81. Indicate whether each of the following statements about the closing process and the accounting cycle is true or false.
_____ a) The closing process transfers certain account balances to retained earnings at the end of the accounting cycle.
_____ b) Only accounts that appear on the income statement are closed at the end of each accounting cycle.
_____ c) Another name for temporary accounts is "nominal accounts."
_____ d) The permanent accounts contain information that is cumulative in nature.
_____ e) The retained earnings balance at the end of any given year is equal to that year's net income.
a) T b) F c) T d) T e) F
a) This is true. The closing process transfers the balances in revenue, expense, and dividend accounts to retained earnings at the end of the period.
b) This is false. Dividends are closed, but do not appear on the income statement.
c) This is true. Temporary accounts are also called nominal accounts.
d) This is true. All balance sheet, or permanent, accounts contain cumulative information.
e) This is false. Because the retained earnings account accumulates earnings from year to year, its balance is not equal to net income in any particular year.
82. Regarding the effects of end-of-period adjustments, state whether each of the following statements is true or false.
_____ a) Recording the usage of supplies involves an increase in liabilities and a decrease in equity.
_____ b) The accrual of salaries is considered a claims exchange transaction.
_____ c) Recording services performed on a prepaid contract involves a decrease in liabilities and an increase in assets.
_____ d) End-of-period adjustments often affect cash flows.
_____ e) Failure to record accrued salaries at the end of the year will cause reported net income to be higher than it should have been.
a) This is false. Recording usage of supplies decreases assets (supplies) and increases expense, which decreases equity.
b) This is true. Accruing salaries increases a liability (salaries payable) and decreases equity (salaries expense decreases retained earnings).
c) This is false. Recording service performed on a prepaid contract involves a decrease in liabilities (unearned revenue) and an increase in revenue, which increases equity. Assets are not affected.
d) This is false. End of period adjustments never affect the cash account, therefore never affect cash flows.
e) This is true. Failure to record accrued salaries would understate salaries expense, causing reported income to be higher than it should have been.
83. Indicate whether each of the following statements regarding the four types of accounting events is true or false.
_____ a) Asset exchange transactions involve an increase in one asset and a decrease in another asset.
_____ b) An asset source transaction involves an increase in assets and an increase in a corresponding claims account.
_____ c) An asset use transaction cannot result in an increase in equity.
_____ d) Asset exchange transactions cannot affect cash flows.
_____ e) Some claims exchange transactions involve an increase in a liability account and a decrease in an equity account.
a) T b) T c) T d) F e) T
a) This is true. An asset exchange transaction involves an increase in one asset and a decrease in another.
b) This is true. An asset source transaction involves an increase in assets and an increase in liabilities or equity.
c) This is true. An asset use transaction involves a decrease in assets and either a decrease in liabilities or equity. Therefore, it cannot result in an increase in equity.
d) This is false. Because an asset exchange transaction involves an increase in one asset and a decrease in another, it often affects cash.
e) This is true. Some claims exchange transactions, including accruing salaries, involve an increase in a liability and a decrease in equity.
84. Indicate whether each of the following statements about corporate governance is true or false.
_____ a) The Financial Accounting Standards Board issues a code of ethical behavior by which public accountants must abide.
_____ b) The Sarbanes Oxley Act created the Public Company Accounting Oversight Board (PCAOB).
_____ c) Because of the Sarbanes Oxley Act, audit firms are not permitted to provide many nonaudit services to audit clients.
_____ d) The fraud triangle identifies opportunity, pressure, and rationalization as the three elements that are typically present when fraud is committed.
_____ e) An executive found guilty of falsely certifying a company's financial statements faces up to a $100,000 fine and 5 years in prison.
a) F b) T c) T d) T e) F
a) This is false. The AICPA, not FASB, issues a code of professional behavior for CPAs.
b) This is true. The PCAOB is a result of the Sarbanes-Oxley Act.
c) This is true. The Sarbanes-Oxley Act restricts nonaudit services that audit firms can provide to audit clients.
d) This is true. Opportunity, pressure, and rationalization make up the fraud triangle.
e) This is false. A $5 million fine and 20 year prison sentence are possible penalties for executives who falsely certify a company’s financial statements.
True / False Questions
85. The term "recognition" means to report an economic event in the financial statements.
86. Companies that use accrual accounting recognize revenues and expenses at the time that cash is paid or received.
87. The term "accrual" describes an earnings event that is recognized before cash is paid or received.
88. A company may recognize a revenue or expense without a corresponding cash collection or payment in the same accounting period.
89. A payment to an employee in settlement of salaries payable decreases an asset and decreases equity.
90. An increase in an expense may be accompanied by a decrease in a liability.