Smartbook: Chapter 3 Financial Statement Adjustments

Questions and Answers

Accrual basis accounting recognizes _ when the service or product is delivered and records _ when ___ in order to adhere to the matching principle.

revenues; expenses; incurred

Which of the following could be a logical or realistic accounting period for a business that is creating financial statements? (Check all that apply)

One-year period (correct)

One-month period (correct)

Six-month period (correct)

Which of the following statements describes the expense recognition (matching) principle? (Check all that apply)

Matching of expenses with revenues is a major part of the adjusting process. (correct)

Expenses should be matched in the same accounting period as the revenues that are earned as a result of those expenses. (correct)

Place the steps in the adjusting process in the correct order in which they would be performed.

Determine what the current account balance is. = 1 Determine what the correct account balance should be. = 2 Record an adjusting entry. = 3 Signup and view all the answers

Demonstrate the required adjusting journal entry on Dec. 31 for a 12-month insurance policy purchased on Dec. 1 for $3,600.

Insurance expense would be debited for $300. Signup and view all the answers

Which of the following is (are) true regarding timeliness and the importance of periodic reporting? (Check all that apply)

The value of information is often linked to its timeliness. Signup and view all the answers

Accrual basis accounting is defined as: (Check all that apply)

An accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred. Signup and view all the answers

The expense recognition _ principle requires that be recorded in the same accounting period as the _ that are recognized as a result of those costs. This principle is a major part of the ___ process.

matching; revenues; adjusting Signup and view all the answers

Describe the final step in the adjusting process.

The final step is to create an adjusting journal entry to get from step 1 to step 2. Signup and view all the answers

The required adjusting journal entry on December 31 for a 12-month insurance policy purchased on Dec. 1 for $4,800 includes: (Check all that apply)

Debit to Insurance expense for $400. Signup and view all the answers

What does the revenue recognition principle state?

Revenue should be recorded when goods or services are provided to customers at an amount expected to be received from them. Signup and view all the answers

For the adjusting journal entry for $1,000 of supplies purchased at the beginning of the month, which of the following is correct? (Check all that apply)

Supplies would be credited for $300. Signup and view all the answers

Which account is considered a prepaid expense?

Supplies Signup and view all the answers

A plant asset can be defined by which of the following statements? (Check all that apply)

It has a life within the business greater than one period. Signup and view all the answers

Explain what unearned revenues are.

Unearned revenues refer to cash received in advance of providing a service or product. Signup and view all the answers

What would be the adjusting entry for supplies purchased at the beginning of the month valued at $800, with $200 remaining?

Supplies expense would be debited for $600. Signup and view all the answers

Which of the following accounts would be considered a prepaid expense or prepaid asset account? (Check all that apply)

Prepaid Insurance Signup and view all the answers

Select the correct statements regarding accrued expenses. (Check all that apply)

Examples of accrued expenses are wages expense and interest expense. Signup and view all the answers

What is a plant asset?

A plant asset refers to a long-term tangible asset used to produce and sell products or services. Signup and view all the answers

Select the correct statements regarding unearned revenues. (Check all that apply)

They refer to cash received in advance of performing a service or product. Signup and view all the answers

What is the proper adjusting entry for $500 of salaries that employees have earned but will not be paid until the next pay period?

Debit Salaries expense for $500. Signup and view all the answers

For a $4,000 loan from the bank at 9% interest, which is the required adjusting entry after 30 days?

Debit Interest expense for $30. Signup and view all the answers

Which of the accounts below are considered accrued expenses? (Check all that apply)

Wages expense Signup and view all the answers

Demonstrate the required journal entry on January 3 for accrued salaries. (Check all that apply)

Cash would be credited for $4,000. Signup and view all the answers

Which of the following statements reflect the required adjusting entry if employees have earned salaries of $650 that will be paid later? (Check all that apply)

Credit the Salaries payable account. Signup and view all the answers

For a loan of $10,000 at 5% interest after 45 days, what is the required adjusting entry? (Check all that apply)

Credit the Interest payable account. Signup and view all the answers

Accrued ___ are earned in a period that are both unrecorded and not yet received in cash.

revenue Signup and view all the answers

What is the journal entry for accrued salaries for Sheldon Company?

Debit to Salaries Payable for $500; Debit to Salaries Expense for $2,000. Signup and view all the answers

What is the adjusting entry for catering services completed but not recorded?

Debit Accounts receivable for $600. Signup and view all the answers

For earned but not recorded interest of $200, the required adjusting entry involves debiting the _ account and _ the ___ account.

Interest receivable; credit; interest revenue Signup and view all the answers

Which of the following describes accrued revenue? (Check all that apply)

They refer to revenues that are earned in a period, but have not been received and are unrecorded. Signup and view all the answers

The required adjusting entry for a service completed for $400 that had not been billed involves debiting the _ account and _ the ___ account.

Accounts receivable; credit; service revenue Signup and view all the answers

What is the required half of the adjusting entry for $600 interest earned but not recorded?

Debit Interest receivable for $600. Signup and view all the answers

Select the journal entries on January 31 for the customer payment of $900 including a previous $500 owed. (Check all that apply)

Cash will be debited for $600. Signup and view all the answers

Which transactions may require adjustments? (Check all that apply)

Six months of rent were paid in advance. Signup and view all the answers

Journal entry for a customer payment of $900 that includes a previous balance of $500 owed? (Check all that apply)

Cash will be debited for $900. Signup and view all the answers

Identify which group of accounts may require adjustments at the end of the accounting period. (Check all that apply)

Prepaid rent Signup and view all the answers

What is the difference between an adjusted trial balance and an unadjusted trial balance? (Check all that apply)

The adjusted trial balance is used to prepare financial statements. Signup and view all the answers

To prepare an income statement using the account balances on an adjusted trial balance, all of the _ and their credit balances are transferred to the income statement as well as all of the _ and their ___ balances.

revenues; expenses; debit Signup and view all the answers

Which of the following statements correctly define(s) a profit margin? (Check all that apply)

Profit margin is the ratio of a business's net income to its net sales. Signup and view all the answers

Explain the difference between the unadjusted and the adjusted trial balance.

The adjusted trial balance is prepared after adjusting entries have been recorded and posted. Signup and view all the answers

The formula to figure out the profit margin of a company is _ divided by _.

Net income; net sales Signup and view all the answers

Study Notes

Accrual Basis Accounting

Recognizes revenues when goods/services are delivered.
Records expenses when incurred to follow the matching principle.
Expense recognition (matching) involves aligning expenses with the revenues they generate.

Accounting Periods

Common accounting periods include one-month, six-month, and one-year.

Adjusting Process Steps

Identify the current balance of accounts.
Determine the correct balance needed.
Record the necessary adjusting entries.

Insurance and Supplies Adjustments

For a prepaid insurance policy, adjust the insurance expense monthly as it accrues.
Supplies used during the period need adjustment entries to reflect the expense incurred.

Timeliness of Reporting

Financial information must reach decision-makers regularly to remain useful.
Timeliness enhances the value of information in decision-making.

Revenue and Expense Recognition

Revenue is recorded when services are provided at expected amounts to be received.
Accrual accounting recognizes revenues earned and expenses incurred through adjustments.

Prepaid Expenses

Prepaid Insurance, Supplies, and Prepaid Rent are examples of prepaid assets.

Accrued Expenses

Include costs incurred that have not yet been recorded or paid, like wages and interest.
Require adjustments that increase both expense and liability accounts.

Plant Assets Definition

Long-term tangible assets reported on the balance sheet.
Costs are expensed over their useful lives.

Unearned Revenues

Cash received before services are rendered, treated as a liability.
Represent a future obligation to provide goods or services.

Adjusting Entries for Salaries

Adjust for earned salaries not yet paid by debiting Salaries Expense and crediting Salaries Payable.
Include accrued interest expense adjustments based on outstanding loans.

Account Adjustments During Period End

Common adjustments involve supplies, prepaid expenses, and unearned revenues needing proper recognition.

Adjusted vs. Unadjusted Trial Balance

Adjusted balances reflect entries after adjustments are made, used to prepare financial statements.
The adjusted trial balance typically lists more accounts due to adjustments.

Profit Margin Calculation

Calculated as net income divided by net sales, reflecting the efficiency of operations.

By understanding these key concepts, you can effectively work with and prepare financial statements, ensuring compliance with accounting principles.

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Description

Test your knowledge on adjusting accounts for financial statements with this quiz based on Smartbook Chapter 3. Explore key concepts such as accrual basis accounting and the matching principle through flashcards designed to enhance your understanding of essential accounting principles.