OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 4: The Adjustment Process
Principles of Accounting, Volume 1: Financial Accounting
Chapter 4: The Adjustment Process
Multiple Choice
1. LO 4.1 Which of the following is any reporting period shorter than a full year (fiscal or
calendar) and can encompass monthly, quarterly, or half-year statements?
A. fiscal year
B. interim period
C. calendar year
D. fixed year
Solution
B
2. LO 4.1 Which of the following is the federal, independent agency that provides oversight of
public companies to maintain fair representation of company financial activities for investors to
make informed decisions?
A. IRS (Internal Revenue Service)
B. SEC (Securities and Exchange Commission)
C. FASB (Financial Accounting Standards Board)
D. FDIC (Federal Deposit Insurance Corporation)
Solution
B
3. LO 4.1 Revenues and expenses must be recorded in the accounting period in which they were
earned or incurred, no matter when cash receipts or outlays occur under which of the following
accounting methods?
A. accrual basis accounting
B. cash basis accounting
C. tax basis accounting
D. revenue basis accounting
Solution
A
4. LO 4.1 Which of the following breaks down company financial information into specific time
spans, and can cover a month, quarter, half-year, or full year?
A. accounting period
B. yearly period
C. monthly period
D. fiscal period
Solution
A
5. LO 4.1 Which of the following is a twelve-month reporting cycle that can begin in any month,
except January 1, and records financial data for that twelve-month consecutive period?
A. fixed year
B. interim period
C. calendar year
D. fiscal year
Solution
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 4: The Adjustment Process
D
6. LO 4.2 Which type of adjustment occurs when cash is either collected or paid, but the related
income or expense is not reportable in the current period?
A. accrual
B. deferral
C. estimate
D. cull
Solution
B
7. LO 4.2 Which type of adjustment occurs when cash is not collected or paid, but the related
income or expense is reportable in the current period?
A. accrual
B. deferral
C. estimate
D. cull
Solution
A
8. LO 4.2 If an adjustment includes an entry to a payable or receivable account, which type of
adjustment is it?
A. accrual
B. deferral
C. estimate
D. cull
Solution
A
9. LO 4.2 If an adjustment includes an entry to Accumulated Depreciation, which type of
adjustment is it?
A. accrual
B. deferral
C. estimate
D. cull
Solution
B
10. LO 4.2 Rent collected in advance is an example of which of the following?
A. accrued expense
B. accrued revenue
C. deferred expense (prepaid expense)
D. deferred revenue (unearned revenue)
Solution
D
11. LO 4.2 Rent paid in advance is an example of which of the following?
A. accrued expense
B. accrued revenue
C. deferred expense (prepaid expense)
D. deferred revenue (unearned revenue)
Solution
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 4: The Adjustment Process
C
12. LO 4.2 Salaries owed but not yet paid is an example of which of the following?
A. accrued expense
B. accrued revenue
C. deferred expense (prepaid expense)
D. deferred revenue (unearned revenue)
Solution
A
13. LO 4.2 Revenue earned but not yet collected is an example of which of the following?
A. accrued expense
B. accrued revenue
C. deferred expense (prepaid expense)
D. deferred revenue (unearned revenue)
Solution
B
14. LO 4.3 What adjusting journal entry is needed to record depreciation expense for the period?
A. a debit to Depreciation Expense; a credit to Cash
B. a debit to Accumulated Depreciation; a credit to Depreciation Expense
C. a debit to Depreciation Expense; a credit to Accumulated Depreciation
D. a debit to Accumulated Depreciation; a credit to Cash
Solution
C
15. LO 4.3 Which of these transactions requires an adjusting entry (debit) to Unearned Revenue?
A. revenue earned but not yet collected
B. revenue collected but not yet earned
C. revenue earned before being collected, when it is later collected
D. revenue collected before being earned, when it is later earned
Solution
D
16. LO 4.4 What critical purpose does the adjusted trial balance serve?
A. It proves that transactions have been posted correctly
B. It is the source document from which to prepare the financial statements
C. It shows the beginning balances of every account, to be used to start the new year’s
records
D. It proves that all journal entries have been made correctly.
Solution
B
17. LO 4.4 Which of the following accounts’ balance would be a different number on the
Balance Sheet than it is on the adjusted trial balance?
A. accumulated depreciation
B. unearned service revenue
C. retained earnings
D. dividends
Solution
C
18. LO 4.5 On which financial statement would the Supplies account appear?
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, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 4: The Adjustment Process
A. Balance Sheet
B. Income Statement
C. Retained Earnings Statement
D. Statement of Cash Flows
Solution
A
19. LO 4.5 On which financial statement would the Dividends account appear?
A. Balance Sheet
B. Income Statement
C. Retained Earnings Statement
D. Statement of Cash Flows
Solution
C
20. LO 4.5 On which financial statement would the Accumulated Depreciation account appear?
A. Balance Sheet
B. Income Statement
C. Retained Earnings Statement
D. Statement of Cash Flows
Solution
A
21. LO 4.5 On which two financial statements would the Retained Earnings account appear?
A. Balance Sheet
B. Income Statement
C. Retained Earnings Statement
D. Statement of Cash Flows
Solution
A and C
Questions
1. LO 4.1 Describe the revenue recognition principle. Give specifics.
Solution
The revenue recognition principle mandates that revenue be reported when earned, regardless of
when the revenue is collected. For this reason, when revenue is earned but not yet collected, an
accrual entry is required to accurately report revenue earned. For the same reason, when cash is
collected, in advance of the earnings process, a deferral entry is required, to accurately report
revenue earned.
2. LO 4.1 Describe the expense recognition principle (matching principle). Give specifics.
Solution
The expense recognition principle (or matching principle) mandates that expenses be reported in
the period in which they were incurred and utilized to benefit business operations or production
of revenue, regardless of when the cost is paid. For this reason, when a current period expense is
incurred but not paid, an accrual entry is required, to accurately report expenses in the current
period. And, when a payment is made for future period expenses, a deferral entry is required, to
accurately report expenses in the current period.
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Chapter 4: The Adjustment Process
Principles of Accounting, Volume 1: Financial Accounting
Chapter 4: The Adjustment Process
Multiple Choice
1. LO 4.1 Which of the following is any reporting period shorter than a full year (fiscal or
calendar) and can encompass monthly, quarterly, or half-year statements?
A. fiscal year
B. interim period
C. calendar year
D. fixed year
Solution
B
2. LO 4.1 Which of the following is the federal, independent agency that provides oversight of
public companies to maintain fair representation of company financial activities for investors to
make informed decisions?
A. IRS (Internal Revenue Service)
B. SEC (Securities and Exchange Commission)
C. FASB (Financial Accounting Standards Board)
D. FDIC (Federal Deposit Insurance Corporation)
Solution
B
3. LO 4.1 Revenues and expenses must be recorded in the accounting period in which they were
earned or incurred, no matter when cash receipts or outlays occur under which of the following
accounting methods?
A. accrual basis accounting
B. cash basis accounting
C. tax basis accounting
D. revenue basis accounting
Solution
A
4. LO 4.1 Which of the following breaks down company financial information into specific time
spans, and can cover a month, quarter, half-year, or full year?
A. accounting period
B. yearly period
C. monthly period
D. fiscal period
Solution
A
5. LO 4.1 Which of the following is a twelve-month reporting cycle that can begin in any month,
except January 1, and records financial data for that twelve-month consecutive period?
A. fixed year
B. interim period
C. calendar year
D. fiscal year
Solution
Page 1 of 41
,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 4: The Adjustment Process
D
6. LO 4.2 Which type of adjustment occurs when cash is either collected or paid, but the related
income or expense is not reportable in the current period?
A. accrual
B. deferral
C. estimate
D. cull
Solution
B
7. LO 4.2 Which type of adjustment occurs when cash is not collected or paid, but the related
income or expense is reportable in the current period?
A. accrual
B. deferral
C. estimate
D. cull
Solution
A
8. LO 4.2 If an adjustment includes an entry to a payable or receivable account, which type of
adjustment is it?
A. accrual
B. deferral
C. estimate
D. cull
Solution
A
9. LO 4.2 If an adjustment includes an entry to Accumulated Depreciation, which type of
adjustment is it?
A. accrual
B. deferral
C. estimate
D. cull
Solution
B
10. LO 4.2 Rent collected in advance is an example of which of the following?
A. accrued expense
B. accrued revenue
C. deferred expense (prepaid expense)
D. deferred revenue (unearned revenue)
Solution
D
11. LO 4.2 Rent paid in advance is an example of which of the following?
A. accrued expense
B. accrued revenue
C. deferred expense (prepaid expense)
D. deferred revenue (unearned revenue)
Solution
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 4: The Adjustment Process
C
12. LO 4.2 Salaries owed but not yet paid is an example of which of the following?
A. accrued expense
B. accrued revenue
C. deferred expense (prepaid expense)
D. deferred revenue (unearned revenue)
Solution
A
13. LO 4.2 Revenue earned but not yet collected is an example of which of the following?
A. accrued expense
B. accrued revenue
C. deferred expense (prepaid expense)
D. deferred revenue (unearned revenue)
Solution
B
14. LO 4.3 What adjusting journal entry is needed to record depreciation expense for the period?
A. a debit to Depreciation Expense; a credit to Cash
B. a debit to Accumulated Depreciation; a credit to Depreciation Expense
C. a debit to Depreciation Expense; a credit to Accumulated Depreciation
D. a debit to Accumulated Depreciation; a credit to Cash
Solution
C
15. LO 4.3 Which of these transactions requires an adjusting entry (debit) to Unearned Revenue?
A. revenue earned but not yet collected
B. revenue collected but not yet earned
C. revenue earned before being collected, when it is later collected
D. revenue collected before being earned, when it is later earned
Solution
D
16. LO 4.4 What critical purpose does the adjusted trial balance serve?
A. It proves that transactions have been posted correctly
B. It is the source document from which to prepare the financial statements
C. It shows the beginning balances of every account, to be used to start the new year’s
records
D. It proves that all journal entries have been made correctly.
Solution
B
17. LO 4.4 Which of the following accounts’ balance would be a different number on the
Balance Sheet than it is on the adjusted trial balance?
A. accumulated depreciation
B. unearned service revenue
C. retained earnings
D. dividends
Solution
C
18. LO 4.5 On which financial statement would the Supplies account appear?
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, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 4: The Adjustment Process
A. Balance Sheet
B. Income Statement
C. Retained Earnings Statement
D. Statement of Cash Flows
Solution
A
19. LO 4.5 On which financial statement would the Dividends account appear?
A. Balance Sheet
B. Income Statement
C. Retained Earnings Statement
D. Statement of Cash Flows
Solution
C
20. LO 4.5 On which financial statement would the Accumulated Depreciation account appear?
A. Balance Sheet
B. Income Statement
C. Retained Earnings Statement
D. Statement of Cash Flows
Solution
A
21. LO 4.5 On which two financial statements would the Retained Earnings account appear?
A. Balance Sheet
B. Income Statement
C. Retained Earnings Statement
D. Statement of Cash Flows
Solution
A and C
Questions
1. LO 4.1 Describe the revenue recognition principle. Give specifics.
Solution
The revenue recognition principle mandates that revenue be reported when earned, regardless of
when the revenue is collected. For this reason, when revenue is earned but not yet collected, an
accrual entry is required to accurately report revenue earned. For the same reason, when cash is
collected, in advance of the earnings process, a deferral entry is required, to accurately report
revenue earned.
2. LO 4.1 Describe the expense recognition principle (matching principle). Give specifics.
Solution
The expense recognition principle (or matching principle) mandates that expenses be reported in
the period in which they were incurred and utilized to benefit business operations or production
of revenue, regardless of when the cost is paid. For this reason, when a current period expense is
incurred but not paid, an accrual entry is required, to accurately report expenses in the current
period. And, when a payment is made for future period expenses, a deferral entry is required, to
accurately report expenses in the current period.
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