1.

The time period assumption states that

a. a transaction can only affect one period of time.
b. estimates should not be made if a transaction affects more than one time
period.
c. adjustments to the enterprise's accounts can only be made in the time
period when the business terminates its operations.
d. the economic life of a business can be divided into artificial time periods.

2. An accounting time period that is one year in length, but does not begin on
January 1, is referred to as
a. a fiscal year.
b. an interim period.
c. the time period assumption.
d. a reporting period.

3. Adjustments would not be necessary if financial statements were prepared to

reflect net income from
a. monthly operations.
b. fiscal year operations.
c. interim operations.
d. lifetime operations.

4. Which of the following are in accordance with generally accepted accounting

principles?

a. Accrual basis accounting

b. Cash basis accounting
c. Both accrual basis and cash basis accounting
d. Neither accrual basis nor cash basis accounting

5. . The revenue recognition principle dictates that revenue should be recognized in

the accounting records

a. when cash is received.

b. when it is earned.
c. at the end of the month.
d. in the period that income taxes are paid.

6. In a service-type business, revenue is considered earned

a. at the end of the month.

b. at the end of the year.
c. when the service is performed.
d. when cash is received.

7. . The matching principle matches

a. customers with businesses.

b. expenses with revenues.
c. assets with liabilities.
d. creditors with businesses.
 8. Ken's Tune-up Shop follows the revenue recognition principle. Ken services a car
on July
31. The customer picks up the vehicle on August 1 and mails the payment to
Ken on August 5. Ken receives the check in the mail on August 6. When should
Ken show that the revenue was earned?
a. July 31
b. August 1
c. August 5
d. August 6

9. A company spends $10 million dollars for an office building. Over what period
should the cost be written off?
a. When the $10 million is expended in cash
b. All in the first year
c. Over the useful life of the building
d. After $10 million in revenue is earned

10.The matching principle states that expenses should be matched with revenues.
Another way of stating the principle is to say that
a. assets should be matched with liabilities.
b. efforts should be matched with accomplishments.
c. owner withdrawals should be matched with owner contributions.
d. cash payments should be matched with cash receipts.

11.A dress 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
dress shop follows GAAP and applies the revenue recognition principle. When
is the $1,000 considered to be earned?
a. December 5
b. December 10
c. November 30
d. December 1

12. A furniture factory's employees work overtime to finish an order that is sold on
February
28. The office sends a statement to the customer in early March and payment
is received by mid-March. The overtime wages should be expensed in
a. February.
b. March.
c. the period when the workers receive their checks.
d. either in February or March depending on when the pay period ends.

13.Expenses sometimes make their contribution to revenue in a different period

than when the expense is paid. When wages are incurred in one period and
paid in the next period, this often leads to which account appearing on the
balance sheet at the end of the time period?
a. Due from Employees
b. Due to Employer
c. Wages Payable
d. Wages Expense
14. Under accrual-basis accounting
a. cash must be received before revenue is recognized.
b. net income is calculated by matching cash outflows against cash inflows.
c. events that change a company's financial statements are recognized in the
period they occur rather than in the period in which cash is paid or
received.
d. the ledger accounts must be adjusted to reflect a cash basis of
accounting before financial statements are prepared under generally
accepted accounting principles.

15.Adjusting entries are required

a. yearly.
b. quarterly.
c. monthly.
d. every time financial statements are prepared.

16.Which is not an application of revenue recognition?

a. Recording revenue as an adjusting entry on the last day of the accounting
period.
b. Accepting cash from an established customer for services to be performed
over the next three months.
c. Billing customers on June 30 for services completed during June.
d. Receiving cash for services performed.

17.Which statement is correct?

a. As long as a company consistently uses the cash basis of accounting,
generally accepted accounting principles allow its use.
b. The use of the cash basis of accounting violates both the revenue
recognition and matching principles.
c. The cash basis of accounting is objective because no one can be
certain of the amount of revenue until the cash is received.
d. As long as management is ethical, there are no problems with using the
cash basis of accounting.

18.The following is selected information from J Corporation for the fiscal year
ending October 31, 2008.
Cash received from customers $300,000
Revenue earned 350,000
Cash paid for expenses 170,000
Cash paid for computers on November 1, 2007 that will
be used
for 3 years (annual depreciation is $16,000) 48,000
Expenses incurred, not including any depreciation 200,000
Proceeds from a bank loan, part of which was used to
pay for
the computers 100,000
Based on the accrual basis of accounting, what is J Corporation’s net income for
the year ending October 31, 2008?
a. $114,000
b. $134,000
c. $82,000
d. $150,000
 Use the following information for questions 19–20.

Sheepskin Company had the following transactions during 2008.

 Sales of $4,500 on account
 Collected $2,000 for services to be performed in 2009
 Paid $625 cash in salaries
 Purchased airline tickets for $250 in December for a trip to take place in 2009

19.What is Sheepskin’s 2008 net income using accrual accounting?

a. $3,875
b. $5,875
c. $5,625
d. $3,625

20.What is Sheepskin’s 2008 net income using cash basis accounting?

a. $5,875
b. $1,375
c. $5,625
d. $1,125

21.Adjusting entries are required

a. because some costs expire with the passage of time and have not
yet been journalized.
b. when the company's profits are below the budget.
c. when expenses are recorded in the period in which they are incurred.
d. when revenues are recorded in the period in which they are earned.

22. A small company may be able to justify using a cash basis of accounting if they
have
a. sales under $1,000,000.
b. no accountants on staff.
c. few receivables and payables.
d. all sales and purchases on account.

23.Which one of the following is not a justification for adjusting entries?

a. Adjusting entries are necessary to ensure that revenue recognition
principles are followed.
b. Adjusting entries are necessary to ensure that the matching principle is
followed.
c. Adjusting entries are necessary to enable financial statements to be in
conformity with GAAP.
d. Adjusting entries are necessary to bring the general ledger accounts in line
with the budget.

24. An adjusting entry

a. affects two balance sheet accounts.
b. affects two income statement accounts.
c. affects a balance sheet account and an income statement account.
d. is always a compound entry.
25. The preparation of adjusting entries is
a. straight forward because the accounts that need adjustment will be out of
balance.
b. often an involved process requiring the skills of a professional.
c. only required for accounts that do not have a normal balance.
d. optional when financial statements are prepared.

26.If a resource has been consumed but a bill has not been received at the
end of the accounting period, then
a. an expense should be recorded when the bill is received.
b. an expense should be recorded when the cash is paid out.
c. an adjusting entry should be made recognizing the expense.
d. it is optional whether to record the expense before the bill is received.

27.Accounts often need to be adjusted because

a. there are never enough accounts to record all the transactions.
b. many transactions affect more than one time period.
c. there are always errors made in recording transactions.
d. management can't decide what they want to report.

28.Adjusting entries are

a. not necessary if the accounting system is operating properly.
b. usually required before financial statements are prepared.
c. made whenever management desires to change an account balance.
d. made to balance sheet accounts only.

29. Expenses incurred but not yet paid or recorded are called
a. prepaid expenses.
b. accrued expenses.
c. interim expenses.
d. unearned expenses.

30.A law firm received $2,000 cash for legal services to be rendered in the future.
The full amount was credited to the liability account Unearned Legal Fees. If
the legal services have been rendered at the end of the accounting period and
no adjusting entry is made, this would cause
a. expenses to be overstated.
b. net income to be overstated.
c. liabilities to be understated.
d. revenues to be understated.

31.Adjusting entries can be classified as

a. postponements and advances.
b. accruals and prepayments.
c. prepayments and postponements.
d. accruals and advances.

32. Accrued revenues are

a. received and recorded as liabilities before they are earned.
b. earned and recorded as liabilities before they are received.
c. earned but not yet received or recorded.
d. earned and already received and recorded.
33. Prepaid expenses are
a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

34. Accrued expenses are

a. paid and recorded in an asset account before they are used or consumed.
b. paid and recorded in an asset account after they are used or consumed.
c. incurred but not yet paid or recorded.
d. incurred and already paid or recorded.

35. Unearned revenues are

a. received and recorded as liabilities before they are earned.
b. earned and recorded as liabilities before they are received.
c. earned but not yet received or recorded.
d. earned and already received and recorded.

36. A liability—revenue relationship exists with

a. prepaid expense adjusting entries.
b. accrued expense adjusting entries.
c. unearned revenue adjusting entries.
d. accrued revenue adjusting entries.

37. Which of the following reflect the balances of prepayment accounts prior to
adjustment?
a. Balance sheet accounts are understated and income statement accounts are
understated.
b. Balance sheet accounts are overstated and income statement accounts are
overstated.
c. Balance sheet accounts are overstated and income statement accounts are
understated.
d. Balance sheet accounts are understated and income statement accounts are
overstated.

38. An asset—expense relationship exists with

a. liability accounts.
b. revenue accounts.
c. prepaid expense adjusting entries.
d. accrued expense adjusting entries.

39.Quirk Company purchased office supplies costing $6,000 and debited Office
Supplies for the full amount. At the end of the accounting period, a physical
count of office supplies revealed $2,400 still on hand. The appropriate
adjusting journal entry to be made at the end of the period would be
a. Debit Office Supplies Expense, $2,400; Credit Office Supplies, $2,400.
b. Debit Office Supplies, $3,600; Credit Office Supplies Expense, $3,600.
c. Debit Office Supplies Expense, $3,600; Credit Office Supplies, $3,600.
d. Debit Office Supplies, $2,400; Credit Office Supplies Expense, $2,400.

40. If an adjustment is needed for unearned revenues, the

a. liability and related revenue are overstated before adjustment.
b. liability and related revenue are understated before adjustment.
c. liability is overstated and the related revenue is understated before
adjustment.
d. liability is understated and the related revenue is overstated before
adjustment.
 41.If an adjustment is needed for prepaid expenses, the
a. asset and related expense are overstated before adjustment.
b. asset and related expense are understated before adjustment.
c. asset is understated and the related expense is overstated before adjustment.
d. asset is overstated and the related expense is understated before adjustment.

42. Depreciation expense for a period is computed by taking the

a. original cost of an asset – accumulated depreciation.
b. depreciable cost ÷ depreciation rate.
c. cost of the asset ÷ useful life.
d. market value of the asset ÷ useful life.

43. Accumulated Depreciation is

a. an expense account.
b. an owner's equity account.
c. a liability account.
d. a contra asset account.

44.Hardy Company purchased a computer for $4,800 on December 1. It is

estimated that annual depreciation on the computer will be $960. If financial
statements are to be prepared on December 31, the company should make the
following adjusting entry:
a. Debit Depreciation Expense, $960; Credit Accumulated Depreciation, $960.
b. Debit Depreciation Expense, $80; Credit Accumulated Depreciation, $80.
c. Debit Depreciation Expense, $3,840; Credit Accumulated Depreciation,
$3,840.
d. Debit Office Equipment, $4,800; Credit Accumulated Depreciation, $4,800.

45.Baden Realty Company received a check for $18,000 on July 1 which

represents a 6 month advance payment of rent on a building it rents to a
client. Unearned Rent was credited for the full $18,000. Financial statements
will be prepared on July 31. Baden Realty should make the following adjusting
entry on July 31:
a. Debit Unearned Rent, $3,000; Credit Rental Revenue, $3,000.
b. Debit Rental Revenue, $3,000; Credit Unearned Rent, $3,000.
c. Debit Unearned Rent, $18,000; Credit Rental Revenue, $18,000.
d. Debit Cash, $18,000; Credit Rental Revenue, $18,000.

46. As prepaid expenses expire with the passage of time, the correct adjusting entry
will be a
a. debit to an asset account and a credit to an expense account.
b. debit to an expense account and a credit to an asset account.
c. debit to an asset account and a credit to an asset account.
d. debit to an expense account and a credit to an expense account.

47. A company usually determines the amount of supplies used during a period by
a. adding the supplies on hand to the balance of the Supplies account.
b. summing the amount of supplies purchased during the period.
c. taking the difference between the supplies purchased and the supplies paid
for during the period.
d. taking the difference between the balance of the Supplies account and
the cost of supplies on hand.
48. If a company fails to make an adjusting entry to record supplies expense, then
a. owner's equity will be understated.
b. expense will be understated.
c. assets will be understated.
d. net income will be understated.

49.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?
a. Failure to make an adjustment does not affect the financial statements.
b. Expenses will be overstated and net income and owner's equity will be
understated.
c. Assets will be overstated and net income and owner's equity will be
understated.
d. Assets will be overstated and net income and owner's equity will be
overstated.

50.At December 31, 2008, before any year-end adjustments, Karr Company's
Insurance Expense account had a balance of $1,450 and its Prepaid Insurance
account had a balance of $3,800. It was determined that $3,000 of the
Prepaid Insurance had expired.
The adjusted balance for Insurance Expense for the year would be
a. $3,000.
b. $1,450.
c. $4,450.
d. $2,250.

51.Depreciation is the process of

a. valuing an asset at its fair market value.
b. increasing the value of an asset over its useful life in a rational and
systematic manner.
c. allocating the cost of an asset to expense over its useful life in a
rational and systematic manner.
d. writing down an asset to its real value each accounting period.

52.A new accountant working for Metcalf Company records $800 Depreciation
Expense on store equipment as follows:
Dr. Depreciation Expense 800
.............................................
Cr. Cash ............................................................... 800
The effect of this entry is to
a. adjust the accounts to their proper amounts on December 31.
b. understate total assets on the balance sheet as of December 31.
c. overstate the book value of the depreciable assets at December 31.
d. understate the book value of the depreciable assets as of December 31.

53.From an accounting standpoint, the acquisition of productive facilities can be

thought of as a long-term
a. accrual of expense.
b. accrual of revenue.
c. accrual of unearned revenue.
d. prepayment for services.

54. In computing depreciation, the number of years of useful life of the asset is
a. known with certainty.
b. an estimate.
c. always fixed at 5 years.
d. always fixed at 3 years.
55. An accumulated depreciation account
a. is a contra-liability account.
b. increases on the debit side.
c. is offset against total assets on the balance sheet.
d. has a normal credit balance.

56. The difference between the cost of a depreciable asset and its related
accumulated depreciation is referred to as the
a. market value of the asset.
b. blue book value of the asset.
c. book value of the asset.
d. depreciated difference of the asset.

57. White Laundry Company purchased $6,500 worth of laundry supplies on

June 2 and recorded the purchase as an asset. On June 30, an inventory
of the laundry supplies indicated only $2,000 on hand. The adjusting
entry that should be made by the company on June 30 is
a. Debit Laundry Supplies Expense, $2,000; Credit Laundry Supplies,
$2,000.
b. Debit Laundry Supplies, $2,000; Credit Laundry Supplies Expense,
$2,000.
c. Debit Laundry Supplies, $4,500; Credit Laundry Supplies Expense,
$4,500.
d. Debit Laundry Supplies Expense, $4,500; Credit Laundry Supplies,
$4,500.

58. On July 1, Dexter Shoe Store paid $8,000 to Ace Realty for 4 months rent
beginning July
1. Prepaid Rent was debited for the full amount. If financial statements
are prepared on July 31, the adjusting entry to be made by Dexter Shoe
Store is
a. Debit Rent Expense, $8,000; Credit Prepaid Rent, $2,000.
b. Debit Prepaid Rent, $2,000; Credit Rent Expense, $2,000.
c. Debit Rent Expense, $2,000; Credit Prepaid Rent, $2,000.
d. Debit Rent Expense, $8,000; Credit Prepaid Rent, $8,000.

59. Southeastern Louisiana University sold season tickets for the 2008
football season for
$160,000. A total of 8 games will be played during September, October
and November. In September, three games were played. The adjusting
journal entry at September 30
a. is not required. No adjusting entries will be made until the end of
the season in November.
b. will include a debit to Cash and a credit to Ticket Revenue for $40,000.
c. will include a debit to Unearned Ticket Revenue and a credit to Ticket
Revenue for
$60,000.
d. will include a debit to Ticket Revenue and a credit to Unearned Ticket
Revenue for
 $53,333.

60. Southeastern Louisiana University sold season tickets for the 2008
football season for
$160,000. A total of 8 games will be played during September, October
and November. In September, two games were played. In October, three
games were played. The balance in Unearned Revenue at October 31 is
a. $0.
b. $40,000.
c. $60,000.
d. $100,000.
61. Southeastern Louisiana University sold season tickets for the 2008
football season for
$160,000. A total of 8 games will be played during September, October
and November. Assuming all the games are played, the Unearned
Revenue balance that will be reported on the December 31 balance sheet
will be
a. $0.
b. $60,000.
c. $100,000.
d. $160,000.
62. At March 1, 2008, Candy Inc. had supplies on hand of $500. During the
month, Candy purchased supplies of $1,200 and used supplies of $1,500.
The March 31 adjusting journal entry should include a
a. debit to the supplies account for $1,500.
b. credit to the supplies account for $500.
c. debit to the supplies account for $1,200.
d. credit to the supplies account for $1,500.
63. Dorting Company purchased a computer system for $3,600 on January
1, 2008. The company expects to use the computer system for 3
years. It has no salvage value.
Monthly depreciation expense on the asset is
a. $0.
b. $100.
c. $1,200.
d. $3,600.

64. Maple Tree Inc. purchased a 12-month insurance policy on March 1,

2008 for $900. At March 31, 2008, the adjusting journal entry to record
expiration of this asset will include a
a. debit to Prepaid Insurance and a credit to Cash for $900.
b. debit to Prepaid Insurance and a credit to Insurance Expense for $100.
c. debit to Insurance Expense and a credit to Prepaid Insurance for $75
d. debit to Insurance Expense and a credit to Cash for $75.

65. Ogletree Enterprises purchased an 18-month insurance policy on May

31, 2008 for
$3,600. The December 31, 2008 balance sheet would report Prepaid
Insurance of
a. $0 because Prepaid Insurance is reported on the Income Statement.
b. $1,400.
c. $2,200.
d. $3,600.