.........a.........3....0....5

The reason we post journal entries is to

• provide a chronological record of all economic events affecting the firm

• ensure that all accounts are up to date prior to preparing financial statements

• ensure that debits equal credits in the trial balance

• reflect the information in journal entries in ledger accounts

Which of the following is most likely an accrued liability?

• Depreciation

• Interest on borrowing

• Cost of goods sold

• Office supplies

Answer explanation

Accrued liability: an expense incurred, but not yet paid

A prepaid expense:

• occurs when an expense is recorded in the current period but not paid until a future period

• occurs when a company receives cash from customers prior to providing goods and services to those customers

• occurs when an asset is acquired in the current period but not expensed until a future period

• All of these answer choices are incorrect

If the required adjusting entry for prepaid rent that has expired for the period is omitted:

• assets will be understated and net income understated

• assets will be understated and net income overstated

• assets will be overstated and net income understated

• assets will be overstated and net income overstated

Answer explanation

The adjusting entry for prepaid rent that has expired includes a debit to rent expense and a credit to prepaid rent. By not recording the expense, net income will be overstated. By not recording the decrease to prepaid rent, the asset will be overstated.

On July 1, Year 1, a company paid $48,000 for 24 months of advance rent on its warehouse. Assuming the company has a December year end, what would be the amount of rent expense in Year 1 under cash basis versus accrual accounting?

• Cash basis = $24,000; Accrual = $24,000

• Cash basis = $48,000; Accrual = $12,000

• Cash basis = $12,000; Accrual = $36,000

• Cash basis = $48,000; Accrual = $24,000

Answer explanation

Cash-basis: full amount of $48,000 is paid in Year 1, so the full amount is expensed in Year 1

Accrual-basis: Monthly rent = $48,000/24 months = $2,000

Year 1 rent expense = $2,000 * 6 months = $12,000

Which of the following are the accounting standards issued by the FASB?

• Accounting Principal Board Opinions

• Accounting Research Board Bulletins

• Accounting Standards Updates

• Conceptual Framework

If a company has declared bankruptcy, its financial statements likely violate the:

• Going concern assumption

• Fair value measurement approach

• Stable monetary unit assumption

• Present value measurement approach

Answer explanation

Going concern assumption: assumes a business will be in operation indefinitely

Gains are:

• Inflows from selling a product or service to a customer

• Increases in equity resulting from transfers of assets to the company from owners

• Increases in equity from peripheral transactions of an entity

• None of these answer choices are correct

Which of the following is true regarding equity?

• It represents the accumulated earnings of the business over time

• It represents the owner’s return for investing in the business

• It represents the residual interest in the assets of an entity that remains after deducting its liabilities

• It represents how much the owner profits from the business

Which of the following has the statutory authority to set accounting standards in the United States?

• IRS

• FASB

• AICPA

• SEC

Answer explanation

SEC: Securities and Exchange Commission, has legal authority

IRS: Internal Revenue Service

FASB: Financial Accounting Standards Board, private-sector body

AICPA: American Institute of Certified Public Accountants