Mya Walker

Financial Accounting
Chapter 5-6 Questions
September 9, 2018
Chapter 5

1. What is the purpose of adjusting entries?

Financial Data must be adjusted before creating a financial statement because the purpose of the
statement is to give investors, creditors and any other interested parties an overall portrait of the company
to make decisions. Adjustments must be made to depict any significant information that may be relevant.

2. Name the four general types of adjustments.

Accrued expenses, prepaid expenses, accrued revenue, and unearned revenue are the four general
types of adjustment.

3. Give three examples of accrued expenses.

Salary, interest and utilities are examples of accrued expenses.

4. Briefly explain why it is difficult for accountants to determine whether or not revenue has been
earned if the sales process is not complete.

Accountants have a difficult time distinguishing whether the earning process is substantially complete to
determine if an adjustment to reflect the revenue is warranted since no money has been collected yet.

5. Give an example of business or industry where customers usually pay for the product or service in
advance.

Amazon is an example of a business that customers pay for their goods before they receive them.

6. What type of account is unearned revenue?

Unearned revenue is a liability.

7. When should a company reclassify unearned revenue to revenue?

Unearned revenue becomes revenue when the good or service has been reasonably delivered to the
customer and therefore actually earned.

8. Why do companies produce a second trial balance? When is this second trial balance prepared?

The second trial balance is produced to ensure for one last careful review. This is done right before the
financial statement is prepared.

9. Why do accountants prepare closing entries?

Closing entries are prepared at the end of a reporting period so that all of the T- accounts can be
returned to zero and recording can begin for the new year.

10. Into which account are revenues and expenses closed?

Revenues and expenses are closed into the retained earnings account.
 Mya Walker
Financial Accounting
Chapter 5-6 Questions
September 9, 2018
True or False

1. __T__ Determining when to recognize revenue can be difficult for accountants.

2. __F__ Only permanent accounts are closed at the end of the financial statement cycle.

3. __F__ Revenue may not be recorded until cash is collected.

4. __T__ Some changes to accounts occur because of the passage of time.

5. __F__ Accountants do not have to exercise much judgment because there are so many rules to
follow.

6. __T__ Assets, liabilities and owners’ equity accounts will start each financial statement cycle with the
same balance they had at the end of the previous cycle.

7. __T__ The word “accrue” means “to grow.”

8. __T__ Companies have some discretion in how and when they record accruals.

9. __F__ The purpose of adjusting entries is to bring the balance in temporary accounts to zero at the
end of the reporting cycle.

10. _F__ Only one trial balance is prepared during a financial statement cycle.

Multiple Choice

1. Which of the following accounts would be closed at the end of the financial statement cycle?

B. ACCOUNTS PAYABLE

2. Jenkins Company received $600 from a client in May for work Jenkins would perform during May and
June. What entry should Jenkins make on May 31 if one-third of the work is complete on that date?

B. FIGURE 5.10

3. Which of the following accounts would increase retained earnings when closed into it?

B. SALES REVENUE

4. Which of the following is not one of the four types of adjustments? Accrued expenses, prepaid
expenses, accrued revenue, and unearned revenue

A. PREPAID REVENUE
 Mya Walker
Financial Accounting
Chapter 5-6 Questions
September 9, 2018

5. In September 20X3, LaToya Corporation paid for insurance for the next six months in the amount of
$42,000. On December 31, LaToya’s accountant forgot to make the adjusting entry that was needed.
Which of the following is true?

D. NET INCOME IS OVERSTATED BY $28,000.

Chapter 6

Questions

1. Why is it important that people and organizations have trust in the financial reporting process?

The financial reporting process works best when both the people and the organizations have faith in it.
This will cause organizations to be diligent in insuring their own accuracy in reporting which in turn will
reassure people that the figures they are viewing can be trusted.

2. What is the Securities and Exchange Commission?

The SEC is an independent federal government agency that has been tasked with the protection of
investors by monitoring and enforcing GAAP to keep the securities market functioning fairly.

3. What types of companies fall under the jurisdiction of the SEC?

Any publicly traded company is under the SEC’s jurisdiction.

4. Who has the SEC given responsibility to for setting generally accepted accounting principles

(GAAP) in the United States?

The Financial Accounting Standards board was designated to the role of setting GAAP in the US.

5. Who is the Emerging Issues Task Force?

The EITF was created by the FASB to find and resolve any issues in financial accounting.

6. Why doesn’t the SEC examine all the financial statements submitted to it to ensure their

accuracy?

It would be extremely costly and time consuming to do so. There are other safe guards in place to
negate that duty.

7. For what must public companies hire an auditing firm before they submit their financial

statements to the SEC?

Auditors examine the financial statements and report on whether there was enough evidence for
auditor to be confident there are no material misstatements.
 Mya Walker
Financial Accounting
Chapter 5-6 Questions
September 9, 2018
8. Why would a nonpublic company have its statements audited?

Nonpublic companies would want their statements audited to get approval and better interest rates on
their loans.

9. What is a CPA?

A CPA is a certified public accountant, they have been recognized by a state government and are the
only ones who can operate an independent auditing firm.

10. Which organization sets standards for and regulates firms who audit public companies?

The Public Company Accounting Oversight Board (PCAOB).

11. Which act established the Public Company Accounting Oversight Board?

The Sarbanes-Oxley Act of 2002.

12. Which organization sets standards for and regulates firms who do not audit public companies?

The American Institute of Certified Public Accountants (AICPA)

13. What type of assurance does an audit provide?

An audit assures the integrity of the financial statement.

14. Why do audits not provide absolute assurance that financial statements are presented fairly

according to GAAP?

An auditor’s job is to detect noncompliance, fraud and potential material misstatements. Many figures
on a financial statement are estimations so there is no way to be completely certain

15. What are internal controls?

Internal controls ae redundancies built into a system to make sure that it functions properly.

16. How is an auditor’s work affected by a company’s internal controls?

The auditor has to evaluate the internal controls and determine if they are effective. If they are
effective, the auditor may have less work to do.

17. To whom is the audit report addressed?

The Board of Directors and Shareholders of a company.

18. What is an unqualified opinion?

The judgement of an independent auditor that no problems worthy of note were found during the
audit.

19. Why would an auditor include an explanatory paragraph in an audit report?

 Mya Walker
Financial Accounting
Chapter 5-6 Questions
September 9, 2018
An auditor may think further explanation is required in certain sections of the financial report and would
include this in the explanatory paragraph.

20. Why would an auditor not give an unqualified opinion?

The auditor was not able to obtain sufficient evidence during the audit to justify an unqualified opinion.
The auditor discovers the existence of a material misstatement in the financial statements, a balance or
disclosure that does not conform to U.S. GAAP.

True or False

1. ____ The quality of a company’s internal controls has no effect on the work of an auditor.

2. ____ Acquiring the CPA designation requires a candidate to pass an exam, meet education

requirements, and meet experience requirements.

3. ____ The SEC is the current accounting standard setting body in the United States.

4. ____ The inclusion of an explanatory paragraph in an audit report is an indication that the

financial statements should not be relied on.

5. ____ The PCAOB oversees auditors of public companies.

6. ____ Nonpublic companies have no reason to have an audit of their financial statements

performed.

7. ____ Audits are paid for by the creditors and investors of a company.

8. ____ CPAs can work for large, multinational firms, or for small, local firms.

9. ____ Auditors provide reasonable assurance that financial statements are fairly presented in

accordance with U.S. GAAP.

10. ____ The Financial Accounting Standards Board is a governmental agency.

Multiple Choice

1. Whittington and Company is a CPA firm that audits publicly traded companies. Which of the

following is true concerning Whittington and Company?

C. WHITTINGTON AND COMPANY SHOULD FOLLOW THE AUDITING STANDARDS SET FORTH BY THE
AUDITING STANDARDS BOARD.
 Mya Walker
Financial Accounting
Chapter 5-6 Questions
September 9, 2018
2. Which of the following is not true about an audit report?

A. AN EXPLANATORY PARAGRAPH MAY BE INCLUDED TO DRAW THE READER’S ATTENTION TO SOME

ASPECT OF

THE FINANCIAL STATEMENTS.

3. Which of the following is true about the Financial Accounting Standards Board (FASB)?

C. FASB PRODUCES STANDARDS THAT APPLY TO ALMOST ALL COMPANIES IN THE UNITED STATES.

4. Which organization is a governmental entity?

D. ASB

5. Which of the following is true about the Securities and Exchange Commission (SEC)?

C. THE SEC DETERMINES AUDITING STANDARDS FOR THOSE WHO AUDIT PUBLIC COMPANIES.