Chapter 4: Adjustments, Financial Statements, and the Quality of Financial Reporting

Chapter 4: Adjustments, Financial Statements, and the Quality of Financial Reporting September 17, 2008

1. When are adjusting entries necessary?

2. If the inflow/outflow of cash ______precedes______the recognition of the revenue or expense, we have a deferral.

3. If the inflow/outflow of cash____follows______the recognition of the revenue or expense we have an accrual.

4. Adjustments never involve _____cash______! (Very important!)

5. Adjustments always affect the ______income statement______and the __balance sheet ______.

6. What is a contra-account? What is an example of a contra-account?

7. When a concert promotions company collects cash for ticket sales two months in advance of the show date, which of the following accounts is involved? a. Accounts Payable b. Accounts Receivable c. Prepaid Expense d. Unearned Revenue

8. An adjusting journal entry to recognize accrued salaries payable would cause which of the following? a. A decrease in assets and stockholder’s equity. b. A decrease in assets and liabilities. c. An increase in expenses, liabilities, and stockholder’s equity. d. An increase in expenses and liabilities and a decrease in stockholder’s equity. 9. Assume the balance of prepaid insurance is $2500, but it should only be $1500. The adjusting entry should include which of the following? a. Debit to prepaid insurance for $1000 b. Credit to insurance expense for $1000 c. Debit to insurance expense for $1000 d. Debit to insurance expense for $1500

10. Assume a company receives a bill for $10,000 for advertising done during the current year. The bill has not been recorded at of the year-end, what will need to be in the adjusting entry? a. Debit to Advertising expense for $10,000 b. Credit to Advertising expense for $10,000 c. Debit to Accrued liabilities for $10,000 d. None of the above.

11. For the following, decide whether they are a Deferred expense (DE), Deferred revenue (DR), Accrued revenue (AR), or Accrued expense (AE).

___DE___a. An expense has not yet been incurred, but is already paid for. ___AR___b. Rent has not yet been collected, but is already earned. __DE____c. Office supplies on hand will be used in the next accounting period. __AE____d. An expense has been incurred, but not yet paid for or recorded. ___DR___e. Revenue has been collected in advance and will be earned later.

12. Record the adjusting entries for the following. The year is December 31. a. Received $600 utility bill for electricity used in December, to be paid in January.

Utilities Expense 600 A/P 600 b. Owed wages to 10 employees who worked three days at $100/day at the end of December. The company will pay the wages in January.

Wages Expense 3000 Wages Payable 3000 c. As of Dec. 31, the company had earned interest revenue of $3,000. It will be collected in March. Interest Receivable 3000 Interest Revenue 3000 d. At year end, supplies expense balance is $0. During the year, $10,000 worth of supplies were used up. Supplies Expense 10,000 Supplies 10,000