Financial Accounting: IFRS, 11e, GE
Harrison/Horngren/Thomas/Suwardy
Test Item File
Chapter 3: Accrual Accounting
3.1-1 When using accrual accounting, revenues are recorded when the business earns a service fee.
3.1-2 Your equity is increased when you make a sale, not when you collect the cash.
3.1-3 The basic defect of accrual accounting is that it ignores important information and, therefore, the financial
statements can be misleading.
3.1-4 If a sale on account is not recorded, the balance sheet reports no accounts payable and, therefore, assets
are understated.
3.1-5 IFRS requires use of the cash basis of accounting.
3.1-6 All but the smallest businesses use the accrual basis of accounting.
3.1-7 Under the cash basis of accounting, there are two defects—one on the balance sheet and one on the
income statement.
3.1-8 Accrual accounting records both cash and non-cash transactions.
3.1-9 Companies generally have a year that ends at the low point in their business activity.
3.1-10 The time-period concept requires a company to report accounting information at regular intervals.
3.1-11 A company makes a $200 sale on account. It later collects the $200 in cash. Under the accrual method of
accounting, revenue is recognized:
A) when the cash is collected.
B) when the sale is made.
C) either when the cash is received or the sale is made.
D) at a time that cannot be determined from the facts.
3.1-12 Under accrual accounting, revenue is recorded:
A) when the cash is collected, regardless of when the services are performed.
B) when the services are performed, regardless of when the cash is received.
C) either when the cash is received or the sale is made.
D) only if the cash is received at the same time the services are performed.
3.1-13 An example of a noncash transaction under the accrual method of accounting does NOT include:
A) depreciation expense.
B) sales on account.
C) collecting cash from customers.
D) accrual of expenses incurred, but not yet paid.
3.1-14 If a company makes a journal entry to debit Accounts Receivable and credit the Service Revenue account,
it is using:
A) the cash method of accounting.
B) the hybrid method of accounting.
C) the accrual method of accounting.
D) either the cash or accrual method of accounting.
3.1-15 There are two methods used to account for transactions. These methods are:
A) deferral and prepaid.
B) accrual and deferral.
C) cash and deferral.
D) cash and accrual.
3.1-16 The method of accounting that records the impact of a business transaction as it occurs is the:
A) deferral method.
B) cash method.
C) accrual method.
D) hybrid method.
3.1-17 The method of accounting that records revenues when the cash is received and expenses as they are
paid is the:
A) deferral method.
B) cash method.
C) accrual method.
D) hybrid method.
3.1-18 AMR received $1,600 on a sale using the cash basis of accounting and did not record a sale on account.
This transaction should have been recorded under accrual accounting. The balance sheet problem, using
the cash basis of accounting, is the failure to record an entry to which account?
A) Cash
B) Accounts Receivable
C) Sales
D) Both Accounts Receivable and Sales
3.1-19 Chunky Bags sold items for $20,000 cash using the cash basis of accounting and did not record a sale on
account. This transaction should have been recorded under accrual accounting. The income statement
defect of the cash basis with respect to this transaction is the failure to record an entry to which account?
A) Cash
B) Accounts Receivable
C) Sales
D) Both Accounts Receivable and Sales
3.1-20 An accountant recognizes the impact of a business event as it occurs and accounts for it appropriately
under which basis of accounting?
A) Cash
B) Prepaid
C) Accrual
D) Deferred
3.1-21 An expense incurred in 20X6 is not paid until 20X7. Using the accrual basis of accounting, the expense
should appear on:
A) the 20X6 income statement.
B) the 20X7 income statement.
C) neither the 20X6 nor the 20X7 income statement.
D) both the 20X6 and 20X7 income statements.
3.1-22 Cash for merchandise delivered to the customer in 20X6 is received in 20X7. Using the accrual basis of
accounting, the revenue should appear on:
A) the 20X6 income statement.
B) the 20X7 income statement.
C) neither the 20X6 nor the 20X7 income statement.
D) both the 20X6 and 20X7 income statements.
3.1-23 An interim period is generally:
A) more than one year, but less than the life of the company.
B) more than one year.
C) less than one year.
D) half of the life of the company.
3.1-24 The requirement to report accounting information at regular intervals is known as the:
A) interval concept.
B) IFRS concept.
C) time-period concept.
D) reporting concept.
3.1-25 Which time period indicates that a company has prepared interim statements?
A) For the year ended December 31
B) For the month ended June 30
C) For the quarter ended April 30
D) Both the month ended June 30 and the quarter ended April 30 are correct.
3.1-26 The process of going out of business is called:
A) time-period concept.
B) revenue principle.
C) liquidation.
D) bankruptcy.
3.1-27 The accounting period that ends on a date other than December 31 is called a:
A) fiscal year.
B) year end.
C) calendar year.
D) revolving year.
3.2-1 The amount of revenue to record is the cash value of the goods or services transferred to the customer.
3.2-2 The revenue principle states that revenue should be recorded in the same period as the cash is received.
3.2-3 Under the adjusting principle, a business should record revenue when it is earned, regardless of when
payment is received from the customer.
3.2-4 The matching principle requires the identification of expenses and matching them with the cash used to
pay them.
3.2-5 Expenses have a future benefit to the company.
3.2-6 The matching principle states that expenses should be recorded in the same period as the related revenues.
3.2-7 The cost of assets used up in the process of earning revenue are considered:
A) assets.
B) expenses.
C) dividends.
D) shareholders’ equity.
3.2-8 Cash accounting provides some ethical challenges that accrual accounting avoids.
3.2-9 On December 15, 20X6, a company receives an order from a customer for services to be performed on
December 28, 20X6. Due to a backlog of orders, the company does not perform the services until January
3, 20X7. The customer pays for the services on January 6, 20X7. The matching principle requires
the revenue to be recorded by the company on:
A) December 15, 20X6.
B) January 3, 20X7.
C) December 28, 20X6.
D) January 6, 20X7.
3.2-10 A company using the accrual basis of accounting pays $15,000 for a television advertising campaign.
Commercials will run evenly in December, January, and February. How much expense will be reported
on an income statement prepared for the month of December?
A) $0
B) $5,000
C) $10,000
D) $15,000
3.2-11 The revenue principle governs two things:
A) when to record a revenue and where to record this revenue.
B) where to record a revenue and the amount of revenue to record.
C) when to record revenue and the amount of revenue to record.
D) to record the amount to be received and in which journal to record this amount.
3.2-12 According to the revenue principle, revenue should be recorded:
A) before it has been earned.
B) when the cash is received.
C) when it has been earned.
D) whenever the company needs to record the revenue.
3.2-13 In most cases, revenue is earned:
A) when the cash is received.
B) when the order is placed.
C) when the customer mails the check.
D) when the goods or services have been delivered to the customer.
3.2-14 To obtain a new customer, a business sells merchandise to the customer for $65. Normally, the
merchandise sells for $85. For this sale, the business should record revenue of:
A) $85.
B) $65.
C) either amount.
D) neither amount.
3.2-15 Thompson Company executives are planning a $5 million advertising campaign. The expense of this
advertising campaign should be recognized when:
A) planning for the campaign is complete.
B) cash is paid to the television stations which will run the commercials.
C) commercials are filmed.
D) commercials are broadcast.
3.2-16 The revenue recognition principle requires that a business record revenue when the business:
A) receives an order from a customer.
B) prepares the invoice for the customer.
C) delivers goods or services to a customer.
D) receives payment from a customer.
3.2-17 The matching principle includes two steps:
A) measure the expenses and record the revenue.
B) identify all the expenses incurred during the accounting period and measure the expenses and match
them against the revenue earned.
C) when to record revenue and the amount of revenue to record,
D) when to record the revenue and identify all the expenses incurred during the accounting period.
3.2-18 Expenses can:
A) be paid in cash.
B) arise from using up an asset.
C) occur when a company creates a liability.
D) be all of the above.
3.2-19 On July 25, Hamilton Bey Company’s accountant prepared a check for August’s rent payment. Hamilton
Bey Company mails the check on July 27 to the landlord. The landlord receives the check on July 31 and
cashes the check on August 2. When should Hamilton Bey Company record the rent expense associated
with this transaction?
A) July 25
B) July 27
C) August 31
D) August 2
3.3-1 The updating of accounts is called the adjusting process.
3.3-2 Adjusting journal entries recorded at the end of an accounting period update revenues or expense
accounts, as well as asset or liability accounts.
3.3-3
Certain accounts do not need to be adjusted at the end of the period, since the day–to-day transactions
provide all the data for these accounts.
3.3-4 Adjusting journal entries are dated on the last day of the period.
3.3-5 Accrued revenues have been recorded and need adjusting, while deferred revenues have never been
recorded before the adjusting process.
3.3-6 In a deferral adjustment, the expense or revenue is recognized after the cash is paid or received.
3.3-7 Depreciation allocates the cost of a PPE to expense over the useful life of the asset.
3.3-8 In accrual adjustments, the revenue or expense is recognized before the cash is received or paid.
3.3-9 The accumulated depreciation account decreases over the life of the asset.
3.3-10 An asset that is appreciating in value is still depreciated for accounting purposes.
3.3-11 If depreciation for the current period is not recorded, net income for the current period will be
understated.
3.3-12 If deferred revenue has been earned by the end of the current period and no adjustment is recorded, net
income for the current period will be understated.
3.3-13 The unearned revenue adjustment decreases both net income and total assets.
3.3-14 An unadjusted trial balance is prepared to assist the accountant in determining the adjusting entries.
3.3-15 Before the financial statements are prepared, all of the accounts must be up-to-date.
3.3-16 Certain accounts do not need to be adjusted at the end of the period, since the day–to-day transactions
provide all the data for these accounts.
3.3-17 The cost of supplies used up is a liability.
3.3-18
Recording an expense in order to measure net income is consistent with the matching principle.
3.3-19 All plant, property and equipment—except buildings—decline in usefulness. This decline is an expense.
3.3-20 The adjusting entry to recognize unpaid salaries increases net income and increases liabilities.
3.3-21 Unearned service revenue is a current liability because the company is obligated to perform the service.
3.3-22 The term deferral refers to an event where the:
A) recognition of an expense or revenue is recorded after the cash is paid or received.
B) liability for an expense is recorded before the expense is actually incurred.
C) liability for an expense is recorded after the expense is actually incurred.
D) recognition of an expense or revenue is recorded before the cash is paid or received.
3.3-23 Adjusting entries are:
A) not needed under the accrual basis of accounting.
B) prepared at the option of the accountant.
C) prepared at the beginning of the accounting period to update all accounts.
D) prepared at the end of the accounting period to update certain accounts.
3.3-24 The following accounts are up-to-date and need no adjustment at the end of the period:
A) cash, share capital and prepaid rent.
B) prepaid rent, supplies and unearned rent.
C) cash, dividends and share capital.
D) cash, dividends and unearned rent.
3.3-25 The three basic categories of adjusting entries are:
A) deferrals, depreciation and accruals.
B) deferrals, unearned and accruals.
C) depreciation, deferrals and closing.
D) accruals, deferrals and reversing.
3.3-26 An expense that is paid in advance is a(n):
A) unearned expense.
B) prepaid expense.
C) liability.
D) unearned asset.
3.3-27 Prepaid expenses will:
A) become expenses when their future benefits expire.
B) become revenues when their future benefits expire.
C) become liabilities when their future benefits expire.
D) become none of the above.
3.3-28 Prepaid insurance is reported on the balance sheet as a(n):
A) expense.
B) liability.
C) asset.
D) contra asset.