Generally Accepted Accounting Principles and Balance Sheet

F? 151. Assets become liabilities when they expire. F152. Revenue results from collection of accounts receivable. F153. A company’s fiscal year must correspond to the calendar year. T154. Accounting periods should be of equal length to facilitate comparison between periods. T155. When there is no direct connection between revenues and costs, the costs are systematically allocated among the periods benefitted. T156. Applying accrual accounting results in a more accurate measurement of profit for the period than does the cash basis of accounting. F157. Adjusting entries affect cash flows in the current period.

T158. Revenue cannot be recognized unless delivery of goods has occurred or services have been rendered. F159. Accrual accounting recognizes revenues and expenses at the point that cash changes hands. F160. A deferral is the recognition of an expense that has arisen but has not yet been recorded. T161. Adjusting entries are useful in apportioning costs among two or more accounting periods. T162. An adjusting entry includes at least one balance sheet account and at least one income statement account. T163. Recording incurred but unpaid expenses is an example of an accrual. F164.

If all transactions were originally recorded in conformity with GAAP, there would be no need for adjusting entries at the end of the period. T165. Every adjusting entry must change both an income statement account and a balance sheet account. F166. When the reduction in prepaid expenses is not properly recorded, this causes the asset accounts and expense accounts to be understated. T167. Accumulated depreciation may be referred to as a contra-asset account. T168. The adjustment to record depreciation of property and equipment consists of a debit to depreciation expense and credit to accumulated depreciation.

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T169. When services are not paid for until they have been performed, the accrued expense is recorded by an adjusting entry at the end of the accounting period. T170. The amount of accrued revenues is recorded by debiting an asset account and crediting an income account. F171. Acquiring a computer for cash is just exchanging one asset for another and will not result in an expense even in future periods. F172. A decrease in an expense account is the equivalent of a decrease in owner’s equity. F173. Accrued revenue is a term used to describe revenue that has been received but not yet earned. T174.

Book value is the original cost of a building less depreciation for the year. F175. The adjusting entry to allocate part of a cost of a one-year fire insurance policy to expense will cause total assets to increase. T176. The adjusting entry to recognize earned commission revenues, not previously recorded or billed will cause total assets to increase. F177. The adjusting entry to recognize an expense which is unrecorded and unpaid will cause total assets to increase. T178. The adjusting entry to recognize earned revenues which was received in advance will cause total liabilities to decrease.

F179. The maximum period covered by a worksheet is 6 months. T180. Withdrawals is recorded in the Balance Sheet debit column of the worksheet. F181. The Owner’s capital account is shown in the Income Statement credit column in the worksheet. F182. The Owner’s withdrawal account will not appear on an adjusted trial balance on the worksheet. F183. Accumulated depreciation appears on the income statement. T184. The worksheet is used to pull together up-to-date account balances needed to prepare the financial statements. F185.

Financial statements are prepared from the adjusted trial balance of the worksheet. F186. Because adjusting entries are recorded on a worksheet, they do not need to be journalized or posted. T187. A loss occurs when there are more expenses than revenue. T188. If revenue and expenses were equal for an accounting period, the result would be neither profit nor loss. T189. The worksheet is not presented with the financial statements. T190. The third step in worksheet preparation is to enter the adjusted account balances in the adjusted trial balance column.

T191. The worksheet is a convenient device for completing the accounting cycle. T192. After all necessary adjustments are entered in the worksheet, the two adjustment columns are totaled to prove the equality of debits and credits. F193. Income and expense accounts are moved to the balance sheet columns of the worksheet. F194. Assets, liabilities capital and withdrawal accounts are extended to the income statement column of the worksheet. T195. The balance of the Unearned Revenues account will appear in the balance sheet credit column of the worksheet. F196.

The balance sheet credit column of the worksheet usually contains only the liability and equity accounts. F197. Where the income statement column of the worksheet are totaled the excess of debits over credits is called profit. F198. The totals of the balance sheet columns of the worksheet will usually be the same as the totals appearing in the formal balance sheet. T199. The last step in the worksheet preparation is to enter the profit and loss figure as a balancing figure in the income statement and balance sheet columns. T200. The worksheet helps the accountant discover existing posting and calculation errors.

T201. If an asset has been carried to the debit column of the income statement and a similar error occurred involving income or liabilities, the worksheet may appear to be correct but the profit figure is actually misstated. F202. Financial statements are confidential documents which are available only to the owner of the business. T203. The focal point of the accounting cycle is the financial statements. T204. The income statement shows the types and mounts of revenues and expenses for the accounting period. F205. The excess of expenses over revenues is called loss. F206.

Expenses are increases in equity caused by the entity’s income-generating activities. F207. Cash loaned from a bank constitutes income. F208. The statement of changes in equity uses only the profit figure from the income statement to explain the change in equity. T209. The balance sheet provides the financial statement user the type and amount of each asset, liability and capital account at a particular date. T210. The balance sheet is prepared based on the final equity balance in the statement of changes in equity. F211. The account form of balance sheet shows assets, liabilities and equity in a vertical sequence.

T212. Financial flexibility is the ability to take effective actions to alter the amounts and timings of cash flows so that it can respond to unexpected needs and opportunities. T213. Solvency refers to the availability of cash over the longer term to meet financial commitments as they fall due. T214. Liquidity refers to the availability of cash in the near future after taking account of the financial commitments over this period. T215. An income statement refers to the specified period while a balance sheet shows the financial position of the entity at a particular date. T216.

Cash flow statement reports the amount of cash received and disbursed during the period. T217. Notes to financial statements include narrative descriptions or more detailed analyses of amounts shown on the face of the balance sheet, income statement, cash flow statement and statement in changes in equity. T218. Accounting policies are the specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and presenting financial statements. F219. The purchase of an equipment is an example of a financing activity. T220. Buying and producing goods and services are examples of operating activities.

T221. The purchase of land is an example of an investing activity. F222. Paying taxes to the government is an example of financing activity. T223. Financial position may be assessed by referring to the balance sheet. T224. The statement in changes in equity discloses the withdrawals during the period. F225. The heading of the income statement might include the “As of December 31, 2011. ” T226. The balance sheet is also known as the statement of financial position. T227. The statement of cash flows discloses significant events related to the operating, investing and financing activities of the business.

T228. The statement of changes in equity relates the income statement to the balance sheet by showing how the owner’s capital account changed during the accounting period. F229. The account Commissions Earned would appear on the balance sheet. F230. The account Wages Payable would appear in the income statement. T231. Financial statements cannot be prepared correctly until all the accounts have been adjusted. F232. A worksheet is more useful for a small company than a large one. T233. Working papers provide a written record of the work performed by an accountant or auditor. T234.

The worksheet is a type of accountant’s working paper. F235. The amount for owner’s withdrawal will appear in the income statement column of a worksheet. T236. The adjusted trial balance columns of the worksheet are prepared by combining the trial balance and adjustments column. T237. When the Income Statement columns of the worksheet are initially footed, they should be out of balance by the amount of profit and loss. F238. When the balance sheet columns of the worksheet are initially footed, they should be in balance. F239. The worksheet should be prepared after the formal financial statements have been prepared.

T240. An important use of the worksheet is an aid in the preparation of financial statements. 241. The worksheet is prepared after the formal adjusting and closing entries. 242. On a worksheet, the balance of the owner’s Capital account is its ending amount for the period. 243. The amount placed opposite the owner’s Capital account in the Balance Sheet columns of the worksheet is the amount to be reflected for owner’s Capital on the Balance Sheet. 244. The balances of the Accumulated Depreciation accounts will appear on the credit side of the worksheet’s Balance Sheet Columns. 245.

The balance sheet may be prepared by referring solely to the Balance Sheet columns of the worksheet. 246. When adjusting entries are entered onto a worksheet, it is not necessary to record them in the general journal. 247. Total assets, total liabilities and owner’s equity on the balance sheet are the same as the totals of the Balance Sheet columns on the worksheet. 248. The amount of owner’s withdrawals can be found on the worksheet. 249. After the adjusting and closing entries have been recorded and posted, the general ledger accounts that appear on the balance sheet have no balances. 250.

General account balances agree with those in the financial statements even before adjusting and closing entries are recorded and posted. 251. The income summary account is used to close the income and expense accounts. 252. The balance of the owner’s Capital account represents the cumulative net result of income, expense and withdrawal transactions. 253. Closing entries clear income and expense accounts at the end of the period. 254. The post-closing trial balance contains asset, liability, withdrawal and capital accounts. 255. The final trial balance is called a post-closing trial balance. 56. A reversing entry is a journal entry which is the exact opposite of a related adjusting entry made at the end of the period. 257. To simplify the recording of regular transactions in the next accounting period, all adjusting journal entries are reversed. 258. Post-closing trial balance tests the equality of the accounts after adjustments and the closing entries are posted. 259. Trial balances are prepared to ensure that no entries have been omitted. 260. In the accounting cycle, closing entries are prepared before adjusting entries. 261.

In the accounting cycle, information from source documents is initially recorded in the journal. 262. Nominal accounts are reduced to zero by closing entries. 263. Closing entries deal primarily with the balances of real accounts. 264. The only accounts that are closed are the income statement accounts. 265. Closing entries result in the transfer of profit or loss into the owner’s Capital account. 266. After all closing entries have been entered and posted, the balance of the income summary account will be zero. 267. Depreciation Expense-Building is a permanent account. 68. Supplies expense is a temporary account. 269. A revenue account is closed with a credit to the revenue account and a debit to income summary. 270. An expense account is closed with a debit to the expense account and a credit to income summary.

271. Income Summary is closed with a debit to income summary and a credit to the owner’s Withdrawals account. 272. When profit or loss is exactly zero, one of the usual closing entries will be avoided. 273. The Income Summary account appears in the income statement. 274. Temporary accounts are also known as real accounts. 75. During the closing process, revenues are transferred to the credit side of the Income Summary account. 276. During the closing process, expenses are transferred to the credit side of the Income Summary account. 277. All nominal accounts must be closed before the Income Summary account can be closed. 278. The post-closing trial balance will have fewer accounts than the adjusted trial balance. 279. The balances of all accounts that appear on the balance sheet are the same on the adjusted trial balance as they are on a post closing trial balance. 280.

There is sufficient information on a post-closing trial balance to prepare an income statement. 281. The post-closing trial balance will contain only real accounts. 282. The Income Summary account will appear on the post-closing trial balance. 283. There is sufficient information on a post-closing trial balance to prepare a balance sheet. 284. There is sufficient information on a post-closing trial balance to prepare a statement of changes in equity. 285. If the post-closing trial balance does not balance, then the error/s definitely occurred at some point during the closing process. 86. The adjusting entries involving Rent Receivable and Salaries Payable could be reversed. 287. The adjusting entries involving Depreciation Expense-Building and Supplies Expense could be reversed. 288. A reversing entry will include either a debit to a revenue account or a credit to an expnseaccount. 289. Reversing entries are never required. 290. Reversing entries can be made for deferrals but not for accruals. 291. Reversing entries are made to correct errors in the account. 292. The purpose of reversing entry is to simplify the bookkeeping process. 293.

Adjusting entries are all dated as at the first day of the new accounting period. 294. Closing entries can be prepared by referring solely to the income statement columns of the worksheet. 295. The chart of accounts for a merchandising entity differs from that of a service entity. 296. The difference between revenue from sales and cost of sales is operating income. 297. For cash sales, the operating cycle is from cash to inventory to accounts receivable and back to cash. 298. The bill of lading is a document prepared by the seller detailing the terms of delivery. 99. A validated deposit slip indicates that cash and checks were actually deposited. 300. Discounts offered to the buyer to encourage early payment are trade discounts. 301. Cash discounts are called purchase discounts from the buyer’s viewpoint. 302. The sales discounts account is a contra-income account and will have a debit balance. 303. A credit term of 2/10 n/30 means that the buyer may deduct 3% from the invoice if payment is made within 10 days from the end of the month. 304. Purchases return and allowances is a deduction from purchases. 305.

The cost of merchandise purchased during the period is determined by subtracting from the net purchases the amount of transportation costs incurred during the period. 306. The purchase of equipment not for resale should be debited to the purchases account. 307. If the seller is to shoulder the cost of delivery, the term is stated as F. O. B destination. 308. The term freight prepaid or collect will dictate who shoulders the transportation costs. 309. The two main systems for accounting for merchandise are periodic and perpetual. 310. The perpetual inventory system requires recording the cost of each sale as it occurs. 11. There is no need for a physical inventory count in the perpetual inventory system. 312. The debit balance in the inventory account in the trial balance under the periodic inventory system is the amount of inventory at the end of the current year.

313. The ending inventory of one period is the beginning inventory of the next period. 314. The balance in the merchandise inventory account at the beginning of the period represents the cost of merchandise on hand at that time. 315. The operating cycle involves the purchase and sale of inventory as well as the subsequent payment for purchase and collection of cash. 16. A business can shorten its operating cycle by increasing the percentage of cash sales and reducing the percentage of credit sales.

317. Merchandise inventory could include goods in transit. 318. An advantage of using the periodic inventory system is that it requires less recordkeeping than the perpetual inventory system. 319. The periodic inventory system relies on a physical count of merchandise for its balance sheet account. 320. Under the periodic inventory system, the cost of goods sold is treated as an account. 321. The periodic inventory system provides an up-to-date inventory on hand.

322. Summing ending merchandise inventory and cost of goods sold gives the cost of goods available for sale. 323. A physical inventory is usually taken at the end of the accounting period. 324. Under the periodic inventory system , purchases of merchandise are not recorded in the Merchandise Inventory account. 325. A company would be more likely to know the amount of inventory on hand if I it used the periodic inventory system ra of all merchandisether than the perpetual inventory system. 326. Taking a physical inventory refers to making a count of all merchandise on hand at a particular time. 327.

When the periodic inventory system is used , a physical inventory should be taken at the end of the fiscal year. 328. The income statement of a company that provides services only will not have cost of goods sold. 329. For a merchandising company, the difference between the net sales and operating expenses is called a gross margin. 330. Sales return and allowances is described a contra-revenue account. 331. On the income statement of a merchandising concern, profit is the amount by which net sales exceed operating expenses. 332. Transportation out is included in the cost of goods sold calculation. 33. Advertising expense appears as a selling expense on the income statement. 334. Transportation in is considered a cost of merchandise purchased. 335. The difference between gross sales and net sales is equal to the sum of sales discounts and sales returns and allowances.

336. When the terms of sale include a sales discount, it usually is advisable for the buyer to pay within the discount period. 337. The terms 2/10, n/30 mean that a 2% discount is allowed on payments made over 10 days but before 30 days after the invoice date. 338. Terms 2/10, n/30 is an example of a trade discount. 39. Goods should be recorded at their list price less any trade discounts involved. 340. FOB Shipping point means that the seller incurs the shipping costs. 341. Under the perpetual inventory system, the cost of merchandise is debited to Merchandise Inventory at the time of purchase.

342. The merchandise inventory account is not affected when a sales allowance is granted. 343. Ending merchandise inventory is included in the calculation of cost of goods available for sale. 344. Ending merchandise inventory for year 1 automatically becomes the beginning inventory for year 2. 45. The calculation of cost of goods available for sale during the year is not affected by the previous year’s ending inventory. 346. The change in inventory level from the beginning to the end of the year affect cost of goods sold. 347. Transportation In is treated as a deduction in the cost of goods sold section of the income statement. 348. Under the periodic inventory system, the Purchases account is used to accumulate all purchases of merchandise for resale.

349. Cost of goods sold is the primary difference between a merchandising and a service business income statement. 350. Debiting income summary and crediting beginning merchandise inventory eliminates the beginning inventory at the end of the period. 351. Cost of goods sold is a major expense of a merchandising business. 352. Using the nature of expense method of presenting expenses in the income statement has the advantage of simplicity because no allocation of operating expenses between functional classifications is necessary. 353. The function of expense method reports gross margin and income from operations. 354. Operating income is not computed in the nature of expense method.

355.Gross margin from sales is the income that the business would have made if all goods available for sale had been sold during the period. 356. The excess of gross profit over operating expenses is called operating profit. 357. In the worksheet, the ending inventory amount will appear in the income statement credit column and the balance sheet debit column. 358. The determination of net cost of purchase would include addition of transportation out. 359. The traditional balance sheet arrangement of assets on the left-hand side with the liabilities and owner’s equity on the right-hand side is called the report form. 360. Net sales is not an account name. 361. In the income statement, operating expenses are classified as selling expenses, administrative expenses and other operating expenses. 362. The sales return and allowances has a normal debit balance. 363. The closing entry for transportation in debits purchases and credits income summary. 364. Both Transportation In and Transportation Out accounts are closed by crediting the accounts. 365. On the worksheet of a merchandising company that uses the perpetual inventory system, the Merchandise inventory account balance is not adjusted.

366.When using the perpetual inventory system, the Merchandise inventory account will not appear in the closing entries. 367. The worksheet of a merchandising company that uses the perpetual inventory system will not have a Transportation In account. 368. When preparing a worksheet for a merchandising company that uses the perpetual inventory system, the cost of goods sold can be derived from the balances of several account in the income statement column. 369. Under the perpetual inventory system, the ending merchandise inventory balance is closed at the same time as cost of goods sold.

370.When preparing a worksheet for a merchandising company that uses the periodic inventory system, the merchandise inventory amount shown on the trial balance will be carried over the Balance Sheet debit column. 371. On the worksheet of a merchandising company that uses the periodic inventory system, both Purchase and Purchases Returns and Allowances appear in the Income Statement column. 372. The Purchases account is closed to the Merchandise Inventory account. 373. The ending inventory amount appears in both Income Statement columns on the worksheet of a merchandising company that uses the periodic inventory system. 74. Under the periodic inventory system, the Merchandise Inventory account appears in the closing entries made at the end of the period. 375. When preparing closing entries under the periodic inventory system, Sales, Purchases Returns an Allowances are both closed in the same entry. 376. Sales discount is a contra-revenue account with a normal credit balance.

377. Purchases discount would be recorded as a credit. 378. Transactions involving the payment of cash for any purpose are usually recorded in the cash journal. 379. Special journals are modified in practice to adapt to the specific needs of an entity. 80. The primary ledger that contains all the balance sheet accounts and income statement accounts is called the general ledger. 381. At the end of each month, the total of the amount column of the sales journal is posted as a debit to accounts receivable and credit to sales. 382. After postings have been completed for the month, if the sum of the balances in the accounts receivable subsidiary ledger does not agree with the balance of the accounts receivable In the general ledger, the errors must be located and corrected. 383. Sales on ccount of office equipment used in the business would be recorded in the sales journal.

384. Each amount in the other accounts column of the cash receipts journal must be posted individually to the appropriate general ledger account. 385. When there are numerous accounts with a common characteristic, it is common to place them in a separate ledger called a detail ledger. 386. The sale of merchandise for cash is recorded in the sales journal. 387. The total of the other accounts column of the cash receipts journal is not posted to the general ledger. 88. When special journals, control accounts, and subsidiary ledgers are used, no posting to any ledger is performed until the end of the month. 389. For each transaction recorded in the purchases journal, the credit is entered in the accounts payable column. 390. Acquisitions on account which are not provided for in a special debit column are recorded in the other accounts column in the purchases journal. 391. Debits to creditor’s accounts for invoices paid are recorded in the accounts payable debit column of the cash payments journal. 392.

Comparing the purchase order with the receiving report will show that all the goods ordered actually arrived and all goods that arrived were actually ordered. 393. The total of the accounts payable in the cash payments journal is posted at the end of the month as a debit to accounts payable and a credit to cash. 394. When customers are allowed to return for credit to their accounts, these transactions are recorded in the general journal. 395. A check register is used to record all expenditures. 396. The voucher register is a substitute for a sales journal. 397. The voucher register takes the place of the cash payments journal.

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