Question 1

Using accrual accounting,expenses are recorded and reported only:
A)when they are incurred,whether or not cash is paid.
B)when they are incurred and paid at the same time.
C)if they are paid before they are incurred.
D)if they are paid after they are incurred.

Accepted Answer

Accrual accounting records and reports expenses when they are incurred, regardless of whether or not cash has been paid. This means that expenses are recognized when the goods or services have been received, even if payment is not made until a later date. This is in contrast to cash accounting, which records expenses only when they are paid.

Question 2

Which of the following accounts would likely be included in a deferral adjusting entry?
A)Interest Revenue
B)Unearned Revenue
C)Salaries Payable
D)Accounts Receivable

Accepted Answer

Unearned revenue is a liability account that represents cash received in advance for services or products that have not yet been provided or delivered. Therefore, it would likely be included in a deferral adjusting entry to recognize the revenue when the services or products are actually provided or delivered. The other accounts listed do not represent deferral items.

Question 3

A&M Co.provided services of $1,000,000 to clients on account.How does this transaction affect A&M's accounts?
A)Increase accounts receivable and cash by $1,000,000 each
B)Increase accounts receivable and revenues by $1,000,000 each
C)Increase accounts receivable and unearned revenues by $1,000,000 each
D)Increase cash and decrease accounts receivable by $1,000,000 each

Accepted Answer

This transaction increases the amount of services provided to clients on account, which is recognized as revenue. Therefore, Accounts Receivable and Revenues will both increase by $1,000,000.

Question 4

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 includes analyzing transactions, recording them in journals, posting them to ledgers, preparing a trial balance, adjusting entries, creating financial statements, and closing the books. It is a continuous process that starts again with the analysis of transactions for the next accounting period.

Question 5

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 Flyer Co.record the revenue?
A)January
B)February
C)Some in January and some in February
D)Flyer Co.should not record any revenue

Accepted Answer

Under the accrual basis of accounting, revenue is recognized when earned, regardless of when the payment is received. Since the flying lessons were given in January, Flyer Co. should record the revenue in January.

Question 6

Every company must use the cash basis of accounting.

Accepted Answer

While the cash basis of accounting is one option for companies, they can also choose to use the accrual basis of accounting. In fact, larger companies are typically required to use accrual accounting under Generally Accepted Accounting Principles (GAAP).

Question 7

Electrodo Co.purchased land for $55,000 with $20,000 paid in cash and $35,000 in notes payable.What effect does this transaction have on the accounts under the accrual basis of accounting?
A)Net increase in assets and liabilities of $55,000
B)Net increase in assets of $35,000 and a net increase in liabilities of $35,000
C)Net increase in assets of $55,000 and a net decrease in liabilities of $35,000
D)Net increase in assets of $75,000 and a net decrease in liabilities of $30,000

Accepted Answer

The transaction increases assets (land) by $55,000 and increases liabilities (notes payable) by $35,000. Cash, an asset, decreases by $20,000, but this is offset by the increase in land, leading to a net increase in assets of $35,000.

Question 8

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?
A)Increase insurance expense and decrease cash by $7,200 each
B)Increase prepaid insurance and decrease cash by $7,200 each
C)Increase unearned insurance and decrease cash by $7,200 each
D)Increase prepaid insurance and decrease retained earnings by $7,200 each

Accepted Answer

The transaction increases Smart's prepaid insurance account because it is a three-year insurance policy and only one year has been used up, so $7,200 is still considered a prepaid expense. Cash is also decreased by $7,200 since the payment was made. There is no effect on insurance expense or unearned insurance since insurance expense will be recognized over the three-year policy period and unearned insurance is not applicable in this situation. Retained earnings is also not affected as it is not related to this transaction.

Question 9

UNI Co.received $1,000 advance 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?
A)Cash is increased and revenue is increased.
B)Cash is increased and revenue is decreased.
C)Cash is increased and unearned revenue is increased.
D)It is not recorded.

Accepted Answer

When UNI recognizes a liability, it means they have not earned the revenue yet. Therefore, the $1,000 cash received from Newbie will increase UNI's cash account, but the corresponding liability account, unearned revenue, will also increase by the same amount. This is because UNI has an obligation to provide the use of the building to Newbie in the future, so they have not yet earned the revenue.

Question 10

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

Accepted Answer

The cash basis of accounting records only transactions involving cash inflows and outflows, and does not take into account non-cash transactions such as accounts payable and receivable, which are recorded under the accrual basis of accounting.

Question 11

Using accrual accounting,revenue is recorded and reported only:
A)when cash is received without regard to when the services are rendered.
B)when the services are rendered without regard to when cash is received.
C)when cash is received before services are rendered.
D)if cash is received after the services are rendered.

Accepted Answer

Accrual accounting records revenue when services are rendered, regardless of when cash is received. This allows for a more accurate representation of a company's financial performance during a certain period of time.

Question 12

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:
A)equipment allocation.
B)depreciation.
C)accumulation.
D)matching.

Accepted Answer

Depreciation is the process in which the cost of a fixed asset, other than land, is systematically allocated to expense as the asset loses its capacity to provide useful services over time. This process reflects the decrease in the usefulness of the asset due to wear and tear, technological advancements or obsolescence.

Question 13

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

The amount of $135,000 represents the proceeds from the sale of the land and would be reported in the investing activities section of the statement of cash flows.

Question 14

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

To calculate cash flows from operations, it is necessary to adjust the income statement from an accrual basis to the cash basis of accounting, which involves removing non-cash expenses and revenues and including changes in working capital such as accounts receivable, accounts payable, and inventory.

Question 15

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 16

Unearned revenue is what type of an account?
A)Asset
B)Revenue
C)Stockholders' equity
D)Liability

Accepted Answer

Unearned revenue is a liability account because it represents funds received by a company for goods or services that have not yet been delivered or earned. The company is obligated to fulfill the promise of delivering the goods or rendering the service, therefore owing something to the customer in return.

Question 17

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, and as such, it is added back to net income when determining cash flow from operating activities using the direct method.

Question 18

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

Accepted Answer

In the cash basis of accounting, expenses are recorded when they are paid, rather than when they are incurred or invoiced. This means that an expense is only recognized in the books when the cash for that expense actually leaves the company's bank account.

Question 19

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

Accepted Answer

Accrual accounting requires expenses to be recorded when they are incurred, regardless of when they are actually paid. This ensures that financial statements reflect the true financial situation of a company, including all expenses that have been incurred but not yet paid.

Question 20

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?
A)Increase in stock expense and decrease cash by $6,000 each
B)Increase capital stock and increase cash by $6,000 each
C)Increase capital stock and increase revenue by $6,000 each
D)Increase capital stock and decrease retained earnings by $6,000 each

Accepted Answer

When Eagle Eye, Inc. receives an additional investment of $6,000 in exchange for shares of capital stock, it increases the company's cash by $6,000, which is reflected as a debit in the cash account. At the same time, it increases the company's capital stock by $6,000, which is reflected as a credit in the capital stock account. Therefore, option B, which states "increase capital stock and increase cash by $6,000 each" is the correct answer. Options A, C, and D are incorrect because they do not accurately reflect the effects of this transaction on Eagle Eye's accounts.

Quiz 3: Accrual Accounting Concepts

Using accrual accounting,expenses are recorded and reported only:

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

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

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.

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 Flyer Co.record the revenue?

Every company must use the cash basis of accounting.

Electrodo Co.purchased land for $55,000 with $20,000 paid in cash and $35,000 in notes payable.What effect does this transaction have on the accounts under the accrual basis of accounting?

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?

UNI Co.received $1,000 advance 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?

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

Using accrual accounting,revenue is recorded and reported only:

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: