Chapter 4

Question 1

True or False: Accounting systems are designed to record most recurring daily transactions, particularly any involving cash. However, cash is not always received or paid in the period in which the company earns the related revenue or incurs the related expense.

Answer 1

True

Question 2

Why are adjustments needed?

Answer 2

Adjustments are made to the accounting records at the end of the period to state assets, liabilities, revenues, and expenses at appropriate amounts.

Question 3

Income Statements

Answer 3

(1) Revenues are recorded when earned

(2) Expenses are recorded in the same period as the revenues to which they relate.

Question 4

Balance Sheet

Answer 4

(1) Assets are reported at amounts representing the economic benefits that remain at the end of the period.
(2) Liabilities are reported at amounts owed at the end of the period.

Question 5

An expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period.

Answer 5

Deferral Adjustments

Question 6

Deferral adjustments are used to _____ balance sheet accounts and ____ corresponding income statements.

Answer 6

(1) decrease

(2) increase

Question 7

True or False: Each deferral adjustment involves one asset and one expense account, or one liability and one revenue account.

Answer 7

True

Question 8

Are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period.

Answer 8

Accrual Adjustments

Question 9

Accrual adjustments are used to record revenue or expenses when they occur _______ to receiving or paying cash, and to ____ corresponding balance sheet accounts.

Answer 9

(1) Prior

(2) Adjust

Question 10

True or False: Each accrual adjustment involves one asset and one revenue account, or one liability and one expense account.

Answer 10

True

Question 11

Adjustments are ______ on a daily basis because it’s more efficient to do them all at once at the end of each period.

Answer 11

Not made

Question 12

Determine the necessary adjustments to make the accounting records.

Answer 12

Analyze

Question 13

Adjusting journal entries ____ involve cash.

Answer 13

Never

Question 14

Adjusting entries ____ include on balance sheet and ____ income statement account

Answer 14

(1) One

(2) One

Question 15

Closing Temporary Accounts

Answer 15

(1) Transfer Net Income and Dividends to Retained Earnings

(2) Establish zero balances in all income statement and dividend accounts.

Question 16

What do temporary accounts track?

Answer 16

Financial results for a limited period of time.

Question 17

What do permanent accounts track?

Answer 17

Financial results from year to year.

Question 18

Closing Journal Entries Needed:

Answer 18

(1) Debit revenues account and credit expense accounts. Debit or credit the difference to Retained Earnings.
(2) Credit Dividends Declared and debit Retained Earning

Question 19

After posting these closing entries, all the income statement accounts and the dividends will have a balance of _____.

Answer 19

Zero

Question 20

Post Closing Trial Balance Steps

Answer 20

(1) Final Check that all debits still equal credits and that all temporary accounts have been closed.
(2) Contains balances for only permanent accounts
(3) Is the last step in the accounting process

Question 21

Adjustments help to ensure that all revenues and expenses are reported in the ______________.

Answer 21

Period in which they are earned and incurred

Question 22

True or False: Without adjustments, the financial statements present an incomplete and misleading picture of the company’s financial performance.

Answer 22

True