Question 1

Flyer Co.billed a client for flying lessons given in January.The payment was received in February.Under the accrual basis of accounting,when should Jedi record the revenue?

Accepted Answer

Under the accrual basis of accounting, revenue is recorded when it is earned, regardless of when the payment is received. Since the flying lessons were given in January, the revenue should be recorded in January.

Question 2

The process that begins with the analysis of transactions and ends with preparing the accounting records for the next accounting period is called the accounting cycle.

Accepted Answer

The accounting cycle is a systematic process starting with the analysis of business transactions and ending with the preparation of financial statements for the next accounting period.

Question 3

Under the cash basis of accounting,a business records only transactions involving increases or decreases of its cash.

Accepted Answer

This is the definition of the cash basis of accounting. It only considers transactions that involve the movement of cash.

Question 4

Under accrual accounting,expenses are recorded when incurred regardless of when paid.

Accepted Answer

Accrual accounting recognizes expenses when they are incurred or earned, regardless of when they are paid. This means that expenses are recorded when the costs are incurred, not when the payment for those expenses is made.

Question 5

Under the cash basis of accounting,no adjustments are necessary prior to the preparation of the financial statements.

Accepted Answer

The answer of Under the cash basis of accounting,no adjustments...

Question 6

Unearned revenue is what type of an account?

Accepted Answer

Unearned revenue represents a liability because it is money received in advance for goods or services that have not yet been provided. The company owes the customer the service or product, and until it is delivered, the money received is considered a liability.

Question 7

UNI Co.received $1,000 from Newbie as rent for the use of a building owned by UNI.How does this transaction affect UNI's accounts if UNI recognizes a liability?

Accepted Answer

Since UNI recognizes a liability, the cash received from Newbie will be recorded as an increase in the Cash account, while the unearned revenue account will also be increased to reflect the liability UNI owes to Newbie for the use of the building. This means that revenue has not been earned yet, and therefore cannot be recognized until the services have been provided or the rental period has ended.

Question 8

To arrive at cash flows from operations,it is necessary to convert the income statement from an accrual basis to the cash basis of accounting.

Accepted Answer

Cash flows from operations represent the cash generated or used by a company's normal business activities. To determine this, the income statement must be adjusted from accrual basis to cash basis by removing non-cash items such as depreciation, adding back changes in working capital, and adjusting for any other cash flow items specific to the company's operations.

Question 9

As time passes,fixed assets,other than land,lose their capacity to provide useful services.To account for this decrease in usefulness,the cost of fixed assets is systematically allocated to expense through a process called

Accepted Answer

Depreciation is the process of systematically allocating the cost of a fixed asset (except land) over its useful life. This helps to match the cost of the asset with the revenue it generates each period, and reflects the decrease in usefulness of the asset over time.

Question 10

To determine cash payments for operating expenses for the cash flow statement using the direct method,depreciation expense is added to net income.

Accepted Answer

Depreciation expense is a non-cash expense, therefore it is not added to net income when calculating cash payments for operating expenses using the direct method. Instead, it is subtracted from net income.

Question 11

On April 1,Smart,Inc.paid $7,200 for an insurance premium on a three-year insurance policy.How does this transaction affect Smart's accounts?

Accepted Answer

The payment of an insurance premium for a three-year policy creates a prepaid expense, as the benefit of the insurance coverage will be received over a period of time. Therefore, the transaction will increase prepaid insurance, which is an asset account, and decrease cash, which is also an asset account. Option A is incorrect because insurance expense is not affected until the policy coverage is used up over the three-year period. Option C is incorrect because unearned insurance is a liability account and would not be affected in this transaction. Option D is incorrect because retained earnings is a equity account and would not be affected by this transaction.

Question 12

A&M Co.purchased land for $50,000 with $10,000 paid in cash and $40,000 in a note payable due three years from now.What effect does this transaction have on the accounts under the accrual basis of accounting?

Accepted Answer

The answer of A&M Co.purchased land for $50,000 with $10,000...

Question 13

Using accrual accounting,expenses are recorded and reported only

Accepted Answer

Accrual accounting records and reports expenses when they are incurred or earned, regardless of whether or not cash has been paid. This is because accrual accounting matches expenses to the period in which they were incurred, rather than when they are paid.

Question 14

Which of the following accounts would likely be included in a deferral adjusting entry?

Accepted Answer

Unearned revenue is a liability account that represents cash received from customers for goods or services that have not yet been provided. A deferral adjusting entry would be required at the end of the accounting period to record the revenue that has been earned and to reduce the unearned revenue liability.

Question 15

If land costing $75,000 was sold for $135,000,the amount reported in the investing activities section of the statement of cash flows would be $135,000.

Accepted Answer

When land is sold, the cash received is reported in the investing activities section of the statement of cash flows, not the original cost of the land. Therefore, the amount reported would be $135,000.

Question 16

Every company must use the cash basis of accounting.

Accepted Answer

Companies have the option to use either cash basis or accrual basis of accounting. The cash basis records transactions when cash is received or paid, while the accrual basis records transactions when they occur, regardless of when cash is received or paid.

Question 17

Eagle Eye,Inc. ,a corporation,received an additional investment of $6,000 cash in exchange for shares of capital stock.How does this transaction affect Eagle Eye's accounts?

Accepted Answer

When a corporation receives an additional investment in exchange for shares of capital stock, the "Cash" account is increased and the "Capital Stock" account is also increased by the same amount. Therefore, the correct answer is B, increase capital stock and increase cash by $6,000 each. There is no impact on expenses, revenue, or retained earnings in this transaction.

Question 18

A&M Co.provided services of $1,000,000 to clients on account.How does this transaction affect A&M's accounts?

Accepted Answer

The transaction increases the company's services revenue by $1,000,000, which is recorded as an increase in the revenue account. At the same time, the company's accounts receivable also increase by $1,000,000 as the service was provided on account, meaning payment will be received at a later date. Therefore, the correct option is to increase accounts receivable and revenues by $1,000,000 each.

Question 19

Under the cash basis of accounting,expenses are recorded when paid.

Accepted Answer

Under cash basis accounting, expenses are recorded when they are actually paid, regardless of when they were incurred. This is in contrast to accrual accounting, where expenses are recorded when they are incurred, regardless of when they are paid.

Question 20

Using accrual accounting,revenue is recorded and reported only

Accepted Answer

Accrual accounting records revenue when the services are rendered, regardless of when the cash is received. This method provides a clearer picture of a company's financial performance than cash accounting, which records revenue only when cash is received.

Quiz 3: Accrual Accounting Concepts