Fundamentals of Financial Accounting 4th Edition by Fred Phillips, Robert Libby, Patricia Libby

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Fundamentals of Financial Accounting 4th Edition by Fred Phillips, Robert Libby, Patricia Libby

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Chapter 04
Adjustments, Financial Statements, and Financial Results

True / False Questions

1. As a company uses supplies, an adjustment should be made to decrease an asset account and increase an expense account.

True False

2. The purpose of adjusting entries is to transfer net income and dividends to retained earnings.

True False

3. A contra account is added to the account it offsets.

True False

4. The amount charged for a good or service provided to a customer on account is recorded only after the payment is received.

True False

5. The carrying value of an asset is an approximation of the assets market value.

True False

6. You mistakenly include a contra account of $20,000 in the same column of your trial balance as the account it offsets. All other things equal, your debit and credit column totals will differ by $40,000.

True False

7. Corporate income taxes cannot be calculated until all other adjustments are made.

True False

8. The adjusted trial balance is completed to check that debits still equal credits after the income statement is prepared.

True False

9. The amounts of all the accounts reported on the balance sheet can be taken from the adjusted trial balance.

True False

10. One of the purposes of the closing entries is to bring the balances in all asset, liability, revenue, and expense accounts down to zero to start the next accounting period.

True False

11. A deferral adjustment may involve one asset and one expense account.

True False

12. Depreciation is a measure of the decline in market value of an asset.

True False

13. After posting the closing entries, all the revenue accounts and all the expense accounts are zero and the Retained Earnings account has been debited for $4,000. This implies that the company had a net income of $4,000.

True False

14. The closing process includes a transfer of the Dividends Declared account balance to the Retained Earnings account.

True False

15. If a company failed to record depreciation expense on equipment for a period, the financial statements would show total assets overstated and total stockholders equity understated on the balance sheet.

True False

16. A post-closing trial balance should include only permanent accounts.

True False

17. All asset accounts, all liability accounts, contributed capital, and retained earnings accounts are called permanent accounts.

True False

18. A company forgot to make an adjusting entry to record wages incurred but unpaid at the end of the period. This would understate Total Liabilities and overstate Retained Earnings on the Balance Sheet.

True False

19. Prepaid expense accounts are reported as assets on the balance sheet.

True False

20. Adjusting entries often involve cash.

True False

Multiple Choice Questions

21. Which of the following statements regarding types of adjusting entries is true?

A. An accrual adjustment that increases an asset will include an increase in an expense.

B. A deferral adjustment that decreases an asset will include an increase in an expense.

C. An accrual adjustment that increases an expense will include an increase in assets.

D. A deferral adjustment that increases a contra account will include an increase in an asset.

22. Which of the following statements regarding adjusting entries is not true?

A. Adjustments are needed to ensure that the accounting system includes all of the revenues and expenses of the period.

B. Adjustments help to ensure the related accounts on the balance sheet and income statement are up to date and complete.

C. Adjusting entries often affect the cash account.

D. Adjusting entries generally include one balance sheet and one income statement account.

23. The book value of equipment is equal to which of the following?

A. Cost of equipment plus accumulated depreciation.

B. Accumulated depreciation less depreciation expense.

C. Cost of equipment less accumulated depreciation.

D. Accumulated depreciation plus depreciation expense.

24. Which of the following statements regarding the need for adjustments is not true?

A. Without adjustments, the financial statements present an incomplete and misleading picture of the company.

B. Adjusting entries are intended to change the operating results to reflect managements objectives for operating performance.

C. Adjustments help the financial statements to present the best picture of whether the companys activities were profitable for the period.

D. Adjustments help the financial statements to present the economic resources the company owns and owes at the end of the period.

25. Which of the following statements regarding the trial balance is correct?

A. The adjusted trial balance is prepared after the financial statements to verify that the numbers are accurate.

B. The primary purpose of the post-closing trial balance is to see whether revenues are greater than expenses.

C. The adjusted trial balance is a check that the accounting records are still in balance after posting all adjustments to the accounts.

D. The post-closing trial balance debit column total is the amount to be shown as Total Assets on the Balance Sheet.

26. Which of the following statements regarding the presentation of a trial balance is correct?

A. The adjusted trial balance shows the end-of-year balance for Retained Earnings.

B. An adjusted trial balance presents account balances in the same level of detail as in the presentation of the financial statements.

C. The order of accounts is assets, liabilities, stockholders equity, dividends, revenues and expenses.

D. The adjusted trial balance shows all the debit and credit postings to all the ledger accounts.

27. Which of the following statements regarding financial statements and the trial balance is correct?

A. Financial statements are prepared only after the adjusted trial balance has shown that debits equal credits.

B. A post-closing trial balance should be prepared before temporary accounts are closed.

C. An adjusted trial balance reflects the amount of retained earnings to be shown on the Balance Sheet.

D. A post-closing trial balance lists all the accounts that are shown on the Income Statement.

28. Which of the following statements regarding timing issues associated with the closing entries is true?

A. Closing entries are recorded at the end of each reporting period which could be monthly, quarterly or annually.

B. After closing entries are posted, the balances of the income statement accounts will be zero.

C. Closing entries are made to zero out the balances of the permanent accounts on the balance sheet.

D. After closing entries are posted, the only temporary account with a balance is the Dividends Declared account.

29. Which of the following statements regarding the effect of a net loss on the closing process is true?

A. If a company has a net loss during the current accounting period, then the ending retained earnings will be smaller than the beginning retained earnings.

B. When closing entries are prepared, contributed capital is debited if a company has a net loss.

C. If a company has a net loss, the closing entry will include debits to the revenue accounts, credits to the expense accounts, and a credit to Retained earnings.

D. If a company has a net loss, the amount of revenues to be closed will be greater than the amount of expenses to be closed in the closing process.

30. If an expense has been incurred but will be paid later, then:

A. nothing is recorded on the financial statements.

B. a liability account is created or increased and an expense is recorded.

C. an asset account is decreased or eliminated and an expense is recorded.

D. a revenue and an expense are accrued.

31. If certain assets are partially used up during the accounting period, then:

A. nothing is recorded on the financial statements until they are completely used up.

B. a liability account is decreased or eliminated and an expense is recorded.

C. an asset account is decreased or eliminated and an expense is recorded.

D. nothing is recorded on the financial statements until they are replaced or replenished.

32. A company makes a deferral adjustment that reduces a liability. This must mean:

A. an expense account is decreasing by the same amount.

B. an expense account is increasing by the same amount.

C. a revenue account is increasing by the same amount.

D. a revenue account is decreasing.

33. One major difference between deferral and accrual adjustments is:

A. deferral adjustments involve previously recorded transactions and accruals involve previously unrecorded events.

B. deferral adjustments are made after taxes and accrual adjustments are made before taxes.

C. deferral adjustments are made annually and accrual adjustments are made monthly.

D. deferral adjustments are influenced by estimates of future events and accrual adjustments are not.

34. One major difference between deferral and accrual adjustments is:

A. accrual adjustments affect income statement accounts and deferral adjustments affect balance sheet accounts.

B. deferral adjustments increase net income and accrual adjustments decrease net income.

C. deferral adjustments are made under the cash basis of accounting and accrual adjustments are made under the accrual basis of accounting.

D. accounts affected by an accrual adjustment always go in the same direction (i.e., both accounts are increased or both accounts are decreased) and accounts affected by a deferral adjustment always go in opposite directions.

35. The company uses up $5,000 of an existing asset. The company adjusts its accounts accordingly. Which of the following is a true statement?

A. This is an accrual adjustment.

B. This is a closing adjustment.

C. This is a deferral adjustment.

D. This is an unethical adjustment.

36. Accrual adjustments involve:

A. increasing assets and revenues or increasing liabilities and expenses moving in the same direction.

B. increasing assets and expenses or increasing liabilities and revenues.

C. increasing assets and decreasing revenues or increasing liabilities and decreasing expenses.

D. increasing assets and decreasing expenses or increasing liabilities and decreasing revenues.

37. At the end of the month, the adjusting journal entry to record the use of supplies would include:

A. A debit to supplies and a credit to supplies expense.

B. A debit to supplies expense and a credit to supplies.

C. A debit to supplies and a credit to revenue.

D. A debit to supplies and a credit to cash.

38. A company owes rent at a rate of $6,000 per month. The company pays the rent owed on the tenth of each month for the previous month. At the end of each month, what kind of adjustment is required?

A. An accrual adjustment.

B. A closing adjustment.

C. A deferral adjustment.

D. No adjustment.

39. Which of the following is not a term for the value at which an asset is reported on a financial statement?

A. Carrying value.

B. Book value.

C. Equipment, net.

D. Accrual value.

40. When existing assets are used up in the ordinary course of business:

A. an expense is recorded.

B. unearned revenue is recorded.

C. an accrual is recorded.

D. a prepaid expense is recorded.

41. During the month, a company uses up $4,000 of supplies. At the end of the month, the related adjusting journal entry would result in:

A. a decrease in an asset and an equal decrease in expenses.

B. an increase in an asset and an equal increase in expenses.

C. a decrease in an asset and an equal increase in expenses.

D. an increase in an asset and a decrease in expenses.

42. Unearned insurance premiums were $5,500 at the beginning of the year and $7,500 at the end of the year. Insurance premiums collected were $42,000. How much in insurance premiums were earned this year?

A. $40,000

B. $44,000

C. $55,000

D. $29,000

43. An adjusting journal entry that includes an increase to an asset contra-account would include an increase in a(n):

A. related asset account.

B. liability account.

C. revenue account.

D. expense account.

44. To calculate the companys income tax expense for the current period, it is necessary to know:

A. the companys operating revenue and tax bill from prior periods.

B. the companys income before income taxes and the companys tax rate.

C. the companys operating expenses and revenue.

D. the companys revenues, expenses, and dividends.

45. Declared dividends:

A. are an expense of doing business.

B. are not a legal obligation that a company must pay.

C. are a way to distribute the companys profits to its stockholders.

D. are reported on the balance sheet.

46. Which of these accounts would normally not be affected by an adjustment?

A. Supplies.

B. Revenues.

C. Expenses.

D. Cash.

47. Purrfect Pets had income before income tax of $164,000 last quarter and a 34% tax rate. Its net income should be reported as:

A. $55,760.

B. $108,240.

C. $219,760.

D. $482,353.

48. Purrfect Pets had $6,000 of supplies at the end of October. During November, the company bought $2,000 of supplies. At the end of November, the company had $1,000 of supplies remaining. Which of the following statements is not true?

A. During November, the company used $7,000 of supplies.

B. Supplies should be reported at $1,000 on the balance sheet.

C. An expense should be debited for $7,000 in November.

D. An asset should be debited for $1,000 in November.

49. A company has an asset account, Prepaid Insurance, with a balance of $3,750 at the beginning of the month. The company used $980 of insurance during the month. Which of the following statements is true?

A. The company should credit Insurance Expense for $980 and debit Prepaid Insurance for $980.

B. Retained earnings should decrease and stockholders equity should increase because of this event.

C. The company should debit Insurance Expense for $980 and credit Prepaid Insurance for $980.

D. Retained earnings and stockholders equity should increase because of this event.

50. A company has a loan that accrues interest at a rate of $20 a day. The company pays the interest once a quarter. Which of these would be an accurate adjustment for a month in which no payments are made?

A. Debit Interest Payable and credit Interest Expense.

B. Debit Notes Payable and credit Cash.

C. Debit Interest Expense and credit Interest Payable.

D. Debit Cash and credit Notes Payable.

51. Accumulated depreciation:

A. is an expense account.

B. is a liability account.

C. is an asset account.

D. is a contra-asset account.

52. A company pays wages every two weeks. Wages amount to $100 a day, 7 days a week. On March 31, the company pays wages for the two weeks ending March 24. At the end of the month, the related adjusting journal entry will include a

A. debit to Wages Payable for $1,400 and a credit to Wages Expense for $1,400.

B. debit to Wage Expense for $700 and a credit to Wages Payable for $700.

C. debit to Wages Payable for $700 and a credit to Cash for $700.

D. debit to Wages Expense for $1,400 and a credit to Wages Payable for $1,400.

53. Contra-accounts:

A. are used to increase the original value of the account they offset.

B. always appear in the same column of the trial balance as the account they offset.

C. are used to decrease the original value of the account they offset.

D. reduce the asset to its fair value.

54. Recording an adjusting journal entry to recognize depreciation would cause which of the following?

A. An increase in liabilities and expenses, and a decrease in stockholders equity.

B. A decrease in assets and stockholders equity, and an increase in expenses.

C. A decrease in assets, an increase in liabilities, and an increase in expenses.

D. An increase in assets, an increase in liabilities, and a decrease in expenses.

55. When a dividend has been declared but not yet paid,

A. assets will increase and stockholders equity will decrease.

B. assets will decrease and stockholders equity will increase.

C. no accounts will be affected until the dividend is paid.

D. liabilities will increase and stockholders equity will decrease.

56. At the end of the year, accrual adjusting entries could include a:

A. debit to an expense and a credit to an asset.

B. credit to a revenue and a debit to an expense.

C. debit to cash and a credit to contributed capital.

D. debit to an expense and a credit to a liability.

57. Your business purchased a certificate of deposit on April 1 that will pay $90 interest three months from that date. On April 30, which of the following adjusting entries would be made?

A. Debit Interest Receivable for $90; credit Interest Revenue for $90.

B. Debit Interest Revenue for $30; credit Interest Receivable for $30.

C. Debit Interest Receivable for $30; credit Interest Revenue for $30.

D. Debit Interest Revenue for $90; credit Interest Receivable for $90.

58. Your business declared a $200 dividend on August 31, payable in September. On August 31, which of the following journal entries would be made?

A. Debit Dividends Receivable for $200; credit Dividends Declared for $200.

B. Debit Dividends Declared for $200; credit Dividends Payable for $200.

C. Debit Dividends Payable for $200; credit Dividends Declared for $200.

D. Debit Dividends Declared for $200; credit Dividends Receivable for $200.

Presented below are selected accounts from the unadjusted trial balance of Sneetch Star Makers Inc., a talent agency, at 12/31/13 (debit and credit labels have been omitted; assume all balances are normal).

59. A count of supplies revealed $400 worth on hand at 12/31/13. The adjusting entry would include

A. a debit to supplies expense for $400.

B. a debit to supplies expense for $600.

C. a debit to supplies for $400.

D. a debit to supplies for $600.

60. The insurance policy covers four years and was purchased by Sneetch on 1/1/13. The adjusting entry on December 31, 2013 would include

A. a debit to prepaid insurance for $1,200.

B. a credit to prepaid insurance for $1,200.

C. a debit to insurance expense for $3,600.

D. a credit to prepaid insurance for $3,600.

61. The office equipment depreciates at a rate of $1,000 per year. The adjusting entry would include

A. a debit to accumulated depreciation for $1,000.

B. a credit to office equipment for $1,000.

C. a credit to depreciation expense for $1,000.

D. a credit to accumulated depreciation for $1,000.

62. Three-fifths (60%) of the amount recorded as unearned revenue remains unearned as of 12/31/13. The adjusting entry would include

A. a credit to service revenue for $3,000.

B. a credit to unearned revenue for $3,000.

C. a credit to service revenue for $2,000.

D. a credit to unearned revenue for $2,000.

63. Accrued salaries at 12/31/13 are $2,000. The adjusting entry would include

A. a debit to salaries payable for $2,000.

B. a debit to salaries expense for $28,000.

C. a credit to salaries payable for $2,000.

D. a credit to salaries expense for $28,000.

The new CEO of a company takes over on December 10, 2013. He is promised a significant bonus for every percent he can increase net income in 2014 over 2013 results.

64. Which of the following actions would aid the CEO in making 2014 net income results look more impressive?

A. Overstating the cost of machinery purchased in 2014.

B. Prepaying 2014 expenses in 2013.

C. Deferring 2014 expenses to 2015 and accruing revenues in 2014 that dont exist.

D. Recording 2014 revenue as unearned revenue.

65. Which of the following actions would not be considered unethical?

A. Overstating the cost of machinery purchased in 2014.

B. Prepaying 2014 expenses in 2013.

C. Deferring 2014 expenses to 2015 and accruing revenues in 2014 that dont exist.

D. Recording 2014 revenue as unearned revenue.

66. One of the major advantages of making adjustments in order to improve the quality of financial statements is that they:

A. ensure that revenues and expenses are recognized during the period they are earned and incurred.

B. ensure that all estimates of future activities are eliminated from consideration.

C. ensure that revenues and expenses are recognized conservatively during the period hey are paid.

D. provide an opportunity to manipulate the numbers to the best effect.

67. Which of the following is performed first at the end of each accounting period?

A. Prepare adjusting entries.

B. Prepare a post closing trial balance.

C. Prepare closing journal entries.

D. Prepare the statement of retained earnings.

68. Which of the following is performed last at the end of the year?

A. Prepare adjusting entries.

B. Prepare an adjusted trial balance.

C. Prepare closing journal entries.

D. Prepare a post-closing trial balance.

69. After preparing adjusting entries, the equality of recorded debits and credits is checked by preparing a(n):

A. post-closing trial balance.

B. adjusted trial balance.

C. income statement.

D. balance sheet.

70. If total debits are not equal to total credits in an adjusted trial balance, which of the following errors may have occurred?

A. Posting Wage Expense to Administrative Expenses.

B. Debiting Interest Payable instead of debiting Interest Expense.

C. Recording a transaction twice.

D. Posting a credit to Wages Payable as a debit.

71. An adjusted trial balance should be prepared immediately:

A. after the financial statements, but before closing.

B. before posting adjusting entries.

C. after posting adjusting entries.

D. after journalizing adjusting entries.

72. Which of the following statements about an adjusted trial balance is true?

A. Debits should equal credits both before and after adjustments are made.

B. Debits will equal credits after adjustments are made but not necessarily before.

C. Debits will equal credits before adjustments are made but not necessarily after.

D. Debits do not have to equal credits in the adjusted trial balance but they must be equal in the post-closing trial balance.

73. In a trial balance a contra-account appears:

A. just before the account it offsets but in the opposite column.

B. just after the account it offsets and in the same column.

C. just after the account it offsets but in the opposite column.

D. just before the account it offsets and in the same column.

74. Which of the following would appear in the debit column of an adjusted trial balance?

A. Service revenue.

B. Dividends declared.

C. Accumulated depreciation.

D. Unearned revenue.

75. Which of the following would appear in the credit column of an adjusted trial balance?

A. Income tax payable.

B. Depreciation expense.

C. Prepaid insurance.

D. Interest receivable.

76. After adjusting entries are prepared and posted, but before closing entries are prepared and posted, the balance in retained earnings is equal to

A. zero.

B. the difference between total assets and total liabilities.

C. the amount that is to be reported in the current years balance sheet.

D. the amount that was reported on the previous years balance sheet.

77. Which of the following statements about dividends is not true?

A. Dividends Declared has a debit balance.

B. Dividends reduce retained earnings.

C. Dividends Declared is an expense.

D. Dividends Declared is a balance sheet account.

78. Which of the following trial balances are used as a source for preparing the income statement?

A. Unadjusted trial balance.

B. Pre-adjusted trial balance.

C. Adjusted trial balance.

D. Post-closing trial balance.

79. The first financial statement prepared after the adjusted trial balance is:

A. the balance sheet.

B. the income statement.

C. the statement of cash flows.

D. the statement of retained earnings.

80. After net income has been determined, it is then transferred to:

A. the balance sheet.

B. the income statement.

C. the statement of cash flows.

D. the statement of retained earnings.

81. Before the closing entries are prepared, the retained earnings balance in the adjusted trial balance is equal to:

A. the balance of retained earnings at the beginning of the year.

B. the balance of retained earnings after adding revenues and subtracting expenses but before subtracting dividends.

C. the balance of retained earnings at the end of the year.

D. the balance of retained earnings at the beginning of the next year.

82. Which of the following accounts would be classified as a current liability?

A. Dividends declared.

B. Unearned revenue.

C. Wages expense.

D. Accounts receivable.

83. Which of the following is a true statement about the nature of equipment?

A. While equipment is an asset, its use (depreciation) is an expense.

B. While equipment is an asset, its use (depreciation) is a liability.

C. While equipment is an asset, its use (depreciation) affects contributed capital.

D. Equipment and its use (depreciation) are both liabilities.

84. Which of the following accounts would be classified as a current liability?

A. Service revenue.

B. Wages expense.

C. Accumulated depreciation.

D. Dividends payable.

85. On the balance sheet, accumulated depreciation is:

A. added to property and equipment.

B. subtracted from property and equipment.

C. added to total liabilities.

D. subtracted from total liabilities.

86. Assuming no errors have been made, when a company prepares its adjusted trial balance:

A. assets will equal liabilities plus retained earnings.

B. stockholders equity will be adjusted to include the current periods net income.

C. the debit column and the credit column will be equal.

D. income statement accounts will have been closed.

87. Which of the following statements is not true?

A. Net income implies that revenues are greater than expenses.

B. A net loss causes retained earnings to decrease.

C. Net income causes stockholders equity to increase.

D. A net loss prevents a company from declaring dividends.

88. Which of the following statements is true?

A. Expenses are listed before revenues on the income statement.

B. Operating income is listed before net income on the income statement.

C. The income statement is prepared after the balance sheet.

D. Dividends declared are listed on the income statement.

89. On the statement of retained earnings:

A. dividends declared increase net income and are added to calculate the end-of-year balance of retained earnings.

B. dividends declared are subtracted to calculate the end-of-year balance of retained earnings.

C. dividends declared are not used to calculate the end-of-year balance of retained earnings.

D. dividends declared are not reported on the retained earnings statement.

90. The Dont Tread on Me Tire Company had retained earnings at December 31, 2013 of $200,000. During 2014, the company had revenues of $400,000 and expenses of $350,000, and the company declared and paid dividends of $11,000. Retained earnings on the balance sheet as of December 31, 2014 will be:

A. $39,000.

B. $239,000.

C. $250,000.

D. $289,000.

91. Purrfect Pets had a beginning balance in its retained earnings account of $385,600. During the year, the company declared and paid a $4,700 dividend, and at the end of the year, it reported retained earnings of $399,860. The companys net income for the year was:

A. $14,260.

B. $18,960.

C. $9,560.

D. $0.

92. The Treasury Bank Corporation had retained earnings at the end of December 31, 2013 of $450,000. During 2014, the company had net income of $170,000 and declared dividends of $20,000. Retained earnings on the balance sheet as of December 31, 2014 will be:

A. $430,000.

B. $600,000.

C. $620,000.

D. $640,000.

93. At the end of the accounting period:

A. all accounts are closed.

B. temporary accounts are closed; permanent accounts are not.

C. permanent accounts are closed; temporary accounts are not.

D. only accounts with a credit balance are closed.

94. Income statement accounts are closed at what stage of the accounting process?

A. At the time that adjustments are made.

B. After adjustments are made and before the income statement is prepared.

C. After the income statement and the statement of retained earnings are prepared, but before the balance sheet is prepared.

D. As the last journal entries at the end of each accounting year.

95. Which of the following statements is true?

A. If revenues are less than expenses, the company has a net loss and retained earnings decreases.

B. If revenues are greater than expenses, the company has net income and contributed capital increases.

C. If revenues are less than expenses, the company has a net loss and contributed capital increases to balance off the loss.

D. If revenues are greater than expenses, the company has net income and retained earnings decreases.

96. Closing entries:

A. are prepared before financial statements are prepared.

B. reduce the number of permanent accounts.

C. cause the revenue and expense accounts to have zero balances.

D. summarize the activity in every account.

97. Permanent accounts:

A. are not permitted under GAAP.

B. have their balances zeroed-out at the end of each accounting year.

C. do not have their year-end balance carried into the next year.

D. are Balance Sheet accounts.

98. Purrfect Pets has made all the year-end adjustments. Its expense accounts total $130,000, and its revenue accounts total $190,000. The closing entry to close the income statement accounts for the year will:

A. debit its various expense accounts for a total of $130,000, debit retained earnings for $60,000, and credit its various revenue accounts for a total of $190,000.

B. debit its various revenue accounts for a total of $190,000, credit its various expense accounts for a total of $130,000, and credit retained earnings for $60,000.

C. debit its various expense accounts for a total of $130,000, credit its various revenue accounts for a total of $190,000, and credit retained earnings for $60,000.

D. debit its various revenue accounts for a total of $190,000, debit retained earnings for $60,000, and credit its various expense accounts for a total of $130,000.

99. Two types of closing journal entries are posted to retained earnings at year-end. These are entries to:

A. transfer revenues and expenses to retained earnings.

B. transfer assets and liabilities to retained earnings.

C. transfer net income (or loss) and dividends declared to retained earnings.

D. close permanent and temporary accounts.

100. The sales revenue account has a credit balance of $367,200 at year end. After Closing entries are made, the account will:

A. have a debit balance of $367,200.

B. have a zero balance.

C. still have a credit balance of $367,200.

D. be removed entirely from the general ledger.

101. Which of the following statements is true?

A. Retained earnings is a permanent account, while income statement accounts are temporary.

B. Retained earnings and income statement accounts are all temporary accounts.

C. Retained earnings and income statement accounts are all permanent accounts.

D. Retained earnings is a temporary account, while income statement accounts are permanent accounts.

102. Which of the following would have an unfavorable effect on net income?

A. Omission of an adjusting entry to accrue revenue.

B. Understating the amount of depreciation recorded.

C. Failure to record the portion of prepaid rent that has expired.

D. Overstating the year-end count of supplies.

103. Which of the following will happen if the accrual adjusting entry is not made for revenue earned but not yet recorded?

A. Assets will be understated and revenues will be overstated.

B. Revenues will be understated and assets will be overstated.

C. Both revenues and assets will be overstated.

D. Both revenues and assets will be understated.

104. Which of the following will happen if the accrual adjustment entry is not made to record expenses incurred but not yet recorded?

A. Both expenses and liabilities will be overstated.

B. Both expenses and liabilities will be understated.

C. Expenses will be understated and liabilities will be overstated.

D. Expenses will be overstated and liabilities will be understated.

105. On December 31, 2013, interest of $500 is owed on a bank loan that will not be paid until June 30, 2014. What is the necessary adjusting journal entry on December 31, 2013?

A. Option A

B. Option B

C. Option C

D. Option D

106. A company pays its workforce on Fridays for a five day workweek. The payroll for a week is $100,000. If the accounting year-end falls on a Tuesday, the adjusting journal entry to record this will include a

A. debit to Salaries Expense $100,000.

B. debit to Salaries Expense $40,000.

C. credit to Salaries Payable $60,000.

D. credit to Salaries Payable $100,000.

107. A company originally recorded Prepaid Rent. As of the end of the accounting year, part of this is no longer prepaid. If no adjustment is made to record this expiration, which of the following will occur?

A. Assets will be understated and expenses will be overstated.

B. Assets will be overstated and expenses will be understated.

C. Assets and expenses will be overstated.

D. Assets and expenses will be understated.

108. On June, 30, 2013, a company purchased a two-year insurance policy for $18,000, paying cash and debiting Prepaid Insurance for the entire two-year premium amount. The adjusting entry on December 31, 2013 includes a

A. credit to Prepaid Insurance $4,500.

B. credit to Insurance Expense $4,500.

C. credit to Prepaid Insurance $9,000.

D. debit to Insurance expense $9,000.

109. A company reported the following amounts of wages payable at the beginning and the end of the year 2013:

The income statement for 2013 reported Wages Expense of $56,200.
How much cash was paid for wages during 2013?

A. $52,950

B. $56,200

C. $54,450

D. $53,700

110. A company started the year with $1,500 of supplies on hand. During the year the company purchased additional supplies of $800 and recorded them as increase to the supplies asset. At the end of the year the company determined that only $300 of supplies are still on hand. What is the adjusting journal entry to be made at the end of the period?

A. Option A

B. Option B

C. Option C

D. Option D

111. On December 16, 2013, B. Darin Company received $3,600 from S. Dee Company for rent of an office owned by B. Darin Company. The $3,600 is for the period from December 16, 2013 through February 15, 2014. B. Darin Company recorded this as unearned rent when it was received on December 16. The adjusting entry on December 31 would include

A. A credit to Rent Revenue of $900.

B. A credit to Unearned Rent Revenue of $900.

C. A debit to Rent Revenue of $1,800.

D. A debit to Unearned Rent Revenue of $1,800.

112. A company had calculated net income to be $77,550 based on the unadjusted trial balance. The following adjusting entries were then made: Salaries payable of $790 was recorded; Interest earned but not received from investments $750; Prepaid insurance decreased by $550 for insurance used up during the period; $750 of Unearned revenue has now been earned. After recording these adjustments, net income would be:

A. $77,710.

B. $74,710.

C. $77,310.

D. $79,600.

113. Which of the following is not a true statement?

A. Expenses are closed with a credit.

B. Revenues are closed with a debit.

C. Dividends are closed with a credit.

D. Retained earnings are closed with a debit.

114. The December 31, 2013, adjusted trial balance of a company, where all accounts have normal balances is:

Given this information, after all closing entries are made, the balance in the retained earnings account is:

A. $2,000.

B. $4,000.

C. $0.

D. $1,500.

115. On December 31, 2013, the balance in retained earnings is $20,000. On December 31, 2014, the balance in retained earnings is $19,100. During 2014, dividends of $4,000 were declared and paid. What is the amount of net income for 2014?

A. $4,900

B. $3,100

C. $900

D. $(900)

On April 30, 2014, a three-year insurance policy was purchased with a cash payment of $18,000. Coverage began immediately.

116. What is the amount of insurance expense that would be reported on the income statement for the year ended December 31, 2014?

A. $4,000

B. $18,000

C. $6,000

D. $2,000

117. What is the amount to be reported on the balance sheet as Prepaid Insurance at December 31, 2014?

A. $0

B. $14,000

C. $12,000

D. $16,000

118. If Salaries payable were recorded on December 31, and these salaries were paid on the following January 5, the entry on January 5 would be:

A. Debit to Salaries Expense and Credit to Cash.

B. Debit to Salaries payable and Credit to Cash.

C. Debit to Cash and Credit to Salaries Payable.

D. Debit to Cash and Credit to Salaries Expense.

119. The asset account Office Supplies has a balance of $800 at the beginning of the year. The amount on hand at the end of the year is $500. The company has calculated the Office Supplies Expense for the year to be $3,500. Based on this information, what amount of office supplies was purchased during the year?

A. $0

B. $4,000

C. $3,200

D. $3,000

The following items are taken from the adjusted trial balance prepared as of December 31, 2013. All accounts have normal balances.

120. What is the total of the credit column of the adjusted trial balance?

A. $24,700

B. $37,050

C. $74,900

D. $37,450

121. What is the amount of net income (net loss) for the year?

A. ($2,000)

B. ($3,800)

C. ($1,600)

D. ($3,300)

122. What is the amount of Total Assets to be reported on the Balance Sheet at December 31, 2013?

A. $26,950

B. $27,100

C. $27,250

D. $26,550

123. Total Liabilities on the Balance Sheet at December 31, 2013 are:

A. $19,550.

B. $14,950.

C. $15,350.

D. $19,850.

124. What is the amount of Retained Earnings on the Balance Sheet at December 31, 2013?

A. $100

B. $2,300

C. $3,900

D. $1,700

125. An error is indicated if the following account appears on the post-closing trial balance with a positive balance.

A. Office equipment.

B. Contributed capital.

C. Accumulated depreciation.

D. Depreciation expense.

126. A company declared and paid a dividend of $8,000 this year. The entry to close the dividend account at the end of the year is:

A. Option A

B. Option B

C. Option C

D. Option D

127. The periodic allocation of the cost of equipment to the periods in which it is used is called

A. Accumulated allocation.

B. Unearned revenue.

C. Depreciation.

D. Prepaid expense.

128. Accrued revenues recorded at the end of the current year:

A. often result in cash receipts from customers in the next period.

B. often result in cash payments in the next period.

C. are also called Unearned Revenues.

D. are recorded in the current year when cash is received.

129. Which of the following is the usual last step in the accounting cycle?

A. Preparing the adjusted trial balance.

B. Preparing the financial statements.

C. Preparing a post-closing trial balance.

D. Preparing an unadjusted trial balance.

130. Which of the following statements is not true?

A. Adjusting entries affect the cash account.

B. Adjustments to prepaid expenses and unearned revenues are deferral adjustments.

C. Adjustments for wages and income taxes are normally accrual adjustments.

D. Adjusting entries involve one income statement account and one balance sheet account.

131. Adjusting entries:

A. affect only balance sheet accounts.

B. affect only income statement accounts.

C. affect only cash flow accounts.

D. affect both income statement and balance sheet accounts.

132. If the total amount that should have been debited to insurance expense is mistakenly debited to prepaid insurance, what will be the effect on the financial statements for the year?

A. Revenues will be overstated.

B. Assets will be overstated.

C. Stockholders equity will be understated.

D. Expenses will be overstated.

133. Which of the following errors cause net income to be understated?

A. Employee wages that have not been paid are not recorded.

B. Depreciation expense is not recorded.

C. Collection of accounts receivable is not recorded.

D. Revenue that has been earned but not yet collected has not been recorded.

134. Failure to accrue wages would not affect which one of the following financial statements?

A. Balance sheet.

B. Income statement.

C. Retained earnings statement.

D. Cash flow statement.

135. Which of the following is not a true statement?

A. When making an adjustment to recognize supplies used in a period, total assets will not change.

B. Accrued wages are wages owed but not yet paid to employees and will need to be recorded with an adjusting entry that will increase expenses.

C. Deferrals are created by reflecting a transaction so that it delays or defers the recognition of an expense or a revenue.

D. Depreciation is an example of a deferred expense.

136. A company billed a client for services rendered in January. The payment was received partially in January, and the balance in February. When should the entry be made to record the service revenue?

A. January.

B. February.

C. Split between January and February.

D. At the end of the year with an adjusting entry.

137. Deferred expenses (prepaid expenses) are initially recorded as assets, but over time are expected to become

A. liabilities.

B. other assets.

C. revenues.

D. expenses.

138. An example of an accrued revenue is

A. accumulated interest on a note receivable.

B. accumulated interest on a note payable.

C. unearned revenue.

D. accounts receivable.

139. An example of an accrued expense is

A. Services performed, but not yet billed.

B. Accumulated interest on a note payable.

C. Prepaid insurance.

D. Depreciation.

140. When are adjusting entries made?

A. At the beginning of the accounting period.

B. At the end of the accounting period.

C. Daily.

D. Weekly.

Essay Questions

141. The companys unadjusted trial balance includes the following account balances:

The following data are available to determine adjusting entries:

A) $4,350 of prepaid insurance expired during the period.
B) The company estimates depreciation expense of $8,150 for the period.
C) A count showed $85,700 of supplies on hand.
D) Interest earned and receivable on the outstanding notes receivable is $260 for the period.
E) Performed services, $5,600, for which customers had previously paid in advance.
F) Performed services, $2,000, not yet billed or recorded.

Prepare the adjusting entries that should be recorded. Then, prepare an adjusted trial balance using the blank columns to the right of the unadjusted trial balance.

The following data are for the Grass is Greener Company at the end of 2014, after adjustments, except for the calculation of income tax expense.

142. Required:

A) Calculate the income before income tax.
B) Calculate the income tax owed by the company if its tax rate is 40%.
C) Calculate the net income.

143. Prepare an income statement and a statement of retained earnings

144. Below is an alphabetical listing of all of the accounts for T.O.s Dance Studio on 12/31/14. Assume all adjustments have been made and all balances are normal.

A) Prepare closing entries for T.O.s Dance Studio.
B) Prepare the post-closing trial balance for T.O.s Dance Studio.
C) Prepare the classified balance sheet for T.O.s Dance Studio.

145. Starbellies Tattoo Parlor LLC is completing the accounting process for its year ended 12/31/14. The transactions for the year have been journalized and posted. Information for adjusting entries appears below.

a. The supplies account shows a balance of $900. A count of supplies revealed $400 on hand at 12/31/14.
b. A one-year insurance policy was purchased for $1,200 on 12/1/14. It was recorded as Prepaid Insurance at that time.
c. Office equipment depreciates at a rate of $1,000 per year. The equipment has been owned all year.
d. A client paid $10,000 in advance for services to be rendered later, which was recorded as unearned revenue. Of this amount, 30% was earned as of 12/31/14.
e. Employees earn $5,000 for a 5-day work week. December 31, 2014 falls on a Tuesday.
f. Starbellies has completed $500 of work for which it has neither received cash nor billed the client.

A) For each of the adjusting items (a-f) prepare the adjusting journal entry that would be required at 12/31/14.

B) For each of the adjusting items (a-f) indicate the amount and the direction of effects of the adjusting journal entry on the elements of the balance sheet and income statement.
Using the following format, indicate + for increase, for decrease, and NE for no effect.

146. On December 31, 2014, Purrfect Pets had retained earnings of $267,800 before making its closing entries. During 2014, the company had service revenue of $168,100 and other revenue of $81,300. The company used supplies (mainly cat food and litter) during the year which cost $87,900. Administrative expenses were $16,400 and wages (paid in cash) were $18,300. Taxes were $13,700 and dividends declared and paid totaled $6,000.

Prepare T-accounts for the income statement accounts, dividends declared, and retained earnings at the end of the year before closing. Then, enter the closing journal entries in the T-accounts and compute the ending balances of the T-accounts.

147. Insert the appropriate letter A, D, or C into the correct blank to describe the type of adjustment required at the end of April.

Entry Type

A Accrual adjusting entry
D Deferral adjusting entry
C Closing entry

6. The Grass is Greener transfers revenues of $50,000 and expenses of $32,000 to retained earnings.

7. The Grass is Greener makes an entry to reflect use of equipment.

8. The Grass is Greener transfers dividends of $1,200 to retained earnings.

9. The Grass is Greener records income taxes.

10. The weekly payroll of $5,000 to be paid next week is recorded.

148. Match the term with the letter corresponding to the definition in the list below. There are more definitions than terms.

Terms

Definitions

A. When revenue minus expenses is a negative number.
B. Adds new values into the balance sheet and income statement accounts.
C. Also known as balance sheet accounts.
D. Entries made to update existing accounts and record new events.
E. The level of profit prior to considering income tax.
F. Lists the balances of all accounts to check that revenues equal expenses.
G. The amount at which an asset or liability is reported in the financial statements.
H. An account that is paired with another account to reduce its book value.
I. Lists the balances of all temporary and permanent accounts to check that debits equal credits.
J. A journal entry that transfers net income or loss to the retained earnings account.
K. Converts some of an assets or liabilitys book value into an expense or revenue.
L. An account that must have a zero balance after Closing entries have been made.
M. Lists the balances of all permanent accounts to check that debits equal credits.

149. For each of the following transactions, match the action (Debit or Credit) and the account type (Asset, Liability, Revenue, or Expense) to each account for the appropriate adjustment that needs to be made at the end of June. Also, show the effect on Retained Earnings.

(D) Debit or (C) Credit
(A) Asset, (L) Liability, (R) Revenue or (E) Expense Account

or Retained Earnings

a. The company has insurance costs of $620 a day for the month of June. On June 1 the company had $26,000 of prepaid insurance.

b. The company provides services in June for which it had received payment of $18,300 in May.

c. The company had $12,500 worth of labor performed by workers who will be paid in July.

d. The company had income before income taxes of $287,400 for June and will pay taxes at the rate of 36%. The tax will be paid in July.

e. The company had interest of $1,000 due for June on a Certificate of Deposit (CD). The interest will be received in August.

150. Match each of the following accounts to the term that identifies its nature temporary or permanent. If temporary, indicate whether the account would be closed with a debit or a credit, or not closed.

P permanent account
T temporary account
D close account with a debit
C close account with a credit
N not closed


Chapter 04 Adjustments, Financial Statements, and Financial Results Answer Key

True / False Questions

1. As a company uses supplies, an adjustment should be made to decrease an asset account and increase an expense account.

TRUE
The adjustment to record supplies used decreases supplies and increases supplies expense.

AACSB: Analytic
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 04-02 Prepare adjustments needed at the end of the period.
Topic: Adjusting entries

2. The purpose of adjusting entries is to transfer net income and dividends to retained earnings.

FALSE
The purpose of adjusting entries is to update recorded amounts and include events not yet recorded.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why adjustments are needed.
Topic: Why adjustments are needed

3. A contra account is added to the account it offsets.

FALSE
A contra account is an offset to, or reduction of, another account.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Prepare adjustments needed at the end of the period.
Learning Objective: 04-04 Prepare financial statements.
Topic: Financial statements

4. The amount charged for a good or service provided to a customer on account is recorded only after the payment is received.

FALSE
The amount charged for a good or service provided to a customer on account is debited to accounts receivable and credited to revenue at the time the good or service is provided.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-02 Prepare adjustments needed at the end of the period.
Topic: Adjusting entries

5. The carrying value of an asset is an approximation of the assets market value.

FALSE
Carrying value simply means the amount an asset is reported at (carried at) in the financial statements. Carrying value may or may not correspond to its market value.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 04-02 Prepare adjustments needed at the end of the period.
Learning Objective: 04-04 Prepare financial statements.
Topic: Financial statements

6. You mistakenly include a contra account of $20,000 in the same column of your trial balance as the account it offsets. All other things equal, your debit and credit column totals will differ by $40,000.

TRUE
Posting a debit (or credit) instead of a credit (or debit) will make the columns differ by twice the amount of the debit (credit).

AACSB: Analytic
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 04-03 Prepare an adjusted trial balance.
Topic: Adjusted trial balance

7. Corporate income taxes cannot be calculated until all other adjustments are made.

TRUE
The amount of income taxes can only be estimated when the final amounts of revenues and expenses are determined.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 04-02 Prepare adjustments needed at the end of the period.
Topic: Adjusting entries

8. The adjusted trial balance is completed to check that debits still equal credits after the income statement is prepared.

FALSE
The adjusted trial balance is prepared before the income statement.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-03 Prepare an adjusted trial balance.
Topic: Adjusted trial balance

9. The amounts of all the accounts reported on the balance sheet can be taken from the adjusted trial balance.

FALSE
The adjusted trial balance includes the beginning-of-year balance for Retained Earnings; the balance sheet reports the end-of-year balance. As such, the balance of the retained earnings account comes from the statement of retained earnings.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 04-04 Prepare financial statements.
Topic: Financial statements

10. One of the purposes of the closing entries is to bring the balances in all asset, liability, revenue, and expense accounts down to zero to start the next accounting period.

FALSE
Asset and liability accounts should remain unaffected by the closing process.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Explain the closing process.
Topic: The closing process

11. A deferral adjustment may involve one asset and one expense account.

TRUE
Deferrals commonly involve an asset and an expense, or a liability and a revenue.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why adjustments are needed.
Topic: Adjustment categories

12. Depreciation is a measure of the decline in market value of an asset.

FALSE
Depreciation is a systematic and rational method of spreading the depreciable cost of an asset that is used in the business to depreciation expense each period that the asset is being used.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 04-02 Prepare adjustments needed at the end of the period.
Topic: Adjusting entries

13. After posting the closing entries, all the revenue accounts and all the expense accounts are zero and the Retained Earnings account has been debited for $4,000. This implies that the company had a net income of $4,000.

FALSE
All the temporary accounts are closed when the closing entries are posted. This means that revenues and expenses will be zero and their amounts will have been transferred to retained earnings. If that account has been debited it is being decreased which means that there was a net loss.

AACSB: Analytic
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 04-05 Explain the closing process.
Topic: The closing process

14. The closing process includes a transfer of the Dividends Declared account balance to the Retained Earnings account.

TRUE
The Dividends account is prepared for use for the next period by being closed at the end of the period to the retained earnings account.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Explain the closing process.
Topic: The closing process

15. If a company failed to record depreciation expense on equipment for a period, the financial statements would show total assets overstated and total stockholders equity understated on the balance sheet.

FALSE
If the adjusting entry to record depreciation for the period is not made, the accumulated depreciation account will be understated which means that total assets on the balance sheet will be overstated. Depreciation expense will be understated which means that net income will be overstated and this will cause stockholders equity on the balance sheet to be overstated.

AACSB: Analytic
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Evaluate
Difficulty: 3 Hard
Learning Objective: 04-06 Explain how adjustments affect financial results.
Topic: Evaluate financial results

16. A post-closing trial balance should include only permanent accounts.

TRUE
All temporary accounts are reduced to zero in the closing process so they are not included in the post-closing trial balance.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Explain the closing process.
Topic: The closing process

17. All asset accounts, all liability accounts, contributed capital, and retained earnings accounts are called permanent accounts.

TRUE
Assets, Liabilities and Stockholders equity accounts are not closed in the closing process and are called permanent accounts.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-05 Explain the closing process.
Topic: The closing process

18. A company forgot to make an adjusting entry to record wages incurred but unpaid at the end of the period. This would understate Total Liabilities and overstate Retained Earnings on the Balance Sheet.

TRUE
The adjusting entry would have increased wages expense and increased wages payable which means that expenses would be understated, so net income would be overstated. On the balance sheet, retained earnings would be overstated and the liabilities would be understated.

AACSB: Analytic
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Evaluate
Difficulty: 3 Hard
Learning Objective: 04-06 Explain how adjustments affect financial results.
Topic: Evaluate financial results

19. Prepaid expense accounts are reported as assets on the balance sheet.

TRUE
Prepaid expenses are amounts paid in advance that provide future benefits.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-01 Explain why adjustments are needed.
Topic: Why adjustments are needed

20. Adjusting entries often involve cash.

FALSE
Adjusting entries never involve cash.

AACSB: Reflective Thinking
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 04-02 Prepare adjustments needed at the end of the period.
Topic: Adjusting entries

Multiple Choice Questions

21. Which of the following statements regarding types of adjusting entries is true?

A. An accrual adjustment that increases an asset will include an increase in an expense.

B. A deferral adjustment that decreases an asset will include an increase in an expense.

C. An accrual adjustment that increases an expense will include an increase in assets.

D. A deferral adjustment that increases a contra account will include an increase in an asset.
An accrual adjustment that increases an asset will include an increase in revenue and an accrual adjustment that increases expense will include an increase in liabilities. A deferral adjustment that increases expenses will decrease an asset (or increase the contra-asset).

AACSB: Analytic
AICPA BB: Critical thinking
AICPA FN: Measurement
Blooms: Analyze
Difficulty: 2 Medium
Learning Objective: 04-01 Explain why adjustments are needed.
Topic: Adjustment categories

22. Which of the following statements regarding adjusting entries is not true?

A. Adjustments are needed to ensure that the accounting system includes all of the revenues and expenses of the period.

B. Adjustments help to ensure the related accounts on the balance sheet and income statement are up to date and complete.

C. Adjusting entries often affect the cash account.

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