ACC 556 WEEK 2 Chapter 4 Exercise
Chapter 4 Exercise: Accrual Accounting Concepts
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Which statement is correct?
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As long as a company consistently uses the cash basis of accounting, generally accepted accounting principles allow its use.
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The use of the cash basis of accounting violates both the revenue recognition and expense recognition principles.
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The cash basis of accounting is objective because no one can be certain of the amount of revenue until the cash is received.
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As long as management is ethical, there are no problems with using the cash basis of accounting.
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Which of the following would not result in unearned revenue?
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Rent collected in advance from tenants.
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Services performed on account.
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Sale of season tickets to football games.
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Sale of two-year magazine subscriptions.
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The revenue recognition principle dictates that revenue be recognized in the accounting period in which the performance obligation is satisfied.
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If a resource has been consumed but a bill has not been received at the end of the accounting period, then:
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an expense should be recorded when the bill is received.
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an expense should be recorded when the cash is paid out.
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an adjusting entry should be made recognizing the expense.
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it is optional whether to record the expense before the bill is received.
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A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be recognized?
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December 5
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December 10
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November 30
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December 1
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Can financial statements be prepared directly from the adjusted trial balance?
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They cannot. The general ledger must be used.
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Yes, adjusting entries have been recorded in the general journal and posted to the ledger accounts.
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No, the adjusted trial balance merely proves the equality of the total debit and total credit balances in the ledger after adjustments are posted. It has no other purpose.
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They can because that is the only reason that an adjusted trial balance is prepared.
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Accrued expenses are:
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incurred but not yet paid or recorded.
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paid and recorded in an asset account after they are used or consumed.
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paid and recorded in an asset account before they are used or consumed.
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incurred and already paid or recorded.
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Given the data below for a firm in its first year of operation, determine net income under the cash basis of accounting.
Cash received from customers $48,000
Accounts receivable 12,000
Cash paid for expenses 26,000
Accounts payable (related to expenses) 3,000
Prepaid rent for next period 7,000
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$22,000
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$31,000
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$24,000
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$15,000
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When closing entries are prepared, each income statement account is closed directly to retained earnings.
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Match the items below by entering the appropriate code letter in the space provided.
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Question
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Selected Match
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Periodicity assumption
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The economic life of a business can be divided into artificial time periods
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Cash basis
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Events recorded only in periods the company receives or pays cash
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Revenue recognition principle
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Revenue is recognized when the performance obligation is satisfied.
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Prepaid expenses
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Expenses paid before they are incurred
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Expense recognition principle
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Efforts are related to accomplishments
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Accrued revenues
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Revenues earned but not yet received
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Depreciation
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A cost allocation process
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Post-closing trial balance
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Includes only permanent—balance sheet—accounts
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Accrued expenses
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Expenses incurred but not yet paid
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All Answer Choices
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A.
Revenues earned but not yet received
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B.
Events recorded only in periods the company receives or pays cash
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C.
Efforts are related to accomplishments
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D.
Revenue is recognized when the performance obligation is satisfied.
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E.
Expenses paid before they are incurred
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A cost allocation process
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Includes only permanent—balance sheet—accounts
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H.
The economic life of a business can be divided into artificial time periods
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I.
Expenses incurred but not yet paid
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Depreciation is the process of:
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valuing an asset at its fair value.
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increasing the value of an asset over its useful life in a rational and systematic manner.
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allocating the cost of an asset to expense over its useful life in a rational and systematic manner.
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writing down an asset to its real value each accounting period.
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An adjusting entry to a prepaid expense is required to recognize expired expenses.
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Which statement is correct concerning the adjusted trial balance?
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An adjusted trail balance eliminates the need for the preparation of financial statements.
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The purpose of an adjusted trial balance is to prove the equality of the total debit balances and the total credit balances in the ledger.
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An adjusted trial balance will contain only permanent—balance sheet—accounts.
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The adjusted trial balance is prepared after the adjusting entries have been journalized but before they have been posted.
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Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause:
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net income to be understated.
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an overstatement of assets and an overstatement of liabilities.
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an understatement of expenses and an understatement of liabilities.
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an overstatement of expenses and an overstatement of liabilities.
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Why do generally accepted accounting principles require the application of the revenue recognition principle?
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Failure to apply the revenue recognition principle could lead to a misstatement of revenue.
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It is easy to apply the revenue recognition principle because revenue issues are always easy to identify and resolve.
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Recording revenue when cash is received is an objective application of the revenue recognition principle.
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Accounting software has made the revenue recognition easy to apply.
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Unearned revenue is a prepayment that requires an adjusting entry when services are performed.
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Management usually wants ________ financial statements and the IRS requires all businesses to file _________ tax returns.
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annual, annual
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monthly, annual
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quarterly, monthly
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monthly, monthly
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If a company fails to adjust a Prepaid Rent account for rent that has expired, what effect will this have on that month's financial statements?
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Failure to make an adjustment does not affect the financial statements.
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Expenses will be overstated and net income and stockholders’ equity will be under- stated.
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Assets will be overstated and net income and stockholders’ equity will be understated.
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Assets will be overstated and net income and stockholders’ equity will be overstated.
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