Question 1

Which of the following best describes the primary purpose of the income statement?

Accepted Answer

To summarize the revenues and expenses and calculate net income for a period.

Question 2

Which of the following is NOT considered an asset?

Accepted Answer

Unearned Revenue

Question 3

A company paid $2,400 cash for a one-year insurance policy on October 1. Using accrual accounting, what is the balance in Prepaid Insurance at December 31 after adjusting entries are made?

Accepted Answer

$1,800

Question 4

Which of the following transactions would NOT be recorded in the accounting records?

Accepted Answer

The company signs a contract to provide services next month.

Question 5

If total assets increased by $$10,000 during the year and total liabilities decreased by 4$$,000, what is the change in equity?

Accepted Answer

$14,000 increase

Question 6

Which of the following accounts increases with a credit?

Accepted Answer

Revenue

Question 7

A company earned $$5,000 in revenue, of which 3$$,000 was received in cash and $2,000 is still to be collected. Under the accrual basis, what amount of revenue should be recognized?

Accepted Answer

$5,000

Question 8

Which of the following best describes the Revenue Recognition Principle?

Accepted Answer

Revenue is recognized when it is earned, regardless of when cash is received.

Question 9

Which of the following is a nominal (temporary) account that is closed at the end of the period?

Accepted Answer

Service Revenue

Question 10

A company had the following balances: Beginning Retained Earnings $$10,000; Net Income 7$$,000; Dividends Declared $2,000. What is the ending Retained Earnings balance?

Accepted Answer

$15,000

Question 11

Which of the following best explains why adjusting journal entries are necessary?

Accepted Answer

To ensure that revenues and expenses are recorded in the correct period.

Question 12

Which of the following is the correct order of preparation for the financial statements?

Accepted Answer

Income Statement, Retained Earnings Statement, Balance Sheet, Statement of Cash Flows

Question 13

A company collected $1,000 cash in advance for services to be performed next month. What is the effect on the accounting equation at the time of collection?

Accepted Answer

Increase assets and increase liabilities

Question 14

Which of the following is an example of a deferred expense?

Accepted Answer

Prepaid rent

Question 15

If a company fails to make an adjusting entry for accrued expenses, what is the effect on the financial statements?

Accepted Answer

Liabilities are understated and net income is overstated.

Question 16

Which of the following accounts would appear on the adjusted trial balance as a current liability?

Accepted Answer

Accounts Payable

Question 17

A company performed services worth $4,000 on account. What is the correct journal entry?

Accepted Answer

Debit Accounts Receivable $$4,000; Credit Service Revenue 4$$,000

Question 18

Which of the following best describes the Expense Matching Principle?

Accepted Answer

Expenses are recognized in the same period as the related revenues.

Question 19

After closing entries are made, which of the following accounts will have a zero balance?

Accepted Answer

Dividends

Question 20

Given the following information, calculate net income: Revenue $$12,000; Expenses 7$$,500; Dividends $1,000.

Accepted Answer

$4,500

Financial Accounting Exam Review: Chapters 1–3

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