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Chapter 4: The Adjustment Process

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Chapter 4: The Adjustment Process

19 problems · 0 figures

Multiple Choice 4.1 §4.1 source ↗

Which of the following is any reporting period shorter than a full year (fiscal or calendar) and can encompass monthly, quarterly, or half-year statements?
  1. a.
    fiscal year
  2. b.
    interim period
  3. c.
    calendar year
  4. d.
    fixed year

Answer

B. interim period

Multiple Choice 4.3 §4.1 source ↗

Revenues and expenses must be recorded in the accounting period in which they were earned or incurred, no matter when cash receipts or outlays occur under which of the following accounting methods?
  1. a.
    accrual basis accounting
  2. b.
    cash basis accounting
  3. c.
    tax basis accounting
  4. d.
    revenue basis accounting

Answer

A. accrual basis accounting

Multiple Choice 4.5 §4.1 source ↗

Which of the following is a twelve-month reporting cycle that can begin in any month, except January 1, and records financial data for that twelve-month consecutive period?
  1. a.
    fixed year
  2. b.
    interim period
  3. c.
    calendar year
  4. d.
    fiscal year

Answer

D. fiscal year

Multiple Choice 4.7 §4.2 source ↗

Which type of adjustment occurs when cash is not collected or paid, but the related income or expense is reportable in the current period?
  1. a.
    accrual
  2. b.
    deferral
  3. c.
    estimate
  4. d.
    cull

Answer

A. accrual

Multiple Choice 4.9 §4.2 source ↗

If an adjustment includes an entry to Accumulated Depreciation, which type of adjustment is it?
  1. a.
    accrual
  2. b.
    deferral
  3. c.
    estimate
  4. d.
    cull

Answer

B. deferral

Multiple Choice 4.11 §4.2 source ↗

Rent paid in advance is an example of which of the following?
  1. a.
    accrued expense
  2. b.
    accrued revenue
  3. c.
    deferred expense (prepaid expense)
  4. d.
    deferred revenue (unearned revenue)

Answer

C. deferred expense (prepaid expense)

Multiple Choice 4.13 §4.2 source ↗

Revenue earned but not yet collected is an example of which of the following?
  1. a.
    accrued expense
  2. b.
    accrued revenue
  3. c.
    deferred expense (prepaid expense)
  4. d.
    deferred revenue (unearned revenue)

Answer

B. accrued revenue

Multiple Choice 4.15 §4.3 source ↗

Which of these transactions requires an adjusting entry (debit) to Unearned Revenue?
  1. a.
    revenue earned but not yet collected
  2. b.
    revenue collected but not yet earned
  3. c.
    revenue earned before being collected, when it is later collected
  4. d.
    revenue collected before being earned, when it is later earned

Answer

D. revenue collected before being earned, when it is later earned

Multiple Choice 4.17 §4.4 source ↗

Which of the following accounts’ balance would be a different number on the Balance Sheet than it is on the adjusted trial balance?
  1. a.
    accumulated depreciation
  2. b.
    unearned service revenue
  3. c.
    retained earnings
  4. d.
    dividends

Answer

C. retained earnings

Multiple Choice 4.19 §4.5 source ↗

On which financial statement would the Dividends account appear?
  1. a.
    Balance Sheet
  2. b.
    Income Statement
  3. c.
    Retained Earnings Statement
  4. d.
    Statement of Cash Flows

Answer

C. Retained Earnings Statement

Multiple Choice 4.21 §4.5 source ↗

On which two financial statements would the Retained Earnings account appear?
  1. a.
    Balance Sheet
  2. b.
    Income Statement
  3. c.
    Retained Earnings Statement
  4. d.
    Statement of Cash Flows

Answer

A. Balance Sheet · C. Retained Earnings Statement

Question 4.1 §4.1 source ↗

Describe the revenue recognition principle. Give specifics.

Answer

The revenue recognition principle mandates that revenue be reported when earned, regardless of when the revenue is collected. For this reason, when revenue is earned but not yet collected, an accrual entry is required to accurately report revenue earned. For the same reason, when cash is collected, in advance of the earnings process, a deferral entry is required, to accurately report revenue earned.

Question 4.3 §4.2 source ↗

What parts of the accounting cycle require analytical processes, rather than methodical processes? Explain.

Answer

Analyzing transactions (to enable journal entries) is the only analytical part of the accounting cycle. Analysis is required for both the original transaction entries and the adjusting entries. All of the other steps are just methodical posting of the entries, summarizing of the balances, regrouping of the accounts for financial reports, and closing of the accounts for year-end. Only the journal entries require decision-making processes.

Question 4.5 §4.2 source ↗

Name two types of adjusting journal entries that are commonly made before preparing financial statements? Explain, with examples.

Answer

Accruals—when cash has not moved, but it is time to record the transaction (examples: Accounts Payable or Accounts Receivable). Deferrals—when cash has moved, but it is not time to record the transaction (examples: Prepaid Insurance or Unearned Revenue).

Question 4.7 §4.2 source ↗

Why do adjusting entries always include both balance sheet and income statement accounts?

Answer

Adjusting entries always include at least one income statement account and at least one balance sheet account, because the adjustment process is done to shift revenues and expenses between the Balance Sheet and the Income Statement, depending on whether it is the correct period to include that income or expense (report on the Income Statement) or not (report on the Balance Sheet).

Question 4.9 §4.3 source ↗

If the Supplies account had an ending balance of $1,200 and the actual count for the remaining supplies was $400 at the end of the period, what adjustment would be needed?

Answer

An entry to adjust the supplies account to the $400 balance is needed; Debit Supplies Expense for 800; Credit Supplies for 800.

Question 4.11 §4.3 source ↗

If the Prepaid Insurance account had a balance of $12,000, representing one year’s policy premium, which was paid on July 1, what entry would be needed to adjust the Prepaid Insurance account at the end of December, before preparing the financial statements?

Answer

An entry to adjust the Prepaid Insurance account to $6,000 balance is needed; Debit Insurance Expense for 6,000; Credit Prepaid Insurance for 6,000.

Question 4.13 §4.4 source ↗

What is the difference between the trial balance and the adjusted trial balance?

Answer

The adjusted trial balance is the summary of account balances after the adjustments have been posted, so it reflects the corrected balances of all accounts.

Question 4.15 §4.5 source ↗

Indicate on which financial statement the following accounts (from the adjusted trial balance) would appear: (A) Sales Revenue; (B) Unearned Rent Revenue; (C) Prepaid Advertising; (D) Advertising Expense; (E) Dividends; (F) Cash.

Answer

(A) Income Statement; (B) Balance Sheet; (C) Balance Sheet; (D) Income Statement; (E) Retained Earnings Statement; (F) Balance Sheet

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Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.