Question 1

The time period assumption presumes that an organization's activities can be divided into specific time periods.

Accepted Answer

The time period assumption is a fundamental accounting concept that assumes that an organization's activities can be broken down into specific, measurable time periods, such as a month or a year. This allows for the preparation of accurate financial statements and enables users of accounting information to compare results over time.

Question 2

The cash basis of accounting requires that revenues be recognized when cash payments from customers are received.

Accepted Answer

This statement is true. The cash basis of accounting recognizes revenues when cash payments are received, regardless of when the goods or services were actually delivered. This is in contrast to the accrual basis of accounting, which recognizes revenues when they are earned, regardless of when payment is received.

Question 3

The revenue recognition principle is the basis for making adjusting entries that pertain to unearned and accrued revenues.

Accepted Answer

The revenue recognition principle guides the recognition of revenue at the appropriate time and requires adjusting entries for unearned and accrued revenues.

Question 4

The first five steps in the accounting cycle include analyzing transactions, journalizing, posting, preparing an unadjusted trial balance, and recording adjusting entries.

Accepted Answer

These are indeed the first five steps in the accounting cycle.

Question 5

Recording revenues before they are earned overstates current-period income; recording revenues in periods after they have been earned understates the recording period's income.

Accepted Answer

This is because revenue should only be recognized when it is earned and realized or realizable, in accordance with the revenue recognition principle. If revenue is recorded before it is earned, it is an overstatement of income, as the revenue has not actually been earned yet. If revenue is recorded after it has been earned, it is an understatement of income, as the revenue should have been recognized in the period it was earned.

Question 6

The matching principle and the full disclosure principle are the two main accounting principles used in accrual accounting.

Accepted Answer

The answer of The matching principle and the full disclosure...

Question 7

The accrual basis of accounting is an accounting system in which revenues are reported as earned when cash is received.

Accepted Answer

The accrual basis of accounting is an accounting system in which revenues are reported as earned when they are earned, regardless of when cash is received.

Question 8

Prior to recording adjusting entries at the end of an accounting period, some accounts may not show proper financial statement amounts even though all transactions were correctly recorded.

Accepted Answer

Adjusting entries are necessary to properly allocate revenues and expenses to the appropriate accounting period and to ensure that account balances accurately reflect the financial position of the company. Without adjusting entries, some accounts may have incorrect balances that do not reflect the true financial statement amounts.

Question 9

Interim statements report a company's business activities for a one-year period.

Accepted Answer

Interim statements report a company's business activities for a shorter period, typically a quarter or a six-month period, rather than a full year.

Question 10

Adjusting entries are made after the preparation of financial statements.

Accepted Answer

The answer of Adjusting entries are made after the preparation...

Question 11

The matching principle requires that expenses get recorded in the same accounting period as the revenues that are earned as a result of the expenses, not when cash is paid.

Accepted Answer

The matching principle states that expenses should be recognized in the same period as the revenues they helped generate, regardless of when cash is paid or received. This helps provide a more accurate representation of the financial performance of a company during a specific period of time.

Question 12

Under the cash basis of accounting, no adjustments are made for prepaid, unearned, and accrued items.

Accepted Answer

Under the cash basis of accounting, only transactions involving actual cash inflows or outflows are recorded. Prepaid, unearned, and accrued items are not considered in this method, and therefore no adjustments are made for them.

Question 13

The accrual basis of accounting is a system of accounting in which the adjustments are needed to assign revenues to periods in which they are earned and to match expenses with revenues.

Accepted Answer

This statement accurately describes the accrual basis of accounting.

Question 14

The matching principle requires that revenue not be assigned to the accounting period in which it is earned.

Accepted Answer

The matching principle requires that revenue be assigned to the accounting period in which it is earned and related expenses are recognized in the same period. This principle ensures that the financial statements accurately represent the company's performance and expenses associated with generating the revenue are properly recognized.

Question 15

A company paid $6,000 for a six-month insurance policy. The policy coverage began on February 1. On February 28, $100 of insurance expense must be recorded.

Accepted Answer

Since the coverage began on February 1, the entire $6,000 payment should be allocated over the six-month coverage period. Therefore, the insurance expense for February should be $1,000 ($6,000 divided by 6), not $100.

Question 16

The cash basis of accounting is an accounting system in which revenues are reported when cash is received and expenses are reported when cash is paid.

Accepted Answer

This is the definition of the cash basis of accounting.

Question 17

Adjusting entries result in a better matching of revenues and expenses.

Accepted Answer

Adjusting entries ensure that all revenues and expenses belonging to a certain accounting period are accounted for, resulting in a better matching of revenues and expenses. This helps in providing a more accurate financial picture of a business over a given time period.

Question 18

Since the revenue recognition principle requires that revenues be earned, there are no unearned revenues in accrual accounting.

Accepted Answer

The answer of Since the revenue recognition principle requires that...

Question 19

On October 15, a company received $15,000 cash as a down payment on a consulting contract. The amount was credited to Unearned Consulting Revenue. By October 31, 10% of the services required by the contract were completed. The company will record consulting revenue of $1,500 from this contract for October.

Accepted Answer

Since 10% of the services required by the contract were completed by October 31, the company can recognize 10% of the down payment as revenue for the month, which equals $1,500. Therefore, the statement is true.

Question 20

A company's fiscal year must correspond with the calendar year.

Accepted Answer

A company's fiscal year can start and end at any month throughout the year, it does not have to correspond with the calendar year.

Quiz 3: Preparing Financial Statements