Test bank with answers for financial accounting 6e by libby chapter 04

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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

True / False Questions
1. The ledger (T-accounts) contains information which has been posted from the journal.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 1

2. The trial balance, prepared immediately after all transactions of the period have been
recorded and posted, should show all account balances that are in the ledger (T-accounts).
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

3. Deferred expenses are previously unrecorded expenses that need to be recorded at the end
of the accounting period to reflect the amount incurred and its related payable.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

4. Income taxes incurred but not yet paid at the end of the accounting period is an example of
an accrued expense adjusting entry.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

4-1
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

5. When an adjustment decreases prepaid insurance and increases insurance expense for the
portion expired, that is an example of a prepaid expense adjusting entry.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

6. Adjusting entries are used to update income statement accounts and balance sheet
accounts.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

7. Unearned rent revenue is an example of a liability account that will usually not be satisfied
by payment of cash but rather by allowing the tenant to occupy the premises for which they
have prepaid.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 2

8. Rent of $4,000 collected in advance was recorded as unearned rent revenue. At the end of
the accounting period, half the rent was earned. The related adjusting entry should be a credit
to rent revenue for $2,000 and a debit to unearned rent revenue for $2,000.
TRUE

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

4-2
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

9. Adjusting entries are recorded in the journal (i.e., journalized) and then they are posted to
the ledger (T-accounts).

TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

10. Both the adjusting entries and the closing entries usually are dated as of the last day of the
accounting period.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

11. Depreciation expense is an estimated allocation of the cost of long-lived assets and is
recorded in a contra asset, accumulated depreciation, because it is only an estimated amount
and not known with certainty.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

12. The statement of cash flows is designed to explain the causes of changes in the cash
account during the period that resulted from the inflows and outflows of cash.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

4-3
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

13. The earnings per share ratio is disclosed at the bottom of the statement of cash flows.
FALSE

AACSB Tag: Communications
Difficulty: Easy
L.O.: 3

14. Net income under accrual accounting is subject to more distortion than cash flow from
operations because of large accruals and deferrals that can impact reported income.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

15. Net profit margin is computed by dividing net sales by net income.
FALSE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

16. When net profit margin is declining over a five-year period, it could indicate inefficient
management of expenses and sales revenue.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

17. When net profit margin is declining over a five-year period, it signals inefficient
management of expenses and sales revenue.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 4

4-4
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

18. Those firms that make relatively conservative estimates for their accrued and deferred
adjustments are said to have financial reports disclosing a higher quality of earnings.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 5

19. Revenue and expense accounts often are called permanent (real) accounts because their
balances are closed out at the end of the accounting year.
FALSE

AACSB Tag: Relative Thinking

Difficulty: Medium
L.O.: 5

20. At the end of the accounting period, the balances in the nominal accounts are closed while
the balances in the real accounts are carried forward to the next accounting period.
TRUE

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 5

Multiple Choice Questions
21. Which of the following is a correct statement about the unadjusted trial balance?
A. It provides a listing of the balance sheet accounts only.
B. It provides data in a convenient form for preparing the adjusting entries and financial
statements.
C. It provides a check of the equality of the debits and credits of the ledger accounts after
transactions have been journalized and posted.
D. Both B and C are correct.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

4-5
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

22. Morgan Company purchased supplies inventory for $2,000. Due to an error in posting, the
inventory account was debited for only $200 when accounts payable was credited for $2,000.
During which phase of the accounting cycle would this error be discovered?
A. Recording the transaction in the journal.
B. Preparation of the financial statements.
C. Preparation of the trial balance.
D. Analysis of each transaction.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 1

23. Which is the correct order of the steps in the accounting cycle during the accounting
period?
A. Transaction analysis, journal entries, trial balance
B. Transaction analysis, posting to the ledger, journal entries
C. Transaction analysis, posting to the ledger, adjusting the accounts

D. Transaction analysis, journal entries, posting to the ledger

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

24. Which is the correct order of the steps in the accounting cycle at the end of the accounting
period?
A. Prepare financial statements, journalize and post adjusting entries, journalize and post the
closing entries, and prepare a post-closing trial balance
B. Prepare an unadjusted trial balance, journalize and post adjusting entries, journalize and
post the closing entries, and prepare financial statements
C. Journalize and post adjusting entries, journalize and post the closing entries, prepare
financial statements, and prepare an adjusted trial balance
D. Prepare an unadjusted trial balance, journalize and post adjusting entries prepare financial
statements, and journalize and post the closing entries

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 1

4-6
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

25. The following is an example of an error that will not be discovered on the trial balance:
A. An entry was journalized and posted as a debit to cash for $500 and credit to accounts
receivable for $5,000.
B. An entry was journalized and posted as a debit to cash for $500 and a credit to sales
revenue $500 when payment was received on a customer's account.
C. An entry was journalized and posted as a debit to wages expense for $20,000 and a debit to
wages payable for $20,000.
D. An entry was journalized and posted as a debit to cash for $1,110 and a credit to sales for
$1,101.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 1

26. On October 1, 2009, Adams Company paid $4,000 for a two-year insurance policy on the
building with the insurance starting on that date. The accounting period ends December 31. At
the end of December 31, 2009, the financial statements should report
A. Prepaid insurance, $4,000 and Insurance expense, $0.
B. Prepaid insurance, $0 and Insurance expense, $4,000.
C. Prepaid insurance, $2,000 and Insurance expense, $2,000.

D. Prepaid insurance, $3,500 and Insurance expense, $500.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

27. On April 1, 2007, the premium on a one-year insurance policy on equipment was paid
amounting to $3,000 with the insurance starting on that date. At the end of December 31,
2007 (end of the accounting period), the financial statements for 2007, would report
A. Insurance expense, $3,000; Prepaid insurance $0.
B. Insurance expense, $0; Prepaid insurance $3,000.
C. Insurance expense, $750; Prepaid insurance $2,250.
D. Insurance expense, $2,250; Prepaid insurance $750.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

4-7
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

28. On July 1, 2009, Allen Company signed a $100,000, one-year, 6 percent note payable. At
due date, June 30, 2010, the principal and interest will be paid. Interest expense should be
reported on the income statement (for the year ended December 31, 2009) as
A. $6,000.
B. $3,000.
C. $1,500.
D. $1,200.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

29. On December 31, 2009, the effect of recording an adjusting entry for accrued wages of
$2,000 would be
A. a decrease in stockholders' equity and decrease in an asset.
B. a decrease in liabilities and increase in stockholders' equity.
C. a decrease in stockholders' equity and an increase in liabilities.
D. an increase in stockholders' equity and increase in an asset.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

30. On January 1, 2007, the ledger of Global Corporation correctly showed supplies inventory
of $1,000. During 2007, supplies purchases amounted to $5,000. A physical count of
inventory on hand at December 31, 2007, showed $1,200. The 2007 income statement should
report supplies expense amounting to
A. $ 6,000.
B. $ 5,200.
C. $ 4,800.
D. $ 1,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

4-8
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

31. How is carrying value calculated?
A. Acquisition cost minus accumulated depreciation
B. Acquisition cost minus depreciation expense
C. Acquisition cost divided by the useful life of the asset
D. None of the other answers is correct.

AACSB Tag: Analytic
Difficulty: Easy
L.O.: 2

32. On December 31, 2007 (end of the accounting period), Dallas Company recorded
depreciation on its company truck of $5,000. Transaction analysis of the depreciation should
reflect the following
A. decrease stockholders' equity and increase liabilities.
B. decrease assets and increase liabilities.
C. decrease stockholders' equity and decrease assets.
D. decrease assets and increase stockholders' equity.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

33. On July 1, 2009, Canine Company signed a two-year $50,000 note payable with 8 percent
interest. At due date, July 1, 2011, the principal and interest will be paid in full. Interest
expense should be reported on the income statement for the year ended December 31, 2009, in
the amount of
A. $ 2,000.
B. $ 2,250.

C. $ 4,000.
D. $ 0.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 2

4-9
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

34. On July 1, 2009, Gerdin Company borrowed $100,000. The company signed a note
payable with interest at 6 percent per year. The note and interest are due on December 31,
2009. On December 31, 2009, Goode paid $103,000 to settle the debt in full. Assuming no
accruals for interest have been made during the year, transaction analysis of the $103,000

cash payment on December 31, 2009, should reflect the following:
A. decrease assets, $103,000; decrease liabilities, $103,000.
B. decrease assets, $100,000; decrease stockholders' equity, $3,000; and decrease liabilities,
$103,000.
C. decrease stockholders' equity, $100,000; decrease liabilities, $3,000; and decrease assets,
$103,000.
D. decrease liabilities, $100,000; decrease stockholders' equity, $3,000; and decrease assets,
$103,000.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 2

35. On January 1, 2009, Ryan Company paid the premium in advance on a three-year
insurance policy on equipment in the amount of $6,000. At that time, the full amount paid was
recorded as prepaid insurance. On December 31, 2009, the end of the accounting year,
Hammond Company would be required to record an adjusting entry that would include a
A. $6,000 credit to prepaid insurance.
B. $2,000 debit to insurance expense.
C. $2,000 debit to prepaid insurance.
D. $6,000 debit to insurance expense.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

4-10
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

36. On January 1, 2009, Ryan Company paid the premium in advance on a three-year
insurance policy on equipment in the amount of $6,000. At that time, the full amount paid was
recorded as prepaid insurance. After recording the adjusting entry for the insurance policy on
December 31, 2009, Ryan Company's records would reflect a balance in the prepaid insurance
account of
A. $1,000.
B. $2,000.
C. $3,000.
D. $4,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

37. At the end of its accounting period, December 31, 2009, August Corporation owed $1,000

for property taxes for the current year, which had not been recorded or paid. Therefore, the
2009, adjusting entry should be
A. $1,000 credited to an expense account and debited to a liability account.
B. $1,000 debited to an expense account and credited to an asset account.
C. $1,000 credited to a liability account and debited to an expense account.
D. $1,000 debited to a liability account and credited to an asset account.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

38. On October 1, 2009, Ethan Company borrowed $20,000 on a 6-month note with an annual
interest rate of 10 percent. How much interest expense should be reported for the year ended
December 31, 2009?
A. $ 333.
B. $ 500.
C. $2,000.
D. $ -0-.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

4-11
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

39. Adjusting entries
A. always include the cash account
B. usually are recorded as of the first day of the accounting period
C. always change at least one income statement account balance and one balance sheet
account balance
D. are prepared after closing entries

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

40. Assume Idaho Company recorded the following adjusting entry at year-end:

If the beginning balance in prepaid insurance was $500 and $2,500 was paid for an insurance
premium during the year, the ending balance in the prepaid insurance account (after the above
adjusting entry) would be
A. $1,200 debit.
B. $ 700 debit.

C. $2,200 debit.
D. $1,000 debit.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 2

41. Failure to make an adjusting entry to recognize accrued wages payable would cause an
A. understatement of expenses, liabilities and stockholders' equity.
B. overstatement of expenses and liabilities.
C. understatement of expenses and liabilities and an overstatement of stockholders' equity.
D. understatement of assets and stockholders' equity.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

4-12
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

42. Failure to make an adjusting entry to recognize rent revenue receivable would cause
A. an understatement of assets, net income, and stockholders' equity.
B. an overstatement of assets and stockholders' equity and an understatement of net income.
C. no effect on assets, liabilities, net income, nor stockholders' equity.
D. an overstatement of assets, net income, and stockholders' equity.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

43. The essential difference between an unadjusted trial balance and an adjusted trial balance
is that an
A. unadjusted trial balance is prepared at the start of the accounting year, while an adjusted
trial balance is prepared at the end of the year.
B. unadjusted trial balance is prepared by companies that make adjusting entries, while an
adjusted trial balance is prepared by companies that do not make adjusting entries.
C. unadjusted trial balance is prepared before the adjusting entries are reflected, while an
adjusted trial balance is prepared after the adjusting entries are reflected.
D. unadjusted trial balance is prepared after the post-closing trial balance.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

44. The difference between the equipment account balance and the accumulated depreciation,
equipment account balance is called
A. market value.
B. acquisition cost.
C. book value.
D. net realizable value.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 2

4-13
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

45. Which of the following would most likely lead to a deferred adjustment?
A. Wages payable
B. Income taxes payable
C. Unearned revenue
D. Interest expense

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

46. Because of its complexity and susceptibility to errors, which step in the process do
independent auditors (CPAs) examine most closely?
A. financial statement preparation
B. tax reports
C. deferred and accrued adjustments
D. closing entries

AACSB Tag: Ethics
Difficulty: Hard
L.O.: 2

47. Which of the following accounts would most likely lead to an adjusting entry?
A. Office supplies
B. Wages expense
C. Common stock
D. Accounts receivable

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

4-14
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

48. Which of the following would most likely lead to an accrued adjusting entry?
A. Interest revenue earned and collected
B. Wages incurred as an expense and paid
C. Rent owed to the company and not yet received
D. Supplies purchased but not used

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

49. Which of the following would most likely not lead to a deferred adjusting entry?
A. Unearned subscriptions revenue
B. Office supplies
C. Utilities payable
D. Prepaid rent

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 2

50. The primary purpose of the statement of cash flows is to report
A. income earned and dividends paid during the period.
B. all inflows and outflows of cash during the period.
C. assets owned and claims against those assets at the end of the period.
D. liability changes made by the finance department of the company during the period.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 3

4-15
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

51. For the year 2009, Tally Corporation reported $120,000 pretax income (average annual
income tax rate of 30%). The after tax income was
A. $36,000.
B. $56,000.
C. $70,000.
D. $84,000.

AACSB Tag: Analytic
Difficulty: Hard
L.O.: 3

52. Time Corporation reported the following for 2009:

What was the amount of earnings per share (ignore income taxes)?
A. $ 3.00.
B. $12.50.
C. $25.00.
D. $ 7.50.

AACSB Tag: Analytic
Difficulty: Medium

L.O.: 3

53. At the end of 2008, Frankel Company reported an ending balance for retained earnings of
$250,000. During 2009, the company reported the following amounts: Dividends declared and
paid, $20,000 and net income, $60,000. The 2009 statement of stockholders' equity should
report an ending balance for retained earnings of
A. $290,000.
B. $240,000.
C. $210,000.
D. $170,000.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

4-16
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

54. When Lowry Company reports $200,000 of revenue and $220,000 of expenses for 2009,
the following is the effect:
A. Lowry's retained earnings is increased by the net income.
B. Lowry's contributed capital is increased by the net income.
C. Lowry's retained earnings increases by the net loss.
D. Lowry's total stockholders' equity decreases by the net loss.

AACSB Tag: Analytic
Difficulty: Medium
L.O.: 3

55. Which of the following statements best describes the relationship between net income for
the period and the ending balance in retained earnings?
A. Net income for the period increases the ending balance of retained earnings.
B. Retained earnings at the end of the period increases the amount of net income.
C. Net income for the period reduces the ending balance of retained earnings.
D. Net income for the period has no effect on the ending balance of retained earnings.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

56. An income statement reports
A. revenues, expenses, assets, and liabilities during an accounting period.
B. resources, liabilities, and stockholders' equity of a business at a point in time.
C. net income of a business at a point in time.

D. net income of a business for a period of time.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

57. One of the sections on the statement of cash flows is
A. financing activities.
B. inventing activities.
C. business activities.
D. borrowing activities.

AACSB Tag: Communications
Difficulty: Medium
L.O.: 3

58. A calendar year reporting company preparing its annual financial statements should use
the phrase "At December 31, 2009" in the heading of
A. all of the required financial statements it prepares.
B. none of the required financial statements it prepares.
C. the income statement and balance sheet, but not the statement of cash flows.
D. the balance sheet only.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

59. The statement of cash flows is important because
A. of the three required financial statements, it is the only one which reports changes which
took place during an accounting period.
B. it indicates the asset and liability position of a company by reflecting the amounts and
types of its assets and liabilities at the beginning and end of the period.
C. it summarizes the information already reported in the income statement and balance sheet.
D. it explains the sources and uses of cash during the period.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 3

4-18
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

60. The basic financial statements prepared for external users include all of the following
except
A. the balance sheet.
B. the income statement.
C. the sales statement.
D. the statement of cash flows.

AACSB Tag: Communications
Difficulty: Easy
L.O.: 3

61. The statement of stockholders' equity would not include
A. net income.

B. cost of goods sold.
C. investments by owners for stock issued.
D. dividends declared.

AACSB Tag: Communications
Difficulty: Medium
L.O.: 3

62. If a business declared and paid a $5,000 dividend, it would appear on the
A. income statement only.
B. statement of stockholders' equity and statement of cash flows.
C. balance sheet only.
D. statement of stockholders' equity only.

AACSB Tag: Communications
Difficulty: Medium
L.O.: 3

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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

63. Which of the following statements is true about earnings per share?
A. It is the only ratio required to be disclosed on the balance sheet.
B. It is computed by dividing weighted average common shares outstanding by net income.
C. It is rounded to the nearest dollar amount.
D. It discloses the amount of earnings on a per common share basis and is of great importance
to investors.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

64. Net income would appear on the
A. income statement only.
B. balance sheet only.
C. statement of stockholders' equity and income statement.
D. income statement and balance sheet.

AACSB Tag: Communications
Difficulty: Medium
L.O.: 3

65. The statement of cash flows
A. explains what caused net income during the accounting period.

B. identifies all assets held at the end of the accounting period by type and amount.
C. explains that the trial balance is in balance.
D. explains all of the sources and uses of cash during the accounting period.

AACSB Tag: Communications
Difficulty: Easy
L.O.: 3

4-20
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

66. Which of the following statements is false about earnings per share?
A. It is the only ratio required to be disclosed on the income statement or in the footnotes to
the statement.

B. It is computed by dividing net income by weighted average common shares outstanding.
C. It discloses the amount of dividends on a per common share basis.
D. It appears at the bottom of the income statement.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

67. Which of the following errors would most likely lead to an overstatement of income?
A. Recording revenue next period when the cash is collected although it is earned in the
current year.
B. Recording an expense incurred this year when the cash is paid next year.
C. Failure to adjust deferred rent revenue account for the portion of rent earned this year.
D. Failure to record an expense incurred in the current period.

AACSB Tag: Relative Thinking
Difficulty: Hard
L.O.: 3

68. In 2008, Patty's Pizza reported a net profit margin of 14.4%, in 2007 it was 13.2% and in
2006, it was 13.2%. Which of the following is true about Patty's Pizza net profit margin?
A. It has remained constant over the three-year period.
B. It reported an improved gross profit percentage in 2008 which has caused its net profit
margin to increase.
C. Its sales have most likely decreased causing expenses as a percentage of net sales to
increase.
D. All of the answers are true.

AACSB Tag: Relative Thinking
Difficulty: Hard

L.O.: 4

4-21
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

69. The net profit margin is calculated as:
A. net income divided by net sales.
B. gross profit divided by net sales.
C. net income divided by the average number of common shares outstanding.
D. net sales divided by net income.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 4

70. Closing entries
A. are required to reduce the balances in the real accounts to zero at the end of each period.
B. transfer the components of net income to a revenue account each period.
C. establish a zero balance in all revenue and expense accounts at the end of each period.
D. are optional.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

71. Both the depreciation expense account and the accumulated depreciation account at the
end of the first year of operations
A. are closed.
B. appear in an adjusted trial balance prepared after the adjusting entries but before the
closing entries.
C. are not closed at the end of the accounting period.
D. appear in a trial balance prepared prior to the adjusting and closing entries.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

4-22
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

72. Nominal accounts are
A. also called real accounts.
B. closed at the start of the accounting period.
C. include balance sheet accounts.
D. used to collect data for the current accounting period only.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

73. A post-closing trial balance will show account balances for the
A. real and nominal accounts.
B. real accounts only.
C. nominal accounts only.
D. income statement accounts only.

AACSB Tag: Relative Thinking
Difficulty: Easy

L.O.: 5

74. Which one of the following accounts would not be closed at the end of the accounting
year?
A. Utilities expense.
B. Sales revenue.
C. Prepaid rent expense.
D. Wages expense.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

4-23
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

75. A trial balance prepared after the closing entries have been posted would exclude which
one of the following accounts?
A. Inventory.
B. Accounts receivable.
C. Accumulated depreciation.
D. Income tax expense.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

76. Of the following accounts, which one would not appear in the post-closing trial balance?
A. Service revenue.
B. Supplies inventory.
C. Contributed capital.
D. Retained earnings.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

77. Select the statement which best describes the primary purpose of closing entries.
A. To facilitate preparing adjusting entries.
B. To determine the amount of net income or net loss for the period.
C. To allow preparation of the financial statements.
D. To reduce the balances of revenue and expense accounts to zero so that they may be used
to accumulate the revenues and expenses of the next accounting period.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 5

4-24
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Chapter 004: Adjustments, Financial Statements, and the Quality of Earnings

78. The primary purpose of closing entries is to
A. prove the equality of the debit and credit entries in the general journal.
B. insure that all assets and liabilities are recognized in the appropriate period.
C. update the balance of retained earnings and prepare revenue, expense, and dividend
accounts for the next accounting period's transactions.
D. insure that adjusting entries balance.

AACSB Tag: Relative Thinking
Difficulty: Easy
L.O.: 5

79. A post closing trial balance would include account balances for only the
A. assets and liabilities.
B. revenues and expenses.
C. assets, liabilities, and stockholders' equity.
D. assets, liabilities, stockholders' equity, revenues, expenses, and dividends.

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

80. Which of the following accounts is NOT closed at the end of the year?
A. Interest receivable
B. Cost of goods sold
C. Depreciation expense
D. Sales revenue

AACSB Tag: Relative Thinking
Difficulty: Medium
L.O.: 5

4-25
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