Deck 3: Basic Accounting Systems: Accrual Basis

Question 1

Under the accrual basis of accounting, the accounting records are normally updated after the preparation of the financial statements.

Answer 1

False

Question 2

It is easy to objectively determine the physical decline in the ability of fixed assets to provide service.

Answer 2

False

Question 3

The matching concept requires expenses to be recorded in the same period that the related revenue is recorded.

Answer 3

True

Question 4

The accrual basis recognizes liabilities at the time the business incurs the obligation to pay for the services or goods purchased.

Question 5

Physical assets of a long-term nature are referred to as fixed assets.

Question 6

Accrual accounting does not require that the accounting records be updated prior to preparing financial statements.

Question 7

The fixed asset section of a balance sheet may also be labeled as property, plant, and equipment.

Question 8

Rights that are short-term in nature are called intangible assets.

Question 9

"Brand name" recognition is an example of goodwill.

Question 10

Liabilities that will not be due for more than one year are called long-term liabilities.

Question 11

An adjusting entry would adjust revenue so that it is reported when earned and not when cash is received.

Question 12

Expenses on the income statement are assets used up or services consumed in the process of generating revenues.

Question 13

Receiving cash in advance of performing a service creates a liability for the company.

Question 14

The accrual basis of accounting requires revenue to be recorded when the service is performed.

Question 15

An adjusting entry would adjust an expense account so that the expense is reported when incurred.

Question 16

Accrued expenses are expenses that have been incurred and paid.

Question 17

If land costing $75,000 was sold for $135,000, the amount reported in the investing activities section of the statement of cash flows would be $135,000.

Question 18

Current assets are assets that are expected to be converted to cash, sold or used up within 6 months.

Question 19

Land is an example of a current asset.

Question 20

The revenue recognition concept states that revenue should be recorded in the same period as the cash is received.

Question 21

The expired amount of a prepaid expense is recorded as:

A) accrued revenue.
B) a contra asset.
C) a liability.
D) an expense.

Question 22

Every company must use the cash basis of accounting.

Question 23

Which of the following transactions will affect the liquidity metric of a company? ​

A) ​Supplies used for manufacturing a product
B) ​Salary owed but not paid
C) ​Services provided but not billed to the customer
D) ​Depreciation charged on fixed asset

Question 24

Using accrual accounting, expenses are recorded and reported only:

A) when they are incurred, whether or not cash is paid.
B) when they are incurred and paid at the same time.
C) if they are paid before they are incurred.
D) if they are paid after they are incurred.

Question 25

Using accrual accounting, revenue is recorded and reported only:

A) when cash is received without regard to when the services are rendered.
B) when the services are rendered without regard to when cash is received.
C) when cash is received before services are rendered.
D) if cash is received after the services are rendered.

Question 26

Flyer Co.billed a client for flying lessons given in January.The payment was received in February.Under the accrual basis of accounting, when should Flyer Co.record the revenue?

A) January
B) February
C) Some in January and some in February
D) Flyer Co.should not record any revenue

Question 27

Under the cash basis of accounting, no adjustments are necessary prior to the preparation of the financial statements.

Question 28

Which of the following is the effect of the payment of dividends by a company to its stockholders?

A) ​The company's liquidity decreases, while profitability remains unchanged.
B) ​The company's profitability and liquidity remains unchanged.
C) ​The company's profitability and liquidity decrease.
D) ​The company's profitability increases, while its liquidity decreases.

Question 29

Under the cash basis of accounting, a business records only transactions involving increases or decreases of its cash.

Question 30

​Which of the following is the effect of issue of additional common stock by a company on its liquidity and profitability metrics?

A) ​Its profitability increases.
B) ​Its profitability and liquidity increase.
C) ​Its profitability and liquidity remain unaffected.
D) ​Its liquidity increases.

Question 31

Under accrual accounting, expenses are recorded when incurred regardless of when paid.

Question 32

To arrive at cash flows from operations, it is necessary to convert the income statement from an accrual basis to the cash basis of accounting.

Question 33

To determine cash payments for operating expenses for the cash flow statement using the direct method, depreciation expense is added to net income.

Question 34

Under the cash basis of accounting, expenses are recorded when paid.

Question 35

Which of the following transactions will affect the profitability metric of a company?​

A) ​Rent received in advance
B) ​Prepaid insurance
C) ​Purchase of supplies on account
D) ​Fees received in cash for services provided

Question 36

Which of the following is an accrued expense?

A) Rent owed but not yet paid
B) Accumulated depreciation
C) Inventory in process
D) A prepaid advertising expense

Question 37

The process that begins with the analysis of transactions and ends with preparing the accounting records for the next accounting period is called the accounting cycle.

Question 38

Under the accrual basis of accounting, net cash flows from operating activities on the statement of cash flows will normally be the same as net income.

Question 39

Which of the following metrics is affected when a business makes prepayment of rent? ​

A) ​Profitability
B) ​Leverage
C) ​Liquidity
D) ​Contingency

Question 40

Which of the following is the effect of depreciation being recorded by a company?​

A) ​Its cash flow decreases.
B) ​Its net income decreases.
C) ​Its quick assets decrease.
D) ​Its common stock increases.

Question 41

On April 1, Smart, Inc.paid $7,200 for an insurance premium on a three-year insurance policy.How does this transaction affect Smart's accounts?

A) Increase insurance expense and decrease cash by $7,200 each
B) Increase prepaid insurance and decrease cash by $7,200 each
C) Increase unearned insurance and decrease cash by $7,200 each
D) Increase prepaid insurance and decrease retained earnings by $7,200 each

Question 42

The updating of accrual accounting records before preparing financial statements is referred to as the:

A) consolidation process.
B) full disclosure process.
C) adjustment process.
D) money measurement process.

Question 43

When an adjusting entry is made to record insurance expense and reduce the prepaid insurance account, which section of the statement of cash flows is affected?

A) Cash Flow from Operating Activities
B) Cash Flow from Investing Activities
C) Cash Flow from Financing Activities
D) There is no effect on the statement of cash flows.

Question 44

On June 1, Unidevo, Inc.purchased $2,300 worth of supplies on account.Prior to the purchase, the balance in the supplies account was $350.On December 31, the fiscal year-end for Unidevo, it is determined that $500 of supplies still remain.What is the balance in the supplies account after adjustment?

A) $0
B) $1,800
C) $500
D) $2,300

Question 45

A deferred expense is initially recorded as:

A) an asset but becomes an expense over time.
B) an expense but becomes an asset over time.
C) a liability but becomes an expense over time.
D) an expense but becomes a liability over time.

Question 46

Perill Co.has a five-day workweek (Monday through Friday).Employees earn $650 per day.If the month ends on Wednesday, and wages will not be paid until Friday, how much wage expense should be accrued on Wednesday?​

A) ​$650
B) ​$1,950
C) ​$3,250
D) ​$1,300

Question 47

When an entry is made to adjust the supplies account and recognize supplies expense for the period, which section of the statement of cash flows is affected?

A) Cash Flow from Operating Activities
B) Cash Flow from Investing Activities
C) Cash Flow from Financing Activities
D) There is no effect on the statement of cash flows.

Question 48

In August, Falcon Inc.received cash in advance of rendering services to its clients.If only a few of those services were provided by December 31, the year-end adjustment would:

A) increase unearned revenue and decrease revenue.
B) increase accounts payable and decrease revenue.
C) increase cash and decrease accounts receivable.
D) decrease unearned revenue and increase revenue.

Question 49

Which of the following is normally the result of cash being received or paid before the revenue is earned or the expense is incurred?

A) A deferred expense
B) An accrued expense
C) A contra asset
D) An intangible asset

Question 50

Perill Co.has a five-day workweek (Monday through Friday).Employees earn $650 per day.How much cash will be paid on Friday?​

A) ​$650
B) ​$1,950
C) ​$1,300
D) ​$3,250

Question 51

On June 1, Unidevo, Inc.purchased $1,700 worth of supplies on account.Prior to the purchase, the balance in the supplies account was $0.On December 31, the fiscal year-end for Unidevo, it is determined that $800 of supplies still remain.What is the balance in the supplies account after adjustment?

A) $800
B) $900
C) $0
D) $1,700

Question 52

Unearned interest is categorized as:

A) a fixed asset.
B) stockholders' equity.
C) an intangible asset.
D) a liability.

Question 53

Which of the following is true of an accrual?

A) It is normally the result of cash being received or paid before the revenue is earned or the expense is incurred.
B) It is initially recorded as an asset but becomes an expense over time.
C) It is initially recorded as a liability but become revenue over time.
D) It is normally the result of cash being received or paid after revenue has been earned or an expense has been incurred.

Question 54

On April 1, Tenity, Inc.paid $3,300 for an insurance premium on a three-year insurance policy.At the end of December, Tenity's fiscal year-end, what should be the balance in the prepaid insurance account?

A) $1,100
B) $2,475
C) $3,300
D) $2,200

Question 55

Deferred revenue is initially recorded as:

A) revenue but becomes a liability over time.
B) an asset but becomes revenue over time.
C) a liability but becomes revenue over time.
D) revenue but becomes an asset over time.

Question 56

Speedy Company's weekly payroll of $250 is paid on Fridays (five-day work week).Assume that the last day of the month falls on Thursday.Which of the following is the required month-end adjusting entry?

A) Increase Salaries Expense $200 and increase Salaries Payable $200
B) Increase Salaries Expense $50 and increase Salaries Payable $50
C) Increase Salaries Payable $200 and increase Cash $200
D) Increase Salaries Expense $250 and increase Cash $250

Question 57

Which of the following assets never loses its ability to provide service and, as a result, does not need to be depreciated?

A) A copyright
B) Office equipment
C) A patent
D) Land

Question 58

Which of the following accounts would require an adjustment when making an adjusting entry for a deferral?

A) Accrued interest
B) Unearned rent
C) Salary expense
D) Notes receivable

Question 59

​Identify the item that should be treated as a deferred expense by a company. ​

A) Prepaid advertising
B) Unpaid wages
C) Unearned rent
D) Notes receivable

Question 60

St.Nick Corporation's Toy-Making Supplies account showed a beginning balance of $200 and supplies purchased of $800.There were $400 of supplies on hand at year-end.The year-end adjustment would include an increase in Toy-Making Supplies Expense for

A) $1,000.
B) $800.
C) $600.
D) $400.

Question 61

Accrued expenses are ordinarily reported on the balance sheet as:

A) assets.
B) liabilities.
C) fixed assets.
D) prepaid expenses.

Question 62

A&M Co.provided services of $1,000,000 to clients on account.How does this transaction affect A&M's accounts?

A) Increase accounts receivable and cash by $1,000,000 each
B) Increase accounts receivable and revenues by $1,000,000 each
C) Increase accounts receivable and unearned revenues by $1,000,000 each
D) Increase cash and decrease accounts receivable by $1,000,000 each

Question 63

Accumulated depreciation is a(n):

A) contra asset.
B) contingent asset.
C) revenue expenditure.
D) accrued expense.

Question 64

Which of the following is an example of an intangible asset?

A) Goodwill
B) Patents
C) Copyrights
D) All of these

Question 65

While calculating the carrying value of a building, its accumulated depreciation is:

A) not taken into consideration.
B) subtracted from the building's cost.
C) added to the building's cost.
D) subtracted from the fair market value of the building.

Question 66

XYZ Co.paid $1,000 in dividends to stockholders.How does this transaction affect the accounts of XYZ?

A) Cash will decrease by $1,000 and retained earnings will decrease by $1,000.
B) Cash will decrease by $1,000 and expenses will increase $1,000.
C) Cash will decrease by $1,000 and revenues will decrease $1,000.
D) Net income will decrease by $1,000.

Question 67

When cash is paid to suppliers on account, which section of the Statement of Cash Flows is affected?

A) Cash Flow from Operating Activities.
B) Cash Flow from Investing Activities.
C) Cash Flow from Financing Activities
D) There is no effect on the Statement of Cash Flows.

Question 68

The unearned rent account has a balance of $60,000.If $4,000 of the $60,000 is unearned at the end of the accounting period, the amount of the adjusting entry is:

A) $64,000.
B) $56,000.
C) $60,000.
D) $4,000.

Question 69

Eagle Eye, Inc., a corporation, received an additional investment of $6,000 cash in exchange for shares of common stock.How does this transaction affect Eagle Eye's accounts?

A) Increase in stock expense and decrease cash by $6,000 each
B) Increase common stock and increase cash by $6,000 each
C) Increase common stock and increase revenue by $6,000 each
D) Increase common stock and decrease retained earnings by $6,000 each

Question 70

The reduction in the ability of a fixed asset to provide service over time is called:

A) deferral recognition.
B) depreciation.
C) consolidation.
D) accumulation.

Question 71

Unearned rent, representing rent for the next six months' occupancy, would be reported on the landlord's balance sheet as a(n):

A) asset.
B) liability.
C) common stock.
D) revenue.

Question 72

Which of the following statements is prepared with various sections, subsections, and captions?

A) A statement of current assets
B) A statement of stockholders' equity
C) A pro forma contra asset statement
D) A classified balance sheet

Question 73

QRT Co.received $1,560 advance from Zync Inc.as rent for the use of a building owned by QRT Co.How does this transaction affect QRT's accounts if QRT recognizes a liability on receipt of the rent?

A) Cash is increased, and sales revenue is increased.
B) Cash is increased, and rent income is decreased.
C) Cash is increased, and unearned rent is increased.
D) Cash is increased, and prepaid rent is increased.

Question 74

Interest receivable is an example of:

A) accrued revenue.
B) retained earnings.
C) deferred revenue.
D) a prepaid expense.

Question 75

X&Y Co.received $4,000 in payments from clients for services billed in a previous month.What effect does this transaction have on the accounts under the accrual basis of accounting?

A) Total assets increase by $4,000.
B) Assets will increase by $4,000 and revenues will increase $4,000.
C) Total assets will be decrease by $4,000.
D) The net effect on assets is zero.

Question 76

Electrodo Co.purchased land for $55,000 with $20,000 paid in cash and $35,000 in notes payable.What effect does this transaction have on the accounts under the accrual basis of accounting?

A) Net increase in assets and liabilities of $55,000
B) Net increase in assets of $35,000 and a net increase in liabilities of $35,000
C) Net increase in assets of $55,000 and a net decrease in liabilities of $35,000
D) Net increase in assets of $75,000 and a net decrease in liabilities of $30,000

Question 77

When cash is received in payment of an account receivable, which section of the Statement of Cash Flows is affected?

A) Cash Flow from Operating Activities
B) Cash Flow from Investing Activities
C) Cash Flow from Financing Activities
D) There is no effect on the Statement of Cash Flows.

Question 78

The balance in the office supplies account on May 1 was $6,380, supplies purchased during June were $4,740, and the supplies on hand at May 31 were $2,360.The amount to be used for the appropriate adjusting entry is:

A) $8,740.
B) $4,740.
C) $8,760.
D) $13,480.

Question 79

Accrued revenue is shown on a balance sheet as:

A) an asset.
B) common stock.
C) a liability.
D) retained earnings.

Question 80

XYZ Co.received $3,000 in payments from clients for services billed in a previous month.Which accounts will be affected and by what amounts under the accrual basis of accounting?

A) Cash will increase by $3,000 and accounts receivable decrease by $3,000.
B) Cash will increase by $3,000 and revenues will increase $3,000.
C) Accounts receivable will increase by $3,000 and revenue will increase by $3,000.
D) Accounts receivable will increase by $3,000 and cash will increase by $3,000.