Test bank with answers for financial accounting 6e by libby chapter 04

Income taxes incurred but not yet paid at the end of the accounting period is an example of an accrued expense adjusting entry... Journalize and post adjusting entries, journalize and po

True / False Questions

3 Deferred expenses are previously unrecorded expenses that need to be recorded at the end

of the accounting period to reflect the amount incurred and its related payable

4 Income taxes incurred but not yet paid at the end of the accounting period is an example of

an accrued expense adjusting entry

TRUE

5 When an adjustment decreases prepaid insurance and increases insurance expense for the portion expired, that is an example of a prepaid expense adjusting entry

7 Unearned rent revenue is an example of a liability account that will usually not be satisfied

by payment of cash but rather by allowing the tenant to occupy the premises for which they have prepaid

9 Adjusting entries are recorded in the journal (i.e., journalized) and then they are posted to the ledger (T-accounts)

13 The earnings per share ratio is disclosed at the bottom of the statement of cash flows

17 When net profit margin is declining over a five-year period, it signals inefficient

management of expenses and sales revenue

18 Those firms that make relatively conservative estimates for their accrued and deferred adjustments are said to have financial reports disclosing a higher quality of earnings

21 Which of the following is a correct statement about the unadjusted trial balance?

A It provides a listing of the balance sheet accounts only

B It provides data in a convenient form for preparing the adjusting entries and financial statements

22 Morgan Company purchased supplies inventory for $2,000 Due to an error in posting, the inventory account was debited for only $200 when accounts payable was credited for $2,000 During which phase of the accounting cycle would this error be discovered?

A Recording the transaction in the journal

B Preparation of the financial statements

C Preparation of the trial balance

D Analysis of each transaction

A Transaction analysis, journal entries, trial balance

B Transaction analysis, posting to the ledger, journal entries

C Transaction analysis, posting to the ledger, adjusting the accounts

D Transaction analysis, journal entries, posting to the ledger

C Journalize and post adjusting entries, journalize and post the closing entries, prepare

financial statements, and prepare an adjusted trial balance

D Prepare an unadjusted trial balance, journalize and post adjusting entries prepare financial

statements, and journalize and post the closing entries

25 The following is an example of an error that will not be discovered on the trial balance:

A An entry was journalized and posted as a debit to cash for $500 and credit to accounts receivable for $5,000

B An entry was journalized and posted as a debit to cash for $500 and a credit to sales

revenue $500 when payment was received on a customer's account

C An entry was journalized and posted as a debit to wages expense for $20,000 and a debit to wages payable for $20,000

D An entry was journalized and posted as a debit to cash for $1,110 and a credit to sales for

A Prepaid insurance, $4,000 and Insurance expense, $0

B Prepaid insurance, $0 and Insurance expense, $4,000

C Prepaid insurance, $2,000 and Insurance expense, $2,000

D Prepaid insurance, $3,500 and Insurance expense, $500

2007 (end of the accounting period), the financial statements for 2007, would report

A Insurance expense, $3,000; Prepaid insurance $0

B Insurance expense, $0; Prepaid insurance $3,000

C Insurance expense, $750; Prepaid insurance $2,250

D Insurance expense, $2,250; Prepaid insurance $750

28 On July 1, 2009, Allen Company signed a $100,000, one-year, 6 percent note payable At due date, June 30, 2010, the principal and interest will be paid Interest expense should be reported on the income statement (for the year ended December 31, 2009) as

A a decrease in stockholders' equity and decrease in an asset

B a decrease in liabilities and increase in stockholders' equity

C a decrease in stockholders' equity and an increase in liabilities

D an increase in stockholders' equity and increase in an asset

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 2

30 On January 1, 2007, the ledger of Global Corporation correctly showed supplies inventory

of $1,000 During 2007, supplies purchases amounted to $5,000 A physical count of

inventory on hand at December 31, 2007, showed $1,200 The 2007 income statement should report supplies expense amounting to

31 How is carrying value calculated?

A Acquisition cost minus accumulated depreciation

B Acquisition cost minus depreciation expense

C Acquisition cost divided by the useful life of the asset

D None of the other answers is correct

AACSB Tag: Analytic

Difficulty: Easy

L.O.: 2

32 On December 31, 2007 (end of the accounting period), Dallas Company recorded

depreciation on its company truck of $5,000 Transaction analysis of the depreciation should reflect the following

A decrease stockholders' equity and increase liabilities

B decrease assets and increase liabilities

C decrease stockholders' equity and decrease assets

D decrease assets and increase stockholders' equity

34 On July 1, 2009, Gerdin Company borrowed $100,000 The company signed a note

payable with interest at 6 percent per year The note and interest are due on December 31,

2009 On December 31, 2009, Goode paid $103,000 to settle the debt in full Assuming no accruals for interest have been made during the year, transaction analysis of the $103,000 cash payment on December 31, 2009, should reflect the following:

A decrease assets, $103,000; decrease liabilities, $103,000

B decrease assets, $100,000; decrease stockholders' equity, $3,000; and decrease liabilities,

35 On January 1, 2009, Ryan Company paid the premium in advance on a three-year

insurance policy on equipment in the amount of $6,000 At that time, the full amount paid was recorded as prepaid insurance On December 31, 2009, the end of the accounting year,

Hammond Company would be required to record an adjusting entry that would include a

A $6,000 credit to prepaid insurance

B $2,000 debit to insurance expense

C $2,000 debit to prepaid insurance

D $6,000 debit to insurance expense

36 On January 1, 2009, Ryan Company paid the premium in advance on a three-year

insurance policy on equipment in the amount of $6,000 At that time, the full amount paid was recorded as prepaid insurance After recording the adjusting entry for the insurance policy on December 31, 2009, Ryan Company's records would reflect a balance in the prepaid insurance account of

2009, adjusting entry should be

A $1,000 credited to an expense account and debited to a liability account

B $1,000 debited to an expense account and credited to an asset account

C $1,000 credited to a liability account and debited to an expense account

D $1,000 debited to a liability account and credited to an asset account

A $ 333

B $ 500

C $2,000

D $ -0-

39 Adjusting entries

A always include the cash account

B usually are recorded as of the first day of the accounting period

C always change at least one income statement account balance and one balance sheet

41 Failure to make an adjusting entry to recognize accrued wages payable would cause an

A understatement of expenses, liabilities and stockholders' equity

B overstatement of expenses and liabilities

C understatement of expenses and liabilities and an overstatement of stockholders' equity

D understatement of assets and stockholders' equity

42 Failure to make an adjusting entry to recognize rent revenue receivable would cause

A an understatement of assets, net income, and stockholders' equity

B an overstatement of assets and stockholders' equity and an understatement of net income

C no effect on assets, liabilities, net income, nor stockholders' equity

D an overstatement of assets, net income, and stockholders' equity

C unadjusted trial balance is prepared before the adjusting entries are reflected, while an

adjusted trial balance is prepared after the adjusting entries are reflected

D unadjusted trial balance is prepared after the post-closing trial balance

45 Which of the following would most likely lead to a deferred adjustment?

48 Which of the following would most likely lead to an accrued adjusting entry?

A Interest revenue earned and collected

B Wages incurred as an expense and paid

C Rent owed to the company and not yet received

D Supplies purchased but not used

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 2

49 Which of the following would most likely not lead to a deferred adjusting entry?

A Unearned subscriptions revenue

50 The primary purpose of the statement of cash flows is to report

A income earned and dividends paid during the period

B all inflows and outflows of cash during the period

C assets owned and claims against those assets at the end of the period

D liability changes made by the finance department of the company during the period

51 For the year 2009, Tally Corporation reported $120,000 pretax income (average annual income tax rate of 30%) The after tax income was

53 At the end of 2008, Frankel Company reported an ending balance for retained earnings of

$250,000 During 2009, the company reported the following amounts: Dividends declared and paid, $20,000 and net income, $60,000 The 2009 statement of stockholders' equity should report an ending balance for retained earnings of

54 When Lowry Company reports $200,000 of revenue and $220,000 of expenses for 2009, the following is the effect:

A Lowry's retained earnings is increased by the net income

B Lowry's contributed capital is increased by the net income

C Lowry's retained earnings increases by the net loss

D Lowry's total stockholders' equity decreases by the net loss

A Net income for the period increases the ending balance of retained earnings

B Retained earnings at the end of the period increases the amount of net income

C Net income for the period reduces the ending balance of retained earnings

D Net income for the period has no effect on the ending balance of retained earnings

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: 3

56 An income statement reports

A revenues, expenses, assets, and liabilities during an accounting period

B resources, liabilities, and stockholders' equity of a business at a point in time

C net income of a business at a point in time

D net income of a business for a period of time

57 One of the sections on the statement of cash flows is

A all of the required financial statements it prepares

B none of the required financial statements it prepares

C the income statement and balance sheet, but not the statement of cash flows

D the balance sheet only

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: 3

59 The statement of cash flows is important because

A of the three required financial statements, it is the only one which reports changes which took place during an accounting period

B it indicates the asset and liability position of a company by reflecting the amounts and types of its assets and liabilities at the beginning and end of the period

C it summarizes the information already reported in the income statement and balance sheet

D it explains the sources and uses of cash during the period

60 The basic financial statements prepared for external users include all of the following except

A the balance sheet

B the income statement

C the sales statement

D the statement of cash flows

B cost of goods sold

C investments by owners for stock issued

62 If a business declared and paid a $5,000 dividend, it would appear on the

A income statement only

B statement of stockholders' equity and statement of cash flows

C balance sheet only

D statement of stockholders' equity only

63 Which of the following statements is true about earnings per share?

A It is the only ratio required to be disclosed on the balance sheet

B It is computed by dividing weighted average common shares outstanding by net income

C It is rounded to the nearest dollar amount

D It discloses the amount of earnings on a per common share basis and is of great importance

64 Net income would appear on the

A income statement only

B balance sheet only

C statement of stockholders' equity and income statement

D income statement and balance sheet

AACSB Tag: Communications

Difficulty: Medium

L.O.: 3

65 The statement of cash flows

A explains what caused net income during the accounting period

B identifies all assets held at the end of the accounting period by type and amount

C explains that the trial balance is in balance

D explains all of the sources and uses of cash during the accounting period

66 Which of the following statements is false about earnings per share?

A It is the only ratio required to be disclosed on the income statement or in the footnotes to the statement

B It is computed by dividing net income by weighted average common shares outstanding

C It discloses the amount of dividends on a per common share basis

D It appears at the bottom of the income statement

AACSB Tag: Relative Thinking

Difficulty: Hard

L.O.: 3

67 Which of the following errors would most likely lead to an overstatement of income?

A Recording revenue next period when the cash is collected although it is earned in the current year

B Recording an expense incurred this year when the cash is paid next year

C Failure to adjust deferred rent revenue account for the portion of rent earned this year

D Failure to record an expense incurred in the current period

AACSB Tag: Relative Thinking

Difficulty: Hard

L.O.: 3

68 In 2008, Patty's Pizza reported a net profit margin of 14.4%, in 2007 it was 13.2% and in

2006, it was 13.2% Which of the following is true about Patty's Pizza net profit margin?

A It has remained constant over the three-year period

B It reported an improved gross profit percentage in 2008 which has caused its net profit

69 The net profit margin is calculated as:

A net income divided by net sales

B gross profit divided by net sales

C net income divided by the average number of common shares outstanding

D net sales divided by net income

A are required to reduce the balances in the real accounts to zero at the end of each period

B transfer the components of net income to a revenue account each period

C establish a zero balance in all revenue and expense accounts at the end of each period

C are not closed at the end of the accounting period

D appear in a trial balance prepared prior to the adjusting and closing entries

72 Nominal accounts are

A also called real accounts

B closed at the start of the accounting period

C include balance sheet accounts

D used to collect data for the current accounting period only

AACSB Tag: Relative Thinking

Difficulty: Medium

L.O.: 5

73 A post-closing trial balance will show account balances for the

A real and nominal accounts

B real accounts only

C nominal accounts only

D income statement accounts only

75 A trial balance prepared after the closing entries have been posted would exclude which one of the following accounts?

77 Select the statement which best describes the primary purpose of closing entries

A To facilitate preparing adjusting entries

B To determine the amount of net income or net loss for the period

C To allow preparation of the financial statements

D To reduce the balances of revenue and expense accounts to zero so that they may be used

to accumulate the revenues and expenses of the next accounting period

78 The primary purpose of closing entries is to

A prove the equality of the debit and credit entries in the general journal

B insure that all assets and liabilities are recognized in the appropriate period

C update the balance of retained earnings and prepare revenue, expense, and dividend

accounts for the next accounting period's transactions

D insure that adjusting entries balance

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: 5

79 A post closing trial balance would include account balances for only the

A assets and liabilities

B revenues and expenses

C assets, liabilities, and stockholders' equity

D assets, liabilities, stockholders' equity, revenues, expenses, and dividends

Essay Questions

81 The following trial balance of Lea Corporation dated December 31, 2009 developed by a clerk, contains errors The balances have all been computed correctly, but some of the debits and credit balances were reversed

Required: Prepare a corrected trial balance

82 Is the adjusted trial balance a financial statement? Explain why or why not

No, the adjusted trial balance is not a financial statement It is an internal work paper that lists all accounts with their balances to provide a check on the equality of debits and credits It is

an aid in the preparation of financial statements (income statement, statement of stockholders' equity, and balance sheet)

AACSB Tag: Relative Thinking

Difficulty: Easy

L.O.: 1

used to record the economic effects of transactions in terms of the basic accounting equation

is given below You are to indicate the accounts to be debited and credited for each

transaction by entering the appropriate letter in each blank

December 31, 2009 (assuming that no adjusting entries have been made during the year)

85 Below are two related transactions for Golden Corporation The annual accounting period ends December 31 For each date listed, give the required entry in journal format

A October 1, 2009–Golden Corporation borrowed $100,000 and signed a note providing for 8% interest The principal and interest are due in one year (on September 30, 2010)

B December 31, 2009–end of the annual accounting period (If no entry is required, explain why)

On December 31, 2009, the inventory count of supplies in the storeroom was $1,750 Give the adjusting entry required at December 31, 2009

87 On November 1, 2009, Bruce Company leased some of its office space to Fairlane

Company and immediately collected twelve months rent in advance of $600,000 Bruce debited cash and credited unearned rent revenue for $600,000 At December 31, 2009 (the end

of the accounting period), give the adjusting entry Bruce should make in respect to the rent