CHAPTER 3: ACCRUAL ACCOUNTING CONCEPTS
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
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
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: Accrual Accounting Concepts
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
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
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
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: Accrual Accounting Concepts
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 that one year are called long-term liabilities.
a. True
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. 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
21. 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
22. Under the cash basis of accounting, expenses are recorded when paid.
a. True
b. False
23. Under accrual accounting, expenses are recorded when incurred regardless of when paid.
a. True
b. False
Chapter 3: Accrual Accounting Concepts
24. Under the cash basis of accounting, no adjustments are necessary prior to the preparation of
the financial statements.
a. True
b. False
25. Every company must use the cash basis of accounting.
a. True
b. False
26. Under the cash basis of accounting, a business records only transactions involving increases or
decreases of its cash.
a. True
b. False
27. 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
28. 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
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. 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
Chapter 3: Accrual Accounting Concepts
31. 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.
32. 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.
33. UNI Co. received $1,000 advance from Newbie as rent for the use of a building owned by
UNI. How does this transaction affect UNI’s accounts if UNI recognizes a liability?
a. Cash is increased and revenue is increased.
b. Cash is increased and revenue is decreased.
c. Cash is increased and unearned revenue is increased.
d. It is not recorded.
34. Which of the following accounts would likely be included in a deferral adjusting entry?
a. Interest Revenue
b. Unearned Revenue
c. Salaries Payable
d. Accounts Receivable
35. Unearned revenue is what type of an account?
a. Asset
b. Revenue
c. Stockholders’ equity
d. Liability
36. On April 1, Smart, Inc. paid $7,200 for an insurance premium on a three-year insurance
policy. How does this transaction affect Smart’s accounts?
a. Increase insurance expense and decrease cash by $7,200 each
b. Increase prepaid insurance and decrease cash by $7,200 each
c. Increase unearned insurance and decrease cash by $7,200 each
d. Increase prepaid insurance and decrease retained earnings by $7,200 each
Chapter 3: Accrual Accounting Concepts
37. Eagle Eye, Inc., a corporation, received an additional investment of $6,000 cash in exchange
for shares of capital stock. How does this transaction affect Eagle Eye’s accounts?
a. Increase in stock expense and decrease cash by $6,000 each
b. Increase capital stock and increase cash by $6,000 each
c. Increase capital stock and increase revenue by $6,000 each
d. Increase capital stock and decrease retained earnings by $6,000 each
38. As time passes, fixed assets, other than land, lose their capacity to provide useful services. To
account for this decrease in usefulness, the cost of fixed assets is systematically allocated to
expense through a process called:
a. equipment allocation.
b. depreciation.
c. accumulation.
d. matching.
39. A&M Co. provided services of $1,000,000 to clients on account. How does this transaction
affect A&M’s accounts?
a. Increase accounts receivable and cash by $1,000,000 each
b. Increase accounts receivable and revenues by $1,000,000 each
c. Increase accounts receivable and unearned revenues by $1,000,000 each
d. Increase cash and decrease accounts receivable by $1,000,000 each
40. Electrodo Co. purchased land for $55,000 with $20,000 paid in cash and $35,000 in notes
payable. What effect does this transaction have on the accounts under the accrual basis of
accounting?
a. Net increase in assets and liabilities of $55,000
b. Net increase in assets of $35,000 and a net increase in liabilities of $35,000
c. Net increase in assets of $55,000 and a net decrease in liabilities of $35,000
d. Net increase in assets of $75,000 and a net decrease in liabilities of $30,000
41. Accrued revenues would appear on the balance sheet as:
a. assets.
b. liabilities.
c. stockholders’ equity.
d. prepaid expenses.
Chapter 3: Accrual Accounting Concepts
42. The unearned rent account has a balance of $60,000. If $4,000 of the $60,000 is unearned at
the end of the accounting period, the amount of the adjusting entry is:
a. $64,000.
b. $56,000.
c. $60,000.
d. $4,000.
43. X&Y Co. received $4,000 in payments from clients for services billed in a previous month.
What effect does this transaction have on the accounts under the accrual basis of accounting?
a. Total assets increase by $4,000.
b. Assets will increase by $4,000 and revenues will increase $4,000.
c. Total assets will be decrease by $4,000.
d. The net effect on assets is zero.
44. XYZ Co. received $3,000 in payments from clients for services billed in a previous month.
Which accounts will be affected and by what amounts under the accrual basis of accounting?
a. Cash will increase by $3,000 and accounts receivable decrease by $3,000.
b. Cash will increase by $3,000 and revenues will increase $3,000.
c. Accounts receivable will increase by $3,000 and revenue will increase by $3,000.
d. Accounts receivable will increase by $3,000 and cash will increase by $3,000.
45. Unearned rent, representing rent for the next six months’ occupancy, would be reported on the
landlord’s balance sheet as a(n):
a. asset.
b. liability.
c. capital stock.
d. revenue.
46. XYZ Co. paid $1,000 in dividends to stockholders. How does this transaction affect the
accounts of XYZ?
a. Cash will decrease by $1,000 and retained earnings will decrease by $1,000.
b. Cash will decrease by $1,000 and expenses will increase $1,000.
c. Cash will decrease by $1,000 and revenues will decrease $1,000.
d. Net income will decrease by $1,000.
Chapter 3: Accrual Accounting Concepts
47. Fees receivable would appear on the balance sheet as a(n):
a. asset.
b. liability.
c. fixed asset.
d. unearned revenue.
48. Depreciation Expense and Accumulated Depreciation are classified, respectively, as:
a. expense and contra asset.
b. asset and contra liability.
c. revenue and asset.
d. contra asset and expense.
49. The balance in the office supplies account on May 1 was $6,380, supplies purchased during
June were $4,740, and the supplies on hand at May 31 were $2,360. The amount to be used for
the appropriate adjusting entry is:
a. $8,740.
b. $4,740.
c. $8,760.
d. $13,480.
50. When cash is received in payment of an account receivable, which section of the Statement of
Cash Flows is affected?
a. Cash Flow from Operating Activities
b. Cash Flow from Investing Activities
c. Cash Flow from Financing Activities
d. There is no effect on the Statement of Cash Flows.
51. Which of the following is an example of an accrued expense?
a. Salary owed but not yet paid
b. Fees received but not yet earned
c. Supplies on hand
d. A two-year premium paid on a fire insurance policy
Chapter 3: Accrual Accounting Concepts
52. Accrued expenses are ordinarily reported on the balance sheet as:
a. assets.
b. liabilities.
c. fixed assets.
d. prepaid expenses.
53. When cash is paid to suppliers on account, which section of the Statement of Cash Flows is
affected?
a. Cash Flow from Operating Activities.
b. Cash Flow from Investing Activities.
c. Cash Flow from Financing Activities
d. There is no effect on the Statement of Cash Flows.
54. On April 1, Tenity, Inc. paid $3,300 for an insurance premium on a three-year insurance
policy. At the end of December, Tenity’s fiscal year-end, what should be the balance in the
prepaid insurance account?
a. $1,100
b. $2,475
c. $3,300
d. $2,200
55. On June 1, Unidevo, Inc. purchased $1,700 worth of supplies on account. Prior to the
purchase, the balance in the supplies account was $0. On December 31, the fiscal year-end for
Unidevo, it is determined that $800 of supplies still remain. What is the balance in the supplies
account after adjustment?
a. $800
b. $900
c. $0
d. $1,700
56. On June 1, Unidevo, Inc. purchased $2,300 worth of supplies on account. Prior to the
purchase, the balance in the supplies account was $350. On December 31, the fiscal year-end
for Unidevo, it is determined that $500 of supplies still remain. What is the balance in the
supplies account after adjustment?
a. $0
b. $1,800
c. $500
d. $2,300
Chapter 3: Accrual Accounting Concepts
57. Updating accrual accounting records prior to preparing financial statements is called:
a. the closing process.
b. converting to cash basis accounting.
c. the adjustment process.
d. going concern adjustments.
58. If prepaid insurance expires over time, this asset account becomes a(n):
a. liability.
b. another asset.
c. revenue.
d. expense.
59. Deferred expenses (prepaid expenses) are items initially recorded as assets but are expected to
become over time.
a. liabilities
b. assets
c. stockholders’ equity
d. expenses
60. Which of the following is an example of a deferred expense?
a. Prepaid advertising
b. Unearned revenue
c. Accounts payable
d. Accounts receivable
61. Deferred revenues (unearned revenues) are items initially recorded as liabilities, but expected
to become over time.
a. liabilities
b. assets
c. revenues
d. expenses
Chapter 3: Accrual Accounting Concepts
62. Which of the following best describes an accrual adjustment?
a. It records a transaction in a way that delays or defers the recognition of an expense or
revenue.
b. It is initially recorded as an asset but become expense over time or through normal
operations of the business.
c. It is initially recorded as liabilities but become revenues over time or through normal
operations of the business.
d. It is created when a revenue or expense has been earned or incurred but has not been
recorded.
Perill Co.
Perill Co. has a five-day workweek (Monday through Friday). Employees earn $650 per day.
63. Refer to Perill Co. If the month ends on Wednesday, and wages will not be paid until Friday,
how much wage expense should be accrued on Wednesday?
a. $650
b. $1,950
c. $3,250
d. $1,300
64. Refer to Perill Co. How much cash will be paid on Friday?
a. $650
b. $1,950
c. $1,300
d. $3,250
65. Which asset is not depreciated as it usually does not lose its ability to provide service?
a. Prepaid insurance
b. Equipment
c. Building
d. Land
Chapter 3: Accrual Accounting Concepts
66. St. Nick Corporation’s Toy-Making Supplies account showed a beginning balance of $200 and
supplies purchased of $800. There were $400 of supplies on hand at year-end. The year-end
adjustment would include an increase in Toy-Making Supplies Expense for
a. $1,000.
b. $800.
c. $600.
d. $400.
67. In October, cash is received in advance of rendering services. Assuming that half of the
services have been performed by December 31, the year-end adjustment would:
a. decrease Unearned Service Revenue and decrease Cash.
b. increase Accounts Receivable and increase Service Revenue.
c. increase Cash and increase Service Revenue.
d. decrease Unearned Service Revenue and increase Service Revenue.
68. Speedy Company’s weekly payroll of $250 is paid on Fridays (five-day work week). Assume
that the last day of the month falls on Thursday. Which of the following is the required month–
end adjusting entry?
a. Increase Salaries Expense $200 and increase Salaries Payable $200
b. Increase Salaries Expense $50 and increase Salaries Payable $50
c. Increase Salaries Payable $200 and increase Cash $200
d. Increase Salaries Expense $250 and increase Cash $250
69. Accumulated depreciation is to get the carrying value.
a. added to equipment
b. subtracted from equipment
c. added to accounts payable
d. subtracted from accounts payable
70. When an adjusting entry is made to record insurance expense and reduce the prepaid insurance
account, which section of the statement of cash flows is affected?
a. Cash Flow from Operating Activities
b. Cash Flow from Investing Activities
c. Cash Flow from Financing Activities
d. There is no effect on the statement of cash flows.
Chapter 3: Accrual Accounting Concepts
71. When an entry is made to adjust the supplies account and recognize supplies expense for the
period, which section of the statement of cash flows is affected?
a. Cash Flow from Operating Activities
b. Cash Flow from Investing Activities
c. Cash Flow from Financing Activities
d. There is no effect on the statement of cash flows.
72. The financial statements are affected by which type(s) of adjustments?
a. Deferrals
b. Accruals
c. Both deferrals and accruals
d. Neither deferrals nor accruals
73. The is prepared with various sections, subsections, and captions that aid in its
interpretation and analysis.
a. accounting equation
b. retained earnings statement
c. intangible asset section
d. classified balance sheet
74. Which of the following is an example of an intangible asset?
a. Goodwill
b. Patents
c. Copyrights
d. All of these
75. The liabilities that are due to be paid usually within a year or less are called:
a. long-term liabilities.
b. deferred liabilities.
c. current liabilities.
d. contingent liabilities.
76. For a corporation, stockholders’ equity consists of:
a. assets plus liabilities.
b. current assets plus long-term assets.
c. intangible assets.
d. capital stock and retained earnings.
Chapter 3: Accrual Accounting Concepts
77. Which of the following is not reported as revenue on the income statement?
a. Unearned revenue
b. Fees revenue
c. Commissions revenue
d. Rent revenue
78. Expenses not related to the primary operations of the business are sometimes reported as:
a. administrative expense.
b. operating expense.
c. other expense.
d. all of these.
79. The following assets are included in Fortible Auto Parts, Inc.’s December 31, 2015, balance
sheet.
Accounts Receivable (net of Allowance for Uncollectible Accounts)
$ 65,000
Accumulated Depreciation, Building
32,000
Building
150,000
Cash
80,000
Land
160,000
Merchandise Inventory
90,000
Trademark
125,500
The total dollar amount of assets classified as property, plant, and equipment on Fortible Auto
Part’s December 31, 2015, classified balance sheet is:
a. $250,000.
b. $310,000.
c. $278,000.
d. $375,000.
80. Cash and other assets that are expected to be converted to cash or sold or used up within one
year or less through the normal operations of the business are called:
a. current assets.
b. intangible assets.
c. fixed assets.
d. notes receivable.