Question 1

Under cash-basis accounting, we record revenues at the time we receive cash and expenses at the time we pay cash.

Accepted Answer

This statement accurately describes the cash-basis accounting method. However, it's important to note that this method is not accepted under generally accepted accounting principles (GAAP) and businesses are typically required to use the accrual basis method.

Question 2

A post-closing trial balance:

Accepted Answer

A post-closing trial balance is prepared after all closing entries have been recorded, and it lists all accounts and their balances after closing entries. This trial balance ensures that the company's books are in balance and ready to start the next accounting period. Choice A refers to an adjusted trial balance, while choice B refers to an unadjusted trial balance. Choice D is incorrect because the post-closing trial balance is not adjusted for cash-basis accounting, but rather it shows the final balances on an accrual basis.

Question 3

According to the matching principle, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the current year.

Accepted Answer

The matching principle requires that expenses be recognized in the same period as the related revenues. This means that if costs are incurred in a period but the corresponding revenue is not earned until a later period, the costs should still be recognized in the period in which they were incurred. This principle ensures that financial statements accurately reflect the economic activity of the business in each period.

Question 4

Which of the following accounts is(are) listed in a post-closing trial balance?

Accepted Answer

Prepaid Rent and Accounts Payable.

Question 5

A list of all accounts and their balances after posting closing entries is referred to as:

Accepted Answer

A post-closing trial balance is a list of all accounts and their balances after the closing entries have been posted. It only includes permanent accounts, as temporary accounts have been closed out. A trial balance is a list of all accounts and their balances before any adjustments or closing entries have been made. An adjusted trial balance is a list of all accounts and their balances after adjusting entries have been recorded. An accounting trial balance is not a commonly used term.

Question 6

Under cash-basis accounting, if a company provides services to a customer in the current year but does not collect cash until the following year, the company should report the revenue in the current year.

Accepted Answer

Under cash-basis accounting, revenues are recorded at the time cash is collected.

Question 7

Adjusting entries should be prepared after financial statements are prepared.

Accepted Answer

Adjusting entries should be prepared before financial statements are prepared.

Question 8

Under cash-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the following year.

Accepted Answer

The answer of Under cash-basis accounting, if costs associated with...

Question 9

Adjusting entries involve recording events that have occurred but that have not yet been recorded by the end of the period.

Accepted Answer

Adjusting entries are made at the end of the accounting period to account for events that have occurred but have not yet been recorded in the accounts. These entries are necessary to ensure that the financial statements accurately reflect the company's financial position and performance. Some common examples of adjusting entries include accruals for revenue or expenses that have been earned/incurred but not yet recorded, adjustments for prepaid expenses or unearned revenue, and depreciation/amortization of fixed assets or intangible assets.

Question 10

Jones Corporation provides services to a customer on June 17, but the customer does not pay for the services until August 12. According to the revenue recognition principle, Jones Corporation should record the revenue on August 12.

Accepted Answer

The revenue recognition principle requires that revenue be recorded when earned (June 17).

Question 11

The revenue recognition principle states that we record revenue in the period in which we collect cash.

Accepted Answer

The revenue recognition principle states that we record revenue in the period in which we earn it.

Question 12

Because cash-basis accounting violates both the revenue recognition principle and the matching principle, it is generally not accepted in preparing financial statements.

Accepted Answer

Cash-basis accounting does not adhere to the revenue recognition principle, which states that revenue should be recognized when earned and not when cash is received. It also violates the matching principle, which requires expenses to be matched with the revenue they help generate. Therefore, it is generally not accepted in preparing financial statements.

Question 13

Because adjusting entries allow the proper application of the revenue recognition principle or the matching principle, they are a necessary part of cash-basis accounting.

Accepted Answer

Adjusting entries are a necessary part of accrual-basis accounting.

Question 14

The closing process includes which of the following?

Accepted Answer

The closing process involves closing the balances of revenue, expense, and dividend accounts to zero by transferring these balances to the retained earnings account. This ensures that the income and expenses for the period are properly accounted for, and that the beginning balance of the retained earnings account for the next period is accurate. Only closing the balance of the retained earnings account to zero (Option A) or only revenue and expense accounts to zero (Option C) would not complete the closing process as these accounts would still have balances that need to be transferred. Closing the balance of only the dividends account to zero (Option B) would not properly account for all the income and expenses for the period.

Question 15

Frosty Inc. has the following balances on December 31 prior to closing entries: $$\begin{array} { | l | r | } 
\hline \text { Revenues } & \$ 35,000 \
\hline \text { Retained Earnings, Jan. 1 } & 10,000 \
\hline \text { Cash } & 7,000 \
\hline \text { Expenses } & 23,000 \
\hline \text { Accounts Payable } & 4,000 \
\hline \text { Dividends } & 1,000 \
\hline \text { Supplies } & 18,000 \
\hline
\end{array}$$ Based upon the balances above, what net adjustment would be made to Retained Earnings due to closing entries?

Accepted Answer

The net income is calculated as Revenues ($35,000) minus Expenses ($23,000), which equals $12,000. Dividends of $1,000 are subtracted from net income to adjust Retained Earnings, resulting in an increase of $11,000.

Question 16

Which one of the following accounts would NOT have a balance after closing entries?

Accepted Answer

Dividends are not a permanent account and are closed out at the end of each accounting period. Therefore, after closing entries, the Dividends account will have a balance of zero.

Question 17

The matching principle states that we recognize expenses in the same period as the revenues they help to generate.

Accepted Answer

This is the definition of the matching principle.

Question 18

Accrual-basis accounting involves recording revenues when earned and recording expenses with their related revenues.

Accepted Answer

Accrual-basis accounting recognizes revenue when earned (regardless of payment) and matches expenses with the related revenue, even if payment has not been made.

Question 19

According to the revenue recognition principle, if a company provides services to a customer in the current year but does not collect cash until the following year, the company should report the revenue in the current year.

Accepted Answer

The revenue recognition principle states that revenue should be recognized when it is earned, regardless of when payment is received. Therefore, if a company provides services in the current year but does not collect cash until the following year, the revenue earned should be recognized in the current year.

Question 20

Under cash-basis accounting, the timing of cash inflows and outflows exactly matches the reporting of revenues and expenses in the income statement.

Accepted Answer

Cash-basis accounting recognizes revenue and expenses when cash is received or paid, respectively. Therefore, the timing of cash inflows and outflows will match the reporting of revenues and expenses in the income statement.

Quiz 3: The Financial Reporting Process