ACC 2013 — Principles of Accounting I (EXAM TWO)

Exam Two - 10/6/2026

Adjusting entries are recorded:

At the end of the period, before the financial statements are prepared

Why are adjusting entries needed?

So revenues are recorded when earned and expenses when incurred

A deferral adjustment is needed when:

Cash was received or paid before the revenue is earned or the expense is incurred

An accrual adjustment is needed when:

Revenue is earned or an expense is incurred before cash is received or paid

Every adjusting entry affects:

One balance sheet account and one income statement account

Which account is NEVER part of an adjusting entry?

Cash

Supplies has a $900 balance before adjustment. A count shows $250 of supplies still on hand. The adjusting entry is:

Debit Supplies Expense $650; credit Supplies $650

On September 1, a company paid $2,400 for 12 months of insurance. The adjusting entry on September 30 is:

Debit Insurance Expense $200; credit Prepaid Insurance $200

Depreciation on equipment is $600 for the month. The adjusting entry is:

Debit Depreciation Expense $600; credit Accumulated Depreciation $600

Accumulated Depreciation is:

A contra-asset account that reduces the equipment's book value

The book value (carrying value) of equipment equals:

Cost minus accumulated depreciation

A customer paid $3,000 in advance. By month-end, $1,000 of the work is done. The adjusting entry is:

Debit Deferred Revenue $1,000; credit Service Revenue $1,000

Employees earned $1,800 of wages at month-end that will be paid next month. The adjusting entry is:

Debit Wages Expense $1,800; credit Wages Payable $1,800

A company finished $2,500 of services at month-end. It has not billed the client or recorded anything. The adjusting entry is:

Debit Accounts Receivable $2,500; credit Service Revenue $2,500

Interest of $150 has built up on a note payable but has not been paid. The adjusting entry is:

Debit Interest Expense $150; credit Interest Payable $150

A company forgets to record $1,000 of accrued wages at month-end. The result is:

Expenses are understated and net income is overstated

A company forgets to record the supplies used this month. The result is:

Assets are overstated and net income is overstated

A company forgets to record the part of deferred revenue it earned this month. The result is:

Liabilities are overstated and revenue is understated

The adjusted trial balance is prepared:

After the adjusting entries are posted, to check that debits still equal credits

The financial statements are prepared from the:

Adjusted trial balance

The financial statements are prepared in which order?

Income statement, statement of retained earnings, balance sheet

Temporary (nominal) accounts include:

Revenues, expenses, and dividends

Which of these is a permanent account?

Accumulated Depreciation

The purpose of closing entries is to:

Reset temporary accounts to zero and move their balances into Retained Earnings

When a revenue account is closed, it is:

Debited for its balance

The closing entry for dividends is:

Debit Retained Earnings; credit Dividends

After the closing entries are posted, which accounts have a zero balance?

Revenue, expense, and dividend accounts

A post-closing trial balance contains:

Only permanent (balance sheet) accounts

Revenues of $40,000 and expenses of $28,000 are closed. Retained Earnings:

Increases by $12,000

Rent paid for several months in advance is first recorded as:

Prepaid Rent, an asset

Fraud is best defined as:

An attempt to deceive others for personal gain

The three main types of fraud are:

Corruption, asset misappropriation, and financial statement fraud

An employee takes cash from the register. This is:

Asset misappropriation

Cash equivalents are:

Short-term, highly liquid investments bought within three months of maturity

The three elements of the fraud triangle are:

Incentive, opportunity, and rationalization

Internal controls most directly reduce which element of the fraud triangle?

Opportunity

The Sarbanes-Oxley Act (SOX) was passed to:

Strengthen internal control and financial reporting at public companies

The three objectives of internal control are:

Operations, reporting, and compliance

Which internal control component sets the ethical “tone at the top” of an organization?

Control environment

Which of these is NOT one of the five internal control components?

Cash budgeting

Giving each task to one specific person, so you know who did it, is the principle of:

Establish responsibility

The person who handles cash should not also record cash in the books. This principle is:

Segregate duties

Keeping cash in a locked safe and using passwords on the accounting system is the principle of:

Restrict access

Using prenumbered receipts and checks is the principle of:

Document procedures

A surprise cash count by a supervisor is an example of:

Independently verify

Internal controls cannot completely prevent fraud because:

Controls can cost more than they save, and people can make errors or work together to cheat

Why does cash need stronger internal controls than most other assets?

It is valuable, portable, and “owned” by whoever holds it

The main internal control goal for cash receipts is to make sure the business:

Receives the right amount of cash and safely deposits it in the bank

Cashiers rang up sales of $6,100 but have only $6,097 to deposit. The entry is:

Debit Cash $6,097, debit Cash Shortage $3; credit Sales Revenue $6,100

A customer pays by EFT and emails a remittance advice. The remittance advice tells the seller:

Which invoice was paid and how much

The main internal control goal for all cash payments is to make sure the business:

Pays only for properly authorized transactions

Receiving staff list the goods received and notify accounting. Which two control principles apply?

Document procedures and segregate duties

Many companies pay employees from a separate imprest payroll account. The main benefit is that:

The account holds only the exact payroll amount, so overpaying is easy to spot

A bank reconciliation is:

An internal report comparing the bank statement to the company's cash records

On a bank reconciliation, a deposit in transit is:

Added to the bank statement balance

On a bank reconciliation, outstanding checks are:

Subtracted from the bank statement balance

On a bank reconciliation, a customer's NSF (not sufficient funds) check is:

Subtracted from the book (company) balance

The bank statement shows $35 of interest earned that is not yet on the company's books. The entry is:

Debit Cash $35; credit Interest Revenue $35

After a bank reconciliation, journal entries are needed for:

Only the items on the book (company) side

Your Cash account shows $5,000 and the bank shows $5,400. Deposits in transit are $600, outstanding checks are $1,030, and a bank service fee is $30. The correct cash balance is:

$4,970

How is a merchandiser different from a service company?

A merchandiser buys goods and sells them again; a service company sells work or time

For a merchandiser, Inventory is:

A current asset: the cost of goods it owns and has not sold yet

Cost of Goods Sold is:

An expense equal to what the goods sold to customers cost the company

Gross profit equals:

Net Sales − Cost of Goods Sold

What is the difference between Supplies and Inventory?

Supplies are used up in running the business; inventory is held to sell

A perpetual inventory system:

Updates inventory records every time goods are bought, sold, or returned

A periodic inventory system:

Updates inventory records only at the end of the period, after a physical count

Shrinkage (loss from theft or damage) can be estimated only with:

A perpetual inventory system

A store started the month with $5,000 of inventory, bought $38,000 more, and sold goods that cost $31,000. A count finds $10,500 on hand. Shrinkage is:

$1,500

Under a periodic system, beginning inventory is $8,000, purchases are $30,000, and ending inventory is $6,000. Cost of goods sold is:

$32,000

Walmart receives $10,500 of bikes bought on account. Under a perpetual system, the entry is:

Debit Inventory $10,500; credit Accounts Payable $10,500

A company places an order for merchandise but the goods have not arrived. The entry is:

No entry yet; the entry is made when the goods arrive

Goods are shipped FOB shipping point. This means:

The buyer owns the goods once they leave the seller and pays the freight

The buyer pays a trucker $200 cash to deliver merchandise bought FOB shipping point. The entry is:

Debit Inventory $200; credit Cash $200

Freight out (delivery to customers) paid by the seller is reported as:

A selling expense

A company returns $500 of merchandise bought on account. The entry is:

Debit Accounts Payable $500; credit Inventory $500

Credit terms of 2/10, n/30 mean:

A 2% discount if paid within 10 days; the full amount is due in 30 days

A company buys $1,000 of goods on terms 2/10, n/30 and pays on day 8. Using the gross method, the payment entry is:

Debit Accounts Payable $1,000; credit Cash $980; credit Inventory $20

A company buys $15,000 of goods (terms 2/10, n/30), pays $700 freight in, returns $3,000 of goods, and pays within the discount period. Inventory cost is:

$12,460

The base for a purchase discount is:

The invoice amount minus any returns; freight is not discounted

Under a perpetual system, every sale of merchandise requires:

Two entries: one for the selling price and one for the cost

A store sells goods for $1,200 cash. The goods cost $750. The cost entry is:

Debit Cost of Goods Sold $750; credit Inventory $750

A store sells goods for $1,200 cash. The goods cost $750. Gross profit on this sale is:

$450

Sales Returns and Allowances is:

A contra-revenue account that reduces sales

A customer returns goods in good condition for a refund. Under a perpetual system, the seller records:

Two entries: one reduces sales, and one puts the cost back into Inventory

A customer keeps damaged goods and gets a price reduction (an allowance). The seller records:

Only the selling price entry, because no goods came back

A customer owes $5,000 on terms 2/10, n/30 and pays on day 7. The cash received is:

$4,900

Net Sales equals:

Sales Revenue − Sales Returns and Allowances − Sales Discounts

On a multistep income statement, Income from Operations equals:

Gross Profit − Selling, General, and Administrative Expenses

Net Sales are $400,000 and Cost of Goods Sold is $260,000. The gross profit percentage is:

35.0%