Deck 2: Accounting for Accruals and Deferrals

Question 1

When is revenue recognized under accrual accounting?

Answer 1

Revenue is recognized when it is earned; i.e. when the services are performed.
Explanation: Accrual accounting requires that companies recognize revenue when work is done regardless of when cash is collected.

Question 2

When are expenses recognized under accrual accounting in relation to the payment of cash?

Answer 2

Expenses are recognized when they are incurred, regardless of when cash is paid. In accrual transactions, that means that expenses are recorded before cash payments, and in deferral transactions they are recorded after cash payments.
Explanation: Expenses are recognized when incurred, regardless of when payment is made.

Question 3

What effect does providing services on account have on the statement of cash flows? The balance sheet?

Answer 3

There is no effect on the statement of cash flows when services are performed on account. Assets and equity will increase on the balance sheet.
Explanation: Providing services on account does not affect the cash account; therefore the statement of cash flows is unaffected. The asset accounts receivable increases as does equity (revenue increases retained earnings).

Question 4

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.
Sparta Co. provided $1,600 of services for a customer who paid $1,000 cash immediately and promised to pay an additional $600 one month later.

Question 5

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.
Curtis Company received $250 from a customer for services to be performed at a future date.

Question 6

What is the effect on the accounting equation of a cash payment to creditors?

Question 7

Explain the meaning of the term, "matching concept."

Question 8

Define the accounting cycle and list the stages of the cycle.

Question 9

Bledsoe Company received $15,000 cash from the issue of stock on January 1, 2013. During 2013 Bledsoe earned $8,500 of revenue on account. The company collected $6,000 cash from accounts receivable and paid $5,400 cash for operating expenses. Based on this information alone, during 2013.

A) Total assets increased by $24,100.
B) Total assets increased by $600.
C) Total assets increased by $18,100.
D) Total assets did not change.

Question 10

Adkins Company experienced an accounting event that affected its financial statements as indicated below: Which of the following accounting events could have caused these effects on ABC's statements?

A) Issued common stock.
B) Earned cash revenue.
C) Earned revenue on account.
D) Collected cash from accounts receivable.

Question 11

What effect does the recording of revenue normally have on total assets?

Question 12

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.
At the end of the accounting period, Stewart Co. recognized accrued salaries.

Question 13

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.
Jenkins Co. performed services for customers on account.

Question 14

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.
Aztec Co. signed contracts for $20,000 of services to be performed in the future.

Question 15

Describe the difference between temporary and permanent accounts, and state which ones are closed.

Question 16

Indicate how each event affects the elements of financial statements. Use the following letters to record your answer in the box shown below each element. You do not need to enter amounts.
George Co. collected $1,000 cash from accounts receivable.

Question 17

Why are adjusting entries necessary in an accrual accounting system? What are some common examples?

Question 18

What does the balance in accounts receivable represent?

Question 19

Describe the purpose of the closing process.

Question 20

The temporary or nominal accounts are closed prior to the start of the next accounting cycle. In this closing process, the amounts in each of these accounts are transferred to what other account(s)?

Question 21

Sandridge Company recorded salaries earned by employees but not yet paid. Which of the following represents the effect of this transaction on the financial statements?

A)

B)

C)

D)

Question 22

Franklin Trash Removal Company received a cash advance of $9,000 on December 1, 2013 to provide services during the months of December, January, and February. The year-end adjustment to recognize the partial expiration of the contract will

A) increase equity by $3,000
B) increase assets by $3,000
C) increase liabilities by $3,000
D) Increase Equity by $3,000 and assets by $3,000.

Question 23

Recognition of revenue may be accompanied by which of the following?

A) A decrease in a liability.
B) An increase in a liability.
C) An increase in assets.
D) A decrease in a liability and an increase in assets.

Question 24

Olaf Company began 2013 with $600 in its supplies account. During the year, the company purchased $1,700 of supplies on account. The company paid $1,500 on accounts payable by year end. On December 31, 2013, Olaf counted $700 of supplies on hand. Olaf's financial statements for 2013 would show:

A) $800 of supplies; $100 of supplies expense
B) $700 of supplies; $1,600 of supplies expense
C) $700 of supplies; $1,000 of supplies expense
D) $800 of supplies; $1,700 of supplies expense

Question 25

James Company paid $1,800 for one year's rent in advance beginning on October 1, 2013. James's 2013 income statement would report rent expense, and its statement of cash flows would report cash outflow for rent, respectively, of

A) $1,800; $1,800
B) $450; $1,800
C) $450; $450
D) $300; $1,800

Question 26

Prior to closing, XYZ Company's accounting records showed the following balances: After closing, XYZ's retained earnings balance would be

A) $5,600.
B) $7,000.
C) $7,900.
D) None of these.

Question 27

Purchasing prepaid rent is classified as a(n):

A) asset source transaction.
B) asset use transaction.
C) asset exchange transaction.
D) claims exchange transaction.

Question 28

The following account balances were drawn from the 2013 financial statements of Gunn Company Based on the above information, what is the balance of Common Stock for Gunn Company?

A) $9,950
B) $7,700
C) $450
D) $10,400

Question 29

In uncertain circumstances, the conservatism principle guides accountants to

A) accelerate revenue recognition and delay expense recognition.
B) accelerate expense recognition and delay revenue recognition.
C) recognize expense of prepaid items when payment is made.
D) maximize reported net income.

Question 30

Which of the following accounts would not appear on a balance sheet?

A) Unearned Revenue.
B) Salaries Payable.
C) Interest Revenue.
D) Retained Earnings.

Question 31

Woodward Enterprises had the following events during 2013:
The business issued $20,000 of common stock to its stockholders.
The business purchased land for $12,000 cash.
Services were provided to customers for $16,000 cash.
Services were provided to customers for $5,000 on account.
The company borrowed $16,000 from the bank.
Operating expenses of $12,000 were incurred and paid in cash.
Salary expense of $800 was accrued.
A dividend of $4,000 was paid to the owners of Woodward Enterprises.
Assuming the company began operations during 2013, the amount of retained earnings as of December 31, 2013 would be:

A) $4,200
B) $5,000
C) $8,200
D) $21,000

Question 32

Revenue on account amounted to $3,000. Cash collections of accounts receivable amounted to $2,700. Cash paid for expenses was $2,500. The amount of employee salaries accrued at the end of the year was $300. Cash flow from operating activities was

A) $200.
B) $300.
C) $500.
D) None of these.

Question 33

Which of the following choices accurately reflects how the recording of accrued salary expense affects a business's financial statements?

A)

B)

C)

D)

Question 34

Which of the following events would not require an end-of-year adjusting entry?

A) Purchasing supplies for cash
B) Providing services on account
C) Purchasing a 12-month insurance policy on July 1
D) All of these would require an end-of-year adjustment

Question 35

The entry to recognize work completed on unearned revenue involves which of the following?

A) An increase in assets and a decrease in liabilities
B) An increase in liabilities and a decrease in equity
C) A decrease in assets and a decrease in liabilities
D) A decrease in liabilities and an increase in equity

Question 36

Which of the following transactions does not involve an accrual?

A) Recording interest earned that will be received in the next period.
B) Recording operating expense incurred but not yet paid.
C) Recording salary expense incurred but not yet paid.
D) Recording the pre-payment of two years' worth of insurance.

Question 37

Revenue on account amounted to $4,000. Cash collections of accounts receivable amounted to $2,300. Expenses for the period were $2,100. The company paid dividends of $450. Net income for the period was

A) $200.
B) $1,450.
C) $1,850.
D) $1,900.

Question 38

Mackie Company provided $25,500 of services on account, and collected $18,000 from customers during the year. The company also incurred $17,000 of expenses on account, and paid $15,400 against its payables. As a result of these events.

A) total assets would increase
B) total liabilities would increase
C) total equity would increase
D) all of these are correct

Question 39

Which of the following statements is true in regard to accrual accounting?

A) Revenue is recorded only when cash is received.
B) Expenses are recorded when they are incurred.
C) Revenue is recorded in the period when it is earned.
D) Expenses are recorded when they are incurred and revenue is recorded in the period when it is earned.

Question 40

The recognition of an expense may be accompanied by which of the following?

A) An increase in assets
B) A decrease in liabilities
C) A decrease in revenue
D) An increase in liabilities

Question 41

If retained earnings decreased during the year, and no dividends were paid, which of the following must be true?

A) Expenses for the year exceeded revenues
B) The company did not have enough cash to pay its expenses
C) Total equity decreased
D) Liabilities increased during the year

Question 42

The matching concept refers to the "matching" of:

A) expenses and liabilities
B) expenses and revenues
C) assets and equity
D) assets and liabilities

Question 43

Norris Company experienced the following transactions during 2013, its first year in operation.
1) Issued $6,000 of common stock to stockholders.
2) Provided $2,300 of services on account.
3) Paid $1,600 cash for operating expenses.
4) Collected $1,900 of cash from accounts receivable.
5) Paid a $100 cash dividend to stockholders.
The amount of net cash flow from operating activities shown on Norris Company's 2013 statement of cash flows is

A) $200.
B) $300.
C) $700.
D) $600.

Question 44

Expenses that are matched with the period in which they are incurred are frequently called:

A) market expenses
B) matching expenses
C) period costs
D) working costs

Question 45

The purpose of the accrual basis of accounting is to:

A) Report revenue when received.
B) Match revenues and expenses in the proper period.
C) Report expenses when cash disbursements are made.
D) Improve the company's earnings per share.

Question 46

Which of the following would cause net income on the accrual basis to be different than (either higher or lower than) "cash provided by operating activities" on the statement of cash flows?

A) Purchased supplies for cash.
B) Purchased land for cash.
C) Invested cash in an interest earning account.
D) All of these are correct.

Question 47

Norris Company experienced the following transactions during 2013, its first year in operation.
1) Issued $6,000 of common stock to stockholders.
2) Provided $2,300 of services on account.
3) Paid $1,600 cash for operating expenses.
4) Collected $1,900 of cash from accounts receivable.
5) Paid a $100 cash dividend to stockholders.
The amount of net income recognized on Norris Company's 2013 income statement is:

A) $500.
B) $400.
C) $700.
D) $600.

Question 48

The following accounts and balances were drawn from the records of Hoover Company on December 31, 2013: $$\begin{array} { l r l r } \text { Cash } & \$ 1,000 & \text { Accounts Receivable } & \$ 850 \\\text { Dividends } & 500 & \text { Common Stock } & 975 \\\text { Land } & 800 & \text { Revenue } & 800 \\\text { Accounts Payable } & 450 & \text { Expense } & 550\end{array}$$ The amount of net income shown on the December 31, 2013 income statement would amount to:

A) $550.
B) $800.
C) $50.
D) $250.

Question 49

The results of the matching process are best reported on which financial statement?

A) Balance sheet
B) Income statement
C) Statement of changes in stockholders' equity
D) Statement of cash flows

Question 50

Gonzales Company collected $18,000 on September 1, 2013 from a customer for services to be provided over a one-year period beginning on that date. How much revenue would Gonzales Company report related to this contract on its income statement for the year ended December 31, 2013? How much would it report as cash flows from operating activities for 2013?

A) $6,000; $6,000
B) $6,000; $18,000
C) $18,000; $18,000
D) $0; $18,000

Question 51

Norris Company experienced the following transactions during 2013, its first year in operation.
1) Issued $6,000 of common stock to stockholders.
2) Provided $2,300 of services on account.
3) Paid $1,600 cash for operating expenses.
4) Collected $1,900 of cash from accounts receivable.
5) Paid a $100 cash dividend to stockholders.
The total amount of assets shown on Norris Company's December 31, 2013 balance sheet is:

A) $6,200.
B) $6,600.
C) $6,700.
D) None of these.

Question 52

Which of the following financial statement elements is closed at the end of an accounting cycle?

A) Liabilities
B) Common stock
C) Assets
D) Revenues

Question 53

On December 31, 2013, Farrell Co. owed $1,500 in salaries to employees who had worked during December but would be paid in January. If the year-end adjustment is properly recorded on December 31, 2013, what will be the effect of the accrual on the following items for Farrell? $$\begin{array} { | l | l | l | } \hline &{ \text { Net Income } } & { \begin{array} { c } \text { Cash Flow from } \\\text { Operating Activities }\end{array} } \\\hline \text { a. } & \text { No effect } & \text { No effect } \\\hline \text { b. } & \text { Decrease } & \text { No effect } \\\hline \text { c. } & \text { Increase } & \text { Decrease } \\\hline \text { d. } & \text { No effect } & \text { Decrease } \\\hline\end{array}$$

A) Option A
B) Option B
C) Option C
D) Option D

Question 54

The following accounts and balances were drawn from the records of Hoover Company on December 31, 2013: Total assets on the December 31, 2013 balance sheet would amount to:

A) $3,150.
B) $3,450.
C) $1,800.
D) $2,650.

Question 55

Ruiz Company provided services for $15,000 cash during the 2013 accounting period. Ruiz incurred $12,000 expenses on account during 2013, and by the end of the year, $3,000 of that amount had been paid with cash. Assuming that these are the only accounting events that affected Ruiz during 2013.

A) The amount of net income shown on the income statement is $3,000.
B) The amount of net income shown on the income statement is $9,000.
C) The amount of net loss shown on the income statement is $3,000.
D) The amount of net cash flow from operating activities shown on the statement of cash flows is $6,000.

Question 56

Norris Company experienced the following transactions during 2013, its first year in operation.
1) Issued $6,000 of common stock to stockholders.
2) Provided $2,300 of services on account.
3) Paid $1,600 cash for operating expenses.
4) Collected $1,900 of cash from accounts receivable.
5) Paid a $100 cash dividend to stockholders.
The amount of retained earnings appearing on Norris Company's December 31, 2013 balance sheet is:

A) $500.
B) $600.
C) $700.
D) $6,600.

Question 57

Which of the following accounts is not closed at the end of an accounting cycle?

A) Liabilities
B) Revenues
C) Dividends
D) Expenses

Question 58

The following accounts and balances were drawn from the records of Hoover Company on December 31, 2013: $$\begin{array} { l r l r } \text { Cash } & \$ 1,000 & \text { Accounts Receivable } & \$ 850 \\\text { Dividends } & 500 & \text { Common Stock } & 975 \\\text { Land } & 800 & \text { Revenue } & 800 \\\text { Accounts Payable } & 450 & \text { Expense } & 550\end{array}$$ The amount of retained earnings as of January 1, 2014 was:

A) $1,475.
B) $1,800.
C) $975.
D) $1,225.

Question 59

Tocca Co. collected a $5,000 cash advance from a customer on November 1, 2013 for work to be performed over a six-month period beginning on that date. If the year-end adjustment is properly recorded, what will be the effect on Tocca's 2013 financial statements?

A) Increase assets and increase liabilities
B) Increase assets and increase revenues
C) Decrease liabilities and increase revenues
D) No effect

Question 60

Which of the following correctly states the proper order of the accounting cycle?

A) Record transactions, adjust accounts, prepare statements, close temporary accounts.
B) Adjust accounts, record transactions, close temporary accounts, prepare statements.
C) Prepare statements, record transactions, close temporary accounts, adjust accounts.
D) Adjust accounts, prepare statements, record transactions, close temporary accounts.

Question 61

The term "recognition" means to report an economic event in the financial statements.

Question 62

Kenyon Company uses accrual accounting. Indicate whether each of the following statements regarding Kenyon's accounting system is true or false.
_____ a) The recognition of accounting events and the realization of cash consequences may occur in different accounting periods.
_____ b) The cash consequence of a transaction always precedes its accounting recognition.
_____ c) Expenses may either be matched to revenues they produce or to periods in which they are incurred.
_____ d) Kenyon may record accrual transactions, but may not record deferral transactions.
_____ e) Kenyon is not permitted to make cash sales.

Question 63

Which of the following is an asset source transaction?

A) Issued common stock.
B) Paid a cash dividend to stockholders.
C) Received a payment on accounts receivable.
D) Accrued salary expense.

Question 64

Companies that use accrual accounting recognize revenues and expenses at the time that cash is paid or received.

Question 65

Regarding the effects of end-of-period adjustments, state whether each of the following statements is true or false.
_____ a) Recording the usage of supplies involves a decrease in assets and a decrease in equity.
_____ b) The accrual of salaries is considered a claims exchange transaction.
_____ c) Recording services performed on a prepaid contract involves a decrease in liabilities and an increase in assets.
_____ d) End of period adjustments never affect cash flows.
_____ e) Failure to record accrued salaries at the end of the year will cause reported income to be higher than it should have been.

Question 66

The term "accrual" describes an earnings event that is recognized after cash is paid or received.

Question 67

Which of the following is a claims exchange transaction?

A) Purchased machine for cash.
B) Issued common stock.
C) Invested cash in an interest earning account.
D) Recognized revenue earned on a contract where the cash had been collected at an earlier date.

Question 68

The accounting principle that guides accountants, when faced with a recognition dilemma, to choose the alternative that produces the lowest net income is referred to as

A) the matching principle.
B) internal control.
C) conservatism.
D) materiality.

Question 69

Which of the following describes the effects of a claims exchange transaction on a company's financial statements?

A)

B)

C)

D)

Question 70

Dandridge Company collected cash in 2012 from a customer for services to be performed beginning January 2013. Indicate whether each of the following statements about this transaction is true or false.
_____ a) Dandridge's 2012 income statement would not be affected by this transaction.
_____ b) Dandridge's 2012 statement of cash flows would be affected by this transaction.
_____ c) This transaction is an asset exchange transaction.
_____ d) The revenue for the services provided will be recorded in 2013.
_____ e) This transaction is considered an accrual transaction.

Question 71

Wyatt Company paid $57,000 in January 2013 for salaries that had been earned by employees in December 2012. Indicate whether each of the following statements about financial statement effects of the January 2013 event is true or false.
_____ a) The income statement for 2013 is not affected because the salaries expense had been recognized at the end of December.
_____ b) On the 2013 statement of cash flows, cash flows from operating activities decreased.
_____ c) Payment of the salaries in 2013 decreased a liability.
_____ d) The 2013 statement of changes in stockholders' equity would not be affected because the salaries expense had been recognized at the end of December.
_____ e) Both assets and equity decreased as a result of this transaction.

Question 72

Which of the following is an asset exchange transaction?

A) Issued common stock.
B) Accrued salary expense at the end of the accounting period.
C) Recognized revenue earned on a contract where the cash had been collected at an earlier date.
D) Collected cash on accounts receivable

Question 73

The balance in a revenue account at the beginning of an accounting period will always be

A) equal to the amount of retained earnings for the previous period.
B) last period's ending balance.
C) higher than the previous periods beginning balance.
D) zero.

Question 74

Whetstone Co. performed services for a customer on account. Indicate whether each of the following statements about this transaction is true or false.
_____ a) Assets and equity both increase when the revenue is recognized.
_____ b) This transaction did not affect cash flows.
_____ c) The company recorded an increase in revenue and a decrease in accounts receivable.
_____ d) Recognition of revenue would be delayed until cash was received.
_____ e) This transaction is an example of an asset source transaction.

Question 75

Indicate whether each of the following statements regarding the four types of accounting events is true or false.
_____ a) Asset use transactions involve an increase in one asset and a decrease in another asset.
_____ b) An asset source transaction involves an increase in assets and an increase in a corresponding claims account.
_____ c) An asset exchange transaction involves an increase in an asset and a decrease in a claims account.
_____ d) Asset exchange transactions involve an increase in one asset and a decrease in another asset.
_____ e) Some claims exchange transactions involve an increase in a liability account and a decrease in an equity account.

Question 76

A company may recognize a revenue or expense without a corresponding cash collection or payment in the same accounting period.

Question 77

Which of the following is an asset use transaction?

A) Purchased machine for cash.
B) Recorded supplies expense at the end of the period.
C) Invested cash in an interest earning account.
D) Accrued salary expense.

Question 78

Indicate whether each of the following statements about the closing process and the accounting cycle is true or false.
_____ a) The closing process transfers certain account balances to retained earnings at the end of the accounting cycle.
_____ b) Only accounts that appear on the income statement are closed at the end of each accounting cycle.
_____ c) Another name for permanent accounts is "nominal accounts."
_____ d) The permanent accounts contain information that is cumulative in nature.
_____ e) The retained earnings balance at the end of any given year is equal to that year's net income.

Question 79

Regarding the relationships of revenues and expenses to assets and liabilities, state whether each of the following statements is true or false.
_____ a) Recording an increase in a revenue account may be associated with an increase in assets.
_____ b) Recording an increase in a revenue account may be associated with a decrease in liabilities.
_____ c) An increase in Salaries Expense may be accompanied by a decrease in Salaries Payable.
_____ d) Recording a decrease in assets may be associated with an increase in an expense account.
_____ e) An increase in Supplies may be accompanied by an increase in Supplies Expense.

Question 80

Earning revenue on account would be classified as a/an:

A) claims exchange transaction.
B) asset source transaction.
C) asset use transaction.
D) asset exchange transaction.