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Exam 3: Adjusting Accounts for Financial Statements

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Question 121

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The current ratio:

A) Is used to measure a company's profitability.
B) Is used to measure the relation between assets and long-term debt.
C) Measures the effect of operating income on profit.
D) Is used to help assess a company's ability to pay its debts in the near future.
E) Is calculated by dividing current assets by equity.

F) C) and D)
G) A) and C)

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Question 122

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Describe the types of entries required in later periods that result from accruals.

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Accrued revenues recorded in one period ...

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Question 123

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Journal entries recorded at the end of each accounting period to prepare the revenue,expense,and dividends accounts for the upcoming period and to update the retained earnings account for the events of the period just finished are referred to as:

In its first year of operations,Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers) ; Incurred expenses of $35,000 ($31,000 cash paid toward them) ; Prepaid $8,000 cash for costs that will not be expensed until next year.Net income under the accrual basis of accounting is:

Under the cash basis of accounting,no adjustments are made for prepaid,unearned,and accrued items.

Match the following terms with the appropriate definition. -Revenues earned in a period that are both unrecorded and not yet received in cash or other assets.

On January 1,Fashion Forward Magazine received $15,000 from subscribers for the annual subscriptions that it recorded in Unearned Subscription Revenue.The issues of the magazine are mailed to subscribers quarterly.What amount of subscription revenue should the magazine recognize on March 31 when the first issue is sent in March?

The closing process takes place before financial statements have been prepared.

Explain the purpose of reversing entries.

Fragmental Co.leased a portion of its store to another company for eight months beginning on October 1,at a monthly rate of $800.Fragmental collected the entire $6,400 cash on October 1 and recorded it as unearned revenue.Assuming adjusting entries are only made at year-end,the adjusting entry made by Fragmental Co.on December 31 would be:

On December 31,Winters Company received a $385 bill for the purchase of supplies in December that it will not pay for until January 15.Winters follows a policy of recording all prepaid expenses to asset accounts at the time of cash payment.The adjusting entry needed on December 31 to accrue this cost is:

In preparing statements from the adjusted trial balance,the balance sheet must be prepared first.

On December 31,the year end,a company forgot to record $6,000 of depreciation on machinery.In the current year financial statements,what is the effect of this error on assets,net income,and equity?

A roofing company collects fees when jobs are complete.The work for one customer,whose job was bid at $3,000,has been completed as of December 31,but the customer has not yet been billed.Assuming adjustments are only made at year-end,what is the adjusting entry the company would need to make on December 31,the calendar year-end?

In its first year of operations,Grace Company reports the following: Earned revenues of $60,000 ($52,000 cash received from customers) ; Incurred expenses of $35,000 ($31,000 cash paid toward them) ; Prepaid $8,000 cash for costs that will not be expensed until next year.Net income under the cash basis of accounting is:

If a company reporting on a calendar year basis,paid $18,000 cash on January 1 for one year of rent in advance (lease beginning January 1),and adjusting entries are made at the end of each month,the balance remaining in Prepaid Rent on December 1 should be $1,500.

A classified balance sheet differs from an unclassified balance sheet in that:

Carroll Co.is a multi-million dollar business.The business results for the year have been impacted significantly by a slowing economy.The company wants to increase its net income.It has incurred $2,900,000 in unpaid salaries at the end of the year and wants to leave those amounts unrecorded at the end of the year.(a)How would this omission affect the financial statements of Carroll? (b)Which accrual basis of accounting principles does this omission violate? (c)Would this be considered an ethical problem?

Use the information in the adjusted trial balance presented below to calculate current assets for Taron Company: $\begin{array}{lrr}\text {Account Title}&\text {Dr.}&\text {Cr} \\\text { Cash } & \$ 23,000 \\\text { Accounts receivable } & 16,000 \\\text { Prepaid insurance } & 6,600 \\\text { Equipment } & 100,000\\\text { Accumulated depreciation-Equipment } & & \$ 5,000 \\\text { Land } & 95,000 & \\\text { Accounts payable } & & 17,000 \\\text { Interest payable } & & 2,400 \\\text { Unearned revenue } & & 5,000 \\\text { Long-term notes payable } & & 30,000 \\\text { Retained earnings } & & 136,200 \\\text { Totals } & \$ 240,600 & \$ 240,600\end{array}$

On a work sheet,the adjusted balances of revenues and expenses are sorted to the Income Statement columns of the work sheet.