Question 1

Which one of the following is an example of an accrued liability?

Accepted Answer

An accrued liability is an expense that has been incurred but not yet paid. Rent that has been incurred but not paid at the end of the period falls into this category. Choices B, C, and D do not fit the definition of an accrued liability. Choice B is an example of a long-term asset, choice C is a prepaid expense, and choice D is an example of an inventory asset.

Question 2

Under accrual accounting, revenue is recognized:

Accepted Answer

Under accrual accounting, revenue is recognized when it is earned, not just when cash is received. Similarly, expenses are recognized when they are incurred, not just when they are paid in cash. This allows for a more accurate representation of a company's financial position by matching revenue and expenses in the same accounting period.

Question 3

Which of the following concepts is important to accrual accounting?

Accepted Answer

Accrual accounting recognizes revenue and expenses in the period in which they are earned or incurred, rather than when cash is received or paid. This requires dividing earnings into time periods, which is why the time period concept is important in accrual accounting. The other choices are not directly related to accrual accounting principles.

Question 4

Joe's Auto Company uses the accrual basis of accounting. Which situation violates the matching principle during 2012?

Accepted Answer

The matching principle requires that expenses be matched with the revenues they help to generate. Recognizing the total cost of a 1-year insurance policy purchased in May 2012 as an expense in 2012 violates this principle, as the expense should be spread over the period the policy covers.

Question 5

Using the accrual basis of accounting, when is revenue from the sale of merchandise normally recognized?

Accepted Answer

The accrual basis of accounting recognizes revenue when it is earned, regardless of when the customer pays for the merchandise. Therefore, revenue from the sale of merchandise is normally recognized on the date the sale is made.

Question 6

Glass Corporation sold merchandise to a customer for $30,000 on credit on July 15. The customer paid Glass the amount due on July 31. Under the accrual basis of accounting, how should Glass record the transaction?

Accepted Answer

Under the accrual basis of accounting, revenue is recognized when earned, regardless of when cash is received. Therefore, the revenue should be recognized on July 15, the date of the sale. The subsequent cash receipt on July 31 has no effect on the recognition of the revenue. Total assets would have increased on July 15 as accounts receivable would have been recorded, and then decreased on July 31 when the accounts receivable was converted to cash.

Question 7

GMC sells cars and pays each salesperson a commission of $800 for each car sold. During the month of December, a salesperson, Tom, sold 3 new cars. GMC pays commissions on the 5th day of the month following the sale. Tom operates on the cash basis; the car dealer operates on the accrual basis. Which of the following statements is true?

Accepted Answer

GMC, operating on an accrual basis, will recognize the commission expense in December when the sales occurred, even though the payment is made in January. Tom, operating on a cash basis, will recognize the revenue in January when he actually receives the payment.

Question 8

Accrued expenses originate from:

Accepted Answer

Accrued expenses are expenses that have been incurred but have not yet been paid or recorded in the accounts. This means that the expense has been recognized for accounting purposes, but the effect on the company's financial statements has not yet been recorded. Examples of accrued expenses include salaries and wages, interest, and taxes.

Question 9

Under accrual basis of accounting, expenses are be matched against revenue:

Accepted Answer

The accrual basis of accounting requires expenses to be recognized in the same period as the revenue that it helped to generate, regardless of when cash is collected or payment is made. This is based on the matching principle, which states that expenses should be matched against revenues in the period in which the expenses were incurred.

Question 10

What effect does "recognizing revenue at the end of the accounting period for rent previously received in advance" have on the accounting equation for the insurance company?

Accepted Answer

Recognizing revenue for rent previously received in advance decreases liabilities (unearned revenue) and increases stockholders' equity (retained earnings) as the revenue is now earned.

Question 11

FedZ is a local package delivery service. If FedZ uses accrual basis of accounting, when should it recognize revenue from its package delivery service?

Accepted Answer

Under the accrual basis of accounting, revenue should be recognized when it is earned, regardless of when payment is received. In the case of FedZ, revenue from package delivery services should be recognized at the date the packages are delivered.

Question 12

What happens to the accounting equation when the adjustment for depreciation expense for the accounting period is recorded?

Accepted Answer

When the adjustment for depreciation expense is recorded, it reduces the value of the asset and corresponds to a decrease in the stockholders' equity. This is because the reduction in the asset's value is recognized as an expense on the income statement, which directly reduces the retained earnings in the equity section. Therefore, both assets and stockholders' equity decrease.

Question 13

Brooks Company sells merchandise to customers. Under the accrual basis of accounting, Brooks should normally recognize:

Accepted Answer

Under the accrual basis of accounting, revenue and the related expenses should be recognized in the same accounting period as earned, regardless of when payment is received or made. This ensures that the financial statements accurately reflect the transactions that have taken place during a specific period, rather than only reflecting cash inflows and outflows.

Question 14

Under which accounting method are revenues and expenses recognized in the same accounting period that cash receipts and payments occur?

Accepted Answer

The cash basis of accounting recognizes revenues and expenses in the same accounting period that cash receipts and payments occur. This method of accounting is simple and easy to apply, but it does not match expenses with the revenues they generate, which may not provide an accurate picture of a company's financial performance.

Question 15

Assets become expenses when:

Accepted Answer

Assets become expenses when their economic benefits expire. This means that they are no longer providing any benefits to the company and have reached the end of their useful life. At this point, they are removed from the balance sheet and recorded as an expense on the income statement. Choices A, B, and C are incorrect as they do not accurately describe when assets become expenses.

Question 16

Adjusting journal entries are made at the end of the period when:

Accepted Answer

Adjusting journal entries are made at the end of the period when cash receipts and payments occur before or after the point in time when revenues and expenses should be recognized under the accrual basis of accounting. This is because under accrual accounting, revenue and expenses should be recognized in the period in which they are earned or incurred, regardless of when the cash is actually received or paid. Adjusting entries are necessary to ensure that the financial statements are accurate and reflect the correct amount of revenue and expenses for the period.

Question 17

What effect does "recognizing accrued interest revenue at the end of the accounting period" have on the accounting equation?

Accepted Answer

Recognizing accrued interest revenue at the end of the accounting period will increase the asset account (accounts receivable) and increase the revenue account (interest revenue). This will result in an overall increase in the stockholders' equity. Therefore, assets increase and stockholders' equity increases.

Question 18

What does the phrase, "Revenue is recognized when earned" mean?

Accepted Answer

The phrase "Revenue is recognized when earned" means that revenue should be recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer, not necessarily when cash is received. Option A is incorrect because revenue is only recorded when goods are sold to a customer, not when received from a supplier. Option B is incorrect because revenue is recognized when earned, not when cash is received. Option C is partially correct, but not entirely accurate because revenue is recognized when goods are sold and delivered to a customer, regardless of whether or not cash has been received.

Question 19

Which one of the following is an example of a deferred revenue?

Accepted Answer

Deferred revenue refers to payments received in advance of providing goods or services to customers. Choice A describes accounts receivable, where sales are made on credit and payment is expected at a later date. Choice B describes accrued revenue, where revenue has been earned but not yet recorded. Choice D describes cash sales, where payment is received at the time of sale.

Question 20

Which of the following statements present financial information based on the cash basis of accounting?

Accepted Answer

The statement of cash flows presents financial information based on the cash basis of accounting as it shows cash inflows and outflows during a specific period of time. The other options (balance sheet, income statement, and statement of retained earnings) are prepared on the accrual basis of accounting, which recognizes transactions when they occur, regardless of whether cash has been exchanged.

Quiz 4: Accrual Accounting and Adjusting Entries