Multiple-Choice Questions
1. Which of the following statements is true?
a. Under cash-basis accounting, revenues are recorded when earned and expenses are recorded when incurred.
b. Accrual-basis accounting records both cash and noncash transactions when they occur.
c. Generally accepted accounting principles require companies to use cash-basis accounting.
d. The key elements of accrual-basis accounting are the revenue recognition principle, the matching principle, and the historical cost principle.
2. In December 2011, Swanstrom Inc. receives a cash payment of $3,000 for services performed in December 2011 and a cash payment of $4,000 for services to be performed in January 2012. Swanstrom also receives the December utility bill for $500 but does not pay this bill until 2012. For December 2011, under the accrual basis of accounting, Swanstrom would recognize:
a. $7,000 of revenue and $500 of expense
b. $7,000 of revenue and $0 of expense
c. $3,000 of revenue and $500 of expense
d. $3,000 of revenue and $0 of expense
3. Which transaction would require adjustment at December 31?
a. The sale of merchandise for cash on December 30.
b. Common stock was issued on November 30.
c. Salaries were paid to employees on December 31 for work performed in December.
d. A one-year insurance policy (which took effect immediately) was purchased on December 1.
4. Which of the following statements is false?
a. Adjusting entries are necessary because timing differences exist between when a revenue or expense is recognized and cash is received or paid.
b. Adjusting entries always affect at least one revenue or expense account and one asset or liability account.
c. The cash account will always be affected by adjusting journal entries.
d. Adjusting entries can be classified as either accruals or deferrals.
5. Dallas Company loaned $10,000 to Ewing Company on December 1, 2011. Ewing will pay Dallas $600 of interest ($50 per month) on November 30, 2012. Dallas’s adjusting entry at December 31, 2011, is:
a. Interest Expense.............. 50
Cash......................................... 50
b. Cash................................ 50
Interest Revenue.................. 50
c. Interest Receivable.......... 50
Interest Revenue................. 50
d. No adjusting entry is required.
6. Ron’s Diner received the following bills for December 2011 utilities:
• Electricity: $850 on December 29, 2011
• Telephone: $475 on January 5, 2012
Both bills were paid on January 10, 2012. On the December 31, 2011, balance sheet, Ron’s Diner will report accrued expenses of:
a. $0
b. $475
c. $850
d. $1,325
7. In September 2011, GolfWorld Magazine obtained $12,000 of subscriptions for one year of magazines and credited Unearned Sales Revenue. The magazines will begin to be delivered in October 2011. At December 31, 2011, GolfWorld should make the following adjustment:
a. Debit Sales Revenue by $3,000 and credit Unearned Sales Revenue by $3,000.
b. Debit Unearned Sales Revenue by $3,000 and credit Sales Revenue by $3,000.
c. Debit Sales Revenue by $9,000 and credit Unearned Sales Revenue by $9,000.
d. Debit Unearned Sales Revenue by $9,000 and credit Sales Revenue by $9,000.
8. Hurd Inc. prepays rent every three months on March 1, June 1, September 1, and December 1. Rent for the three months totals $3,600. On December 31, 2011, Hurd will report Prepaid Rent of:
a. $0
b. $1,200
c. $2,400
d. $3,600
9. Which of the following statements is incorrect regarding preparing financial statements?
a. The adjusted trial balance lists only the balance sheet accounts in a ‘‘debit’’ and ‘‘credit’’ format.
b. The adjusted trial balance is the primary source of information needed to prepare the financial statements.
c. The financial statements are prepared in the following order:
(1) The income statement,
(2) The retained earnings statement,
(3) The balance sheet.
d. The income statement and the balance sheet are related through the retained earnings account.
10. Reinhardt Company reported revenues of $122,000 and expenses of $83,000 on its 2011 income statement. In addition, Reinhardt paid $4,000 of dividends during 2011. On December 31, 2011, Reinhardt prepared closing entries. The net effect of the closing entries on retained earnings was a(n):
a. Decrease of $4,000
b. Increase of $35,000
c. Increase of $39,000
d. Decrease of $87,000
11. Which of the following is true regarding the accounting cycle?
a. The accounts are adjusted after preparing the financial statements.
b. Journal entries are made prior to the transaction being analyzed.
c. The temporary accounts are closed after the financial statements are prepared.
d. An adjusted trial balance is usually prepared after the accounts are closed.