Deck 4: Accrual Accounting Concepts

Question 1

Under the accrual basis of accounting, expenses are only recognized when they are paid.

Answer 1

False

Question 2

Revenue is generally recognized (recorded) when there is an increase in a liability or a decrease in an asset.

Answer 2

False

Question 3

Under the cash basis of accounting, expense recognition generally does not follow revenue recognition.

Answer 3

True

Question 4

Under the cash basis of accounting, revenue is only recognized when cash is received.

Question 5

Since some costs are not recorded, adjusting entries are necessary.

Question 6

Expense recognition is tied to changes in assets and liabilities.

Question 7

Prepare an adjusted trial balance.

Question 8

Prepare adjusting entries for accruals.

Question 9

Prepare closing entries and a post-closing trial balance.

Question 10

An adjusting entry to a prepaid expense is required to recognize costs that expire with time.

Question 11

Expense recognition always coincides with revenue recognition.

Question 12

Revenue must be recognized once the sales or performance effort is substantially complete, regardless of whether or not collection is reasonably assured.

Question 13

An accounting transaction never affects more than one accounting time period.

Question 14

For a private company reporting under ASPE, adjusting entries must be prepared at least quarterly.

Question 15

Adjusting entries are only required under the cash basis of accounting.

Question 16

Revenue recognition follows expense recognition.

Question 17

Adjusting entries are needed to produce relevant financial information.

Question 18

Describe the types of adjusting entries and prepare adjusting entries for prepayments.

Question 19

Accounting divides the economic life of a business entity into artificial time periods.

Question 20

Explain when revenues and expenses are recognized and how this forms the basis for accrual accounting.

Question 21

If a three-month, 6% bank loan for $5,000 is signed on October 1, the interest expense for the month of October is $75.

Question 22

Expenses paid before being used or consumed are initially recorded as liabilities.

Question 23

Accrued revenues represent money received from customers for work to be done later.

Question 24

Expiration of one month of an insurance policy paid in advance, initially recorded by debiting Prepaid Insurance, results in an adjusting entry that reduces the company's liabilities.

Question 25

A contra asset account is subtracted from a related asset account in the statement of financial position and its normal balance is a credit.

Question 26

When money is received from a customer prior to the delivery of goods or the performance of a service, it is recorded as revenue.

Question 27

The adjusting entry for unearned revenues results in an increase to a liability account and a decrease to a revenue account.

Question 28

Depreciation is a valuation concept; that is, we allocate costs to reflect the actual change in the value of the asset.

Question 29

The original cost of equipment will typically will be shown on the statement of financial position.

Question 30

Accumulated Depreciation is a liability account and its normal account balance is a credit.

Question 31

Prepaid expenses are costs that are paid for before they are used.

Question 32

An asset purchased for $125,000 on the first day of the fiscal year with a useful life of 5 years has an annual depreciation expense of $25,000.

Question 33

Accrued revenues are revenues that have not been earned before financial statements have been prepared.

Question 34

When a company performs a service for which payment was received in advance, a journal entry is recorded that will increase revenue and decrease unearned revenue.

Question 35

The cost of any depreciable asset less accumulated depreciation reflects the carrying amount of the asset.

Question 36

Adjusting entries never affect cash.

Question 37

The purchase of certain types of long-lived (non-current) assets is essentially a long-term prepayment for services.

Question 38

If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

Question 39

Depreciation allocates the cost of a long-lived asset to the accounting periods over which it is used.

Question 40

The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

Question 41

The Dividends account is closed to the Income Summary account at the end of each year.

Question 42

The statement of financial position and income statement can be prepared from the information provided by an adjusted trial balance.

Question 43

The post-closing trial balance will have fewer accounts than the adjusted trial balance.

Question 44

In general, revenue recognition occurs
(a)when cash is received.
(b)when it is earned.
(c)when expenses are incurred.
(d)in the period that income taxes are paid.

Question 45

Closing entries result in the transfer of profit or loss into the Retained Earnings account.

Question 46

An adjusted trial balance must be prepared before the adjusting entries can be recorded.

Question 47

The purpose of an adjusted trial balance is to ensure all adjusting entries have been recorded.

Question 48

Which of the following is not generally an accounting time period?
(a)a week
(b)a month
(c)a quarter
(d)a year

Question 49

The adjustment for accrued salaries results from services being paid for after the services are performed.

Question 50

The accounting cycle begins with the journalizing of the transactions.

Question 51

Financial statements are generally prepared before the closing entries are posted.

Question 52

When preparing the statement of financial position, the balance of Retained Earnings is taken from the Adjusted Trial Balance.

Question 53

The Income Summary account is a permanent account.

Question 54

The post-closing trial balance will contain only permanent accounts.

Question 55

When closing entries are posted, the result is a zero balance in each income statement account.

Question 56

Recording transactions that affect a company's financial statements in the periods in which they occur rather than when cash is received or paid is called
(a)time period accounting.
(b)the cash basis of accounting.
(c)monetary accounting.
(d)the accrual basis of accounting.

Question 57

Revenue recognition criteria include recognized revenue when
(a)cash is received.
(b)goods or services are transferred to customers.
(c)related expenses are recognized.
(d)the revenue is recorded.

Question 58

Closing entries are prepared before adjusting entries.

Question 59

The statement of changes in equity is prepared from the Common Shares, Retained Earnings and Dividends accounts on the adjusted trial balance.

Question 60

Which of the following is generally not a guideline for recognizing revenue?
(a)The sale or performance effort is substantially complete.
(b)Collection is reasonably assured.
(c)Management declares that revenue should be recognized.
(d)The amount is determinable.

Question 61

Which of the following accounts would not likely need to be adjusted at year end?
(a)Office Supplies
(b)Office Equipment
(c)Prepaid Advertising
(d)Unearned Revenue

Question 62

Which one of the following is not a justification for adjusting entries?
(a)Adjusting entries are necessary to ensure that revenue recognition criteria are followed.
(b)Adjusting entries are necessary to ensure that expense recognition criteria are followed.
(c)Adjusting entries are necessary to enable financial statements to be in conformity with IFRS or ASPE.
(d)Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Question 63

Adjusting entries are required
(a)because some costs expire with the passage of time, but have not yet been recorded.
(b)when the company's profit is below budget.
(c)when expenses are recorded in the period in which they are incurred.
(d)when revenues are recorded in the period in which they are earned.

Question 64

A furniture factory's employees work overtime in February to finish an order that is sold on February 28.The office sends a statement to the customer in early March and payment is received by mid-March.The overtime salaries should be expensed in
(a)February.
(b)March.
(c)the period when the workers receive their cheques.
(d)either February or March depending on when the pay period ends.

Question 65

Some accounts need to be adjusted because
(a)there are never enough accounts to record all the transactions.
(b)they are not up-to-date at the time financial statements are prepared.
(c)there are always errors made in recording transactions.
(d)management can't decide what they want to report.

Question 66

The primary difference between prepaid and accrued expenses is that prepaid expenses have
(a)been incurred and accrued expenses have not.
(b)not been paid and accrued expenses have.
(c)been paid and accrued expenses have not.
(d)not been recorded and accrued expenses have.

Question 67

An adjusting entry would not include which of the following accounts?
(a)Cash
(b)Interest Receivable
(c)Property Tax Payable
(d)Unearned Revenue

Question 68

A dress shop makes a dress that sells for $200 and delivers it to the customer on June 30.The customer is sent a statement on July 7 and a cheque is received by the dress shop on July 11.When should the $200 be recognized as revenue?
(a)July 7
(b)July 11
(c)June 30
(d)July 1

Question 69

Fang's Tune-Up Shop uses the accrual basis of accounting.Fang services a car on May 31.The customer picks up the vehicle on June 1 and mails payment to Fang on June 5.Fang receives the cheque in the mail on June 6.When would Fang recognize the revenue as being earned?
(a)June 6
(b)June 5
(c)June 1
(d)May 31

Question 70

Wong's Tune-Up Shop uses the cash basis of accounting.Wong services a car on May 31.The customer picks up the vehicle on June 1 and mails payment to Wong on June 5.Wong receives the cheque in the mail on June 6.When would Wong recognize the revenue as being earned?
(a)June 6
(b)June 5
(c)June 1
(d)May 31

Question 71

On February 15, a local business receives an invoice for electricity used in the month of January and pays it on March 1.In which month should the business recognize the expense?
(a)February
(b)January
(c)March
(d)No expense should be recorded.

Question 72

Unearned revenues are
(a)received and recorded as liabilities before they are earned.
(b)earned and recorded as liabilities before they are received.
(c)earned but not yet received or recorded.
(d)earned and already received and recorded.

Question 73

Mave Corp.sells $5,000 of goods on account in the current year and collects $3,000 of this.It incurs $3,500 in expenses on account during the current year and pays $2,000 of them.Mave would report what amount of profit under the cash and accrual bases of accounting, respectively?
(a)$1,500 on the cash basis and $2,000 on the accrual basis
(b)$1,000 on the cash basis and $1,500 on the accrual basis
(c)$3,500 on the cash basis and $1,000 on the accrual basis
(d)$3,000 on the cash basis and $3,500 on the accrual basis

Question 74

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 75

The preparation of adjusting entries
(a)is straight-forward because the accounts that need adjustment will be out of balance.
(b)requires an understanding of the company's operations and the inter-relationship of accounts.
(c)is only required for accounts that do not have a normal balance.
(d)is optional when financial statements are prepared.

Question 76

An asset-expense relationship exists with
(a)liability accounts.
(b)revenue accounts.
(c)prepaid expense adjusting entries.
(d)accrued expense adjusting entries.

Question 77

Adjusting entries are
(a)not necessary if the accounting system is operating properly.
(b)usually required before financial statements are prepared.
(c)made whenever management desires to change an account balance.
(d)made to statement of financial position accounts only.

Question 78

Unearned revenue is classified as a(n)
(a)asset account.
(b)revenue account.
(c)equity account.
(d)liability.

Question 79

Under the accrual basis of accounting
(a)cash must be received before revenue is recognized.
(b)profit is calculated by matching cash outflows against cash inflows.
(c)events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
(d)the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

Question 80

Which of the following reflects the balances of prepayment accounts prior to adjustment?
(a)Statement of financial position accounts are understated and income statement accounts are understated.
(b)Statement of financial position accounts are overstated and income statement accounts are overstated.
(c)Statement of financial position accounts are overstated and income statement accounts are understated.
(d)Statement of financial position accounts are understated and income statement accounts are overstated.