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Exam 3: Adjusting Accounts and Preparing Financial Statements

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Question 91

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Since the revenue recognition principle requires that revenues be recorded when earned,there are no unearned revenues in accrual accounting.

A) True
B) False

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Question 92

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Profit margin is calculated by dividing net sales by net income.

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B) False

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Question 93

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Discuss how accrual accounting enhances the usefulness of financial statements.

Accrued revenues at the end of one accounting period are expected to result in cash payments in a future period.

Adjustments are necessary to bring an asset or liability account to its proper amount and also update a related expense or revenue account.

Match the following terms the appropriate definition.

How is profit margin calculated? Discuss its use in analyzing a company's performance.

Recording revenues early overstates current-period income; recording revenues late understates current period income.

The accrual basis of accounting requires adjustments to recognize revenues in the periods they are earned and to match expenses with revenues.

Reed's net income was $180,000; its total assets were $1,050,000; and its net sales were $3,500,000.Calculate the company's profit margin ratio.

A trial balance prepared after adjustments have been recorded is called a(n) :

What is the usual order in which financial statements are prepared from the adjusted trial balance? Why are they prepared in that order?

What are the types of adjusting entries used for prepaid expenses,depreciation and unearned revenues?

Which of the following statements related to U.S.GAAP and IFRS is incorrect:

All plant assets,including land,eventually wear out or decline in usefulness.

Profit margin reflects the percent of profit in each dollar of revenue.

Prior to recording adjusting entries at the end of an accounting period,some accounts may not show proper financial statement amounts even though all transactions were correctly recorded.

The unadjusted trial balance and the adjustment data for Harris Training Institute are given below along with adjusting entry information.If these adjustments are not recorded,what is the impact on net income? Show calculation for net income without the adjustments and net income with the adjustments.Which one gives the most accurate net income? What accounting principles are being violated if the adjustments are not made? Additional information items: a.The Prepaid Insurance account consists of a payment for a 1 year policy.An analysis of the insurance invoice indicates that one half of the policy has expired by the end of the December 31 year-end. b.A cash payment for space sublet for 8 months was received on July 1 and was credited to Unearned Rent. c.Accrued interest expense on the note payable of $1,000 has been incurred but not paid.

Using the information given below,prepare an income statement and owner's equity statement for Martin Sky Taxi Services from the adjusted trial balance.Helena Martin did not make any additional investments in the company during the year.

On December 31,the year end,a company forgot to record $7,000 of depreciation on office equipment.In the current year financial statements,what is the effect of this error on assets,net income,and equity?