Question 1

Prepaid expenses involve payment of cash (or an obligation to pay cash)for the purchase of an asset before the expense is incurred.

Accepted Answer

Prepaid expenses are recognized as assets on the balance sheets until they are consumed or expire. Examples of prepaid expenses include prepaid insurance, rent, and subscriptions.

Question 2

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

Accepted Answer

Accrual-basis accounting follows the matching principle and records revenues when earned, even if payment has not yet been received, and records expenses when incurred, even if payment has not yet been made. This allows for a more accurate representation of a company's financial performance and position.

Question 3

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

According to the revenue recognition principle, revenue should be recognized when it is earned, regardless of when payment is received. Therefore, 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.

Question 4

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

Under cash-basis accounting, expenses are recorded when they are paid, not when they are incurred.

Question 5

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

Accepted Answer

Under cash-basis accounting, revenues are recorded at the time cash is collected, not when services are provided. Therefore, if a company provides services to a customer in the current year but does not collect cash until the following year, the revenue should be recorded in the following year.

Question 6

Adjusting entries should be prepared after financial statements are prepared.Adjusting entries should be prepared before financial statements are prepared.

Accepted Answer

Adjusting entries are made to update the accounts and bring them up to date as of the balance sheet date. This is done before the financial statements are prepared so that the financial statements reflect the most accurate financial position of the company.

Question 7

The adjusting entry for a prepaid expense has the effect of reducing total assets and reducing net income.

Accepted Answer

The adjusting entry for a prepaid expense involves debiting an expense account and crediting an asset account, which decreases total assets and increases expenses, thereby reducing net income.

Question 8

Deferred revenues occur when cash is received after the revenue is earned.Deferred revenues occur when cash is received before the revenue is earned.

Accepted Answer

Deferred revenues occur when cash is received before the revenue is earned, not after.

Question 9

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

Accepted Answer

The matching principle is a fundamental accounting concept that requires businesses to match expenses with revenues in order to prepare accurate financial statements. This means that expenses related to generating revenue should be recognized in the same period as the revenue they help to generate, in order to give a true and fair view of the business's financial performance.

Question 10

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

Accepted Answer

In cash-basis accounting, revenues are recorded at the time the cash is received, and expenses are recorded at the time the cash is paid.

Question 11

Accrued revenues involve the receipt of cash after the revenue has been earned and an asset has been recorded.

Accepted Answer

Accrued revenues are revenues that have been earned (thus an asset is recorded) but for which no cash has been received yet. This accounting concept recognizes income when it is earned regardless of when the cash is received.

Question 12

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

In cash-basis accounting, revenues and expenses are recognized only when cash is received or paid out, respectively. Therefore, the timing of cash flows matches the reporting of revenues and expenses in the income statement.

Question 13

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 record events that have occurred but have not yet been recorded. These events may include accruals, deferrals, estimates, or corrections of errors.

Question 14

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 properly recognize revenues and expenses, which violates the generally accepted accounting principles of revenue recognition and matching. Therefore, it is generally not accepted in preparing financial statements.

Question 15

Accrued expenses involve the payment of cash before recording an expense and a liability.Accrued expenses involve the payment of cash after recording an expense and a liability.

Accepted Answer

Accrued expenses involve recording an expense and a liability before the payment of cash.

Question 16

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

Accepted Answer

Adjusting entries are only necessary for accrual-basis accounting as cash-basis accounting does not recognize revenue or expenses until they are received or paid.

Question 17

The adjusting entry for a prepaid expense always includes a debit to an expense account and a credit to a liability account.The credit is to an asset account.

Accepted Answer

This is because prepaid expenses are initially recorded as assets, but as time passes, they become expenses. Therefore, the adjusting entry for a prepaid expense involves decreasing the asset account (credit) and increasing the expense account (debit), as well as crediting the liability account (representing the portion of the prepaid expense that has not yet been used up).

Question 18

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

Accepted Answer

According to the revenue recognition principle, revenue should be recorded when it is earned, not when the payment is received. Therefore, Jones Corporation should record the revenue on June 17, the date the service was provided.

Question 19

According to the concept of expense recognition under accrual-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 current year.

Accepted Answer

Under accrual-basis accounting, expenses should be recognized in the period they are incurred, regardless of when they are paid. This means that if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should still be expensed in the current year.

Question 20

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

Accepted Answer

The revenue recognition principle states that we record revenue in the period in which we earn it, regardless of when we collect cash.

Quiz 3: The Accounting Cycle: End of the Period