Chapter 3 Review

A company's fiscal year must correspond with the calendar year.

• True

• False

The time period assumption assumes that an organization's activities can be divided into specific time periods such as months, quarters, or years.

• True

• False

Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items.

• True

• False

The accrual basis of accounting recognizes revenues when cash is received from customers.

• True

• False

A company paid $6,000 for a twelve-month insurance policy on February 1. The policy coverage began on February 1. On February 28, $500 of insurance expense must be recorded.

• True

• False

Which of the following statements is incorrect?

• Adjustments to prepaid expenses and unearned revenues involve previously recorded assets and liabilities.

• Adjusting entries can be used to record both accrued expenses and accrued revenues.

• Adjusting entries affect only balance sheet accounts.

• Prepaid expenses, depreciation, and unearned revenues often require adjusting entries to record the effects of the passage of time.

An adjusting entry could be made for each of the following except:

• Accrued expenses.

• Prepaid expenses.

• Depreciation.

• Owner's investments

A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on December 31. This oversight would:

• Overstate assets by $28,000.

• Understate assets by $28,000.

• Overstate net income by $28,000.

• Have no effect on net income.

The periodic expense created by allocating the cost of plant and equipment to the periods in which they are used, representing the expense of using the assets, is called:

• An accrued account.

• A contra account.

• Accumulated depreciation.

• Depreciation expense.

Profit margin is defined as:

• Net income divided by assets.

• Net sales divided by assets.

• Revenues divided by net sales.

• Net income divided by net sales.