Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Chapter 3
1. Receiving cash in advance of performing a service creates a liability for the company.
a.
True
b.
False
2. The accrual basis recognizes liabilities at the time the business incurs the obligation to pay for the services or goods
purchased.
a.
True
b.
False
3. The accrual basis of accounting requires revenue to be recorded when the service is performed.
a.
True
Chapter 3
b.
False
4. Accrual accounting does not require that the accounting records be updated prior to preparing financial statements.
a.
True
b.
False
5. The revenue recognition concept states that revenue should be recorded in the same period as the cash is received.
a.
True
b.
False
Chapter 3
6. Under the accrual basis of accounting, the accounting records are normally updated after the preparation of the financial
statements.
a.
True
b.
False
7. The matching concept requires expenses to be recorded in the same period that the related revenue is recorded.
a.
True
b.
False
Chapter 3
8. An adjusting entry would adjust revenue so that it is reported when earned and not when cash is received.
a.
True
b.
False
9. An adjusting entry would adjust an expense account so that the expense is reported when incurred.
a.
True
b.
False
Chapter 3
10. It is easy to objectively determine the physical decline in the ability of fixed assets to provide service.
a.
True
b.
False
11. Accrued expenses are expenses that have been incurred and paid.
a.
True
b.
False
Chapter 3
12. Current assets are assets that are expected to be converted to cash, sold or used up within 6 months.
a.
True
b.
False
13. Physical assets of a long-term nature are referred to as fixed assets.
a.
True
b.
False
Chapter 3
14. Rights that are short-term in nature are called intangible assets.
a.
True
b.
False
15. The fixed asset section of a balance sheet may also be labeled as property, plant, and equipment.
a.
True
b.
False
Chapter 3
16. Land is an example of a current asset.
a.
True
b.
False
17. "Brand name" recognition is an example of goodwill.
a.
True
b.
False
18. Liabilities that will not be due for more than one year are called long-term liabilities.
a.
True
Chapter 3
b.
False
19. Expenses on the income statement are assets used up or services consumed in the process of generating revenues.
a.
True
b.
False
20. If land costing $75,000 was sold for $135,000, the amount reported in the investing activities section of the statement
of cash flows would be $135,000.
a.
True
b.
False
Chapter 3
21. To arrive at cash flows from operations, it is necessary to convert the income statement from an accrual basis to the
cash basis of accounting.
a.
True
b.
False
22. Under the accrual basis of accounting, net cash flows from operating activities on the statement of cash flows will
normally be the same as net income.
a.
True
b.
False
Chapter 3
23. The process that begins with the analysis of transactions and ends with preparing the accounting records for the next
accounting period is called the accounting cycle.
a.
True
b.
False
24. Under the cash basis of accounting, expenses are recorded when paid.
a.
True
b.
False
Chapter 3
25. Under accrual accounting, expenses are recorded when incurred regardless of when paid.
a.
True
b.
False
26. Under the cash basis of accounting, no adjustments are necessary prior to the preparation of the financial statements.
a.
True
b.
False
Chapter 3
27. Every company must use the cash basis of accounting.
a.
True
b.
False
28. Under the cash basis of accounting, a business records only transactions involving increases or decreases of its cash.
a.
True
b.
False
Chapter 3
29. To determine cash payments for operating expenses for the cash flow statement using the direct method, depreciation
expense is added to net income.
a.
True
b.
False
30. 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.
Chapter 3
31. Flyer Co. billed a client for flying lessons given in January. The payment was received in February. Under the accrual
basis of accounting, when should Flyer Co. record the revenue?
a.
January
b.
February
c.
Some in January and some in February
d.
Flyer Co. should not record any revenue
32. Using accrual accounting, revenue is recorded and reported only:
a.
when cash is received without regard to when the services are rendered.
b.
when the services are rendered without regard to when cash is received.
c.
when cash is received before services are rendered.
d.
if cash is received after the services are rendered.
Chapter 3
33. Which of the following transactions will affect the profitability metric of a company?
a.
Rent received in advance
b.
Prepaid insurance
c.
Purchase of supplies on account
d.
Fees received in cash for services provided
34. Which of the following metrics is affected when a business makes prepayment of rent?
a.
Profitability
b.
Leverage
c.
Liquidity
d.
Contingency
Chapter 3
35. Which of the following is the effect of issue of additional common stock by a company on its liquidity and
profitability metrics?
a.
Its profitability increases.
b.
Its profitability and liquidity increase.
c.
Its profitability and liquidity remain unaffected.
d.
Its liquidity increases.
36. Which of the following is the effect of the payment of dividends by a company to its stockholders?
a.
The company's liquidity decreases, while profitability remains unchanged.
b.
The company's profitability and liquidity remains unchanged.
c.
The company's profitability and liquidity decrease.
d.
The company's profitability increases, while its liquidity decreases.
Chapter 3
37. Which of the following transactions will affect the liquidity metric of a company?
a.
Supplies used for manufacturing a product
b.
Salary owed but not paid
c.
Services provided but not billed to the customer
d.
Depreciation charged on fixed asset
38. Which of the following is the effect of depreciation being recorded by a company?
a.
Its cash flow decreases.
b.
Its net income decreases.
c.
Its quick assets decrease.
d.
Its common stock increases.
Chapter 3
39. Which of the following is an accrued expense?
a.
Rent owed but not yet paid
b.
Accumulated depreciation
c.
Inventory in process
d.
A prepaid advertising expense
40. The expired amount of a prepaid expense is recorded as:
a.
accrued revenue.
b.
a contra asset.
c.
a liability.
d.
an expense.
Chapter 3
41. Which of the following is true of an accrual?
a.
It is normally the result of cash being received or paid before the revenue is earned or the expense is incurred.
b.
It is initially recorded as an asset but becomes an expense over time.
c.
It is initially recorded as a liability but become revenue over time.
d.
It is normally the result of cash being received or paid after revenue has been earned or an expense has been
incurred.
42. In August, Falcon Inc. received cash in advance of rendering services to its clients. If only a few of those services
were provided by December 31, the year-end adjustment would:
a.
increase unearned revenue and decrease revenue.
b.
increase accounts payable and decrease revenue.
c.
increase cash and decrease accounts receivable.
