Lesson 4 Adjusting Accounts for Financial Statement Self-Test Answer the following questions: 1. what is an accrued revenue? Give an example. 2. what is the difference between the cash basis and accrual basis of accounting? 3. what is accrued expense? Give an example? 4. why are the adjustments not necessary in the cash basis accounting? 5. why is the accrual basis of accounting preferred over the cash basis accounting? True or False For each of the following statements, circle the T or the F to indicate whether the statement is true or false. 1. If no errors are made in the daily recording of transactions, adjusting entries are unnecessary at the end of the period. 2. Adjusting and closing entries will affect the Cash account as well. 3. An adjusting entry to recognize that a fee received in advance has now been earned will cause a decrease in total liabilities. 4. An expenditure that will benefit several accounting periods may be reported as an expense of the current period if the amount is immaterial. 5. Madison Company paid $2,400 cash for an insurance policy providing three years’ protection against fire loss. This transaction could properly be recorded by a $2,400 debit to Unexpired Insurance and a $2,400 credit to Cash. Multiple Choice : Choose the best answer for each of the following questions and insert the identifying letter in the space provided 1. The purpose of adjusting entries is to: A. Prepare the revenue and expense accounts for recording the revenue and expenses of the next accounting period. B. Record certain revenue and expenses that are not properly measured in the course of recording daily routine transactions. C. Correct errors made during the accounting period. D. Update the owner’s Capital account for the changes in owner’s equity that had been recorded in revenue and expense accounts throughout the period. 2. Which of the following situations does not require an adjusting entry at the end of January? A. On January 1, Garfield Company purchased delivery equipment with an estimated useful life of five years. B. On January 1, Garfield Company began delivery service for a large client who will pay at the end of a three-month period. C. At the end of January, Garfield Company pays the custodian for January office cleaning services. D. On January 1, Garfield Company paid rent for six months on its office building. 3. No adjusting entry should consist of: A. A debit to an expense and a credit to an asset. B. A debit to an expense and a credit to revenue. C. A debit to an expense and a credit to a liability. D. A debit to a liability and a credit to revenue. 4. Adjusting entries are needed: A. Whenever revenue is not received in cash. B. Whenever expenses are not paid in cash. C. Only to correct errors in the initial recording of business transactions. D. Whenever transactions affect the revenue or expenses of more than one accounting period. 5. Which of the following statements is not true regarding prepaid expenses? A. Prepaid expenses represent assets. B. Prepaid expenses are shown in a special section of the income statement. C. Prepaid expenses become expenses only as goods or services are used up. D. Prepaid expenses appear in the balance sheet.