Deferred revenue is revenue that is

Select one:

a. not earned and the cash has not been received

b. earned but the cash has not been received

c. earned and the cash has been received

d. not earned but the cash has been received

If merchandise sold on account is damaged in shipment, the seller may inform the customer of a
reduction to the customer’s account by issuing a

Select one:

a. debit memo

b. purchase invoice

c. sales invoice

d. credit memo
Generally accepted accounting principles require that companies use the _____ of accounting.

Select one:

a. deferral basis

b. cash basis

c. accrual basis

d. account basis
Prepaid expenses are eventually expected to become

Select one:

a. expenses when their future economic value expires or is used up

b. revenues when services are performed

c. expenses in the period when they are paid

d. revenues when the liability is no longer owed

In recording the cost of merchandise sold based on data available from perpetual inventory records,
the journal entry is a

Select one:

a. debit to Cost of Merchandise Sold and a credit to Sales

b. debit to Cost of Merchandise Sold and a credit to Merchandise Inventory

c. debit to Accounts Receivable and a credit to Merchandise Inventory

d. debit to Merchandise Inventory and a credit to Cost of Merchandise Sold

Other revenue and expense items are not related to the primary operations of the business.

Select one:

True

False
Prepaid rent, representing rent for the next six months' occupancy, would be reported on the tenant's
balance sheet as a(n)

Select one:

a. asset

b. liability

c. owner's equity account

d. contra liability
Purchased goods in transit, shipped FOB destination, should be excluded from the ending inventory of
the buyer.

Select one:

True

False
Who is responsible for the freight costs when the terms are FOB shipping point?

Select one:

a. the buyer

b. the ultimate customer

c. the seller

d. either the seller or the buyer

When merchandise is sold for $600 plus a 6% sales tax, the sales account should be credited for $636.

Select one:

True

False
 Using accrual accounting, expenses are recorded and reported only

Select one:

a. when they are incurred and paid at the same time

b. if they are paid before they are incurred

c. if they are paid after they are incurred

d. when they are incurred, whether or not cash is paid

If the buyer bears the freight costs related to a purchase, the terms are said to be FOB destination.

Select one:

True

False
Because many companies use computerized accounting systems, periodic inventory is widely used.

Select one:

True

False
The adjustment for accrued fees was debited to Accounts Payable instead of Accounts Receivable.
This error will be detected when the adjusted trial balance is prepared.

Select one:

True

False
Services were performed but not billed. What effect will this have on the income statement if an
adjusting entry is not made?

Select one:

a. Revenues will be overstated.

b. Expenses will be overstated.

c. Net income will be understated.

d. Liabilities will be understated.

Match each of the following examples to the type of account (a through e) it represents. Letters may
be used more than once.

Annual depreciation on equipment, recorded on a monthly basis. Prepaid expense

 Paid six months of rental payments to the landlord. Prepaid expense

Provided tutoring for a student that will be invoiced next month. Accrued revenue

Received payment covering a six-month magazine subscription. Unearned revenue

A contract to provide tutoring services beginning next month was signed. None of these
Wages owed that will be paid next month. Answer 6
Annual property taxes owed that are to be paid at the beginning of next year. Prepaid expense

Received six months of rental payments from a tenant. Unearned revenue

Retainer fee received from a client for future legal representation. Unearned revenue

Services provided that have not been recorded. Accrued revenue

Paid for a six-month magazine subscription. Prepaid expense

Paid for a one-year insurance policy. Prepaid expense

How will the following adjusting journal entry affect the accounting equation?

Unearned Subscription Revenue 11,500

Subscription Revenue 11,500

Select one:

a. decrease liabilities, decrease revenues

b. decrease liabilities, increase revenues

c. increase liabilities, increase revenues

d. increase assets, increase revenues

In a perpetual inventory system, merchandise returned to vendors reduces the merchandise inventory
account.

Select one:

True

False
Merchandise Inventory is classified on the balance sheet as a

Select one:

a. current liability

b. long-term asset
c. long-term liability

d. current asset
Liabilities that will be due within one year or less and that are to be paid out of current assets are
called current liabilities.

Select one:

True

False
Which of the following is the proper adjusting entry, based on a prepaid insurance account balance
before adjustment of $14,000 and unexpired insurance of $3,000, for the fiscal year ending on April
30?

Select one:

a. debit Insurance Expense, $3,000; credit Prepaid Insurance, $3,000

b. debit Insurance Expense, $11,000; credit Prepaid Insurance, $11,000

c. debit Insurance Expense, $14,000; credit Prepaid Insurance, $14,000

d. debit Prepaid Insurance, $11,000; credit Insurance Expense, $11,000

Which of the following accounts would likely be included in an accrual adjusting entry?

Select one:

a. Insurance Expense

b. Interest Expense

c. Prepaid Rent

d. Unearned Rent
Jacob Co. sells merchandise on account to Isaiah Co. for $9,700. The invoice is dated on May 1 with
terms of 1/15, net 45. What is the discount, and up to what date must the invoice be paid in order for
the buyer to take advantage of the discount?

Select one:

a. $194, May 15

b. $97, May 16

c. $194, May 16

d. $97, May 15
 If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account,
which of the following describes the effect of the credit portion of the entry?

Select one:

a. decreases the balance of an expense account

b. decreases the balance of an owner's equity account

c. increases the balance of a liability account

d. increases the balance of an asset account

In a perpetual inventory system, the merchandise inventory account is only used to reflect the
beginning inventory.

Select one:

True

False
Match each of the following omissions to the effect (a through h) it would have on the balance sheet.

Assets and owner's

Depreciation on equipment was not recorded.
equity overstated

Liabilities overstated and

A tenant paid six months' rent in advance when he moved in on
the first day of the month. No entry was made on the last day of owner's equity
the month.
understated

Liabilities overstated and

An attorney has earned half of a retainer fee that was received and
recorded last month. No adjustment was recorded for the amount owner's equity
earned.
understated

Liabilities understated
Property taxes are paid annually. The estimated monthly amount
and owner's equity
for the taxes was not recorded.
overstated

Assets and owner's

Interest earned on a note receivable was not recorded.
equity understated

Services provided to customers on the last day of the month were Assets and owner's
not billed. equity understated
 Assets and owner's
No adjustment was made for supplies used up during the month.
equity overstated

Liabilities understated
Wages are paid every Friday for the five-day workweek. The
and owner's equity
month ended on Monday and no adjustment was recorded.
overstated
A sale of $750 on account subject to a sales tax of 6% would be recorded as an account receivable of
$750.

Select one:

True

False
When a large quantity of merchandise is purchased, a reduction allowed on the sale price is called a
trade discount.

Select one:

True

False
When the perpetual inventory system is used, the inventory sold is shown on the income statement as

Select one:

a. net purchases

b. cost of merchandise sold

c. purchases returns and allowances

d. purchases
Under the perpetual inventory system, when a sale is made, both the sale and cost of merchandise sold
are recorded.

Select one:

True

False
Which of the following is an example of a prepaid expense?

Select one:

a. Supplies
b. Unearned Subscription Revenue

c. Unearned Fees

d. Accounts Receivable
Which of the following accounts would most likely appear on an adjusted trial balance but probably
would not appear on the unadjusted trial balance?

Select one:

a. Accounts Receivable

b. Depreciation Expense

c. Unearned Fees

d. Fees Earned
Which of the following is considered to be an accrued expense?

Select one:

a. A computer technician has been paid in advance to install software updates as they become available.

b. A computer technician has just signed an agreement with you regarding pricing for future work.

c. A computer technician has installed the latest software updates, but you have not received an invoice or
made payment.

d. A computer technician installed the latest software updates and was paid on the same day.
Unearned fees appear on the

Select one:

a. balance sheet as a current liability

b. balance sheet in the Owner's Equity section

c. income statement as revenue

d. balance sheet in the Current Assets section

Merchandise Inventory normally has a debit balance.

Select one:

True

False
Kaden Co. sells merchandise on account to Jase Co. for $9,600. The invoice is dated July 15 with
terms of 1/15, net 45. If Jase Co. chooses not to take the discount, by when should the payment be
made?
 Select one:

a. August 29

b. August 15

c. July 30

d. July 25
Using a perpetual inventory system, the journal entry for the return from a customer of merchandise
sold on account includes a

Select one:

a. debit to Cash

b. debit to Merchandise Inventory

c. credit to Merchandise Inventory

d. credit to Customer Refunds Payable

An example of deferred revenue is Unearned Rent.

Select one:

True

False
In the periodic inventory system, purchases of merchandise for resale are debited to the purchases
account.

Select one:

True

False
The adjusting entry for inventory shrinkage would generally include a debit to Cost of Merchandise
Sold.

Select one:

True

False
Using the following information, determine the cost of merchandise sold.

Purchases $32,000 Selling expenses $ 960

Merchandise inventory, 5,700 Merchandise inventory, 6,370
September 1 September 30
Administrative expenses 910 Sales 63,000
 Rent revenue 1,200 Interest expense 1,040

Select one:

a. $32,400

b. $32,670

c. $31,330

d. $38,370
Who is responsible for the freight cost when the terms are FOB destination?

Select one:

a. either the buyer or the seller

b. the customer

c. the seller

d. the buyer
Using a perpetual inventory system, the journal entry for the sale of merchandise on account includes
a

Select one:

a. credit to Merchandise Inventory

b. credit to Accounts Receivable

c. debit to Merchandise Inventory

d. debit to Sales
Accruals are needed when an unrecorded expense has been incurred or an unrecorded revenue has
been earned.

Select one:

True

False
Which of the following is an example of accrued revenue?

Select one:

a. snow removal services that have been provided and paid on the same day

b. an agreement that has been signed for snow removal services for the next three months

c. snow removal services that have been paid for three months in advance
d. snow removal services that have been provided but have not been billed or paid
The type of account and normal balance of Unearned Consulting Fees would be

Select one:

a. liability, credit

b. revenue, credit

c. liability, debit

d. expense, debit
Unearned revenues that will be earned in a relatively short period of time are listed on the balance
sheet as current assets.

Select one:

True

False
The balance in the supplies account before adjustment at the end of the year is $6,250. The proper
adjusting entry if the amount of supplies on hand at the end of the year is $1,500 would be

Select one:

a. debit Supplies, $4,750; credit Supplies Expense, $4,750

b. debit Supplies, $1,500; credit Supplies Expense, $1,500

c. debit Supplies Expense, $4,750; credit Supplies, $4,750

d. debit Supplies Expense, $1,500; credit Supplies, $1,500

Purchased goods in transit should be included in the ending inventory of the buyer if the goods were
shipped FOB shipping point.

Select one:

True

False
The type of account and normal balance of Prepaid Insurance would be

Select one:

a. contra asset, debit

b. asset, debit

c. asset, credit

d. contra asset, credit

 When the terms of sale are FOB shipping point, the buyer should pay the freight charges.

Select one:

True

False
Adjusting entries affect at least one

Select one:

a. revenue and the dividends account

b. asset and one owner's equity account

c. revenue and one owner's equity account

d. income statement account and one balance sheet account

At the end of the fiscal year, the usual adjusting entry to account for the expired portion of prepaid
insurance was omitted. Which of the following statements is true?

Select one:

a. Insurance expense will be overstated.

b. Total assets at the end of the year will be understated.

c. Net income for the year will be overstated.

d. Owner's equity at the end of the year will be understated.

Purchases of merchandise are typically credited to the merchandise inventory account under the
perpetual inventory system.

Select one:

True

False
Which of the following accounts should be closed at the end of the fiscal year?

Select one:

a. Cost of Merchandise Sold

b. Merchandise Inventory

c. Accumulated Depreciation

d. Owner’s Capital
Using a perpetual inventory system, the entry to journalize the purchase of $30,000 of merchandise on
account would include a
 Select one:

a. credit to Sales

b. debit to Merchandise Inventory

c. credit to Merchandise Inventory

d. debit to Accounts Payable

Merchandise is sold for cash. The selling price of the merchandise is $6,000, and the sale is subject to
a 7% state sales tax. The journal entry for the sale would include a credit to

Select one:

a. Sales for $5,580

b. Sales Tax Payable for $420

c. Cash for $6,000

d. Sales for $6,240

Inventory shrinkage is journalized when

Select one:

a. merchandise is returned to a seller

b. merchandise purchased from a seller is incomplete or short

c. merchandise is returned by a buyer

d. there is a difference between the physical count of inventory and the perpetual inventory records
Merchandise subject to terms 2/10, n/30, FOB shipping point, is sold on account to a customer for
$25,000. What is the amount of the sales discount allowable?

Select one:

a. $460

b. $150

c. $260

d. $500
Under the perpetual inventory system, a company purchases merchandise on terms 2/10, n/30. The
journal entry for this purchase will include a debit to Cash and a credit to Sales.

Select one:

True

False
 Under the periodic inventory system, the cost of merchandise sold is recorded when sales are made.

Select one:

True

False
A retailer purchases merchandise with a catalog list price of $30,000. The retailer receives a 15%
trade discount and has credit terms of 2/10, n/30. How much cash will be needed to pay this invoice
within the discount period?

Select one:

a. $29,400

b. $30,000

c. $24,990

d. $24,900
Adjusting entries affect only expense and asset accounts.

Select one:

True

False
If the adjustment of the unearned rent account at the end of the period to recognize the amount of rent
earned is inadvertently omitted, the net income for the period will be understated.

Select one:

True

False
The general term used to indicate delaying the recognition of an expense already paid or of a revenue
already received is

Select one:

a. depreciation

b. inventory

c. accrual

d. deferral
If title to merchandise purchases passes to the buyer when the goods are shipped from the seller, the
terms are
 Select one:

a. FOB destination

b. consigned

c. FOB shipping point

d. n/30
Under the periodic inventory system, the journal entry for the purchase of merchandise inventory will
include a debit to

Select one:

a. Merchandise Inventory

b. Cost of Merchandise Purchased

c. Purchases

d. Accounts Payable
Sales is equal to the cost of merchandise sold less the gross profit.

Select one:

True

False
When is the adjusted trial balance prepared?

Select one:

a. after adjusting journal entries are posted

b. before the adjusting journal entries are journalized

c. before adjusting journal entries are posted

d. after the adjusting journal entries are journalized

A company using the periodic inventory system has merchandise inventory costing $210 on hand at
the beginning of a period. During the period, merchandise costing $635 is purchased. At year-end,
merchandise inventory costing $160 is on hand. The cost of merchandise sold for the year is

Select one:

a. $685

b. $635

c. $795

d. $265
 If payment is due by the end of the month in which the sale is made, the invoice terms are expressed
as n/30.

Select one:

True

False
A company realizes that the last two days' revenue for the month was billed but not recorded. The
adjusting entry on December 31 is a debit to Accounts Receivable and a credit to Fees Earned.

Select one:

True

False
Accrued expenses affect _____ on the balance sheet.

Select one:

a. fixed assets

b. prepaid expenses

c. liabilities

d. assets
Gracie Company made a prepaid rent payment of $2,800 on January 1. The company’s monthly rent
is $700. The amount of prepaid rent that would appear on the January 31 balance sheet after
adjustment is

Select one:

a. $2,800

b. $700

c. $1,400

d. $2,100
A seller may grant a buyer a reduction in selling price, and this is called a customer discount.

Select one:

True

False
What type of company would normally offer trade discounts to its customers?

Select one:
a. service company

b. retailer

c. online retailer

d. wholesaler
The proper journal entry for the receipt of inventory purchased on account in a periodic inventory
system would be

Select one:

a. Jan. 1 Merchandise Inventory 1,600

Accounts Payable 1,600

b. Jan. 1 Purchases 1,600

Accounts Payable 1,600

c. Jan. 1 Purchases 1,600

Accounts Receivable 1,600

d. Jan. 1 Office Supplies 1,600

Accounts Payable 1,600

If the physical count of inventory revealed $158,000 of merchandise on hand and the inventory
records reported $163,000, what would be the necessary adjusting entry for inventory shrinkage?

Select one:

a. debit Cost of Merchandise Sold, $5,000; credit Merchandise Inventory, $5,000

b. debit Cost of Merchandise Sold, $163,000; credit Merchandise Inventory, $163,000

c. debit Merchandise Inventory, $5,000; credit Cost of Merchandise Sold, $5,000

d. debit Merchandise Inventory, $158,000; credit Cost of Merchandise Sold, $158,000

Which of the following accounts would likely be included in a deferral adjusting entry?

Select one:

a. Interest Revenue

b. Accounts Receivable

c. Unearned Revenue

d. Salaries Payable
Smokey Company purchases a one-year insurance policy on July 1 for $3,600. The adjusting entry on
December 31 is
 Select one:

a. debit Prepaid Insurance, $1,800; credit Cash, $1,800

b. debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800

c. debit Insurance Expense, $2,100; credit Prepaid Insurance, $2,100

d. debit Insurance Expense, $1,500; credit Prepaid Insurance, $1,500

Accumulated Depreciation appears on the

Select one:

a. balance sheet in the Property, Plant, and Equipment section

b. income statement as an operating expense

c. balance sheet in the Current Assets section

d. balance sheet in the Long-Term Liabilities section

Accrued expenses are ordinarily listed on the balance sheet as current assets.

Select one:

True

False
Adjusting entries are

Select one:

a. the same as correcting entries

b. needed to bring accounts up to date and match revenue and expense

c. optional under generally accepted accounting principles

d. rarely needed in large companies

Prepaid expenses that benefit a relatively short period of time are listed on the balance sheet as current
assets.

Select one:

True

False
The accounting principle upon which deferrals and accruals are based is

Select one:

a. conservatism
b. matching

c. price-level adjustment

d. cost
Using accrual accounting, revenue is recorded and reported only

Select one:

a. if cash is received after the services are rendered

b. when cash is received without regard to when the services are rendered

c. when the services are rendered without regard to when cash is received

d. when cash is received at the time services are rendered

Under a perpetual inventory system, the cost of merchandise on hand at the end of the year can only
be determined by reviewing the ledger.

Select one:

True

False
The revenue recognition principle states that revenue should be recorded in the same period as the
cash is received.

Select one:

True

False
A company receives $6,500 for two season tickets sold on September 1. If $2,500 is earned by
December 31, the adjusting entry made at that time is a debit to Cash of $2,500, and a credit to Ticket
Revenue of $2,500.

Select one:

True

False
What is the major difference between a periodic and a perpetual inventory system?

Select one:

a. Under the periodic inventory system, no journal entry is made at the time of the sale of inventory for the
cost of the inventory.

b. All of these choices are correct.

c. Under the periodic inventory system, all adjustments such as purchases returns and allowances and
discounts are reconciled at the end of the month.

d. Under the periodic inventory system, the purchase of inventory will be debited to the purchases account.
The system of accounting where revenues are recorded when they are earned and expenses are
recorded when they are incurred is called the cash basis of accounting.

Select one:

True

False
Under the periodic inventory system, the journal entry for the cost of merchandise sold at the point of
sale will include which of the following?

Select one:

a. Cost of Merchandise Sold

b. Purchases

c. Inventory

d. None of these choices

The financial statements are prepared from the unadjusted trial balance.

Select one:

True

False
Large businesses that make sales to customers who use credit cards, such as American Express,
generally treat these sales as cash sales.

Select one:

True

False
Net income is closed to the owner's capital account.

Select one:

True

False
Select the best explanation for the following adjusting entry:

Unearned Revenue 7,500

 Fees Earned 7,500
????????????????

Select one:

a. To record payment of fees to be earned.

b. To record payment of fees earned.

c. To record fees earned at the end of the month.

d. To record fees that have not been earned at the end of the month.
Deferrals are recorded transactions that delay the recognition of an expense or revenue.

Select one:

True

False
Prepaid expenses have

Select one:

a. been incurred and paid

b. been recorded as expenses and paid

c. not yet been recorded as expenses

d. not yet been recorded as expenses but have been paid

Under a perpetual inventory system,

Select one:

a. accounting records continuously disclose the amount of inventory

b. the purchases returns and allowances account is credited when goods are returned to vendors

c. increases in inventory resulting from purchases are debited to Purchases

d. a physical count is required to determine cost of merchandise on hand

Which account would normally not require an adjusting entry?

Select one:

a. Accumulated Depreciation

b. Cash

c. Wages Expense

d. Accounts Receivable
 Most companies will not take a purchase discount, because 1% or 2% discounts are insignificant.

Select one:

True

False
The account type and normal balance of Unearned Revenue are

Select one:

a. revenue, credit

b. asset, debit

c. expense, debit

d. liability, credit
The inventory system employing accounting records that continuously disclose the amount of
inventory is called

Select one:

a. retail

b. periodic

c. perpetual

d. physical
Which of the following accounts has a normal debit balance?

Select one:

a. Interest Revenue

b. Accounts Payable

c. Merchandise Inventory

d. Sales
In a perpetual inventory system, when merchandise is returned to the supplier, Cost of Merchandise
Sold is debited as part of the transaction.

Select one:

True

False
Prepaid advertising, representing payment for the next quarter, would be reported on the balance sheet
as
 Select one:

a. a contra asset

b. a liability

c. an asset

d. owner's equity
If there is a balance in the unearned subscriptions account after adjusting entries are made, it
represents a(n)

Select one:

a. deferral

b. accrual

c. revenue

d. dividend
Under the periodic inventory system, the cost of merchandise sold is equal to the beginning
merchandise inventory plus the cost of merchandise purchased plus the ending merchandise inventory.

Select one:

True

False
Under the cash basis of accounting, a purchase of merchandise on account is not recorded until
payment is made.

Select one:

True

False
When merchandise purchased on account is returned under the perpetual inventory system, the buyer
would debit

Select one:

a. Accounts Receivable

b. Purchases Returns and Allowances

c. Merchandise Inventory

d. Accounts Payable
 A company receives $360 for a 12-month trade magazine subscription on August 1. The adjusting
entry on December 31 is a debit to Unearned Subscription Revenue of $150 and a credit to
Subscription Revenue of $150.

Select one:

True

False
The adjusting entry for gym memberships earned that were previously recorded in the unearned gym
memberships account is

Select one:

a. debit Unearned Gym Memberships; credit Gym Memberships Revenue

b. debit Gym Memberships Revenue; credit Unearned Gym Memberships

c. debit Gym Memberships Expense; credit Unearned Gym Memberships

d. debit Unearned Gym Memberships; credit Prepaid Gym Memberships

Match each of the following definitions with the term (a–h) it defines.

Expense account for recording shipping costs paid by the seller delivery expense
Informs the seller of the reasons for the return of merchandise or the
debit memo
request for a price allowance

Account where returned merchandise or price adjustments are purchase returns and
recorded by the buyer under the periodic inventory system allowances

Early payment discount offered to customers by the seller sales discount

Discount to government agencies or customers who purchase large
trade discount
quantities of merchandise
Account used to journalize merchandise on hand under a perpetual
merchandise inventory
inventory system
Expense account for recording shipping costs paid by the buyer under
delivery expense
the periodic inventory system
Discount taken by the buyer for early payment of invoice purchase discount
The term used to describe an expense that has not been paid and has not yet been recognized in the
accounts by a routine entry is

Select one:

a. deferred

b. prepaid
c. matched

d. accrued
In credit terms of 3/15, n/45, the "3" represents the

Select one:

a. percent of the available discount for early payment

b. full amount of the invoice

c. number of days when the entire amount is due

d. number of days in the discount period

Which term is applied to the excess of revenue from sales over the cost of merchandise sold?

Select one:

a. income from operations

b. gross profit

c. gross sales

d. net income
The net income reported on the income statement is $58,000. However, adjusting entries have not
been made at the end of the period for supplies expense of $2,200 and accrued salaries of $1,300. Net
income, as corrected, is

Select one:

a. $58,000

b. $56,700

c. $54,500

d. $55,800
The abbreviation FOB stands for "free on board."

Select one:

True

False
Match each of the following definitions with the term (a–h) it defines.

Shipping terms where the ownership of merchandise passes to the buyer FOB shipping
when the seller delivers the merchandise to the freight carrier point
 Inventory system that updates the merchandise inventory account only at the periodic inventory
end of the accounting period based on a physical count of merchandise on
hand system

Inventory system that updates the merchandise inventory account for every perpetual
purchase and sales transaction inventory system
Payment arrangements determined by the seller as to when invoices are due
credit terms
and whether early payment discount is offered
Shipping terms where the ownership of merchandise passes to the buyer
FOB destination
when the buyer receives the merchandise
The account type and normal balance of Prepaid Expense are

Select one:

a. expense, debit

b. asset, debit

c. revenue, credit

d. liability, credit
Which of the following items would not affect the cost of merchandise inventory acquired during the
period?

Select one:

a. purchases discounts

b. quantity discounts

c. freight in

d. sales commissions
Cost of merchandise sold is often the largest expense on a merchandising company’s income
statement.

Select one:

True

False
An adjusting entry to accrue an incurred expense will affect total liabilities.

Select one:

True
 False
If the perpetual inventory system is used, an account entitled Cost of Merchandise Sold is included in
the general ledger.

Select one:

True

False
Expenses that are incurred directly or entirely in connection with the sale of merchandise are
classified as

Select one:

a. other expenses

b. administrative expenses

c. selling expenses

d. general expenses
Freight is the amount paid by the seller to deliver merchandise sold to a customer under FOB shipping
point terms.

Select one:

True

False
An adjusting entry would adjust an expense account so the expense is reported when incurred.

Select one:

True

False
When purchases of merchandise are made on account with a perpetual inventory system, the
transaction is journalized with which entry?

Select one:

a. debit Merchandise Inventory; credit Cash Discounts

b. debit Merchandise Inventory; credit Purchases

c. debit Merchandise Inventory; credit Accounts Payable

d. debit Accounts Payable; credit Merchandise Inventory

If merchandise costing $3,500, terms FOB destination, 2/10, n/30, with prepaid freight costs of $125,
is paid within 10 days, the amount of the purchases discount is $70.
 Select one:

True

False
Accrued revenues are ordinarily listed on the balance sheet as current liabilities.

Select one:

True

False
An adjusting entry would adjust revenue so it is reported when earned and not when cash is received.

Select one:

True

False
A company receives $6,500 for two season tickets sold on September 1. If $2,500 is earned by
December 31, the adjusting entry made at that time is a debit to Cash of $2,500, and a credit to Ticket
Revenue of $2,500.

Select one:

True

False
A deduction allowed to wholesalers and retailers from the price of merchandise listed in catalogs is
called a cash discount.

Select one:

True

False
If the seller is to pay the freight costs of delivering merchandise, the delivery terms are stated as

Select one:

a. FOB n/30

b. FOB shipping point

c. FOB destination

d. FOB seller
What effect will this adjustment have on the accounting records?
 Unearned Fees 6,375
Fees Earned 6,375

Select one:

a. increase revenues reported for the period

b. decrease liabilities

c. All of these choices.

d. increase net income

On March 1, a company collects revenue in advance for the next 12 months and credits a liability
account. The adjusting entry at year-end on the work sheet would

Select one:

a. increase a liability account

b. decrease an asset account

c. decrease a revenue account

d. decrease a liability account

If the effect of the credit portion of an adjusting entry is to increase the balance of a liability account,
which of the following describes the effect of the debit portion of the entry?

Select one:

a. increases the balance of an asset account

b. increases the balance of an expense account

c. decreases the balance of an owner's equity account

d. increases the balance of a contra asset account

All income statement accounts will be closed at the end of the period.

Select one:

True

False
When goods are shipped FOB destination and the seller pays the freight charges, the buyer

Select one:

a. journalizes a reimbursement to the seller

b. journalizes a reduction for the cost of the merchandise

c. makes no journal entry for the freight

d. does not take a discount

If the adjustment to recognize expired insurance at the end of the period is inadvertently omitted, the
assets at the end of the period will be understated.

Select one:

True

False
For the year ending December 31, Orion, Inc. mistakenly omitted adjusting entries for $1,500 of
supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000
that expired. For the year ending December 31, what is the effect of these errors on revenues,
expenses, and net income?

Select one:

a. Net income is overstated by $2,300.

b. Expenses are understated by $3,500.

c. Expenses are overstated by $6,500.

d. Revenues are overstated by $4,200.

If the ownership of merchandise passes to the buyer when the seller delivers the merchandise to the
carrier, the terms are considered FOB destination.

Select one:

True

False
At year-end, the balance in the prepaid insurance account, prior to any adjustments, is $6,000. The
amount of the journal entry required to record insurance expense will be $4,000 if the amount of
unexpired insurance applicable to future periods is $2,000.

Select one:

True

False
Revenues and expenses should be recorded in the same period to which they relate.

Select one:

True

False
 Which of the following is not a characteristic of the accrual basis of accounting?

Select one:

a. The accrual basis of accounting supports the matching concept.

b. Expenses are reported in the same period as the revenues to which they relate.

c. Revenues and expenses are reported in the period in which cash is received or paid.

d. Revenues are reported on the income statement in the period in which they are earned.
President's salaries, depreciation of office furniture, and office supplies are

Select one:

a. miscellaneous expenses

b. selling expenses

c. administrative expenses

d. inventory expenses
The primary difference between a periodic and perpetual inventory system is that a periodic system

Select one:

a. records the cost of the sale on the date the sale is made

b. provides an easy means to determine inventory shrinkage

c. keeps a record showing the inventory on hand at all times

d. determines the inventory on hand only at the end of the accounting period
Which of the following is an example of an accrued expense?

Select one:

a. fees received but not yet earned

b. a two-year premium paid on a fire insurance policy

c. supplies on hand

d. salary owed but not yet paid

Which of the following pairs of accounts could not appear in the same adjusting entry?

Select one:

a. Fees Earned and Unearned Fees

b. Interest Income and Interest Expense

c. Rent Expense and Prepaid Rent

d. Salaries Payable and Salaries Expense

If the buyer is to pay the freight costs of delivering merchandise, delivery terms are stated as

Select one:

a. FOB n/30

b. FOB buyer

c. FOB destination

d. FOB shipping point

The journal entry for the receipt of inventory purchased for cash in a perpetual inventory system
would be

Select one:

a. Jan. 1 Purchases 1,500

Accounts Payable 1,500

b. Jan. 1 Merchandise Inventory 1,500

Cash 1,500

c. Jan. 1 Office Supplies 1,500

Cash 1,500

d. Jan. 1 Cash 1,500

Accounts Receivable 1,500

A sales discount encourages customers to pay their invoice early.

Select one:

True

False
What is the purpose of the adjusted trial balance?

Select one:

a. to verify that the debits and credits balance

b. to verify that no adjusting journal entry has been omitted

c. to verify that all of the adjusting entries have been posted

d. to verify that the net income (loss) is correctly reported

 The matching principle supports matching expenses with the related revenues.

Select one:

True

False
Adjusting journal entries are dated on the last day of the period.

Select one:

True

False
On September 1, the company pays rent for 12 months in advance and debits an asset account. At
year-end, the adjusting entry on the work sheet would

Select one:

a. decrease a liability account

b. decrease an expense account

c. increase an expense account

d. increase an asset account

To encourage a buyer to pay before the end of the credit period, the seller may offer a (answer from
perspective of seller)

Select one:

a. trade discount

b. sales discount

c. purchases discount

d. volume discount
Unearned revenue is a liability.

Select one:

True

False
Cumberland Co. sells $2,000 of merchandise to Hancock Co. for cash. Cumberland paid $1,250 for
the merchandise. Under a perpetual inventory system, which of the following is the correct journal
entry(ies)?

Select one:
a. debit Cash, $1,250; credit Sales, $1,250

b. debit Accounts Receivable, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250;
credit Merchandise Inventory, $1,250

c. debit Cash, $2,000; credit Sales, $2,000; and debit Cost of Merchandise Sold, $1,250; credit
Merchandise Inventory, $1,250

d. debit Cash, $2,000; credit Merchandise Inventory, $2,000

A business using the perpetual inventory system, with its detailed subsidiary records, does not need to
take a physical inventory.

Select one:

True

False
Generally, the revenue account for a merchandising business is entitled

Select one:

a. Sales

b. Fees Earned

c. Gross Profit

d. Gross Sales
The adjusted trial balance verifies that total debits equal total credits before the adjusting entries are
prepared.

Select one:

True

False
Title to merchandise shipped FOB shipping point passes to the buyer upon delivery of the
merchandise to the buyer's place of business.

Select one:

True

False
If title to merchandise purchases passes to the buyer when the goods are delivered to the buyer, the
terms are

Select one:

a. n/30
b. FOB shipping point

c. FOB destination

d. consigned
When a buyer returns merchandise purchased for cash, the buyer will journalize the transaction as a

Select one:

a. debit to Merchandise Inventory and a credit to Cash

b. debit to Sales and a credit to Accounts Payable

c. debit to Cash and a credit to Sales

d. debit to Cash and a credit to Merchandise Inventory

A buyer who acquires merchandise under credit terms of 1/10, n/30 has 30 days after the invoice date
to take advantage of the sales discount.

Select one:

True

False
The difference between deferred revenue and accrued revenue is that accrued revenue has been
recorded and needs adjusting and deferred revenue has never been recorded.

Select one:

True

False
Which of the following is considered to be unearned revenue?

Select one:

a. theater tickets sold for next month's performance

b. theater tickets sold last month for yesterday's performance

c. theater tickets sold yesterday on credit for yesterday's performance

d. theater tickets that were not sold for the current performance
A company receives $360 for a 12-month trade magazine subscription on August 1. The adjusting
entry on December 31 is a debit to Unearned Subscription Revenue of $150 and a credit to
Subscription Revenue of $150.

Select one:

True
 False
Cost of merchandise sold is the amount that a merchandising company pays for the merchandise it
intends to sell.

Select one:

True

False
When the perpetual inventory system is used, the inventory sold is debited to

Select one:

a. Supplies Expense

b. Merchandise Inventory

c. Sales

d. Cost of Merchandise Sold

By matching revenue earned during the accounting period to related incurred expenses,

Select one:

a. net income or loss will be properly reported on the income statement

b. net income or loss will always be overestimated

c. net income or loss will always be underestimated

d. net income or loss will not be determined

Adjustments for accruals are needed to record a revenue that has been earned or an expense that has
been incurred but not recorded.

Select one:

True

False
The unearned rent account has a balance of $72,000. If $18,000 of the $72,000 remains unearned at
the end of the accounting period, the amount of the adjusting entry is

Select one:

a. $54,000

b. $36,000

c. $90,000

d. $18,000
 By ignoring and not posting the adjusting journal entries to the appropriate accounts, net income will
always be overstated.

Select one:

True

False
When the seller offers a sales discount, even if borrowing has to be done, it is generally advantageous
for the buyer to pay within the discount period.

Select one:

True

False
Under the perpetual inventory system, all purchases of merchandise are debited to the account

Select one:

a. Cost of Merchandise Sold

b. Cost of Merchandise Available for Sale

c. Merchandise Inventory

d. Purchases
A company pays $36,000 for 12 months' rent on October 1, recording the prepayment as an asset. The
adjusting entry on December 31 is a debit to Rent Expense of $9,000, and a credit to Prepaid Rent of
$9,000.

Select one:

True

False
Prior to the adjusting process, accrued expenses have

Select one:

a. not yet been incurred, paid, or recorded

b. been incurred but not paid and not recorded

c. been incurred, have not been paid, but have been recorded

d. been paid but have not yet been incurred

Prior to the adjusting process, accrued revenue has

Select one:
a. been earned and not recorded as revenue

b. not been earned but recorded as revenue

c. not been recorded as revenue but cash has been received

d. been earned and cash received

Adjusting entries are not recorded under the cash basis of accounting.

Select one:

True

False
The unexpired insurance at the end of the fiscal period represents a(n)

Select one:

a. accrued liability

b. accrued expense

c. accrued asset

d. deferred expense
The balance in the prepaid rent account before adjustment at the end of the year is $32,000, which
represents four months' rent paid on December 1. The adjusting entry required on December 31 is

Select one:

a. debit Rent Expense, $24,000; credit Prepaid Rent, $8,000

b. debit Prepaid Rent, $24,000; credit Rent Expense, $8,000

c. debit Prepaid Rent, $8,000; credit Rent Expense, $8,000

d. debit Rent Expense, $8,000; credit Prepaid Rent, $8,000

Assets, liabilities, and owner's capital are real accounts and do not get closed at the end of the period.

Select one:

True

False
Generally accepted accounting principles require the accrual basis of accounting.

Select one:
 True

False
Corbit Corp. sold merchandise for $10,000 cash. The cost of merchandise sold was $7,590. The
journal entries for this transaction under the perpetual inventory system would be

Select one:

a. Cash 10,000

Sales 10,000
​
Cost of Merchandise Sold 10,000
Merchandise Inventory 10,000

b. Cash 10,000

Merchandise Inventory 10,000

​
Cost of Merchandise Sold 7,590
Sales 7,590

c. Cash 7,590

Sales 7,590
​
Cost of Merchandise Sold 7,590
Merchandise Inventory 7,590

d. Cash 10,000

Sales 10,000
​
Cost of Merchandise Sold 7,590
Merchandise Inventory 7,590
The revenue recognition principle

Select one:

a. determines when revenue is credited to a revenue account

b. states that revenue is not recorded until the cash is received

c. is not in conflict with the cash method of accounting

d. controls all revenue reporting for the cash basis of accounting

 Which account is not classified as a selling expense?

Select one:

a. Cost of Merchandise Sold

b. Advertising Expense

c. Sales Salaries

d. Delivery Expense
The arrangements between buyer and seller as to when payments for merchandise are to be made are
called

Select one:

a. net cash

b. cash on demand

c. credit terms

d. gross cash
The matching principle

Select one:

a. requires that the dollar amount of debits equal the dollar amount of credits on a trial balance

b. addresses the relationship between the journal and the balance sheet

c. states that the revenues and related expenses should be reported in the same period

d. determines whether the normal balance of an account is a debit or credit

When companies use a perpetual inventory system, the journal entry for the purchase of inventory
will include a debit to Purchases.

Select one:

True

False