Q: A company pays $12,000 for a one-year insurance policy on July 1. What is the correct adjusting entry on December 31 under the accrual basis of accounting?

$\text{Debit Insurance Expense } 6,000; \text{ Credit Prepaid Insurance } 6,000$

Q: A company received $5,000 cash in advance for services to be performed next month. What is the correct journal entry at the time of receipt?

$\text{Debit Cash } 5,000; \text{ Credit Unearned Revenue } 5,000$

Q: Which of the following is an example of an accrual adjusting entry for revenue?

$\text{Debit Accounts Receivable; Credit Revenue}$

Question 1

Which of the following best describes the 'faithful representation' qualitative characteristic in financial accounting?

Accepted Answer

Information that accurately reflects the economic substance of transactions, is complete, neutral, and free from error.

Question 2

A company pays $12,000 for a one-year insurance policy on July 1. What is the correct adjusting entry on December 31 under the accrual basis of accounting?

Accepted Answer

$	ext{Debit Insurance Expense } 6,000; 	ext{ Credit Prepaid Insurance } 6,000$

Question 3

Which of the following is NOT a fundamental qualitative characteristic of useful financial information?

Accepted Answer

Comparability

Question 4

Under the historical cost principle, how are assets generally reported on the balance sheet?

Accepted Answer

At the amount paid to acquire them

Question 5

Which of the following transactions would require a deferral adjusting entry?

Accepted Answer

Prepaid rent for the next six months

Question 6

A company received $5,000 cash in advance for services to be performed next month. What is the correct journal entry at the time of receipt?

Accepted Answer

$	ext{Debit Cash } 5,000; 	ext{ Credit Unearned Revenue } 5,000$

Question 7

Which of the following best describes the entity assumption in financial accounting?

Accepted Answer

The business is separate from its owners and other entities for accounting purposes.

Question 8

If a company writes a check for $79 but records it as $97, what adjustment is needed to reconcile the book balance to the bank balance?

Accepted Answer

Add $18 to the book balance

Question 9

Which of the following is considered cash or cash equivalent on the balance sheet?

Accepted Answer

Treasury bills with less than 3 months to maturity

Question 10

Which of the following is an example of an accrual adjusting entry for revenue?

Accepted Answer

$	ext{Debit Accounts Receivable; Credit Revenue}$

Question 11

Which of the following best describes the purpose of internal controls?

Accepted Answer

To safeguard assets, enhance the reliability of accounting records, and increase operational efficiency

Question 12

Which of the following is NOT a component of the fraud triangle?

Accepted Answer

Comparability

Question 13

A company recognizes revenue when it is earned, regardless of when cash is received. This is an example of which accounting principle?

Accepted Answer

Revenue recognition principle

Question 14

Which of the following transactions would increase both assets and equity?

Accepted Answer

The company earns revenue on account

Question 15

Which of the following is the correct effect of a debit entry?

Accepted Answer

Increases assets

Question 16

Which of the following best describes the 'timeliness' enhancing qualitative characteristic?

Accepted Answer

Information is available to decision-makers before it loses its capacity to influence decisions.

Question 17

Which of the following is an example of a real-world internal control procedure?

Accepted Answer

Requiring two signatures on checks above $10,000

Question 18

Which of the following is the correct formula for the accounting equation?

Accepted Answer

$	ext{Assets} = 	ext{Liabilities} + 	ext{Equity}$

Question 19

Which of the following is an example of a deferral adjusting entry for an expense?

Accepted Answer

$	ext{Debit Expense; Credit Prepaid Expense}$

Financial Accounting Exam 1 Study Guide: Key Concepts, Principles, and Applications

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