115
Chapter 3— Accrual Accounting Concepts
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
1
1
Easy
Analytic
Reporting
34
3
Moderate
Analytic
2
1
Easy
Analytic
Reporting
35
3
Moderate
Analytic
3
1
Easy
Analytic
Reporting
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Difficult
Analytic
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1
Moderate
Analytic
Reporting
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3
Moderate
Analytic
5
2
Easy
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Reporting
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3
Difficult
Analytic
6
2
Moderate
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Reporting
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Difficult
Analytic
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2
Moderate
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40
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Easy
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2
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Analytic
9
2
Difficult
Analytic
Reporting
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3
Difficult
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10
2
Moderate
Analytic
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43
3
Difficult
Reflective
11
2
Moderate
Analytic
Reporting
44
4
Moderate
Analytic
12
2
Difficult
Analytic
Reporting
45
4
Easy
Analytic
13
2
Moderate
Analytic
Reporting
46
4
Easy
Analytic
14
2
Difficult
Analytic
Reporting
47
4
Easy
Analytic
15
2
Difficult
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48
4
Difficult
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16
2
Moderate
Analytic
Reporting
49
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Easy
Reflective
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2
Difficult
Analytic
Reporting
50
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Easy
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18
2
Difficult
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51
4
Easy
Reflective
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2
Moderate
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Easy
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2
Difficult
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4
Easy
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2
Moderate
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6
Easy
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3
Easy
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Reporting
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6
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3
Easy
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7
Easy
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Easy
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7
Moderate
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25
3
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58
Appendix
Moderate
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3
Easy
Reflective
Reporting
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Appendix
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3
Easy
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60
Appendix
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3
Easy
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Appendix
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Easy
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Appendix
Moderate
Analytic
33
3
Difficult
Analytic
Reporting
66
Appendix
Difficult
Analytic
116 ♦ Chapter 3
True/
False
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
1
1
Moderate
Reflective
2
1
Moderate
Reflective
3
1
Moderate
Reflective
4
1
Moderate
Reflective
5
1
Moderate
Reflective
6
1
Moderate
Reflective
7
2
Moderate
Reflective
8
2
Moderate
Analytic
9
2
Moderate
Reflective
10
2
Moderate
Reflective
11
2
Difficult
Reflective
12
2
Moderate
Reflective
13
2
Difficult
Reflective
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2
Moderate
Reflective
15
2
Moderate
Reflective
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2
Moderate
Reflective
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2
Difficult
Reflective
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2
Difficult
Reflective
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2
Difficult
Reflective
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2
Difficult
Reflective
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3
Moderate
Reflective
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3
Moderate
Reflective
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3
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Reflective
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Reflective
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3
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Reflective
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3
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Reflective
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3
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Reflective
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3
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Reflective
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3
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Reflective
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3
Moderate
Reflective
31
3
Moderate
Reflective
32
3
Moderate
Reflective
33
3
Moderate
Reflective
34
3
Moderate
Reflective
35
4
Moderate
Reflective
36
4
Moderate
Reflective
37
4
Moderate
Reflective
38
4
Moderate
Reflective
39
4
Moderate
Reflective
40
4
Moderate
Reflective
41
4
Moderate
Reflective
42
4
Moderate
Reflective
43
4
Moderate
Reflective
44
5
Moderate
Reflective
45
5
Moderate
Reflective
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5
Moderate
Reflective
47
6
Moderate
Reflective
48
7
Moderate
Reflective
49
Appendix
Moderate
Reflective
50
Appendix
Moderate
Analytic
51
Appendix
Moderate
Analytic
Case
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
7
Difficult
Reflective
Reporting
2
3
Difficult
Analytic
Measure
3
5
Difficult
Reflective
Reporting
4
7
Difficult
Analytic
Reporting
5
7
Difficult
Analytic
Risk
Essay
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Difficult
Reflective
Reporting
2
3
Difficult
Reflective
Reporting
3
3
Difficult
Reflective
Reporting
4
3
Difficult
Reflective
Reporting
5
3
Difficult
Reflective
Reporting
6
3
Difficult
Reflective
Reporting
7
4
Difficult
Reflective
Reporting
8
5
Difficult
Reflective
Measure
9
6
Difficult
Reflective
Reporting
Problem(s)
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
1
3
Difficult
Analytic
2
2
Difficult
Analytic
3
2
Difficult
Analytic
4
2
Difficult
Analytic
5
2
Difficult
Analytic
6
2
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Analytic
7
2
Difficult
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2
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2
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2
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3
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3
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3
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3
Difficult
Analytic
16
3
Difficult
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17
3
Difficult
Analytic
18
2,3,4
Difficult
Analytic
Difficulty Ratings
Guide:
Easy
Taken nearly verbatim from
the text
Moderate
Using different expression or
application of concept
Difficult
Several reasoning steps
Accrual Accounting Concepts ♦ 117
MULTIPLE CHOICE
1. Under the business entity concept, a company is accounted for as a(n) __________.
a.
Tax return filer
b.
Separate entity
c.
Unit of measurement
d.
Objective entity
2. Under the accrual basis of accounting, transactions are recorded __________.
a.
Only when cash is received
b.
At the same time as in the cash basis
c.
When assets have been impacted
d.
As they occur
3. Under accrual accounting, revenue is normally recognized when __________.
a.
Cash is received
b.
When it is greater that expenses
c.
When a transaction is recorded
d.
It is earned
4. Jedi Co. billed a client for flying lessons given in January. The payment was received in February.
When should Jedi record the revenue under accrual basis of accounting?
a.
January
b.
February
c.
Some in January and some in February
d.
Jedi should not record any revenue
5. Unearned revenue is what type of an account?
a.
Asset
b.
Revenue
c.
Stockholders’ equity
d.
Liability
118 ♦ Chapter 3
6. UNI Co. received $1,000 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.
Not recorded
7. The beginning asset account balances for April are the __________.
a.
Accrued as April progresses
b.
Zero, since it is a new month
c.
Transactions from April
d.
Ending balances from March
8. On April 1st, Tule, Inc. paid $3,600 for an insurance premium on a three-year insurance policy.
How does this transaction affect Tule’s accounts?
a.
Increase insurance expense and decrease cash by $3,600 each
b.
Increase prepaid insurance and decrease cash by $3,600 each
c.
Increase unearned insurance and decrease cash by $3,600 each
d.
No effect at this time
9. On April 1st, Tule, Inc. paid $3,600 for an insurance premium on a three-year insurance policy. At
the end of December, Tule’s fiscal year end, what should be the balance in the Prepaid Insurance
account?
a.
$2,700
b.
$3,600
c.
$2,400
d.
$0
10. Eagle Eye, Inc. a corporation received an additional investment of $5,000 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 $5,000 each
b.
Increase capital stock and increase cash by $5,000 each
c.
Increase capital stock and increase revenue by $5,000 each.
d.
No effect at this time
Accrual Accounting Concepts ♦ 119
11. On June 1st, Green Pea, Inc. purchased $1,200 worth of supplies on account. How does this
transaction affect Green Pea’s accounts?
a.
Increase supplies and accounts payable by $1,200
b.
Increase supplies and decrease cash by $1,200
c.
Increase supplies and decrease accounts payable by $1,200
d.
No effect since cash has not been paid
12. On June 1st, Green Pea, Inc. purchased $1,200 worth of supplies on account. On December 31st,
the fiscal year end for Green Pea, it is determined that $700 dollars of supplies have been used up.
What is the balance in the supplies account after adjustment?
a.
$600
b.
$700
c.
$500
d.
$1,200
13. On June 1st, Green Pea, Inc. purchased $1,200 worth of supplies on account. On December 31st,
the fiscal year end for Green Pea, it is determined that $700 dollars of supplies still remain. What
is the balance in the supplies account after adjustment?
a.
$600
b.
$700
c.
$500
d.
$1,200
14. On February 1st, Blue Sea, Inc. purchased $9, 600 of office equipment by paying $2,400 in cash
and the remaining $7,200 as a short-term note. How does this transaction affect Blue Sea’s
accounts?
a.
Increases office equipment and notes payable by $9,600
b.
Increases office equipment and notes payable by $72400
c.
Decreases cash by $2,400 and increases office equipment by $72400
d.
Decreases cash by $2,400, increases notes payable by $7,200 and increases office
equipment by $9,600
15. Purchased land for $50,000 with $10,000 paid in cash and $40,000 in a note payable due in three
years from now. What effect does this transaction have on the accounts under the accrual basis of
accounting?
a.
Net increase in assets of $40,000 and a net increase in liabilities of $40,000
b.
Net increase in assets and liabilities of $50,000
c.
Net increase in assets of $50,000 and a net decrease in liabilities of $40,000
d.
Net increase in assets of $60,000 and a net decrease in liabilities of $40,000
120 ♦ Chapter 3
16. 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.
No effect at this time
17. Received $4,000 in payments from clients for services billed in cash. What affect 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.
18. Received $4,000 in payments from clients for services billed in cash. Which accounts will be
affected and by what amounts under the accrual basis of accounting?
a.
Cash will increase by $4,000 and accounts receivable decrease by $4,000
b.
Cash will increase by $4,000 and revenues will increase $4,000
c.
Accounts receivable will increase by $4,000 and revenue will increase by $4,000
d.
Accounts receivable will increase by $4,000 and cash will increase by $4,000
19. Paid $500 on account for supplies that have been purchased. Which accounts will be affected and
by what amounts under the accrual basis of accounting?
a.
Decreases cash by $500 and supplies by $500
b.
Decreases cash by $500 and accounts payable by $500
c.
Increases supplies by $500 and accounts payable by $500
d.
Increases supplies by $500 and revenue by $500
20. Utilities expense was paid for $200. Which accounts will be affected and by what amounts under
the accrual basis of accounting?
a.
Cash will be decreased by $200 and retained earnings will be decreased by $200.
b.
Cash will decrease by $200 and income statement will increase by $200
c.
Utilities expense will increase by $200 and income statement will increase by $200
d.
Accounts payable will decrease by$200 and cash will decrease by $200.
Accrual Accounting Concepts ♦ 121
21. 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 revenues 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
22. Updating accrual accounting records (to properly match revenues and expenses) 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
23. If prepaid insurance expires over time, this asset account becomes a(n) __________.
a.
Liability
b.
Another asset
c.
Revenue
d.
Expense
24. Deferred expenses (prepaid expenses) are items initially recorded as assets but are expected to
become __________ over time.
a.
Liabilities
b.
Assets
c.
S/E
d.
Expenses
25. Which of the following is an example of a deferred expense?
a.
Prepaid advertising
b.
Unearned revenue
c.
Accounts payable
d.
Accounts receivable
26. 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
122 ♦ Chapter 3
27. Deferred revenues (unearned revenues) are items initially recorded as liabilities, but are expected
to become __________ over time.
a.
Liabilities
b.
Assets
c.
Revenues
d.
Expenses
28. Which of the following is an example of deferred revenue?
a.
Prepaid advertising
b.
Premiums received in advance
c.
Insurance expense
d.
Accounts Receivable
29. __________ are created when a revenue or expense has NOT been recorded by the end of the
accounting period.
a.
Prepaid advertising
b.
Premiums received in advance
c.
Unearned revenue
d.
Accruals
30. __________ are normally the result of revenue being earned or an expense being incurred before
any cash is received or paid.
a.
Prepaid advertising
b.
Premiums received in advance
c.
Unearned revenue
d.
Accruals
31. An example of an accrued expense is __________.
a.
Interest accrued on a note receivable
b.
Interest accrued on a note payable
c.
Unearned revenues
d.
Accounts receivable
Accrual Accounting Concepts ♦ 123
32. An example of an accrued revenue is __________.
a.
Interest accrued on a note receivable
b.
Interest accrued on a note payable
c.
Unearned revenues
d.
Accounts receivable
33. Brentwood, Inc. purchased a six month insurance policy on November 1 for $1200. The adjusting
entry on Dec 31 would
a.
Decrease cash $400 and an increase in insurance expense
b.
Increase insurance expense and decrease prepaid insurance
c.
Decrease prepaid insurance and decrease insurance expense
d.
Increase prepaid insurance and increase in insurance expense
34. St. Nick Corporation’s Toy-Making Supplies account showed a beginning balance of $200 and
supplies purchased of $800. There were $300 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.
$700
d.
$300
35. 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
36. 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
124 ♦ Chapter 3
37. Spiezio company’s weekly payroll of $250 is paid on Fridays (5-day workweek). Assume that the
last day of the month falls on Wednesday. Which of the following is the required month-end
adjusting entry?
a.
Increase Salaries Expense $150 and increase Salaries Payable $150.
b.
Increase Salaries Expense $100 and increase Salaries Payable $100.
c.
Increase Salaries Payable $150 and increase Cash $150.
d.
Increase Salaries Expense $250 and increase Cash $250.
Jiminy Cricket Co.
Jiminy Cricket Co. has a five-day workweek (Monday through Friday). Employees earn $500 per
day.
38. Refer to Jiminy Cricket Co. If the month ends on Wednesday, with wages paid on Friday, how
much wage expense should be accrued on Wednesday?
a.
$500
b.
$1,500
c.
$2,500
d.
$1,000
39. Refer to Jiminy Cricket Co. How much cash will be paid on Friday?
a.
$500
b.
$1,500
c.
$2,500
d.
$1,000
40. The adjustment that recognizes that fixed assets such as equipment lose their ability to provide
service over time is called __________.
a.
Prepaid expense
b.
Accrual
c.
Depreciation
d.
Unearned revenue
41. Which asset is NOT depreciated as it usually does NOT lose its ability to provide service?
a.
Prepaid insurance
b.
Equipment
c.
Accounts receivable
d.
Land
Accrual Accounting Concepts ♦ 125
42. During July, wage expense of $25,000 was reported on the income statement. If wages payable at
July 1st was $2,000, and wages of $20,000 were paid during July, how much was accrued wages
payable on July 31st?
a.
$2,000
b.
$1,500
c.
$7,000
d.
$1,000
43. What accounts are affected by an adjusting entry that recognizes that services to patients have
been earned but not billed?
a.
Increases in accounts receivable and retained earnings
b.
Increases in accounts payable and unearned service fees
c.
Decreases in accounts payable and retained earnings
d.
Decreases in accounts receivable and unearned service fees
44. 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
45. Expenses NOT related to the primary operations of the business are sometimes reported as
__________.
a.
Interest expense
b.
Operating expense
c.
Other expense
d.
All of the above
46. The statement of retained earnings
a.
subtracts net income and subtracts dividends to the beginning balance in retained earnings
to get the ending balance in retained earnings
b.
adds net income and adds dividends to the beginning balance in retained earnings to get
the ending balance in retained earnings
c.
adds net income and subtracts dividends to the beginning balance in retained earnings to
get the ending balance in retained earnings
d.
subtracts net income and adds dividends to the beginning balance in retained earnings to
get the ending balance in retained earnings
126 ♦ Chapter 3
47. 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
48. The following assets are included in Ace Auto Parts, Inc.’s December 31, 2004 balance sheet.
Accounts Receivable
$50,000
Accumulated Depreciation, Building
20,000
Building
100,000
Cash
60,000
Land
130,000
Land Held for Future Use
40,000
Merchandise Inventory
70,000
Trademark
110,000
The total dollar amount of assets classified as property, plant, and equipment on Ace Auto Parts’
December 31, 2004 classified balance sheet is __________.
a.
$210,000
b.
$50,000
c.
$360,000
d.
$430,000
49. ___________ are rights that are long term in nature.
a.
Fixed assets
b.
Intangible assets
c.
Depreciation
d.
Long term liabilities
50. Which of the following is an example of an intangible asset?
a.
Goodwill
b.
Patents
c.
Copyrights
d.
All of the above
Accrual Accounting Concepts ♦ 127
51. 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
52. Current liabilities are usually due within __________.
a.
One month or less
b.
One week or less
c.
One year or less
d.
More than one year
53. 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
54. The most important output of the accounting cycle is the __________.
a.
Accounting equation
b.
Financial statements
c.
Balance sheet
d.
Income statement
55. After the financial statements have been prepared, the next step is to __________.
a.
Identifying, analyzing and recording transactions
b.
Adjust the financial statements
c.
Prepare the accounting equation
d.
Prepare the accounting records for the next period
56. In common-sized financial statements, all items are expressed in __________.
a.
Dollars
b.
Percentages
c.
Absolute amounts
d.
Dollars rounded up to the nearest thousand
128 ♦ Chapter 3
57. In common-sized income statements, all items are expressed as a percentage of
a.
Expenses
b.
Net Income
c.
Revenues
d.
Total assets
58. When reconciling net income to net cash flows from operating activities on the statement of cash
flows, a decrease in Accounts receivable would __________.
a.
Be added
b.
Be subtracted
c.
Not be impacted
59. When reconciling net income to net cash flows from operating activities on the statement of cash
flows, an increase in accounts payable would __________.
a.
Be added
b.
Be subtracted
c.
Not be impacted
60. If depreciation expense is deducted to arrive at net income, it must be __________ to reconcile net
income to cash flows from operations.
a.
Added back
b.
Subtracted
c.
Transferred to accumulated deprecation
d.
Closed to retained earnings
61. Accounts Receivable had a net decrease of $10,000 for the year. How does this impact the cash
flows from operations?
a.
Increases it by $20,000
b.
No impact
c.
Decreases it by $10,000
d.
Increases it by $10,000
62. When reconciling net income to net cash flows from operating activities on the statement of cash
flows, depreciation expense would __________.
a.
Be added back
b.
Be subtracted
c.
Not be impacted
Accrual Accounting Concepts ♦ 129
63. When reconciling net income to net cash flows from operating activities on the statement of cash
flows, a decrease in accounts payable would __________.
a.
Be added back
b.
Be subtracted
c.
Not be impacted
64. When reconciling net income to net cash flows from operating activities on the statement of cash
flows, an increase in supplies would __________.
a.
Be added back
b.
Be subtracted
c.
Not be impacted
65. When reconciling net income to net cash flows from operating activities on the statement of cash
flows, a decrease in unearned revenue would __________.
a.
Be added back
b.
Be subtracted
c.
Not be impacted
66. When reconciling net income to net cash flows from operating activities on the statement of cash
flows, the sale of capital stock would __________.
a.
Be added back
b.
Be subtracted
c.
Not be impacted
TRUE/FALSE
1. Under accrual accounting, revenues are recorded when they are earned, regardless of when the
cash is received.
2. Consistent with the going concern concept, land will be revalued for increases or decreases in
market value.
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3. The accrual basis of accounting is designed to avoid misleading income statement results that
could otherwise result from the timing of cash receipts and payments.
4. In accrual accounting, when revenues are earned and recorded, all expenses incurred in generating
the revenues must also be recorded.
5. The accrual basis recognizes liabilities at the time the business incurs the obligation to pay for the
services or goods purchased.
6. Accruals are normally the result of an expense being incurred when cash is paid.
7. Unearned revenue is an asset account that represents cash received for services before services are
earned.
8. Rent received in advance would affect the balance sheet equation by increasing both assets and
liabilities.
9. Prepaid expenses expire with the passage of time.
10. The payment of prepaid rent would affect the balance sheet equation by increasing total assets.
11. When insurance is prepaid, the balance sheet, statement of cash flows and income statements are
all affected.
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12. The issue of additional capital stock for cash would affect the balance sheet equation by increasing
assets and decreasing stockholder’s equity.
13. When additional capital stock is issued for cash, the financing statement and the income statement
would be affected.
14. An accounts payable represents a liability since it is a promise to pay in the near future.
15. When supplies are purchased on account the affect on the balance sheet equation is to increase
assets and increase stockholder’s equity.
16. When equipment is purchased with a cash down payment and a short-term note payable, the
investing section of the statement of cash flows is affected.
17. When services are provided to patients on account both the balance sheet and income statement
are affected.
18. When a customer pays for a service provided in a previous month, recording this transaction will
affect only the income statement.
19. When a company pays on an account that was generated to purchase supplies, total assets is
increased.
20. Paying for expenses in cash affects the balance sheet, statement of cash flows and the income
statement.
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21. Accrual accounting does NOT require that the accounting records be updated prior to preparing
financial statements.
22. Under the accrual basis of accounting, the accounting records are normally updated just prior to
the preparation of the financial statements.
23. Under the cash basis of accounting, no adjustments are necessary prior to the preparation of the
financial statements.
24. Deferrals are created by recording a transaction in a way that delays or defers the recognition of an
expense or a revenue.
25. Prepaid expenses and unearned revenues are accounts that record deferrals and must be adjusted at
the end of the period to properly match revenues and expenses.
26. Accrued expenses are expenses that have been incurred but have NOT been recorded in the
accounts.
27. Depreciation is an example of a deferred expense.
28. Unearned revenue is an example of an accrued revenue.
29. When prepaid insurance expired, the adjusting entry would decrease the prepaid insurance
account.
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30. When making an adjustment to recognize the supplies used, total assets would not change.
31. It is easy to objectively determine the physical decline in the ability of fixed assets to provide
service.
32. The adjustment that recognizes unearned revenue as earned is an accrued revenue.
33. Accrued wages represent wages owed but not paid to employees and the adjusting entry increases
retained earnings.
34. The adjustment that recognizes that services have been provided but not billed is considered a
deferred revenue.
35. Expenses on the income statement are assets used up or services consumed in the process of
generating revenues.
36. Assets are resources that are owned by the business.
37. Physical assets of a long-term nature are referred to as fixed assets.
38. Rights that are short-term in nature are called intangible assets.
39. The fixed asset section may also be labeled as property, plant, and equipment.
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40. Land is an example of an intangible asset.
41. “Brand name” recognition is an example of goodwill.
42. Liabilities that will NOT be due for more that one year are called long-term liabilities.
43. The cash flow from operations is computed by adding the cash receipts from revenue transactions
and adding the cash payments for operating transactions.
44. Accrual basis of accounting is used by large businesses but not required,
45. Under cash basis accounting, expenses are recorded when cash is paid.
46. 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.
47. 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.
48. Common-sized financial statements are useful in comparing the current period with prior periods.
49. Under accrual basis of accounting, net cash flows from operations will always equal to net
income.