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Horngren's Financial and Managerial Accounting, 6e (Miller-Nobles)
1) The major difference between a cash basis accounting system and an accrual basis accounting system is
the timing of recording revenues and assets.
2) Aquatic Supplies, Inc. purchased $2,000 of supplies on account. Under the accrual basis of accounting,
no entry is made until the amount is paid.
3) In cash basis accounting, revenue is recorded when cash is received, and expenses are recorded when
they are paid.
4) Under accrual basis accounting, revenue is recorded only when cash is received.
5) Under cash basis accounting, revenue is recorded when it is earned, regardless of when cash is
received.
6) Under accrual basis accounting, an expense is recorded only when cash is paid.
7) Under cash basis accounting, an expense is recorded only when cash is paid.
8) The accrual method is an easier accounting method to follow than cash basis accounting because it
generally requires less knowledge of accounting concepts and principles.
9) Generally Accepted Accounting Principles (GAAP) require the use of the accrual basis of accounting.
10) If a company is using accrual basis accounting, when should it record revenue?
A) when cash is received, even though services may be performed at a later date
B) when services are performed, even though cash may be received at a later date
C) before services are performed
D) when cash is received, 30 days after the completion of the services
11) When does a company account for revenue if it uses cash basis accounting?
A) when services are performed, even though cash may be received at a later date
B) before services are performed
C) when the services are being performed
D) when cash is received, either prior to, at the time of, or after the services are performed
12) The cash basis of accounting ignores ________.
A) payables
B) revenue
C) cash
D) expenses
13) A company receives payment from one of its customers on August 5 for services performed on July
21. Which of the following entries would be recorded if the company uses accrual basis accounting?
A)
Cash
1,000
Accounts Receivable
1,000
B)
Accounts Payable
1,000
Cash
1,000
C)
Cash
1,000
Service Revenue
1,000
D)
Service Revenue
1,000
Cash
1,000
14) Which of the following entries would be recorded by a company that uses the cash basis method of
accounting?
A)
Cash
1,000
Accounts Receivable
1,000
B)
Salaries Expense
1,000
Salaries Payable
1,000
C)
Prepaid Rent
1,000
Cash
1,000
D)
Rent Expense
1,000
Cash
1,000
15) Which of the following statements is true of accrual basis accounting?
A) Accrual basis accounting is required by Generally Accepted Accounting Principles (GAAP).
B) Accrual basis accounting records expenses only when cash has been paid for them.
C) Accrual basis accounting records revenue only when cash is received.
D) Accrual basis accounting always results in greater net income than cash basis accounting.
16) At the time the transaction occurred, which of the following would result in an increase in net income
under the accrual basis of accounting, but would not result in an increase in net income under cash basis
accounting?
A) purchase of supplies for cash
B) performance of services on account
C) use of supplies purchased earlier
D) receipt of cash for services that were performed earlier on account
17) Which of the following accounts would be used under the accrual basis of accounting, but not under
cash basis accounting?
A) Cash
B) Unearned Revenue
C) Service Revenue
D) Salaries Expense
18) What is the difference between cash basis accounting and accrual basis accounting?
19) The Pediatric Dental Corporation prepays the rent on its dental office. On July 1, the corporation paid
$18,000 for 6 months of rent. The rent period begins on July 1. How much Rent Expense should the
corporation record for the three months ended September 30 under the cash basis? Why?
20) The Hartman Dental Corporation prepays the rent on its dental office. On July 1, the corporation paid
$18,000 for 6 months of rent. The rent period begins on July 1. How much Rent Expense should the
corporation record for the three months ended September 30 under the accrual basis? Why?
21) For each of the following statements, indicate whether it applies to:
the cash basis of accounting (cash basis)
the accrual basis of accounting (accrual basis)
both the cash and accrual basis of accounting (both)
neither the cash nor the accrual basis of accounting (neither).
Your response should be cash basis, accrual basis, both, or neither.
Statement
Applies to
An easier method of accounting
to follow
Provides a better picture of a
business's revenues and
expenses
Small businesses may use this
method
Statement
Applies to
An easier method of accounting
to follow
cash basis
Provides a better picture of a
business's revenues and
expenses
accrual basis
Small businesses may use this
method
both
22) For each of the following statements, indicate whether it applies to:
the cash basis of accounting (cash basis)
the accrual basis of accounting (accrual basis)
both the cash and accrual basis of accounting (both)
neither the cash nor the accrual basis of accounting (neither).
Your response should be cash basis, accrual basis, both, or neither.
Statement
Applies to
Does a good job of tracking a
business's cash flows
It is irrelevant when cash is
received or paid
May require a company to
prorate a prepayment of rent
Statement
Applies to
Does a good job of tracking a
business's cash flows
cash basis
It is irrelevant when cash is
received or paid
accrual basis
May require a company to
prorate a prepayment of rent
accrual basis
Diff: 2
LO: 3-1
AACSB: Application of knowledge
AICPA Functional: Measurement
PE Question Type: Application
H2: What Is the Difference Between Cash Basis Accounting and Accrual Basis Accounting? (H)
3.2 Learning Objective 3-2
1) The key differences between the cash basis and accrual basis of accounting are the timing and
recognition of assets and liabilities.
2) The key differences between the cash basis and accrual basis of accounting can be explained by
understanding the time period concept and the revenue recognition and matching principles.
3) The key differences between the cash basis and accrual basis of accounting can be explained by
understanding the rules of debits and credits.
4) Which of the following accounting principles does NOT help to explain the timing and recognition of
revenues and expenses?
A) time period concept
B) revenue recognition principle
C) economic entity concept
D) matching principle
5) The time period concept assumes that the activities of a business can be sliced into small time
segments.
6) The time period concept assumes that the activities of a business can be sliced into small time segments
and that financial statements can be prepared for specific periods of time.
7) The accounting period used for the annual financial statements is called the fiscal year.
8) The goal of the time period concept is to compute an accurate net income or net loss.
9) Which of the following is considered a fiscal year?
A) six months
B) three months
C) twelve months
D) four months
