Deck 3: Accrual Accounting

Question 1

The amount of interest accrued is added to the note payable account and reported in the liabilities section of the balance sheet.

Answer 1

False

Question 2

Most companies use the accrual basis of accounting because it is required under generally accepted accounting principles.

Answer 2

True

Question 3

Income Statement accounts are closed to the income summary.

Answer 3

True

Question 4

The expense recognition principle requires that expenses be recorded and reported in the same period as the revenue that it helped to generate.

Question 5

One effect of recognizing depreciation is to decrease net income.

Question 6

The balance in the account, Rent Collected in Advance, is reported as a liability on the balance sheet of the landlord.

Question 7

Adjustments are recorded for all transactions involving outside entities.

Question 8

When an expense is incurred prior to the payment of cash for that expense, an adjustment that increases an expense account and increases a liability is prepared.

Question 9

Accumulated depreciation is a contra asset account.

Question 10

Three months before its year-end, a company signed a $250,000, 12%, 8-month note. Principal and interest will be paid at maturity. No interest should be accrued at year-end because the company has no obligation to pay the interest until the note matures.

Question 11

A franchiser is permitted to recognize the revenue from the sale of a franchise whenever they wish under accrual-basis accounting.

Question 12

The Cash account is never part of an adjusting entry.

Question 13

Adjusting entries are prepared using the accrual basis of accounting for preparing financial statements.

Question 14

A company that forgets to recognize depreciation for the year understates its income and assets.

Question 15

Every adjustment involves at least one income statement and one balance sheet account.

Question 16

When a company recognizes the portion of supplies used during a year, the effect is to decrease net income.

Question 17

When cash is paid before an expense is incurred, an accrual is necessary.

Question 18

When revenue is earned after the earlier receipt of cash, an adjustment that increases a revenue account and decreases a liability account is recorded.

Question 19

A cost can be an asset or expense depending on whether or not the future economic benefits have expired.

Question 20

Accrued revenue is recognized when cash is received.

Question 21

Publicly traded companies must prepare an additional financial statement called The Worksheet.

Question 22

The names of the four major types of adjusting entries are ____________________, ____________________, ____________________, and ____________________.

Question 23

The worksheet facilitates preparation of the income statement, retained earnings statement and balance sheet but not the cash flow statement.

Question 24

In the worksheet, the first set of columns immediately following the account titles is for the Adjusted Trial Balance

Question 25

Closing entries are necessary to assure that the company's net income for an accounting period is accurately determined.

Question 26

Dividends, like expenses, are closed to the income summary account during the end-of-period closing process.

Question 27

On the worksheet, the retained earnings balance that gets transferred from the retained earnings statement section of the worksheet to the balance sheet section is the beginning retained earnings balance.

Question 28

If the Income Summary account has a credit balance just prior to closing it to retained earnings, the company must have incurred a net income for the year.

Question 29

____________________ is the allocation of the cost of a tangible, long-term asset over its useful life to expense.

Question 30

Since dividends do not impact income, the dividends account is not closed to the income summary account.

Question 31

The ____________________ principle determines when revenue is recorded and reported.

Question 32

During the closing process, revenues, expenses, and dividends must be closed to the Income Summary account.

Question 33

The difference between accrual-based revenue and accrual-based expenses in the period the activity occurred is called ____________________.

Question 34

The adjustment necessary to record the expense and the associated increase in the company's liabilities is ____________________.

Question 35

The ____________________ principle attempts to associate the revenue of the period with all costs necessary to generate that revenue.

Question 36

Adjusting entries are recorded at the end of each accounting period so that net income is accurately reflected in the financial statements for the period.

Question 37

Under the ____________________ basis of accounting, revenues are recognized when earned and expenses when incurred.

Question 38

____________________ is the name given to balance sheet accounts because their balances are carried forward from the current accounting period to future accounting periods.

Question 39

Adjusting entries must be made prior to the preparation of financial statements.

Question 40

____________________ is the name given to revenue, expense, and dividend accounts because they are closed at the end of the period.

Question 41

Once adjustments have been made, an ____________________ is prepared to ensure the accounting equation is still in balance and to facilitate preparation of the financial statements.

Question 42

The ____________ basis of accounting recognizes revenue when it is received regardless of when the revenue is earned.

Question 43

The preparation of _______________ is necessary to get the account balances properly stated and up to date.

Question 44

The first step in the accounting cycle is to ________________ transactions.

Question 45

The ____________________ principle requires that expenses be recorded and reported in the same period as the revenue that it helped to generate.

Question 46

During December, Camp David, Inc. purchased $5,000 of supplies for use in its business. At the end of December, 20% of the supplies were still on hand, but only 70% had been paid. What amounts will appear on the company's balance sheet on December 31? Supplies on Hand Accounts Payable

Question 47

Cambridge Cleaners started business on January 1, 2019, and immediately purchased $5,000 of supplies to use in the business. At the end of the month, 30 percent of the supplies remains unpaid and 20% are still on hand. What amounts should appear as an expense on the financial statements for January? ?
Income Statement Statement of Cash Flows

Question 48

Measurement of the economic effects on an entity involves each of the following except

A)quantification of effects.
B)identification of the attribute to be measured.
C)selection of an appropriate unit of measure.
D)recording the economic effects in the financial statements.

Question 49

A(n) ____________________ revenue results when cash is received before it is earned and reported on the income statement.

Question 50

An ____________________ revenue must be recorded when revenue is earned in advance of receiving cash.

Question 51

Under accrual accounting when is revenue recognized?

A)When cash is received, and expenses when cash is paid
B)When cash is received, and expenses when the costs are incurred.
C)When earned, and expenses when incurred.
D)When earned, and expenses when cash is paid.

Question 52

A local tennis club sells season memberships for $1,000 each. During January 2019, 50 season memberships were sold. As of March 31, 2019, only $25,000 of season membership fees had been collected from customers. The tennis season runs for 6 months starting April 01, 2019. Which one of the following is an amount reported on the Balance Sheet dated March 31, 2019?

A)Unearned tennis membership revenue of $25,000.
B)Unearned tennis membership revenue of $50,000.
C)Accounts Receivable $50,000.
D)Tennis membership revenue of $25,000.

Question 53

A ____________________ results when cash is paid before the related amount is reported on the income statement.

Question 54

____________________ are journal entries made at the end of the accounting period to return the balance in all temporary accounts to zero.

Question 55

The ____________________ basis of accounting requires that revenues be recorded in the period they are earned rather than in the period they are received.

Question 56

Calmar Corporation sold merchandise to a customer for $30,000 on credit on July 15. The customer paid Calmar Corporation the amount due on July 31. Under the accrual basis of accounting, how should Calmar Corporation record the transaction?

A)The company will recognize the revenue on July 31.
B)The July 15th transaction increases revenue, but has no effect on assets because cash has not been received.
C)Revenue is recognized after the cost of the merchandise sold has been paid by Calmar Corporation
D)The July 31st transaction has no effect on total assets under the accrual basis.

Question 57

Canterbury Cycles sells Harleys and pays each salesperson a commission of $800 for each cycle sold. During the month of December, a salesperson sold 3 cycles. The company pays commissions on the 5th day of the month following the sale. Which of the following statements is true?

A)The salesperson will recognize commission revenue earned in the amount of $2,400 in December.
B)The company will recognize commission expense in the amount of $2,400 in December.
C)The salesperson will recognize commission expense in the amount of $2,400 in January.
D)The salesperson will recognize revenue in the same month that the cycle dealer recognizes expense.

Question 58

Camper City started business on January 1, 2019. Stanton performed services for customers totaling $250,000 of which 40% remain uncollected at the end of December. Under the accrual basis, what amounts would appear on the company's financial statements for 2019? ?
Income Statement Statement of Cash Flows

Question 59

The six steps for preparing the worksheet are unadjusted trial balance, adjusting entries, adjusted trial balance, ______________, retained earnings statement, and balance sheet.

Question 60

An informal schedule called a ________________ is helpful for organizing and preparing the information necessary to perform the end-of-period steps in the accounting cycle.

Question 61

When are revenues and expenses recognized in the same accounting period that cash receipts and payments occur?

A)under the cash basis of accounting
B)under the accrual basis of accounting
C)under the adjusting method of accounting
D)under the finance method

Question 62

What effect does "recognizing accrued interest revenue at the end of the accounting period" have on the accounting equation?

A)Assets increase and Stockholders' equity decreases.
B)Assets increase and Stockholders' equity increases.
C)Assets decrease and liabilities decrease.
D)Liabilities increase and Stockholders' equity decreases.

Question 63

A manufacturing company purchased equipment on January 1, 2010 for $450,000. As of January 1, 2019, depreciation of $202,500 had been recorded on this asset. Depreciation expense for 2019 is $22,500. After the adjustments are recorded and posted at December 31, 2019, what are the balances for the Equipment and Accumulated Depreciation? ​
Equipment Accumulated Depreciation

A)$450,000 $0
B)$450,000 $225,000
C)$225,000 $22,500
D)$225,000 $225,000

Question 64

Accrued expenses originate from

A)paying off liabilities.
B)paying for items such as insurance in advance.
C)collecting cash from customers.
D)incurring expenses without yet having paid cash for them.

Question 65

A company that sells merchandise to customers should normally recognize

A)revenue only after the cash is collected.
B)revenue and the related expenses in the period the revenue earned, whether payment is received or not.
C)both revenue and expenses in the period following sale.
D)expenses in the period the merchandise is sold and revenue in the following period.

Question 66

Which statement presents financial information not based on accrual accounting?

A)Balance Sheet
B)Income Statement
C)Statement of Cash Flows
D)Statement of Retained Earnings

Question 67

Expenses should be matched against revenue

A)before the earnings process is complete.
B)only after cash is collected from the customer.
C)in the same period as the revenue that they helped generate.
D)after payment has been made for any costs related to the revenue.

Question 68

Which one of the following is an example of a deferred revenue?

A)Sales are made to customers on credit.
B)Revenue has been earned but not yet recorded.
C)Payments are received prior to providing the services to customers.
D)Cash sales are made to customers.

Question 69

Which of the following situations violates the matching principle during 2019 for a real estate company that pays its agents on commission?

A)Sales commissions are charged to expense in 2019 on all sales made in 2019 even though some of the commissions have not been paid.
B)Insurance expense is recognized for the total cost of a 1-year policy purchased in July 2019.
C)Wages expense is recognized in 2019 even though payday is not until sometime in 2020.
D)Sales commissions paid in 2019 for 2020 commissions are recorded as prepaid expenses for 2019.

Question 70

On December 31, 2019, a company signed a one-year contract to provide services to a particular customer for $12,000. The customer will pay for the services during January 2020. Using the accrual basis of accounting, when should the company recognize revenue?

A)In January 2020, when the cash is received.
B)On December 31, 2020, after all services have been provided.
C)Equally throughout 2020, as the revenue is earned.
D)On December 31, 2019, when the contract is signed.

Question 71

What does the phrase, "revenue is recognized when earned" mean?

A)Revenue is recorded in the accounting records when the goods are received from a supplier, and reported on the income statement when sold to the customer.
B)Revenue is recorded in the accounting records and reported on the income statement when the cash is received from the customer.
C)Revenue is recorded in the accounting records when the goods are sold to a customer, and reported on the income statement when the cash payment is received from the customer.
D)Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer.

Question 72

Assets become expenses when?

A)Purchased for cash or on credit.
B)Asset is delivered.
C)They are paid for in cash.
D)Their economic benefits expire.

Question 73

Which one of the following is not a proper method of recognizing assets as expenses in a particular accounting period?

A)Customers' account balances in accounts receivable are assigned to expense in the period in which each customer pays.
B)Prepaid insurance is assigned to expense as the insurance expires.
C)A building is depreciated and its cost is assigned to the current and future accounting periods in which the building is expected to be used.
D)Merchandise inventory is assigned to cost of goods sold in the period the goods are sold.

Question 74

Which of the following concepts is important to accrual accounting?

A)Time period, because accrual accounting divides earnings into time periods.
B)Market basis, because inflation is a big factor in the environment.
C)Cash basis, because if cash is not received, revenue is not accrued.
D)Entity concept, because personal transactions must be separated from business transactions.

Question 75

When should a shipping company recognize revenue from its delivery service?

A)On the date the customer places a order.
B)On the date the customer's packages are delivered.
C)On the date the invoice is mailed to the customer.
D)On the date the customer's payment is received.

Question 76

An insurance company received advance payments from clients during 2019 of $12,000. At December 31, 2019, $10,000 of the advance payments still had not been earned. After the adjustments are recorded and posted at December 31, 2019, what will the balances be in the Unearned Insurance Revenue and Insurance Revenue accounts? ​
Unearned Insurance Revenue Insurance Revenue

A)$10,000 $10,000
B)$0 $12,000
C)$2,000 $10,000
D)$10,000 $2,000

Question 77

When is revenue from the sale of merchandise normally recognized?

A)On the date the sale is made.
B)On the date the customer pays for the merchandise.
C)Either on the date on which the sale occurs, or the date on which the customer pays.
D)When the merchandise is sold, if sold for cash, or when payment is received, if sold on credit.

Question 78

Carithers Cleaning Service received advance payments from customers during 2019 of $24,000. At December 31, 2019, $5,000 of the advance payments still had not been earned. After the adjustments are recorded and posted at December 31, 2019, the balances in the Unearned Service Revenue and Service Revenue accounts will be: ​
Unearned Service Revenue Service Revenue

A)$0 $24,000
B)$5,000 $19,000
C)$5,000 $24,000
D)$24,000 $5,000

Question 79

Carlock Systems received a 6-month, 12% note for $50,000 from a customer on November 1, 2019. The note is due on April 30, 2020. Assuming the company's accounting period ends on December 31, how much interest revenue should be recognized during 2019 and 2020? ​
2019 2020

A)$2,000 $1,000
B)$1,000 $2,000
C)$0 $6,000
D)$1,000 $5,000

Question 80

What effect does "recognizing revenue at the end of the accounting period for rent previously received in advance" have on the accounting equation for the insurance company?

A)Assets increase and liabilities decrease.
B)Assets increase and Stockholders' equity increases.
C)Assets decrease and liabilities decrease.
D)Liabilities decrease and Stockholders' equity increases.