Finman4e Test Bank Mod03 050914. Module 3 Accounting Adjustments and Constructing Financial Statements

Module 3 Accounting Adjustments and Constructing Financial Statements Learning Objectives – coverage by question True/False Multiple Choice Exercises Problems Essays LO1 – Analyze and record transactions using th ...

Module 3 Accounting Adjustments and Constructing Financial Statements Learning Objectives – coverage by question True/False Multiple Choice Exercises Problems Essays LO1 – Analyze and record transactions using the financial statement effects template. LO2 – Prepare and explain accounting adjustments and their financial statement effects. LO3 – Explain and construct the trial balance. LO4 – Construct financial statements from the trial balance. LO5 – Describe the closing process Module 3: Accounting Adjustments and Constructing Financial Statements True/False Topic: Financial Statement Effects Template LO: 1 1. The financial statement effects template captures the effects of transactions on all four financial statements. Answer: True Rationale: The balance sheet accounts are all on the left side of the template and the income statement accounts on the right. In addition, the cash column provides the statement of cash flows, and the two equity columns can be used to construct the statement of shareholders’ equity. Topic: Journal Entries LO: 1 2. Assets, expenses and dividends increase with debits. Answer: True Rationale: Assets increase with debits and equity decreases with debits. Therefore, expenses and dividends decrease equity – they are debits. Topic: Journal Entries LO: 1 3. Increases are recorded on the left side of asset T-accounts and on the right side of liability T-accounts. Answer: True Rationale: Debits increase assets and credits increase liabilities. Topic: Financial Statement Effects of Transactions LO: 1 4. When shareholders contribute capital to a company, earned capital increases because the company has earned the shareholders’ trust and their investments. Answer: False Rationale: When shareholders contribute capital to a company, contributed, not earned, capital increases. Topic: Financial Statement Effects of Transactions LO: 1 5. Revenues and expenses affect the income statement but not the balance sheet. Answer: False Rationale: Revenue and expense recognition increases retained earnings on the balance sheet. ©Cambridge Business Publishers, 2015 3-2 Financial & Managerial Accounting for MBAs, 4th EditionTopic: Financial Statement Effects of Transactions LO: 1 6. Revenue is typically recorded as earned when cash is received because that is when the company can measure the revenue objectively. Answer: False Rationale: Revenue is recorded when it is earned regardless of when cash is received. Topic: Financial Statement Effects of Transactions LO: 2 7. Expenses that are paid in advance are held on the balance sheet until the end of the accounting period when they are transferred to the income statement with accounting adjustments. Answer: False Rationale: Expenses paid in advance include prepaid insurance, inventory and fixed assets. All of these items end up on the income statement when they are used up, not necessarily at the end of the accounting period. Topic: Accrual Accounting LO: 2 8. Accrual accounting recognizes revenues only when cash is received and expenses only when cash is paid. Answer: False Rationale: Accrual accounting refers to the recognition of revenue when earned and the matching of expenses when incurred. The recognition of revenues and expenses does not, necessarily, relate to the receipt or payment of cash. Topic: Accrual Accounting LO: 2 9. The journal entry for recording sales revenue that has been earned is to debit accounts receivable if cash will be received later, or debit unearned revenue if cash was received in advance. Answer: True Rationale: If cash is received later, the debit is to accounts receivable. If the cash is received before revenue is earned then the appropriate debit is to unearned revenue. Topic: Accounting Adjustments LO: 2 10. The journal entry for recording cost of sales is to debit cost of sales expense and credit the inventory account. Answer: True Rationale: The journal entry for recording cost of sales is to debit cost of sales expense and credit inventory. When the cash is paid for the inventory does not affect the expense. ©Cambridge Business Publishers, 2015 Test Bank, Module 3 3-3Topic: Accounting Adjustments LO: 2 11. Accounting scandals can happen when managers abuse the accounting adjustment process. Answer: True Rationale: Accounting scandals can result from improperly recorded transactions or with improper accounting adjustments. However, even if managers abuse the adjustment process, it is not the case that a scandal always ensues. Topic: Accounting Adjustments LO: 2 12. Companies make adjustments to more accurately reflect items on the income statement and the balance sheet. Answer: True Rationale: Adjustments ensure that performance and position are accurately portrayed in the financial statements. Topic: Trial Balance LO: 3 13. Companies typically prepare two trial balances – one after recording all the transactions and one after recording all the accounting adjustments. Answer: True Rationale: An unadjusted and an adjusted trial balance are both part of the accounting cycle. Topic: Closing Accounts LO: 5 14. A company closes all of its accounts in order to zero out the balances so that next period starts with a fresh slate. Answer: False Rationale: A company closes its temporary accounts only. Balance sheet accounts are never closed out – they have cumulative balances. Topic: Closing Accounts LO: 5 15. To close revenue accounts, a company must debit Retained Earnings because Revenue has a credit balance and debits must equal credits. Answer: False Rationale: Revenue does have a credit balance. Therefore, to close Revenue, the company debits Revenue and credits Retained earnings. ©Cambridge Business Publishers, 2015 3-4 Financial & Managerial Accounting for MBAs, 4th EditionMultiple Choice Topic: Financial Statement Effects – Sales on Account LO: 1 1. Sales on account would produce what effect on the balance sheet? A) Increase Revenue B) Increase noncash assets (Accounts receivable) C) Decrease noncash assets (Inventory) D) A and B E) A, B and C Answer: B Rationale: Revenue is not on the balance sheet (answer A is incorrect). Inventory is not always decreased – think of service revenue (answer C is incorrect). Topic: Financial Statement Effects – Collection of a Receivable LO: 1 2. Cash collected on accounts receivable would produce what effect on the balance sheet? A) Increase liabilities and decrease equity B) Decrease liabilities and increase equity C) Increase assets and decrease assets D) Decrease assets and decrease liabilities E) None of the above Answer: C Rationale: Cash collected on accounts receivable produces an increase in cash and a decrease in accounts receivable, both asset accounts. There is no impact on profit and on equity. Topic: Financial Statement Effects – Inventory Purchase LO: 1 3. How would a purchase $400 of inventory on credit affect the income statement? A) It would increase liabilities by $400. B) It would decrease liabilities by $400. C) It would increase noncash assets by $400. D) Both A and C E) None of the above Answer: E Rationale: There is no income statement effect of an inventory purchase.