Deck 3: Accrual Accounting Income

Question 1

Under cash-basis accounting,stockholders' equity is increased when company makes a sale,not when the company collects the cash at a later date.

Answer 1

False

Question 2

If a company fails to record a sale on account:

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

Answer 2

D

Question 3

Wilde Company earned revenues of $160,000 in cash and $210,000 on account during 2014.Of the $210,000 on account,$80,000 was collected in cash in 2014 and the rest in 2015.The company incurred expenses of $125,000 in 2014 and made payments of $90,000 towards the expenses in 2014.What is net income in 2014 under cash-basis accounting?

A)($10,000)
B)$70,000
C)$150,000
D)$240,000

Answer 3

C

Question 4

A doctor performed surgery in March and did not receive cash from the patient until July.Under accrual-basis 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.

Question 5

Which of the following transactions would be recorded under accrual-basis 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 6

Under accrual-basis 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)at the end of every month.
D)only if the cash is received at the same time the services are performed.

Question 7

The method of accounting that records revenues ONLY when cash is received is the:

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

Question 8

An interim period used for reporting purposes 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 9

An expense occurred in 2013,and it is not paid until 2014.Using cash-basis accounting,the expense should appear on:

A)the 2013 income statement.
B)the 2014 income statement.
C)neither the 2013 nor the 2014 income statement.
D)both the 2013 and 2014 income statements.

Question 10

When cash-basis accounting is used,and services are provided on account:

A)only the income statement will be incorrect.
B)only 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 11

GAAP requires the use of accrual-basis accounting.

Question 12

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

Question 13

A doctor performed surgery in April and did not receive cash payment from the patient until August.Under cash-basis accounting,the doctor recognizes revenue:

A)in April.
B)in August.
C)in April or August.
D)at a time that cannot be determined from the facts.

Question 14

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

Question 15

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

A)interim reporting concept.
B)revenue principle.
C)time-period concept.
D)expense recognition principle.

Question 16

An expense occurred in 2013,but it is not paid until 2014.Using the accrual basis of accounting,the expense should appear on:

A)the 2013 income statement.
B)the 2014 income statement.
C)neither the 2013 nor the 2014 income statement.
D)both the 2013 and 2014 income statements.

Question 17

Which of the following is a CORRECT statement about the different accounting methods?

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-basis accounting.
D)The largest companies in the United States use cash-basis accounting.

Question 18

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

A)Interim financial reports are rarely prepared.
B)Accountants prepare financial statements for specific periods of time.
C)The basic accounting period is one year.
D)Most large companies use a calendar year for financial reporting.

Question 19

Under cash-basis accounting,income statements and balance sheets are misstated.

Question 20

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

Question 21

Under cash-basis accounting,cash receipts are treated as ________ and cash payments are treated as ________.

A)retained earnings; dividends
B)retained earnings; income
C)revenues; expenses
D)gains; losses

Question 22

Accrual-basis accounting records all of the following transactions EXCEPT:

A)earning of unearned revenue received in advance.
B)expiration of prepaid insurance.
C)accrual of expenses incurred but not paid.
D)receipt of Award for Service to the Community of Naperville,Illinois.

Question 23

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 24

Under accrual-basis accounting,the event that triggers revenue recognition for the sale of goods is the:

A)date a contract is signed.
B)date the customer pays for the goods.
C)date the customer orders the goods.
D)delivery of goods to customer.

Question 25

To obtain a new customer,a business sells merchandise to the customer for $50.Normally,the merchandise sells for $100.For this sale,the business should record revenue of:

A)$50.
B)$100.
C)either amount.
D)an average of the two amounts.

Question 26

Cash-basis accounting does NOT record:

A)receipt of cash from interest earned on note receivable.
B)payment of salaries to employees.
C)expiration of prepaid rent.
D)borrowing money from the local bank.

Question 27

Winter Company earned revenues of $160,000 in cash and $210,000 on account during 2014.Of the $210,000 on account,$80,000 was collected in cash in 2014 and the rest in 2015.The company incurred expenses of $125,000 in 2014 and made payments of $90,000 towards the expenses in 2014.What is net income in 2014 under accrual-basis accounting?

A)$85,000
B)$245,000
C)$280,000
D)$370,000

Question 28

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

Question 29

Expenses have a future benefit to the company.

Question 30

A tax accountant prepares tax returns for clients and bills them after the work is completed.It usually takes two weeks of work to prepare the tax returns.It takes 30 days on average to receive payment from the clients.The accountant uses cash-basis accounting.When should the accountant record revenue?

A)when he starts working on the tax returns
B)when he completes working on the tax returns
C)when he bills the clients
D)when the clients send in their payments

Question 31

Which of the following is a TRUE statement regarding expenses?

A)Expenses represent future assets.
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 32

On July 25,Henry Company's accountant prepared a check for August's rent payment.Henry 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 Henry Company record the rent expense associated with this transaction?

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

Question 33

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

Question 34

On November 1,2014,a company using accrual-basis accounting pays $1,000,000 for a television advertising campaign.Commercials will run evenly over six months beginning on November 1,2014.How much Advertising Expense will be reported on an income statement prepared for the year ended December 31,2015?

A)$333,333
B)$500,000
C)$666,667
D)$1,000,000

Question 35

The expense recognition principle recognizes expenses in the period they are paid.

Question 36

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

Question 37

The matching principle matches cash receipts and cash disbursements.

Question 38

On December 15,2015,a company receives an order from a customer for services to be performed on December 28,2015.Due to a backlog of orders,the company does not perform the services until January 3,2016.The customer pays for the services on January 6,2016.The revenue principle requires the revenue to be recorded by the company on:

A)December 15,2015.
B)January 3,2016.
C)December 28,2015.
D)January 6,2016.

Question 39

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 40

Cash-basis accounting does NOT record:

A)purchase of supplies with cash.
B)sale of common stock.
C)payment of note payable.
D)depreciation expense.

Question 41

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 42

On June 1,2014,Starbucks paid the rent of $60,000 for 30 different stores in Washington and California.The rent covers the period,June 1,2014 through November 30,2014.On June 1,Starbucks will record ________.On June 30,Starbucks will record ________.

A)Rent Expense of $60,000; nothing
B)nothing; Rent Expense of $60,000
C)nothing; Rent Expense of $10,000
D)Prepaid Rent of $60,000; Rent Expense of $10,000

Question 43

The Financial Accounting Standards Board(FASB)and the International Accounting Standards Board(IASB)are working together to develop similar standards.Which of the following statements is FALSE?

A)The FASB and IASB have recently developed a new standard that has a globally consistent and converged way to recognize revenue.
B)In the retail merchandising industry,FASB and IASB have used the same rules for revenue recognition.
C)In the retail merchandising industry,FASB and IASB have used different rules for revenue recognition.
D)FASB and IASB have developed similar standards for the past few years.

Question 44

Unearned Service Revenue is a revenue account.

Question 45

Following the expense recognition principle,recognizing expenses along with the related revenues means to:

A)add expenses and revenues together to compute net income or net loss.
B)add all the expenses paid during the period and call it a net loss.
C)abandon the matching principle.
D)subtract expenses from the related revenues to compute net income or net loss.

Question 46

On January 1,2015,a customer places an order for a new vehicle built especially for the customer.The contract price is $22,000.The vehicle is delivered to the dealer and customer on April 1,2015.What amount of revenue does the dealer record on January 1,2015 and April 1,2015?

A)$22,000; $0
B)$11,000; $11,000
C)$7,333; $7,333
D)$0; $22,000

Question 47

According to the converged standard for revenue recognition developed by FASB and IASB,which item below is NOT necessary?

A)identify the contract with the customer
B)identify the separate performance obligations in the contract
C)allocate the transaction price to the separate performance obligations in the contract
D)recognize expenses as the entity satisfies the performance obligations

Question 48

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

Question 49

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

Question 50

Some 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 51

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

Question 52

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 Revenue.
C)Cash,Land and Common Stock.
D)Cash,Dividends and Unearned Rent Revenue.

Question 53

The expense recognition principle requires:

A)the recognition of expenses in the same period as the related revenues are earned.
B)the recognition of expenses in the period they are paid.
C)the recognition of expenses in the period the benefits are received.
D)the recognition of expenses using depreciation theories and methods.

Question 54

The amount of prepaid insurance used up during a period of time is called Insurance Expense.

Question 55

In accrual adjustments,an adjustment is made for payment of an item in advance of use.

Question 56

A deferral is an adjustment for the receipt of cash in advance of providing services.

Question 57

Prepaid Rent and Unearned Service Revenue are accounts that need to be adjusted at the end of the accounting period.

Question 58

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

Question 59

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

Question 60

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

Question 61

An adjusting journal entry contains a debit to an expense account and a credit to a contra account.This is an example of what type of adjusting entry?

A)Accrued revenue
B)Deferred revenue
C)Depreciation expense
D)Accrued expense

Question 62

The Accumulated Depreciation account:

A)is another term for depreciation expense.
B)represents the original cost of a plant asset.
C)is a contra asset account.
D)has a normal balance which is the same as its companion account.

Question 63

A tired accountant failed to record the adjusting entry for accrued revenues.How does this error affect the balance sheet?

A)The assets for the period will be overstated.
B)The assets for the period will be understated.
C)The liabilities for the period will be overstated.
D)The liabilities for the period will be understated.

Question 64

Which accounts are used in the adjusting entry to record salaries owed to employees,but not paid until the next accounting period?

A)Salaries Expense and Salaries Payable
B)Unearned Salaries and Salaries Payable
C)Salaries Payable and Deferred Salaries Expense
D)Deferred Salaries Payable and Salaries Receivable

Question 65

The book value of a plant asset is the:

A)accumulated depreciation less the cost of the asset.
B)cost of the asset.
C)balance in the accumulated depreciation account.
D)cost of the asset less the accumulated depreciation.

Question 66

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 67

The adjustment for an accrued expense:

A)increases expenses and decreases assets.
B)increases expenses and increases liabilities.
C)decreases expenses and increases liabilities.
D)decreases expenses and increases assets.

Question 68

The Houston Mavericks basketball team receives $5,000 for season tickets on August 1.By December 31,they have earned $2,000 of the revenue.The adjusting entry to be made on December 31 by the Houston Mavericks includes a:

A)credit to Unearned Revenue of $2,000.
B)debit to Unearned Revenue of $2,000.
C)debit to Ticket Revenue of $2,000.
D)credit to Prepaid Revenue of $3,000.

Question 69

Which account is credited in the adjusting entry to allocate the cost of equipment to an expense account?

A)Equipment Expense
B)Depreciation Expense
C)Accumulated Equipment
D)Accumulated Depreciation

Question 70

At the end of the accounting period,a company has accrued interest revenue that they will not receive until the next accounting period.The adjusting entry would include a:

A)debit to Interest Expense.
B)debit to Interest Payable.
C)debit to Interest Revenue.
D)debit to Interest Receivable.

Question 71

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 72

Adjusting entries:

A)close the revenue accounts.
B)close the expense accounts.
C)adjust Cash.
D)adjust Unearned Revenue.

Question 73

Which of the following is NOT a correct statement about adjusting entries?

A)Every adjusting entry affects Cash.
B)Every adjusting entry affects the balance sheet.
C)Every adjusting entry affects net income.
D)Every adjusting entry must balance.

Question 74

With an accrual of revenue:

A)the cash is received after the revenue is recorded.
B)the cash is paid before the expense is recorded.
C)plant assets can create an accrual adjustment.
D)prepaid expenses can create an accrual adjustment.

Question 75

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

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

Question 76

On December 31,2014,salaries owed to employees total $4,150.These will be paid on January 4,2015.An adjusted trial balance prepared on December 31,2014,includes which of the following?

A)Salaries Expense,$4,150 and Salaries Payable,$4,150
B)Salaries Payable,$4,150 and Unearned Salaries Revenue,$4,150
C)Unearned Salaries,$4,150
D)Unearned Salaries,$4,150 and Salaries Payable,$4,150

Question 77

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

A)Service Revenue
B)Accumulated Depreciation
C)Unearned Service Revenue
D)Accrued Salaries Payable

Question 78

A journal entry contains a debit to a liability account and a credit to a revenue account.This is an example of a(n):

A)accrued expense.
B)deferred expense.
C)unearned revenue.
D)accrued revenue.

Question 79

Which of the following financial statement(s)is(are)prepared using the adjusted trial balance?

A)The balance sheet and the income statement only
B)Balance sheet,income statement,and statement of retained earnings
C)The balance sheet only
D)The income statement only

Question 80

When an adjustment is made for prepaid rent:

A)an asset increases and an expense decreases.
B)one asset increases and another decreases.
C)an asset decreases and an expense increases.
D)a liability decreases and an expense decreases.