Deck 4: Accrual Accounting Concepts

Question 1

When money is received from a customer prior to the delivery of goods or the performance of a service, it is recorded as revenue.

Answer 1

False

Question 2

Expense recognition is tied to changes in assets and liabilities.

Answer 2

True

Question 3

Accounting divides the economic life of a business entity into artificial time periods.

Answer 3

True

Question 4

Adjusting entries are only required under the cash basis of accounting.

Question 5

Adjusting entries are needed to produce relevant financial information.

Question 6

Revenue must be recognized once the sales or performance effort is substantially complete, regardless of whether or not collection is reasonably assured.

Question 7

Under the cash basis of accounting, revenue is only recognized when cash is received.

Question 8

For a private company reporting under ASPE, adjusting entries must be prepared at least quarterly.

Question 9

Under the cash basis of accounting, expense recognition generally does not follow revenue recognition.

Question 10

If prepaid costs are initially recorded as an asset, no adjusting entries will be required in the future.

Question 11

Revenue is generally recognized (recorded) when there is an increase in a liability or a decrease in an asset.

Question 12

Prepaid expenses are costs that are paid for before they are used.

Question 13

An accounting transaction never affects more than one accounting time period.

Question 14

Since some costs are not recorded, adjusting entries are necessary.

Question 15

An adjusting entry to a prepaid expense is required to recognize costs that expire with time.

Question 16

Expenses paid before being used or consumed are initially recorded as liabilities.

Question 17

Accrued revenues represent money received from customers for work to be done later.

Question 18

Revenue recognition follows expense recognition.

Question 19

Under the accrual basis of accounting, expenses are only recognized when they are paid.

Question 20

Expense recognition always coincides with revenue recognition.

Question 21

The adjustment for accrued salaries results from services being paid for after the services are performed.

Question 22

The carrying amount of a depreciable asset is always equal to its actual value because depreciation is a valuation technique.

Question 23

The balances of the Depreciation Expense and the Accumulated Depreciation accounts should always be the same.

Question 24

Accrued revenues are revenues that have not been earned before financial statements have been prepared.

Question 25

Accumulated Depreciation is a liability account and its normal account balance is a credit.

Question 26

A contra asset account is subtracted from a related asset account in the statement of financial position and its normal balance is a credit.

Question 27

Expiration of one month of an insurance policy paid in advance, initially recorded by debiting Prepaid Insurance, results in an adjusting entry that reduces the company's liabilities.

Question 28

The purchase of certain types of long-lived (non-current) assets is essentially a long-term prepayment for services.

Question 29

If a three-month, 6% note payable for $5,000 is signed on October 1, the interest expense for the month of October is $75.

Question 30

Depreciation is a valuation concept; that is, we allocate costs to reflect the actual change in the value of the asset.

Question 31

Adjusting entries never affect cash.

Question 32

Depreciation allocates the cost of a long-lived asset to the accounting periods over which it is used.

Question 33

An asset purchased for $100,000 on the first day of the fiscal year with a useful life of 5 years has an annual depreciation expense of $20,000.

Question 34

For accounting purposes, income tax expense is accrued based on the current year's estimated profit before income tax.

Question 35

The statement of financial position and income statement can be prepared from the information provided by an adjusted trial balance.

Question 36

The cost of any depreciable asset less accumulated depreciation reflects the carrying amount of the asset.

Question 37

When a company performs a service for which payment was received in advance, a journal entry is recorded that will increase revenue and decrease unearned revenue.

Question 38

The original cost of equipment will typically will be shown on the statement of financial position.

Question 39

An adjusted trial balance must be prepared before the adjusting entries can be recorded.

Question 40

The adjusting entry for unearned revenues results in an increase to a liability account and a decrease to a revenue account.

Question 41

Accounting divides the economic life of a business into artificial the time periods because
(a)a transaction can only affect one period of time.
(b)estimates should not be made if a transaction affects more than one time period.
(c)Canada Revenue Agency requires monthly statements.
(d)most businesses need regular feedback on how well they are doing.

Question 42

The Dividends account is closed to the Income Summary account at the end of each year.

Question 43

The purpose of an adjusted trial balance is to ensure all adjusting entries have been recorded.

Question 44

The statement of changes in equity is prepared from the Common Shares, Retained Earnings and Dividends accounts on the adjusted trial balance.

Question 45

When preparing the statement of financial position, the balance of Retained Earnings is taken from the Adjusted Trial Balance.

Question 46

Which of the following is generally not a guideline for recognizing revenue?
(a)When the sale or performance effort is substantially complete.
(b)When collection is reasonably assured.
(c)When management declares that revenue should be recognized.
(d)When the amount is determinable.

Question 47

The accounting cycle begins with the journalizing of the transactions.

Question 48

Recording transactions that affect a company's financial statements in the periods in which they occur rather than when cash is received or paid is called
(a)time period accounting.
(b)the cash basis of accounting.
(c)monetary accounting.
(d)the accrual basis of accounting.

Question 49

The post-closing trial balance will have fewer accounts than the adjusted trial balance.

Question 50

The Income Summary account is a permanent account.

Question 51

Closing entries are prepared before adjusting entries.

Question 52

The post-closing trial balance will contain only permanent accounts.

Question 53

Closing entries result in the transfer of profit or loss into the Retained Earnings account.

Question 54

The International Accounting Standards Board has proposed that revenue would be recognized when
(a)cash is received.
(b)goods or services are transferred to customers.
(c)related expenses are recognized.
(d)the revenue is recorded.

Question 55

In general, revenue recognition occurs
(a)when cash is received.
(b)when it is earned.
(c)when expenses are incurred.
(d)in the period that income taxes are paid.

Question 56

When closing entries are posted, the result is a zero balance in each income statement account.

Question 57

Financial statements are generally prepared before the closing entries are posted.

Question 58

Accumulated other comprehensive income is reported on the statement of changes in equity, but not on the statement of financial position.

Question 59

Which of the following is not generally an accounting time period?
(a)A week
(b)A month
(c)A quarter
(d)A year

Question 60

Other comprehensive income may include certain adjustments to reflect some assets at their fair value.

Question 61

Some accounts need to be adjusted because
(a)there are never enough accounts to record all the transactions.
(b)they are not up-to-date at the time financial statements are prepared.
(c)there are always errors made in recording transactions.
(d)management can't decide what they want to report.

Question 62

Wong's Tune-Up Shop uses the accrual basis of accounting. Wong services a car on May 31. The customer picks up the vehicle on June 1 and mails payment to Wong on June 5. Wong receives the cheque in the mail on June 6. When would Wong recognize the revenue as being earned?
(a)June 6
(b)June 5
(c)June 1
(d)May 31

Question 63

A dress shop makes a dress that sells for $1,000 and delivers it to the customer on November 30. The customer is sent a statement on December 5 and a cheque is received by the dress shop on December 10. When should the $1,000 be recognized as revenue?
(a)December 5
(b)December 10
(c)November 30
(d)December 1

Question 64

Adjusting entries are
(a)not necessary if the accounting system is operating properly.
(b)usually required before financial statements are prepared.
(c)made whenever management desires to change an account balance.
(d)made to statement of financial position accounts only.

Question 65

Which of the following reflects the balances of prepayment accounts prior to adjustment?
(a)Statement of financial position accounts are understated and income statement accounts are understated.
(b)Statement of financial position accounts are overstated and income statement accounts are overstated.
(c)Statement of financial position accounts are overstated and income statement accounts are understated.
(d)Statement of financial position accounts are understated and income statement accounts are overstated.

Question 66

An adjusting entry would not include which of the following accounts?
(a)Cash
(b)Interest Receivable
(c)Property Tax Payable
(d)Unearned Revenue

Question 67

Which one of the following is not a justification for adjusting entries?
(a)Adjusting entries are necessary to ensure that revenue recognition criteria are followed.
(b)Adjusting entries are necessary to ensure that expense recognition criteria are followed.
(c)Adjusting entries are necessary to enable financial statements to be in conformity with IFRS or ASPE.
(d)Adjusting entries are necessary to bring the general ledger accounts in line with the budget.

Question 68

Aye Corp sells $10,000 of goods on account in the current year and collects $7,500 of this. It incurs $6,000 in expenses on account during the current year and pays $4,000 of them. Aye would report what amount of profit under the cash and accrual bases of accounting, respectively?
(a)$4,000 on the cash basis and $3,500 on the accrual basis
(b)$3,500 on the cash basis and $4,000 on the accrual basis
(c)$6,000 on the cash basis and $3,500 on the accrual basis
(d)$1,500 on the cash basis and $6,000 on the accrual basis

Question 69

Which of the following accounts would not likely need to be adjusted at year end?
(a)Office Supplies
(b)Office Equipment
(c)Prepaid Advertising
(d)Unearned Revenue

Question 70

On February 15, a local business receives an invoice for electricity used in the month of January and pays it on March 1. In which month should the business recognize the expense?
(a)February
(b)January
(c)March
(d)No expense should be recorded.

Question 71

Unearned revenues are
(a)received and recorded as liabilities before they are earned.
(b)earned and recorded as liabilities before they are received.
(c)earned but not yet received or recorded.
(d)earned and already received and recorded.

Question 72

The primary difference between prepaid and accrued expenses is that prepaid expenses have
(a)been incurred and accrued expenses have not.
(b)not been paid and accrued expenses have.
(c)been paid and accrued expenses have not.
(d)not been recorded and accrued expenses have.

Question 73

A furniture factory's employees work overtime in February to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime salaries should be expensed in
(a)February.
(b)March.
(c)the period when the workers receive their cheques.
(d)either February or March depending on when the pay period ends.

Question 74

Under the accrual basis of accounting
(a)cash must be received before revenue is recognized.
(b)profit is calculated by matching cash outflows against cash inflows.
(c)events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.
(d)the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles.

Question 75

Unearned revenue is classified as a(n)
(a)asset account.
(b)revenue account.
(c)equity account.
(d)liability.

Question 76

Wong's Tune-Up Shop uses the cash basis of accounting. Wong services a car on May 31. The customer picks up the vehicle on June 1 and mails payment to Wong on June 5. Wong receives the cheque in the mail on June 6. When would Wong recognize the revenue as being earned?
(a)June 6
(b)June 5
(c)June 1
(d)May 31

Question 77

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.

Question 78

An asset-expense relationship exists with
(a)liability accounts.
(b)revenue accounts.
(c)prepaid expense adjusting entries.
(d)accrued expense adjusting entries.

Question 79

The preparation of adjusting entries
(a)is straight-forward because the accounts that need adjustment will be out of balance.
(b)requires an understanding of the company's operations and the inter-relationship of accounts.
(c)is only required for accounts that do not have a normal balance.
(d)is optional when financial statements are prepared.

Question 80

Adjusting entries are required
(a)because some costs expire with the passage of time, but have not yet been recorded.
(b)when the company's profit is below budget.
(c)when expenses are recorded in the period in which they are incurred.
(d)when revenues are recorded in the period in which they are earned.