Question 1

Revenue is the economic benefit derived from operating a business.

Accepted Answer

Revenue is defined as the income generated from the sales or services of a business. It is one of the key indicators of a company's financial performance.

Question 2

Revenues and liabilities are temporary accounts that are closed at the end of the accounting period.

Accepted Answer

Revenues are temporary accounts closed at the end of the accounting period, but liabilities are permanent accounts that are not closed.

Question 3

An accrual may involve an adjusting entry between an expense and a liability.

Accepted Answer

An accrual involves recognizing revenue or expenses before cash is exchanged. In order to properly track these transactions, an adjusting entry must be made between the expense and the associated liability.

Question 4

After closing,the only accounts with non-zero balances are assets,liabilities,and equity.

Accepted Answer

This statement is true. After closing, all revenue and expense accounts are closed to the retained earnings account in equity, resulting in a zero balance in those accounts. Only assets, liabilities, and equity accounts remain with non-zero balances.

Question 5

Immediately after closing,every temporary account has a balance of $0.

Accepted Answer

Temporary accounts, such as revenue and expense accounts, are closed at the end of an accounting period to prepare for the new period. The closing process involves transferring their balances to a permanent account (usually retained earnings) and resetting their balance to zero. Therefore, immediately after closing, every temporary account has a balance of $0.

Question 6

An adjusting entry that decreases Unearned Service Revenue and increases Service Revenue is a claims exchange transaction.

Accepted Answer

A claims exchange transaction involves exchanging one type of claim for another, such as exchanging an unearned claim (Unearned Service Revenue) for an earned claim (Service Revenue).

Question 7

Providing services to customers on account is an asset source transaction.

Accepted Answer

Providing services to customers on account means providing a service without receiving immediate payment, which increases the accounts receivable asset on the balance sheet, making it an asset source transaction.

Question 8

Accounts that are closed include expenses,dividends,and unearned revenues.

Accepted Answer

The temporary accounts (that is,revenue,expense,and dividends)are closed prior to the start of the next accounting cycle.Unearned Revenue,which is a liability account,is a permanent account;as such,it is not closed.

Question 9

Two of the steps in the accounting cycle are adjusting the accounts and closing the accounts.

Accepted Answer

Adjusting the accounts involves making necessary adjustments to the accounts before preparing financial statements, while closing the accounts involves transferring balances from temporary accounts to permanent accounts and resetting temporary accounts for the next period.

Question 10

Adjusting entries do not affect a business's Cash account.

Accepted Answer

Adjusting entries are made to update accounts related to revenue and expenses, such as prepaid expenses, accrued expenses, and unearned revenue. These entries do not involve any cash transactions and therefore do not impact the Cash account.

Question 11

Significant interrelationships exist among a company's four financial statements for a given accounting period.

Accepted Answer

The financial statements of a company are interconnected and interdependent. For example, the balance sheet provides information on the company's assets, liabilities, and equity, which are also reflected in the income statement, cash flow statement, and statement of changes in equity. The net income from the income statement is used to determine the retained earnings on the statement of changes in equity, which also affects the balance sheet. Therefore, the financial statements are interrelated, and changes in one statement can impact the others.

Question 12

The matching concept leads accountants to select the recognition alternative that produces the lowest amount of net income.

Accepted Answer

The matching concept requires that expenses be recognized in the same period as the related revenues, regardless of the impact on net income. Therefore, accountants should select the recognition alternative that reflects the economic reality of the transaction, rather than focusing solely on producing the lowest amount of net income.

Question 13

An adjusting entry to accrue salary expense is a claims exchange transaction.

Accepted Answer

An adjusting entry to accrue salary expense involves recognizing and recording an expense that has been incurred but not yet paid. This is a claims exchange transaction because it involves an increase in the company's liability (claims of employees for salary owed) and a decrease in equity (expenses incurred).

Question 14

The collection of an account receivable is a claims exchange transaction.

Accepted Answer

The collection of an account receivable is an asset exchange transaction.

Question 15

In the closing process,the amounts in temporary accounts are moved to Retained Earnings,a permanent account.

Accepted Answer

Temporary accounts, such as revenue, expense, and dividend accounts, are closed at the end of the accounting period to prepare the accounts for the next period. The balances in these accounts are transferred (or closed) to Retained Earnings, a permanent account on the balance sheet, as part of the closing process. This allows the company to begin the next accounting period with a fresh set of temporary accounts.

Question 16

The term "accrual" describes an earnings event that is recognized before cash is paid or received.

Accepted Answer

Accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of when cash is exchanged. This means that an earnings event can be recognized before cash is actually paid or received.

Question 17

Companies that use accrual accounting recognize revenues and expenses at the time that cash is paid or received.

Accepted Answer

Companies that use accrual accounting recognize revenues and expenses when they are earned or incurred, regardless of when cash is paid or received.

Question 18

Assets are listed on the balance sheet in order of amount.

Accepted Answer

Assets are typically listed in order of their liquidity or how easily they can be converted into cash, not necessarily in order of amount.

Question 19

Businesses often recognize a revenue or expense,even though the corresponding cash collection or payment did not occur in the same accounting period.

Accepted Answer

This is known as the accrual accounting method, where revenues and expenses are recognized when they are earned or incurred, regardless of when cash is actually collected or paid.

Question 20

Cash-basis accounting often fails to match expenses with revenues.

Accepted Answer

Cash-basis accounting only records transactions when cash is received or spent, without taking into account when the revenue was earned or the expense was incurred. Therefore, expenses and revenues may be recorded in different periods, leading to a mismatch between them.

Quiz 2: Understanding the Accounting Cycle