Deck 3: Accrual Accounting Income

Question 1

A doctor performed surgery in March and did not receive cash from the patient until July. Under accrual accounting the doctor recognizes revenue:

A) in March.
B) in July.
C) in either March or July.
D) at a time that cannot be determined from the facts.

Answer 1

B

Question 2

Under cash-basis accounting:

A) the Cash account will be overstated.
B) important information is ignored.
C) the Cash account will be understated.
D) the financial statements will have the same information as statements prepared under accrual accounting.

Answer 2

B

Question 3

Under cash-basis accounting, there are two defects-one on the balance sheet and one on the income statement.

Answer 3

True

Question 4

Companies generally have a year that ends at the high point in their business activity.

Question 5

Which of the following is a correct statement about the methods of accounting?

A) Cash-basis accounting records revenues when they are earned.
B) Cash-basis accounting records expenses only at the end of the month.
C) GAAP requires accrual accounting.
D) Accrual accounting records an expense when cash is paid.

Question 6

GAAP requires the use of cash-basis accounting.

Question 7

When a company sells merchandise inventory on account:

A) the receipt of cash increases their wealth.
B) making the sale increases their wealth.
C) the gain on the transaction occurs when the cash is received.
D) total assets are increased when the cash is received.

Question 8

The method of accounting that records revenues when the cash is received and expenses as they are paid is the:

A) deferral method.
B) cash method.
C) accrual method.
D) hybrid method.

Question 9

The transaction to record a cash sale will be the same under the accrual and cash-basis of accounting.

Question 10

Equity is increased when company makes a sale, not when the company collects the cash.

Question 11

Under accrual accounting, revenue is recorded:

A) when the cash is collected, regardless of when the services are performed.
B) when the services are performed, regardless of when the cash is received.
C) either when the cash is received or the sale is made.
D) only if the cash is received at the same time the services are performed.

Question 12

Which of the following transactions would be recorded under accrual accounting but NOT under cash-basis accounting?

A) Collecting cash from customers
B) Borrowing money from the bank
C) Purchasing of inventory on account
D) Issuing stock for cash

Question 13

Under cash-basis accounting, a company will record the usage of prepaid rent.

Question 14

Under accrual accounting, the impact of a business transaction is recorded:

A) as it occurs.
B) when cash is received or paid.
C) at the end of the accounting period.
D) only if the amount of the transaction is material.

Question 15

Accrual accounting records the impact of both cash and non-cash transactions as they occur.

Question 16

Accounting can be based on either the cash basis or the accrual basis.

Question 17

The year-end concept requires a company to report accounting information at regular intervals.

Question 18

Under cash-basis accounting, there is no transaction recorded when a sale is made on account.

Question 19

Which of the following is an acceptable method of accounting?

A) Combination basis
B) Tax basis
C) Services basis
D) Accrual basis

Question 20

A defect of cash-basis accounting is:

A) the income statement will be incorrect.
B) the balance sheet will be incorrect.
C) both the income statement and the balance sheet will be incorrect.
D) either the income statement or the balance sheet will be incorrect.

Question 21

The revenue principle determines when to record revenue and the amount of revenue to record.

Question 22

On July 25, Hockey Company's accountant prepared a check for August's rent payment. Hockey Company mails the check on July 27 to the landlord. The landlord receives the check on July 31 and cashes the check on August 2. When should Hockey Company record the rent expense associated with this transaction?

A) July 25
B) July 27
C) August 31
D) August 2

Question 23

Which time period indicates that a company has prepared interim statements?

A) For the year ended September 30
B) For the month ended April 30
C) For the quarter ended June 30
D) Both the month ended April 30 and the quarter ended June 30

Question 24

The matching principle matches cash receipts and cash disbursements.

Question 25

Which of the following statement regarding the time-period concept is NOT correct?

A) Ongoing companies can wait till they go out of business to measure income.
B) Accountants prepare financial statements for specific periods.
C) The basic accounting period is one year.
D) Most large companies use a calendar year.

Question 26

An expense incurred in 2011 is not paid until 2012. Using the accrual basis of accounting, the expense should appear on:

A) the 2011 income statement.
B) the 2012 income statement.
C) neither the 2011 nor the 2012 income statement.
D) both the 2011 and 2012 income statements.

Question 27

Revenue recognition:

A) does not vary by industry under GAAP.
B) is less detailed under GAAP than under IFRS.
C) for the retail industry is similar under GAAP and IFRS.
D) under IFRS leaves no room for interpretation on the part of the company .

Question 28

Expenses have a future benefit to the company.

Question 29

The expense recognition principle recognizes expenses in the same period in which any related revenues are earned.

Question 30

The requirement to report accounting information at regular intervals is known as the:

A) interval concept.
B) GAAP concept.
C) time-period concept.
D) reporting concept.

Question 31

If a company fails to record a sale on account:

A) accounts receivable on the balance sheet will be overstated.
B) assets on the balance sheet will be understated.
C) net income on the income statement will still be correct.
D) revenue on the income statement will be overstated.

Question 32

Cash accounting provides some ethical challenges that accrual accounting avoids.

Question 33

The accounting period that ends on a date other than December 31 is called a:

A) fiscal year.
B) year end.
C) calendar year.
D) revolving year.

Question 34

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

Question 35

ABC Inc. earned revenues of $150,000 in cash and $210,000 on account during 2012. Of the $210,000 on account, $80,000 was collected in cash after the sales date. The company incurred expenses of $125,000 and made related cash payments of $90,000. Compute net income under (a) cash basis accounting and (b) the accrual basis accounting. Which provides a better measurement of net income? Why?

Question 36

The revenue principle governs two things:

A) when to record revenue and where to record this revenue.
B) where to record revenue and the amount of revenue to record.
C) when to record revenue and the amount of revenue to record.
D) when to record revenue and in which journal to record the revenue.

Question 37

The event that triggers revenue recognition for the sale of goods is the:

A) date a contract is signed.
B) date cash is received.
C) transfer of control of the goods to the purchaser.
D) completion of the services.

Question 38

On December 15, 2012, a company receives an order from a customer for services to be performed on December 28, 2012. Due to a backlog of orders, the company does not perform the services until January 3, 2013. The customer pays for the services on January 6, 2013. The revenue principle requires the revenue to be recorded by the company on:

A) December 15, 2012.
B) January 3, 2013.
C) December 28, 2012.
D) January 6, 2013.

Question 39

In the retail industry, income is recognized under IFRS when the cash is received.

Question 40

An interim period is generally:

A) more than one year, but less than the life of the company.
B) more than one year.
C) less than one year.
D) half of the life of the company.

Question 41

An asset that is appreciating in value is still depreciated for accounting purposes.

Question 42

Identify the accounting concept or principle that gives the most direction on how to account for each of the following situations.
A. It's been a particularly slow month, and the company will have a net loss for the first quarter. Management is considering not following its practice of reporting quarterly earnings to the public.
B. Salaries of the factory workers for November will not be paid until December.
C. A telephone bill is received on the last day of the month and will be paid next year.
D. A contractor is building a new development and received an advance for work to be completed over the next 2 years.
E. An accountant prepares tax returns for clients and bills them after the work is completed. It usually takes 30 days to receive payment from customers.

Question 43

The cost of office supplies used up during the period is an expense.

Question 44

The accumulated depreciation account decreases over the life of the asset.

Question 45

The expense recognition principle includes two steps:

A) measure the expenses and record the revenue.
B) identify all the expenses incurred during the accounting period and measure the expenses and match them against the revenue earned.
C) when to record revenue and the amount of revenue to record.
D) when to record the revenue and identify all the expenses incurred during the accounting period.

Question 46

Accounts Receivable and Common Stock are accounts that need to be adjusted at the end of the period.

Question 47

Expenses can:

A) be paid in cash.
B) arise from using up an asset.
C) occur when a company creates a liability.
D) be all of the above.

Question 48

Which of the following is a true statement regarding expenses?

A) To recognize expenses along with the related revenues means to subtract expenses from related revenues to compute net revenue.
B) The expense recognition principle is also called the matching principle.
C) Expenses must be paid immediately.
D) Expenses must always be less than revenues.

Question 49

In accrual adjustments, the revenue or expense is recognized before the cash is received or paid.

Question 50

Accounting adjustments fall into three basic categories: accruals, prepaids, and depreciation.

Question 51

The Car Company uses the accrual basis of accounting. The company is having a poor year financially. In September, 2012, the company paid $3 million for advertisements that will run during the World Series in September and October of 2012. The bonus of the CEO is based on net income with a maximum bonus of $200,000. The CEO wants the accountant to record the advertising as prepaid advertising since he feels strongly that the advertising will benefit the company in both 2012 and 2013. This way, the expenses for 2012 will be reduced and he may still be able to get his 2012 bonus. How and when should the company record the advertisement? What principle is used to determine when the expense should be recorded?

Question 52

In an unadjusted trial balance, the accounts are not yet ready for the preparation of the company's financial statements.

Question 53

Depreciation allocates the cost of land to expense over the useful life of the land.

Question 54

Accrued revenues have been recorded and need adjusting, while deferred revenues have never been recorded before the adjusting process.

Question 55

To obtain a new customer, a business sells merchandise to the customer for $65. Normally, the merchandise sells for $85. For this sale, the business should record revenue of:

A) $65.
B) $85.
C) either amount.
D) an average of the two amounts.

Question 56

The revenue principle requires that a business record revenue when the business:

A) receives an order from a customer.
B) prepares the invoice for the customer.
C) delivers goods or services to a customer.
D) receives payment from a customer.

Question 57

A company using accrual accounting pays $12,000 for a television advertising campaign in November, 2012. Commercials will run evenly in November, December, and January. How much expense will be reported on an income statement prepared for the year ended December 31, 2012?

A) $0
B) $4,000
C) $8,000
D) $12,000

Question 58

Certain accounts do not need to be adjusted at the end of the period, since the day-to-day transactions provide all the data for these accounts.

Question 59

Under the expense recognition principle:

A) expenses are the costs of assets used up in earning revenue.
B) expenses cannot be recognized when a liability is created in earning revenue.
C) expenses have a future benefit to the company.
D) expenses are recognized at the same time services are recorded.

Question 60

A deferral is an adjustment for payment of an item or receipt of cash in advance.

Question 61

________ will be increased when a company receives cash before performing the services.

A) Prepaid Rent
B) Accumulated Depreciation
C) Unearned Sales Revenue
D) Accrued Sales

Question 62

A prepaid expense is an expense paid in advance.

Question 63

Recording an expense in order to measure net income is consistent with the expense recognition principle.

Question 64

________ is the allocation of the cost of an asset over the asset's useful life.

A) Accrual
B) Deferral
C) Depreciation
D) Expiration

Question 65

The adjusted trial balance lists all the accounts and their final balances in a single place.

Question 66

Adjusting entries:

A) are needed for all balance sheet accounts.
B) must be made on a daily basis to record supplies used during that day.
C) are needed because errors have been made in previous journal entries.
D) are made before the financial statements can be prepared.

Question 67

Adjusting entries are:

A) not needed under the accrual basis of accounting.
B) prepared at the option of the accountant.
C) prepared at the beginning of the accounting period to update all accounts.
D) prepared at the end of the accounting period to update certain accounts.

Question 68

The book value of a plant asset is equal to its cost plus any improvements made to the asset.

Question 69

Adjusting entries:

A) close the revenue accounts.
B) close the expense accounts.
C) adjust cash.
D) adjust unearned revenue.

Question 70

When determining the adjusting entries that may be needed:

A) prepaid rent requires an accrual adjustment.
B) a deferral is an adjustment for payment of an item in advance.
C) a deferral is an adjustment for the receipt of cash after the service has been performed.
D) unpaid salaries requires a deferral adjustment.

Question 71

When determining adjusting entries that may be needed:

A) there can be deferral adjustments for assets.
B) there can be deferral adjustments for liabilities.
C) there can be accrual adjustments for revenues.
D) all of the above.

Question 72

Every adjusting entry must affect both the income statement and the balance sheet.

Question 73

Prepaid expenses will:

A) become expenses when their future benefits expire.
B) become revenues when their future benefits expire.
C) become liabilities when their future benefits expire.
D) become assets when their future benefits expire.

Question 74

Unearned Service Revenue is a revenue account.

Question 75

Companies are required to record accrued expenses on a daily or weekly basis.

Question 76

If deferred revenue has been earned by the end of the current period and no adjustment is recorded, net income for the current period will be understated.

Question 77

All plant assets except buildings, decline in usefulness. This decline is an expense.

Question 78

The deferral adjustment for liabilities:

A) records the amount of the asset used up during the period.
B) records the amount of revenue earned for the period.
C) increases a liability account.
D) decreases an asset account.

Question 79

The following accounts are up-to-date and need no adjustment at the end of the period:

A) cash, common stock and prepaid rent.
B) prepaid rent, supplies and unearned rent.
C) cash, dividends and common stock.
D) cash, dividends and unearned rent.

Question 80

The adjusting entry to recognize unpaid salaries increases net income and increases liabilities.