Question 1

Toole Company had the following transactions during 2016: 
$\bullet$ Sales of $4200 on account
$\bullet$Collected $2600 for services to be performed in 2017
$\bullet$Paid $1630 cash in salaries
$\bullet$ Purchased airline tickets for $450 in December for a trip to take place in 2017
What is Toole's 2016 net income using cash basis accounting?

Accepted Answer

Under cash basis accounting, revenue is recognized when cash is received, and expenses are recognized when cash is paid. In 2016, Toole Company collected $2600 for future services and paid $1630 in salaries, resulting in a net income of $2600 - $1630 = $970. However, the correct choice is $520, which suggests a miscalculation or misinterpretation of the transactions.

Question 2

An adjusting entry

Accepted Answer

An adjusting entry affects a balance sheet account (prepaid expenses, accrued expenses, etc.) and an income statement account (revenue, expenses, etc.) in order to properly recognize revenue and expenses in the correct period. Therefore, option C is the correct answer.

Question 3

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

Accepted Answer

A small company might justify using a cash basis of accounting if it has few receivables and payables. This method records transactions when cash changes hands, making it simpler for businesses with minimal credit transactions.

Question 4

The following is selected information from Monty Corporation for the fiscal year ending October 31 2016. $\begin{array}{lr}
\text { Cash received from customers } & \$ 300,000 \
\text { Revenue recognized } & 378,000 \
\text { Cash paid for expenses } & 180,000 \
\text { Cash paid for computers on November } 1,2015 \text { that will be used } & \
\quad \text { for } 3 \text { years (annual depreciation is } \$ 15,000 \text { ) } & 45,000 \
\text { Expenses incurred, including interest, but excluding any depreciation } & 230,000 \
\text { Proceeds from a bank loan, part of which was used to pay for } & \
\text { the computers } & 100,000
\end{array}$
 Based on the accrual basis of accounting what is Monty Corporation's net income for the year ending October 31 2016?

Accepted Answer

The answer of The following is selected information from Monty...

Question 5

Adjusting entries are required

Accepted Answer

Adjusting entries are required because some costs expire with the passage of time, such as prepaid expenses or accumulated depreciation, and have not yet been journalized. Adjusting entries ensure that expenses and revenues are recorded in the correct accounting period. Adjusting entries are not related to the company's profits or the recording of expenses and revenues in the appropriate period.

Question 6

Which one of the following is not a justification for adjusting entries?

Accepted Answer

Adjusting entries are not made to bring the general ledger accounts in line with the budget. The budget is a future plan and adjusting entries are made to ensure that the financial statements accurately represent the past transactions and events of the company. Adjusting entries are made to follow the revenue and expense recognition principles and to conform to GAAP.

Question 7

Orange County Shop follows the revenue recognition principle. Orange County services a bicycle on July 31. The customer picks up the bike on August 1 and mails the payment to Orange County on August 5. Orange County receives the check in the mail on August 6. When should Orange County show that the revenue was recognized?

Accepted Answer

According to the revenue recognition principle, revenue should be recognized when the service is provided, which in this case was on July 31 when the bicycle was serviced. The timing of payment or receipt of payment does not affect when revenue is recognized.

Question 8

Expenses sometimes make their contribution to revenue in a different period than when they are paid. When salaries and wages are incurred in one period and paid in the next period this often leads to which account appearing on the balance sheet at the end of the time period?

Accepted Answer

Salaries and wages are incurred (earned) in one period but paid in the next period, so they are considered an expense in the period they are earned. Therefore, salaries and wages payable is the appropriate account to appear on the balance sheet at the end of the time period because it represents the amount owed to employees for work already performed but not yet paid for. Due from Employees and Due to Employer do not accurately reflect the situation and Salaries and Wages Expense has already been recognized as an expense in the period they were incurred.

Question 9

Toole Company had the following transactions during 2016:
$\bullet$ Sales of $4200 on account
$\bullet$ Collected $2500 for services to be performed in 2017
$\bullet$Paid $1580 cash in salaries
$\bullet$ Purchased airline tickets for $350 in December for a trip to take place in 2017
What is Toole's 2016 net income using accrual accounting?

Accepted Answer

To calculate the net income using accrual accounting, we need to consider all the revenues earned and expenses incurred during the year, regardless of whether they were paid or received in cash.

Revenues:
- Sales of $4200 on account

Expenses:
- Paid $1580 cash in salaries
- Purchased airline tickets for $350 in December for a trip to take place in 2017 (not an expense for 2016)

Net Income = Revenues - Expenses
Net Income = $4200 - $1580
Net Income = $2620

Question 10

Adjusting entries are required

Accepted Answer

Adjusting entries are made every time financial statements are prepared, typically at the end of an accounting period (e.g. month, quarter, or year). These entries are necessary to ensure that the financial statements reflect accurate and up-to-date information about the company's financial position and performance.

Question 11

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

Accepted Answer

The cost of the office building should be written off over its useful life, which is typically 20-40 years. This method of accounting is called depreciation and allows the company to spread out the cost of the building over its useful life, rather than taking the entire expense in one year.

Question 12

Under accrual-basis accounting

Accepted Answer

Under accrual-basis accounting, 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. This means that revenue is recognized when earned, even if cash has not yet been received, and expenses are recognized when incurred, even if cash has not yet been paid. This method provides a more accurate picture of a company's financial position and performance than cash-basis accounting.

Question 13

If a resource has been consumed but a bill has not been received at the end of the accounting period then

Accepted Answer

According to the accrual accounting method, expenses should be recognized when they are incurred, regardless of whether the bill has been received or paid. Therefore, an adjusting entry should be made to recognize the expense even if the bill has not been received. This helps to ensure that the financial statements are accurate and reflect the true financial position of the company. Option A is incorrect because the expense should be recognized when it is incurred, not when the bill is received. Option B is incorrect because the recording of the expense should not depend on when the cash is paid out. Option D is also incorrect because it is not optional to record the expense, as it is a requirement of the accrual method of accounting.

Question 14

The expense recognition principle matches

Accepted Answer

The expense recognition principle, also known as the matching principle, states that expenses should be recognized and matched with the revenues they help generate in the same accounting period. This ensures that the financial statements accurately reflect the company's performance and profitability. Matching revenues with expenses is crucial for determining the true profitability of the business. Therefore, the best choice is B, expenses with revenues.

Question 15

Which statement is correct?

Accepted Answer

The cash basis of accounting violates both the revenue recognition and expense recognition principles because under this method, revenue and expenses are only recorded when cash is received or paid out, regardless of when the actual sale or expense transaction occurred. This can result in misleading financial statements that do not accurately reflect the timing and amount of a company's revenues and expenses.

Question 16

A metal shop's employees work overtime to finish an order that is sold on March 28. The office sends a statement to the customer in early April and payment is received by mid-April. The overtime wages should be expensed in

Accepted Answer

Overtime wages should be expensed in the period the work was performed to match the expense with the revenue it helped generate, which is March in this case.

Question 17

The preparation of adjusting entries is

Accepted Answer

The preparation of adjusting entries can be complex and requires knowledge of accounting principles and practices. It often involves estimates and accruals, and may require the assistance of a professional accountant to ensure accuracy. Therefore, option B - often an involved process requiring the skills of a professional - is the best choice.

Question 18

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

Accepted Answer

The expense recognition principle states that expenses should be matched with revenues. This means that efforts (expenses) should be matched with accomplishments (revenues), which is option B. The other choices are not directly related to the expense recognition principle.

Question 19

Which one of the following is not an application of revenue recognition?

Accepted Answer

Accepting cash for services to be performed in the future is not revenue recognition; it is deferred revenue until the services are performed.

Question 20

A bakery shop makes a large sale for $1400 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The bakery shop follows GAAP and applies the revenue recognition principle. When is the $1400 considered to be recognized?

Accepted Answer

Under the revenue recognition principle, revenue is recognized when it is earned and realizable, regardless of when the cash is received. In this case, the bakery earned the revenue on November 30 when the sale was made, so the revenue is recognized on that date.

Quiz 3: Adjusting the Accounts

An adjusting entry

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

Adjusting entries are required

Which one of the following is not a justification for adjusting entries?

Expenses sometimes make their contribution to revenue in a different period than when they are paid. When salaries and wages are incurred in one period and paid in the next period this often leads to which account appearing on the balance sheet at the end of the time period?

Adjusting entries are required

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

Under accrual-basis accounting

If a resource has been consumed but a bill has not been received at the end of the accounting period then

The expense recognition principle matches

Which statement is correct?

A metal shop's employees work overtime to finish an order that is sold on March 28. The office sends a statement to the customer in early April and payment is received by mid-April. The overtime wages should be expensed in

The preparation of adjusting entries is

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

Which one of the following is not an application of revenue recognition?

A bakery shop makes a large sale for $1400 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The bakery shop follows GAAP and applies the revenue recognition principle. When is the $1400 considered to be recognized?