Deck 3: Accrual Accounting and the Financial Statements

Question 1

Why does an accountant prepare the income statement first?

A) Management, being profit oriented, is more interested in the company's net income than in the assets the company owns and the debts it owes.
B) It is easier to adjust income statement accounts first than it is to adjust balance sheet accounts.
C) Net income must be computed first to properly complete the other financial statements.
D) There is no particular order in which financial statements must be prepared.

Answer 1

C

Question 2

An adjustment of an asset for which the business paid cash in advance is:

A) revenue recognition
B) an accrual
C) a deferral
D) unearned revenue

Answer 2

C

Question 3

On June 1, 2020, Destiny Ltd. received $3,600 for services to be performed evenly over the next twelve months. The adjusting entry on December 31, 2020, would include a:

A) debit to Unearned Service Revenue for $2,100
B) debit to Service Revenue for $1,500
C) debit to Cash for $3,600
D) debit to Unearned Service Revenue for $1,500

Answer 3

A

Question 4

Which of the following combinations of ratios is preferable?

A) a low current ratio and a low debt ratio
B) a high current ratio and a low debt ratio
C) a low current ratio and a high debt ratio
D) a high current ratio and a high debt ratio

Question 5

On December 15, 2019, a company receives an order from a customer for services to be performed on December 28, 2019. Due to a backlog of orders, the company does not perform the services until January 3, 2020. The customer pays for the services on January 6, 2020. When should revenue be recorded by the company?

A) January 6, 2020
B) December 15, 2019
C) January 3, 2020
D) December 28, 2019

Question 6

An expense incurred in 2019 is not paid until 2020. Using the accrual basis of accounting, the expense should appear on:

A) both the 2019 and 2020 income statements
B) neither the 2019 nor 2020 income statement
C) the 2019 income statement
D) the 2020 income statement

Question 7

On December 31, 2020, salaries owed to employees total $5,650 and will be paid on January 4, 2021. The adjusting entry prepared on December 31, 2020, includes a:

A) credit to Salary Expense for $5,650
B) debit to Salary Expense for $5,650
C) debit to Salary Payable for $5,650
D) credit to Cash for $5,650

Question 8

An accrual refers to an event:

A) where the asset is recorded after the cash settlement
B) where the liability is recorded after the cash settlement
C) where the expense or revenue is recorded after the cash settlement
D) where the expense or revenue is recorded before the cash settlement

Question 9

Interest Payable, Salaries Payable, and Accounts Payable are:

A) non-current assets
B) current assets
C) non-current liabilities
D) current liabilities

Question 10

The post closing trial balance for a company will not contain an account balance for:

A) liabilities
B) revenues
C) retained earnings
D) assets

Question 11

Accumulated depreciation is classified as a(n):

A) expense account
B) liability account
C) asset account
D) contra-asset account

Question 12

On October 31 of the current year, a contract was signed and a cheque received for services to be performed by October 31 of the following year. The Unearned Service Revenue account was credited for $4,800. Assuming services were performed evenly during the remainder of the year, the adjusting entry on December 31 will involve a:

A) credit to Service Revenue $800
B) credit to Unearned Service Revenue $800
C) debit to Unearned Service Revenue $4,000
D) credit to Service Revenue for $4,000

Question 13

The adjusting entry for unearned revenue always involves a:

A) debit to a revenue account and a credit to a liability account
B) debit to an asset account and a credit to a liability account
C) debit to a liability account and a credit to a revenue account
D) debit to an asset account and a credit to a revenue account

Question 14

The adjusting entry for a prepaid expense always involves a(n):

A) asset account and a liability account
B) expense account and an asset account
C) expense account and a liability account
D) liability account and a revenue account

Question 15

The adjusting entry for accrued revenue always involves a:

A) debit to a liability account and a credit to an asset account
B) debit to a revenue account and a credit to an asset account
C) debit to an asset account and a credit to a liability account
D) debit to an asset account and a credit to a revenue account

Question 16

Honey Brown Inc. paid six months' rent in advance totalling $9,000. At the end of the first month, the adjusting entry would include a:

A) debit to Rent Expense for $1,500
B) debit to Prepaid Rent for $1,500
C) debit to Rent Expense for $7,500
D) debit to Prepaid Rent for $7,500

Question 17

A journal entry contains a debit to an expense account and a credit to a payable account. This is an example of a(n):

A) accrued expense
B) deferred expense
C) accrued revenue
D) deferred revenue

Question 18

Accounts which are closed at the end of an accounting period include:

A) assets, revenues, and dividends
B) assets, revenues, and expenses
C) revenues, expenses, and dividends
D) revenues, dividends, and liabilities

Question 19

Under the ASPE revenue recognition standard, a sales transaction must satisfy three criteria before the seller can recognize revenue. Which of the following is not a criteria?

A) It is probable that the customer will pay for the goods or services when payment becomes due.
B) The amount of revenue to be received can be reliably measured.
C) There has been a decrease in future economic benefits caused by a decrease in an asset or an increase in a liability.
D) The ownership (or control) and benefits of the goods have been transferred to the customer, or the services have been provided to the customer.

Question 20

What will be the result if the adjusting entry to record the current period's depreciation on equipment is not recorded?

A) The assets for the period will be understated.
B) The net income for the period will be understated.
C) The net income for the period will not be affected.
D) The net income for the period will be overstated.

Question 21

Which of the following is not one of the three basic categories of adjusting entries?

A) expiration
B) depreciation
C) accruals
D) deferrals

Question 22

Under IFRS and ASPE one of the formal principles which set out the criteria that must be satisfied before an expense can be recognized is:

A) There has been a decrease in future economic benefits caused by a decrease in an asset or an increase in a liability.
B) The expense cannot be reliably measured.
C) There has been an increase in future economic benefits caused by a decrease in an asset or an increase in a liability.
D) The ownership (or control) and benefits of the goods have been transferred to the customer, or the services have been provided to the customer.

Question 23

The post closing trial balance contains which of the following accounts?

A) Retained Earnings
B) Cost of Goods Sold
C) Depreciation Expense
D) Service Revenue

Question 24

On December 1, 2020, Cream Ale Ltd. receives $1,800 in advance for an agreement to brew beer during the months of December, January, and February. As of December 31, 2020, Cream Ale Ltd:

A) would have a $0 liability to its client under accrual accounting, and would have a $1,200 liability to its client under cash-basis accounting
B) would have recognized $600 cash under accrual accounting, and would have recognized $1,800 cash under cash-basis accounting
C) would have recognized $600 revenue under accrual accounting, and would have recognized $1,800 revenue under cash-basis accounting
D) would have a $1,200 liability to its client under accrual accounting, and would have a $1,800 liability to its client under cash-basis accounting

Question 25

The debt ratio is computed by:

A) dividing total liabilities by total assets
B) dividing current liabilities by total assets
C) dividing total assets by current liabilities
D) dividing total assets by total liabilities

Question 26

An accountant who uses the accrual basis of accounting receives cash in advance for services yet to be performed. The entry to record this transaction will include a credit to which of the following accounts?

A) Unearned Expense
B) Unearned Service Revenue
C) Service Revenue
D) Prepaid Expense

Question 27

An accountant who records a transaction only when cash is received or disbursed is using which basis of accounting?

A) deferral
B) prepaid
C) accrual
D) cash

Question 28

What is the liability called that arises from an expense that the business has incurred but has not yet paid?

A) It is called a deferred expense.
B) It is known as an unearned expense.
C) It is referred to as an accrued expense.
D) It is called a prepaid expense.

Question 29

Net income appears on:

A) both the income statement and the statement of retained earnings
B) both the income statement and the balance sheet
C) only the income statement
D) only the balance sheet

Question 30

When considering making a loan to a company, a bank will look for:

A) a high debt ratio and a high current ratio
B) a low debt ratio and a high current ratio
C) a low debt ratio and a low current ratio
D) a high debt ratio and a low current ratio

Question 31

The entry made to close service revenue would include:

A) a debit to Service Revenue and a credit to Retained Earnings
B) a debit to Service Revenue and a credit to Dividends
C) a debit to Service Revenue and a credit to net income
D) a debit to Retained Earnings and a credit to Service Revenue

Question 32

Upper Canada Corp. bought $72,000 of equipment with an estimated service life of 4 years. The equipment will be worthless at the end of its life. The annual amount of depreciation on this equipment is:

A) $36,000
B) $72,000
C) $0
D) $18,000

Question 33

Which of the following transactions would be recorded at the time the transaction occurs under the accrual basis, but would not be recorded until sometime in the future under the cash basis?

A) issuance of stock
B) payment of employee salaries
C) sale of merchandise on account
D) payment of interest expenses

Question 34

On October 25, 2020 Quick Corp. prints a cheque for November's rent payment. Quick Corp. mails the cheque on October 27 to the landlord. The landlord receives the cheque October 31 and cashes the cheque on November 2. When should Quick Corp. record the rent expense associated with this transaction?

A) October 25,
B) October 27
C) November 2
D) November 30

Question 35

The ending balance in Retained Earnings is found on:

A) both the statement of retained earnings and the balance sheet
B) both the income statement and the balance sheet
C) only the statement of retained earnings
D) only the balance sheet

Question 36

The closing entry for utilities expense would include:

A) a debit to Utilities Expense and a credit to net income
B) a debit to Retained Earnings and a credit to Utilities Expense
C) a debit to Utilities Expense and a credit to Retained Earnings
D) a debit to net income and a credit to Utilities Expense

Question 37

Under the revenue recognition principle, a business should record revenue when the business:

A) receives payment from a customer for goods or services
B) receives an order from a customer for goods or services
C) prepares the invoice (bill) for goods or services
D) delivers goods or services to a customer

Question 38

Chance Stables purchased a new baler as its annual equipment purchase. The baler was purchased for $10,000 down and a $50,000 note and has an estimated life of 8 years. The baler will
Be worthless at the end of its life. The annual amount of depreciation on this equipment is:

A) $10,000
B) $6,250
C) $7,500
D) $50,000

Question 39

Non-current assets:

A) are held for sale by the business
B) include Inventory, Equipment, and Land
C) are used in the operations of the business
D) generally are not subject to depreciation

Question 40

A company using the accrual basis of accounting receives its utility bill which will be paid in two weeks. The entry will involve a debit to:

A) Utilities Expense
B) Prepaid Revenue
C) Utilities Payable
D) Prepaid Utilities

Question 41

A journal entry contains a debit to an asset account and a credit to a revenue account. This is an example of a(n):

A) deferred expense
B) unearned revenue
C) accrued expense
D) accrued revenue

Question 42

The adjusting entry to allocate the cost of a plant asset such as equipment over its useful life involves a credit to:

A) Accumulated Depreciation
B) Depreciation Expense
C) Accumulated Equipment
D) Equipment Expense

Question 43

Assume the beginning balance in the Retained Earnings account is zero. If a debit balance exists in Retained Earnings after closing out revenues and expenses at the end of the current period, it indicates:

A) an increase in cash for the current period
B) a decrease in cash for the current period
C) the company incurred a net loss for the current period
D) the company had net income for the current period

Question 44

Closing entries transfer the balances of revenue, expense, and dividends accounts to which account?

A) Net Income
B) Retained Earnings
C) Common Shares
D) Share Capital

Question 45

Adjusting entries:

A) are prepared at the end of the accounting period to update certain accounts
B) are prepared at the option of the accountant
C) are not needed under the accrual basis of accounting
D) are prepared at the beginning of the accounting period to update all accounts

Question 46

Current assets include:

A) Cash, Receivables, and Inventory
B) Cash, Payables, and Retained Earnings
C) Cash, Receivables, and Payables
D) Cash, Receivables, and Equipment

Question 47

The adjusting entry for supplies used during the current period will involve a credit to:

A) Supplies
B) Accrued Supplies
C) Supplies Revenue
D) Supplies Expense

Question 48

The accounting principle which tells accountants when to record revenue and in what amount is called the:

A) expense recognition principle
B) going concern principle
C) revenue recognition principle
D) cost constraint

Question 49

In what order are financial statements generally prepared?

A) income statement, balance sheet, and statement of retained earnings
B) income statement, statement of retained earnings, and balance sheet
C) statement of retained earnings, income statement, and balance sheet
D) balance sheet, statement of retained earnings, and income statement

Question 50

One of the most widely used financial ratios is the:

A) debt ratio
B) working capital
C) current ratio
D) none of the above

Question 51

The adjusting entry made to record prepaid insurance that has expired during the period would include a debit to:

A) Prepaid Insurance
B) Accrued Insurance
C) Insurance Expense
D) Unearned Insurance

Question 52

A classified balance sheet:

A) does not separate current and non-current assets or liabilities.
B) separates current assets from non-current assets and currents liabilities from non-current liabilities.
C) uses report format.
D) uses account format.

Question 53

An accrual refers to an event:

A) where the cash has already exchanged hands between the two parties
B) where the cash has not been exchanged between the two parties
C) that will never involve an income statement account
D) that will never involve cash

Question 54

An accountant who keeps his books using accrual accounting performs a service but does not receive payment at the time the service is performed. The entry made by the accountant will require a credit to:

A) Deferred Expense
B) Service Revenue
C) Unearned Expense
D) Unearned Service Revenue

Question 55

A company using the cash basis of accounting receives cash for services yet to be performed. The entry to record the cash received will involve a credit to:

A) Deferred Revenue
B) Accrued Revenue
C) Prepaid Revenue
D) Service Revenue

Question 56

What effect does an accrued revenue adjustment have on a company's net income?

A) The adjustment decreases net income for the period.
B) The effect of the adjustment cannot be determined with the information given.
C) The adjustment has no effect on net income.
D) The adjustment increases net income for the period.

Question 57

Which of the four accounts listed below would be considered the most liquid?

A) Accounts Receivable
B) Equipment
C) Land
D) Inventory

Question 58

There are two methods used to account for transactions. These methods are:

A) accrual and deferral
B) cash and deferral
C) deferral and prepaid
D) cash and accrual

Question 59

A journal entry contains a debit to the Cash account and a credit to the Unearned Service Revenue account. This is an example of a(n):

A) deferred expense
B) accrued revenue
C) deferred revenue
D) accrued expense

Question 60

A deferral refers to an event:

A) where the recognition of an expense or revenue is recorded before the cash is paid or received
B) where the liability for an expense is recorded after the expense is actually incurred
C) where the recognition of an expense or revenue is recorded after the cash is paid or received
D) where the liability for an expense is recorded before the expense is actually incurred

Question 61

Rover Ltd. had $8,200 of supplies on hand at the beginning of the month. A count at the end of the month indicated $1,350 of supplies were still on hand. The adjusting entry at year end would include a:

A) debit to Supplies for $1,350
B) credit to Supplies Expense for $1,350
C) credit to Supplies Expense for $6,850
D) debit to Supplies Expense for $6,850

Question 62

An adjustment is made for an expense incurred prior to its payment. The adjustment is called a(n):

A) accrued expense
B) accrued asset
C) prepaid expense
D) unearned expense

Question 63

Shaftebury Ltd. began operations and purchased $15,900 of supplies. By year end, $8,800 of supplies were still on hand. The adjusting entry at year end would include a:

A) credit to Supplies Expense for $8,800
B) credit to Supplies Expense for $7,100
C) debit to Supplies Expense for $7,100
D) debit to Supplies for $8,800

Question 64

What effect does an accrued expense adjustment have on the financial statements?

A) The adjustment decreases expenses and increases liabilities.
B) The adjustment increases expenses and decreases assets.
C) The adjustment increases expenses and increases net income.
D) The adjustment increases expenses and increases liabilities.

Question 65

An accountant recognizes the impact of a business event as it occurs and accounts for it appropriately in which basis of accounting?

A) cash
B) deferred
C) prepaid
D) accrual

Question 66

A company using the cash basis of accounting pays for one year of rent in advance. The entry to record this transaction will involve a debit to:

A) Rent Revenue
B) Deferred Rent Revenue
C) Prepaid Rent
D) Rent Expense

Question 67

The adjusting entry to record salaries owed to employees but not paid until the next accounting period involves a credit to:

A) Deferred Salary
B) Salary Payable
C) Salary Expense
D) Unearned Salaries

Question 68

Cash for services to be performed in 2020 is received in 2019. Using the accrual basis of accounting, the revenue should appear on:

A) neither the 2019 nor 2020 income statement
B) the 2020 income statement
C) the 2019 income statement
D) both the 2019 and 2020 income statements

Question 69

What will be the result if no adjusting entry is made to record revenue earned during the current period when the cash was received in the last accounting period?

A) The liabilities will be overstated.
B) The assets will be overstated.
C) The assets will be understated.
D) The liabilities will be understated.

Question 70

The post closing trial balance contains which of the following accounts?

A) Service Revenue
B) Depreciation Expense
C) Accumulated Depreciation
D) Dividends

Question 71

An improvement in the proportion of a company's assets that are financed with debt would be shown by:

A) an increase in the current ratio
B) a decrease in the current ratio
C) a decrease in the debt ratio
D) an increase in the debt ratio

Question 72

The closing entry made for dividends would include:

A) a debit to net income and a credit to Dividends
B) a debit to Dividends and a credit to Retained Earnings
C) a debit to Dividends and a credit to net income
D) a debit to Retained Earnings and a credit to Dividends

Question 73

Which of the following accounts is not considered a "permanent" account?

A) Inventory
B) Common Shares
C) Accounts Payable
D) Rent Expense

Question 74

On September 1 of the current year, Prepaid Rent was debited for $3,000. This amount represents payment for one year of rent, paid in advance. The adjusting entry on December 31 will involve a:

A) debit to Rent Expense for $2,000
B) debit to Rent Payable for $2,000
C) debit to Rent Expense for $1,000
D) debit to Rent Payable for $1,000

Question 75

The adjusted trial balance serves as the basis for preparing:

A) the balance sheet only
B) the statement of retained earnings
C) both the balance sheet and the income statement
D) the income statement only

Question 76

The journal entry to accrue for interest expense is a credit to which account?

A) Interest payable
B) Interest expense
C) Accounts payable
D) Cash

Question 77

Which of the accounts listed below is a permanent (or real) account?

A) Dividends
B) Sales Revenue
C) Rent Expense
D) Salary Payable

Question 78

Unearned Revenue is a(n):

A) revenue account
B) liability account
C) expense account
D) asset account

Question 79

On a cash flow statement, closing entries will:

A) be shown in the financing activities
B) not appear on the statement
C) be shown in the operating activities
D) be shown in the investing activities

Question 80

The current ratio is computed by:

A) dividing current assets by non-current assets
B) dividing current liabilities by current assets
C) dividing current assets by current liabilities
D) dividing current assets by non-current liabilities