ABM FA3 Copy

Which of the following transactions will NOT result in an increase in revenues?

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  Sale of goods on credit

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    Sale of services for cash

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    Accumulation of interest in the bank account

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    An investment in the business by the owner.

Answer explanation

This does not increase revenues. Instead, it is recorded as an increase in the owner's equity or capital account. Revenues are earned from business operations, not from the owner's investment.

The transaction that will NOT result in the recognition of an expense is:

• Expiration of prepaid insurance.

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    Interest accrued on a bank loan.

• A cash withdrawal by the owner.

• Use of machinery during the period.

Answer explanation

his is not an expense; it is a reduction in the owner's equity. It does not impact the income statement or expenses but affects the capital account in the balance sheet.

Which of the following transactions during the year would most NOT likely need an adjusting entry at the end of the period?

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    Purchase of office equipment.

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    Purchase of a piece of land.

• Purchase of a two-year insurance policy.

Answer explanation

This transaction generally does not require adjusting entries at the end of the period because land is not depreciated and does not have associated periodic expenses like insurance.

Which of the following accounts would NOT likely need to be adjusted at year-end?

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    Land

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    Office Supplies

• Prepaid Advertising

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    Unearned Revenues

Answer explanation

• Land is a long-term asset that is not depreciated or amortized, and it generally does not require adjustment at year-end. Its value is recorded at cost and remains unchanged unless there is an impairment or revaluation, which is rare.

Which of the following is an accrual?

• Six months’ interest paid in advance.

• Interest earned but not yet received.

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    Equipment purchased for use in the business.

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    Bookkeeping fees collected but not yet earned.

Answer explanation

• This represents accrued interest income. It’s recognized as revenue in the period it is earned, even though the cash has not yet been received.

Which of the following is a deferral?

• Interest earned on a bank account.

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    A commission collected in advance.

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    Medical fees earned but not yet collected.

• Interest expense incurred but not yet paid.

Answer explanation

This is an example of unearned revenue, which is a deferral. The cash is received before the service is performed, so the revenue is recognized in a future period when the service is actually provided.

What is depreciation?

• A liability shown on the balance sheet.

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    A decrease in the fair market value of an asset.

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    An expense that is incurred during an accounting period.

• An addition to the cost of equipment on the balance sheet.

Answer explanation

• While depreciation does reflect a reduction in the book value of an asset, it does not directly measure fair market value, which can fluctuate due to market conditions.

The entry to record expired insurance is omitted. This error causes…

• Liabilities to be understated.

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    Assets to be overstated.

• Expenses to be overstated.

• Liabilities to be overstated.

Answer explanation

• When expired insurance is not recorded, the prepaid insurance account (an asset) remains higher than it should be. This is because the expired portion of the insurance should be moved to an expense account, reducing the prepaid insurance asset.

What happens if an adjusting entry was not made at the end of the period to remove the earned portion from the Unearned Revenue account?

• Assets will be overstated.

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    Liabilities will be understated

• Liabilities will be overstated.

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    Owner’s equity would be overstated.

Answer explanation

Unearned Revenue represents a liability because it is money received before the service or product is delivered. If the earned portion of this revenue is not adjusted, the liability will remain higher than it should be, as it still shows amounts that have been earned but not yet recognized as revenue.

A company recorded office supplies in an asset account when the supplies were purchased. How will failure to take an inventory and make an adjusting entry result?

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    Understatement of liabilities.

• Understatement of assets

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    Understatement of assets - no response given

  • Understatement of equity

• Overstatement of equity.

Answer explanation

The failure to adjust for the supplies used during the period means that the supplies asset account will be overstated, as it will still show the full amount of supplies originally recorded. This results in an understatement of supplies expense on the income statement. Because expenses are understated, net income (and thus retained earnings or equity) is overstated.