.
An adjusting entry could be made for each of the following except: 

A.
Prepaid expenses.
 

B.
Depreciation.
 

C.
Owner investments.
 

D.
Unearned revenues.
 

E.
Accrued expenses.
 

85.
A company made no adjusting entry for accrued and unpaid employee
wages of $28,000 on December 31. This oversight would: 

A.
Understate net income by $28,000.
 

B.
Overstate net income by $28,000.
 

C.
Have no effect on net income.
 

D.
Overstate assets by $28,000.
 

E.
Understate assets by $28,000.
 

86.
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: 

A.
Assets overstated and equity understated.
 

B.
Assets and equity both understated.
 

C.
Assets overstated, net income understated, and equity overstated.
 
D.
Assets, net income, and equity understated.
 

E.
Assets, net income, and equity overstated.
 

87.
If a company failed to make the end-of-period adjustment to move the
amount of management fees that were earned from the Unearned
Management Fees account to the Management Fees Revenue
account, this omission would cause: 

A.
An overstatement of net income.
 

B.
An overstatement of assets.
 

C.
An overstatement of liabilities.
 

D.
An overstatement of equity.
 

E.
An understatement of liabilities.
 

88.
A company records the fees for legal services paid in advance by its
clients in an account called Unearned Legal Fees. If the company fails
to make the end-of-period adjusting entry to move the portion of these
fees that has been earned to a revenue account, one effect will be: 

A.
An overstatement of equity.
 

B.
An understatement of equity.
 

C.
An understatement of assets.
 

D.
An understatement of liabilities.
 

E.
An overstatement of assets.
 

89.
Profit margin is defined as: 

A.
Revenues divided by net sales.
 

B.
Net sales divided by assets.
 

C.
Net income divided by net sales.
 

D.
Net income divided by assets.
 

E.
Net sales divided by net income.
 

90.
A company earned $3,000 in net income for October. Its net sales for
October were $10,000. Its profit margin is: 

A.
3%.
 

B.
30%.
 

C.
33%.
 

D.
333%.
 

E.
$7,000.
 

91.
All of the following statements regarding profit margin are true except: 

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

B.
Profit margin is also called return on sales.
 

C.
Profit margin can be used to compare a firm’s performance to its
competitors.
 

D.
Profit margin is calculated by dividing net income by net sales.
 

E.
Profit margin is not a useful measure of a company’s operating
results.
 

92.
A company had $7,000,000 in net income for the year. Its net sales
were $15,200,000 for the same period. Calculate its profit margin. 

A.
85.4%.
 

B.
117.1%.
 

C.
53.9%.
 

D.
217.1%.
 

E.
46.1%.