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On June 1,Year 1,Maverick Company paid $1,200 cash for an insurance policy that would protect the company for one year.The company's fiscal closing date is December 31.Based on this information,the amount of insurance expense and the cash flow from operating activities shown on the Year 1 financial statements would be


A)  Insurance Expense  Cash Flow 5001,200\begin{array} { | c | c | } \hline \text { Insurance Expense } & \text { Cash Flow } \\\hline 500 & 1,200 \\\hline\end{array}
B)  Insurance Expense  Cash Flow 7001,200\begin{array} { | c | c | } \hline \text { Insurance Expense } & \text { Cash Flow } \\\hline 700 & 1,200 \\\hline\end{array}
C)  Insurance Expense  Cash Flow 1,2001,200\begin{array} { | c | c | } \hline \text { Insurance Expense } & \text { Cash Flow } \\\hline 1,200 & 1,200 \\\hline\end{array}
D)  Insurance Expense  Cash Flow 700500\begin{array} { | c | c | } \hline \text { Insurance Expense } & \text { Cash Flow } \\\hline 700 & 500 \\\hline\end{array}

E) All of the above
F) A) and B)

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Recognition of depreciation expense is an asset use transaction.

A) True
B) False

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During Bruce Company's first year of operations,the company purchased $2,300 of supplies.At year-end,a physical count of the supplies on hand revealed that $825 of unused supplies were available for future use.How will the related adjusting entry affect the company's financial statements?


A) Expenses will increase and assets will decrease by $1,475.
B) Assets and expenses will both increase by $825.
C) Expenses and assets will both increase by $1,475.
D) The related adjusting entry has no effect on net income or the accounting equation.

E) A) and B)
F) B) and C)

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The carrying value of an asset is the expected selling price of an asset at the end of its useful life.

A) True
B) False

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What is the purpose of the accrual basis of accounting?


A) Recognize revenue when it is collected from customers.
B) Match assets with liabilities during the proper accounting period.
C) Recognize expenses when cash disbursements are made.
D) Recognizing revenue when it is earned and expenses when they are incurred, regardless of when cash changes hands.

E) All of the above
F) C) and D)

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Which of the following statements is false?


A) Prepaid insurance is a liability reported on the balance sheet.
B) Prepaid insurance indicates that a company has already paid cash for insurance coverage that protects the company for some future time period.
C) Prepaid insurance is a deferred expense.
D) Prepaid insurance represents a future economic benefit.

E) None of the above
F) B) and C)

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A deferral


A) exists when a company pays cash at the same time the associated expense is recognized.
B) exists when a company pays cash after recognizing the associated expense.
C) exists when a company pays cash before recognizing the associated expense.

D) A) and B)
E) A) and C)

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Consider how each of the transactions listed below affect net income reported on the income statement and the net cash flows from operating activities reported on the statement of cash flows.Which transaction(s) would affect the income statement in a different period from the statement of cash flows?


A) Recognized depreciation expense on equipment
B) Incurred operating expenses on account
C) Paid interest that was accrued in a prior year
D) All of these answer choices would affect the income statement in a different period from the statement of cash flows

E) A) and C)
F) B) and C)

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[The following information applies to the questions displayed below.] At the end of Year 1, the following information is available for Grumpy, Happy, and Doc Companies. [The following information applies to the questions displayed below.] At the end of Year 1, the following information is available for Grumpy, Happy, and Doc Companies. -Which company is the most profitable from the stockholders' perspective? A) Grumpy B) Happy C) Doc D) Cannot be determined -Which company is the most profitable from the stockholders' perspective?


A) Grumpy
B) Happy
C) Doc
D) Cannot be determined

E) All of the above
F) None of the above

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Chester Company started Year 2 with a $2,000 balance in its Cash account,a $500 balance in its Supplies account,and a $2,500 balance in its Common Stock account.During Year 2,the company experienced the following events: (1) Paid $1,400 cash to purchase supplies. (2) Physical count revealed $300 of supplies on hand at the end of Year 2. Based on this information,which of the following shows how the year-end adjusting entry required to recognize supplies expense would affect Chester's account balances? Chester Company started Year 2 with a $2,000 balance in its Cash account,a $500 balance in its Supplies account,and a $2,500 balance in its Common Stock account.During Year 2,the company experienced the following events: (1) Paid $1,400 cash to purchase supplies. (2) Physical count revealed $300 of supplies on hand at the end of Year 2. Based on this information,which of the following shows how the year-end adjusting entry required to recognize supplies expense would affect Chester's account balances? A) Option A B) Option B C) Option C D) Option D


A) Option A
B) Option B
C) Option C
D) Option D

E) A) and B)
F) A) and C)

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Which of the following events would require a year-end adjusting entry?


A) Purchasing supplies for cash during the year
B) Purchasing land for cash during the year
C) Providing services on account during the year
D) Each of these events would require a year-end adjusting entry.

E) A) and C)
F) B) and C)

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Which of the following is an asset use transaction?


A) Purchased land for cash
B) Recorded rent expense at the end of the period
C) Borrowed cash from the bank
D) Accrued salary expense at the end of the period

E) B) and C)
F) A) and C)

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Recognition of depreciation expense on equipment decreases the equipment account.

A) True
B) False

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Which of the following shows how the event "collected cash for services to be rendered in the future" affects a company's financial statements?


A) Which of the following shows how the event collected cash for services to be rendered in the future affects a company's financial statements? A) B) C) D)
B) Which of the following shows how the event collected cash for services to be rendered in the future affects a company's financial statements? A) B) C) D)
C) Which of the following shows how the event collected cash for services to be rendered in the future affects a company's financial statements? A) B) C) D)
D) Which of the following shows how the event collected cash for services to be rendered in the future affects a company's financial statements? A) B) C) D)

E) B) and D)
F) C) and D)

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Which of the following is a true statement? (Note: A statement may be true even if it does not identify all accounts that appear on that particular financial statement.) A) Account numbers 2, 4, and 5 will appear on the income statement. B) Account numbers 1, 3, and 8 will appear on the balance sheet. C) Account numbers 2, 5, and 8 will appear on the statement of cash flows. D) Account numbers 4, 5, and 6 will appear on the statement of changes in stockholders' equity. Which of the following is a true statement? (Note: A statement may be true even if it does not identify all accounts that appear on that particular financial statement.)


A) Account numbers 2, 4, and 5 will appear on the income statement.
B) Account numbers 1, 3, and 8 will appear on the balance sheet.
C) Account numbers 2, 5, and 8 will appear on the statement of cash flows.
D) Account numbers 4, 5, and 6 will appear on the statement of changes in stockholders' equity.

E) A) and C)
F) All of the above

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The entry to recognize depreciation expense incurred on equipment involves which of the following?


A) A decrease in assets
B) An increase in liabilities
C) An increase in assets
D) A decrease in liabilities

E) B) and C)
F) All of the above

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On November 1,Year 1,Falloch,Inc.paid $3,600 cash for a contract allowing the company to use office space for one year.The company's fiscal closing date is December 31.Based on this information,the amount of cash flow from operating activities appearing on the Year 1 statement of cash flows would be


A) $2,100
B) $3,000
C) $3,300
D) $3,600

E) A) and C)
F) All of the above

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When a revenue or an expense event is recognized after cash has been exchanged it is referred to as


A) an accrual
B) a deferral
C) either an accrual or deferral
D) neither of these terms describe this event

E) C) and D)
F) B) and D)

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On November 1,Year 1,Danny Company paid $12,000 cash to rent an office for a year starting immediately.Indicate whether each of the following statements about this transaction is true or false.

Premises
This transaction increases Danny's liabilities.
This transaction is an asset exchange transaction.
$12,000 of rent expense will be recorded in Year 2.
Danny's Year 1 income statement would not be affected by this transaction.
Danny's Year 1 statement of cash flows would be affected by this transaction.
Responses
False
True

Correct Answer

This transaction increases Danny's liabilities.
This transaction is an asset exchange transaction.
$12,000 of rent expense will be recorded in Year 2.
Danny's Year 1 income statement would not be affected by this transaction.
Danny's Year 1 statement of cash flows would be affected by this transaction.

When a company purchases supplies on account


A) Cash flow from financing activities decreases
B) Total assets decrease
C) Expenses increase
D) Liabilities increase

E) A) and B)
F) C) and D)

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