Questions and Answers
Which of the following statements is incorrect?
The accounting principle that requires revenue to be recorded when earned is the:
Revenue recognition principle.
Financial statements are typically prepared in what order?
Income statement, statement of retained earnings, balance sheet.
Unearned revenue is reported in the financial statements as:
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What do accrued revenues result in at the end of one accounting period?
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Adjusting entries are made after the preparation of financial statements.
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The accrual basis of accounting:
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Adjusting entries result in a better matching of revenues and expenses for the period.
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Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued revenues are all examples of:
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Adjusting entries affect both income statement and balance sheet accounts.
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Study Notes
Incorrect Statement
- Adjusting entries do not solely affect balance sheet accounts; they also impact income statement accounts.
Revenue Recognition Principle
- Revenue must be recorded when it is earned, not necessarily when cash is received.
Order of Financial Statements
- Financial statements are prepared in the following order: income statement, statement of retained earnings, and balance sheet.
Unearned Revenue
- Unearned revenue is classified as a liability on the balance sheet, indicating an obligation to deliver goods or services.
Accrued Revenues
- Accrued revenues represent amounts earned but not yet received in cash, leading to future cash receipts.
Timing of Adjusting Entries
- Adjusting entries are made before the preparation of financial statements, not afterward.
Accrual Basis of Accounting
- The accrual basis is preferred for external reporting due to its ability to provide more relevant information for business decision-making compared to cash basis.
Matching Revenues and Expenses
- Adjusting entries enhance the matching of revenues and expenses within the accounting period, contributing to more accurate financial reporting.
Examples Requiring Adjusting Entries
- Prepaid expenses, depreciation, accrued expenses, unearned revenues, and accrued revenues all require adjustments during the accounting period.
Impact of Adjusting Entries
- Adjusting entries impact both income statement accounts and balance sheet accounts, ensuring accurate financial representation.
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Description
Test your knowledge with these flashcards based on Chapter 3 of accounting principles. This quiz includes essential concepts such as adjusting entries, revenue recognition, and the order of financial statements. Perfect for students brushing up on their accounting skills!
