Deck 4: Accrual Accounting Concepts

Question 1

The periodicity assumption is often referred to as the expense recognition principle.

Answer 1

False

Question 2

Revenue received before it is recognized and expenses paid before being used or consumed are both initially recorded as liabilities.

Answer 2

False

Question 3

The revenue recognition principle dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied.

Answer 3

True

Question 4

An adjusting entry to a prepaid expense is required to recognize expired expenses.

Question 5

Recognizing when an expense contributes to the production of revenue is critical.

Question 6

An adjusting entry always involves two balance sheet accounts.

Question 7

Expense recognition is tied to revenue recognition.

Question 8

The periodicity assumption states that the economic life of a business entity can be divided into artificial time periods.

Question 9

Revenue received before it is recognized and expenses used or consumed before being paid are both initially recorded as liabilities.

Question 10

Adjusting entries are not necessary if the trial balance debit and credit columns balances are equal.

Question 11

An adjusting entry always involves a balance sheet account and an income statement account.

Question 12

Adjusting entries are often made because some business events are not recorded as they occur.

Question 13

The expense recognition principle requires that efforts be related to accomplishments.

Question 14

The revenue recognition principle and the expense recognition principle are helpful guides used in determining net income or net loss for a period.

Question 15

The cash basis of accounting is not in accordance with generally accepted accounting principles.

Question 16

An adjusting entry would be made to the revenue account only when cash is received.

Question 17

Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger.

Question 18

Income will always be greater under the cash basis of accounting than under the accrual basis of accounting.

Question 19

Accrued revenues are revenues that have been received but not yet recognized.

Question 20

The expense recognition principle is frequently referred to as the matching principle.

Question 21

Without an adjusting entry for accrued interest expense, liabilities and interest expense are understated, and net income and stockholders' equity are overstated.

Question 22

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

Question 23

The only accounts that are closed are temporary accounts.

Question 24

The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique.

Question 25

Financial statements can be prepared from the information provided by an adjusted trial balance.

Question 26

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

Question 27

The accrued interest for a three month note payable of $10,000 dated December 1, 2013 at an interest rate of 6% is $150 on December 31, 2013.

Question 28

The adjusting entry for unearned revenue results in an increase (a debit) to an asset account and an increase (a credit) to a revenue account.

Question 29

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

Question 30

The difference between unearned revenue and accrued revenue is that accrued revenue has been recorded and needs adjusting and unearned revenue has never been recorded.

Question 31

Unearned revenue is a prepayment that requires an adjusting entry when services are performed.

Question 32

Accrued revenues are revenues that have been recognized but not yet recorded.

Question 33

Asset prepayments become expenses when they expire.

Question 34

Accrued revenues are revenues that have been recognized but cash has not been received before financial statements have been prepared.

Question 35

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

Question 36

A contra asset account is subtracted from a related account in the balance sheet.

Question 37

The adjusting entry for accrued salaries requires a debit to Salaries and Wages Payable.

Question 38

A liability-revenue account relationship exists with an unearned rent revenue adjusting entry.

Question 39

The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset.

Question 40

Closing entries deal primarily with the balances of permanent accounts.

Question 41

The accounting cycle begins with the journalizing of the transactions.

Question 42

One of the accounting concepts upon which adjustments for prepayments and accruals are based is:

A) expense recognition.
B) cost.
C) monetary unit.
D) economic entity.

Question 43

An expense account is closed with a credit to the expense account and a debit to the Income Summary account.

Question 44

A 10-column worksheet is a permanent accounting record.

Question 45

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

Question 46

Which of the following is not generally an accounting time period?

A) A week.
B) A month.
C) A quarter.
D) A year.

Question 47

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

Question 48

When closing entries are prepared, each income statement account is closed directly to retained earnings.

Question 49

Management usually wants ________ financial statements and the IRS requires all businesses to file _________ tax returns.

A) annual, annual
B) monthly, annual
C) quarterly, monthly
D) monthly, monthly

Question 50

Cash is a temporary account.

Question 51

A revenue account is closed with a credit to the revenue account and a debit to Income Summary.

Question 52

In the accounting cycle, closing entries are prepared before adjusting entries.

Question 53

Accounts receivable is a permanent account.

Question 54

Expenses are recognized when:

A) they contribute to the production of revenue.
B) they are paid.
C) they are billed by the supplier.
D) the invoice is received.

Question 55

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

Question 56

An accounting time period that is one year in length is called:

A) a fiscal year.
B) an interim period.
C) the time period assumption.
D) a reporting period.

Question 57

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

Question 58

Adjustments would not be necessary if financial statements were prepared to reflect net income from:

A) monthly operations.
B) fiscal year operations.
C) interim operations.
D) lifetime operations.

Question 59

The periodicity assumption states that:

A) a transaction can only affect one period of time.
B) estimates should not be made if a transaction affects more than one time period.
C) adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations.
D) the economic life of a business can be divided into artificial time periods.

Question 60

Financial statements must be prepared before the closing entries are made.

Question 61

A small company may be able to justify using a cash basis of accounting if they have:

A) sales under $1,000,000.
B) no accountants on staff.
C) few receivables and payables.
D) all sales and purchases on account.

Question 62

Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)?

A) Cost principle.
B) Periodicity principle.
C) Revenue recognition principle.
D) Expense recognition principle.

Question 63

Under the accrual basis of accounting:

A) cash must be received before revenue is recognized.
B) net income 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 64

The following is selected information from C Corporation for the fiscal year ending October 31, 2014. Based on the accrual basis of accounting, what is C Corporation's net income for the year ending October 31, 2014?

A) $102,000
B) $86,000
C) $76,000
D) $110,000

Question 65

Which is not an application of revenue recognition?

A) Recording revenue as an adjusting entry on the last day of the accounting period.
B) Accepting cash from an established customer for services to be performed over the next three months.
C) Billing customers on June 30 for services completed during June.
D) Receiving cash for services performed.

Question 66

A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be recognized?

A) December 5
B) December 10
C) November 30
D) December 1

Question 67

The expense recognition principle states that expenses should be matched with revenues. Another way of stating the principle is to say that:

A) assets should be matched with liabilities.
B) efforts should be matched with accomplishments.
C) dividends should be matched with stockholder investments.
D) cash payments should be matched with cash receipts.

Question 68

In a service-type business, revenue is recognized:

A) at the end of the month.
B) at the end of the year.
C) when the service is performed.
D) when cash is received.

Question 69

The following is selected information from L Corporation for the fiscal year ending October 31, 2014. Based on the accrual basis of accounting, what is L Corporation's net income for the year ending October 31, 2014?

A) $204,000
B) $174,000
C) $158,000
D) $220,000

Question 70

Under the cash basis of accounting:

A) revenue is recognized when services are performed.
B) expenses are matched with the revenue that is produced.
C) cash must be received before revenue is recognized.
D) a promise to pay is sufficient to recognize revenue.

Question 71

The expense recognition principle matches:

A) customers with businesses.
B) expenses with revenues.
C) assets with liabilities.
D) creditors with businesses.

Question 72

On April 1, 2013, nPropel Corporation paid $48,000 cash for equipment that will be used in business operations. The equipment will be used for four years. nPropel records depreciation expense of $48,000 for the calendar year ending December 31, 2013. Which accounting principle has been violated?

A) Depreciation principle.
B) No principle has been violated.
C) Cash principle.
D) Expense recognition principle.

Question 73

A company spends $20 million dollars for an office building. Over what period should the cost be written off?

A) When the $20 million is expended in cash.
B) All in the first year.
C) After $20 million in revenue is earned.
D) None of these answer choices are correct.

Question 74

A furniture factory's employees work overtime to finish an order that is sold on January 31. The office sends a statement to the customer in early February and payment is received by mid-February. The overtime wages should be expensed in:

A) January.
B) February.
C) the period when the workers receive their checks.
D) either January or February depending on when the pay period ends.

Question 75

The revenue recognition principle dictates that revenue should be recognized in the accounting records:

A) when cash is received.
B) when the performance obligation is satisfied.
C) at the end of the month.
D) in the period that income taxes are paid.

Question 76

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 77

Which statement is correct?

A) As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.
B) The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.
C) The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.
D) As long as management is ethical, there are no problems with using the cash basis of accounting.

Question 78

La More Company had the following transactions during 2013: $\bullet$ Sales of $4,500 on account
$\bullet$ Collected $2,000 for services to be performed in 2014
$\bullet$ Paid $1,875 cash in salaries for 2013
$\bullet$ Purchased airline tickets for $250 in December for a trip to take place in 2014
What is La More's 2013 net income using accrual accounting?

A) $2,875
B) $4,875
C) $4,625
D) $2,625

Question 79

Otto's Tune-Up Shop follows the revenue recognition principle. Otto services a car on August 31. The customer picks up the vehicle on September 1 and mails the payment to Otto on September 5. Otto receives the check in the mail on September 6. When should Otto show that the revenue was recognized?

A) August 31
B) August 1
C) September 5
D) September 6

Question 80

Why do generally accepted accounting principles require the application of the revenue recognition principle?

A) Failure to apply the revenue recognition principle could lead to a misstatement of revenue.
B) It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve.
C) Recording revenue when cash is received is an objective application of the revenue recognition principle.
D) Accounting software has made the revenue recognition easy to apply.