Chapter 3 Flashcards
The assumption that presumes that an organization’s activities can be divided into specific time periods such as a month, a three-month quarter, a six-month interval, or a year is called the:
Time period assumption.
Interim financial statements refer to financial reports:
That cover less than one year, usually spanning one, three, or six-month periods.
The accounting principle that requires revenue to be recorded when goods or services are provided to customers and at an amount expected to be received from customers is the:
Revenue recognition principle.
Adjusting entries:
A) Affect only income statement accounts.
B) Affect only balance sheet accounts.
C) Affect both income statement and balance sheet accounts.
D) Affect cash accounts.
E) Affect only equity accounts.
C) Affect both income statement and balance sheet accounts.
The principle that requires expenses be recorded in the same period as the revenues that were recognized as a result of those expenses is the:
Expense recognition (Matching) principle.
The approach to preparing financial statements based on recording revenues when products and services are delivered and recording expenses when incurred is:
Accrual basis accounting.
Prepaid expenses, depreciation expense, accrued expenses, unearned revenues, and accrued revenues are all examples of:
Items that require adjusting entries.
In its first year of operations, Grace Company reports the following: Revenue of $60,000 ($52,000 cash received from customers); Expenses of $35,000 ($31,000 cash paid toward expenses). Net income under the accrual basis of accounting is:
$25,000.
Revenues, $60,000, minus expenses, $35,000, equals accrual-basis income, $25,000.
If a company mistakenly forgot to record depreciation on office equipment at the end of an accounting period, the financial statements prepared at that time would show:
Assets, net income, and equity overstated.
Profit margin is defined as:
Net income divided by net sales.
A company had $6,992,000 in net income for the year. Its net sales were $15,200,000 for the same period. Calculate its profit margin.
46.0%.
Profit Margin = Net Income/Net Sales
Profit Margin = $6,992,000/$15,200,000 = .46 = 46%
On July 1 Plum Company paid $7,500 cash for management services to be performed over a two-year period. On July 1, Plum should record:
A debit to a prepaid expense and a credit to Cash for $7,500.
Accrued revenues:
At the end of one accounting period result in cash receipts in a future period.
An account linked with another account that has an opposite normal balance and is subtracted from the balance of the related account is a(n):
Contra account.
The contra account that includes total depreciation expense for all prior periods for which an asset was used:
Is referred to as accumulated depreciation.
The expense of allocating the cost of equipment to the periods in which it is used is called:
Depreciation expense.
Prior to recording adjusting entries, the Office Supplies account had a $359 debit balance. A physical count of the supplies showed $105 of unused supplies available. The required adjusting entry is:
Debit Office Supplies Expense $254 and credit Office Supplies $254.
On April 1, a company paid the $1,350 premium on a three-year insurance policy with benefits beginning on that date. What amount of insurance expense will be reported on the annual income statement for the year ended December 31?
$337.50.
Which of the following assets is not depreciated?
Land
On May 1, a two-year insurance policy was purchased for $18,000 with coverage to begin immediately. What is the amount of insurance expense that would appear on the company’s income statement for the first year ended December 31?
$6,000.
$18,000 × 8/24 = $6,000
On January 1, Eastern College received $1,200,000 from its students for the spring semester that it recorded in Unearned Revenue. The term spans four months beginning on January 1, and the college earns the revenue evenly over the months of the term. Assuming the college prepares adjustments on January 31, what amount of tuition revenue should the college recognize?
$300,000.
$1,200,000/4 = $300,000
The difference between the cost of an asset and the accumulated depreciation for that asset is called:
Book Value.
On April 1, Griffith Publishing Company received $1,548 from Santa Fe, Incorporated for 36-month subscriptions to several different magazines. The subscriptions started immediately. What is the amount of revenue that should be recorded by Griffith Publishing Company for the first year of the subscription assuming the company uses a calendar-year reporting period?
$387.
explanation:
$1,548/36 = $43 per month
Year 1: $43 × 9 months = $387
Year 2: $43 × 12 months = $516
Year 3: $43 × 12 months = $516
Year 4: $43 × 3 months = $129
A company made no adjusting entry for accrued and unpaid employee salaries of $9,000 on December 31. Which of the following statements is true?
It will understate expenses and overstate net income by $9,000.
A physical count of supplies on hand at the end of May for Masters, Incorporated indicated $1,250 of supplies on hand. The general ledger balance before any adjustment is $2,100. What is the adjusting entry for supplies that should be recorded on May 31?
Debit Supplies Expense $850 and credit Supplies $850.
General Ledger balance − Supplies on hand = Supplies used
$2,100 − $1,250 = $850
A trial balance prepared after adjustments have been recorded is called a(n):
Adjusted trial balance.
Financial statements are typically prepared in the following order:
Income statement, statement of owner’s equity, balance sheet.
The adjusting entry to record an accrued expense is:
Increase an expense; increase a liability.
