Accrual Accounting MCQ Quiz Questions And Answers

The weakness of the accrual basis accounting system is that it takes the focus off of cash. This is because the accrual basis accounting records revenues and expenses when they are earned or incurred, regardless of when the cash is received or paid. This means that the financial statements may not accurately reflect the cash position of a company at any given time, which can be a disadvantage for businesses that rely heavily on cash flow management.

Depreciation refers to the systematic and rational allocation of the cost of a long-lived item, such as equipment or property, from an asset to an expense over its useful life. This process recognizes that the value of the asset diminishes over time due to wear and tear, obsolescence, or other factors. By spreading the cost of the asset over its expected lifespan, depreciation allows for a more accurate representation of the asset's value and helps to match the expense with the revenue generated by its use.

The depreciation expense each year under the straight-line method can be calculated by subtracting the salvage value (the amount it can be sold for at the end of its useful life) from the initial cost of the asset, and then dividing that amount by the number of years of useful life. In this case, the initial cost is $2,500 and the salvage value is $400. So, the depreciation expense each year would be ($2,500 - $400) / 5 = $420.

Under accrual accounting, revenue is recognized when it is earned, regardless of when payment for it is received. This means that revenue is recognized when the goods or services are provided, and not necessarily when the payment is actually received. This allows for a more accurate reflection of the financial performance of a company, as it matches revenue with the period in which it was earned, rather than when the cash is received.

The correct answer is $4,000. This is because the question states that Cold Storage will use straight-line depreciation to recognize the appropriate cost of the truck for each income statement period. Straight-line depreciation evenly spreads the cost of an asset over its useful life. Since the truck is estimated to be worth $4,000 at the end of its useful life, the depreciation expense for each year would be $4,000 divided by 5 years, which equals $800. Therefore, on December 31, 200X, the amount of depreciation Cold Storage will show on its income statement would be $4,000.

The annual depreciation expense of the grill using the straight-line method can be calculated by dividing the initial cost of the grill ($5,000) by the number of years it is expected to be used (4 years). This gives us an annual depreciation expense of $1,250. However, since the company expects to sell the grill for $500 at the end of the fourth year, we need to subtract this amount from the annual depreciation expense. Therefore, the correct answer is $1,125.

The matching principle is the accounting principle that relates the expenses to the revenues for a particular income statement period. It states that expenses should be recognized and recorded in the same period as the revenues they help generate. This principle ensures that the financial statements accurately reflect the financial performance of a business by matching the expenses incurred to generate the revenues earned in a specific period. By following this principle, businesses can provide a more accurate representation of their profitability and financial position.

Recording a check in the check register is not an actual business event but a measurement of an actual business event. While paying employees, purchasing inventory, and providing services are all tangible actions that directly impact the business, recording a check in the check register is simply a method of tracking and documenting the transaction. It is a way to measure and keep a record of the actual event of paying someone or making a purchase, but it is not the event itself.

For a firm to recognize revenue under accrual accounting, it must meet two criteria. The first criterion is that the revenue must be earned, meaning that the goods or services have been provided to the customer. The second criterion is that the revenue must be realizable, which means that the firm expects to receive cash or other assets in exchange for the goods or services provided. This ensures that the revenue is not recognized until the firm has a reasonable expectation of receiving payment.

The correct answer is the cash basis and the accrual basis. These are the two basic approaches to recording economic activity. The cash basis records transactions when cash is received or paid, while the accrual basis records transactions when they occur, regardless of when cash is exchanged. Both approaches have their advantages and disadvantages, and businesses can choose the one that best suits their needs and financial reporting requirements.

When no direct cause and effect exist between revenues and expenses, and no future benefit from the expense is discernible, then recognizing the expense immediately is the appropriate course of action. This means that the expense is recorded and deducted from the revenues in the same accounting period without being spread out or allocated to future periods. This approach is suitable when there is no expectation of generating future benefits or when the expense is not related to any specific revenue-generating activity.

Under accrual accounting, expenses are recognized when they are incurred, regardless of when the payment is made. In this case, the Cold Storage Company paid $11,000 in wages in January and also owes its employees an additional $2,500 for work done during January. Therefore, the total wage expense for January is the sum of the paid wages and the amount owed, which is $11,000 + $2,500 = $13,500.

Accrual accounting focuses on the earnings process. This means that it recognizes and records revenue when it is earned, regardless of when the cash is received, and it recognizes and records expenses when they are incurred, regardless of when the cash is paid. This method provides a more accurate representation of a company's financial performance and allows for better matching of revenues and expenses. It also ensures that the financial statements reflect the economic activities of the business entity over a specific period of time.

From the seller's standpoint, a receivable refers to money that is owed to a business from a legally enforceable claim for goods or services provided. This means that the seller has provided goods or services to a customer, and the customer is obligated to pay for them. A receivable represents the amount of money that the seller is entitled to receive from the customer. Cash, on the other hand, refers to actual physical currency or its digital equivalent. Inventory refers to the goods that a business holds for sale. Therefore, the correct answer is a receivable.

When the estimated life of an asset is less than the physical life of the asset, it means that the asset is expected to be used for a shorter period of time than its actual lifespan. In such cases, the asset may still have some value remaining at the end of its estimated life. This remaining value is referred to as salvage value, residual value, or scrap value, depending on the specific context. Therefore, all of these answers are correct as they represent the different terms used to describe the value that an asset retains after its estimated life.

The residual value refers to the amount of the cost of a long-lived asset that is not allocated to the periods in which the asset provides benefit to a company. It represents the estimated value of the asset at the end of its useful life, after depreciation has been accounted for. This value is important for determining the depreciation expense and the depreciable base of the asset.

A deferral refers to a situation where cash has been either received or paid, but the income statement effect is delayed until a later period. This means that although the cash transaction has occurred, it has not yet been recognized as revenue or expense on the income statement. This delay in recognizing the transaction on the income statement is known as a deferral.

The FASB (Financial Accounting Standards Board) requires companies to use the accrual basis of accounting in order to comply with GAAP (Generally Accepted Accounting Principles). The accrual basis recognizes revenues when they are earned and expenses when they are incurred, regardless of when cash is received or paid. This method provides a more accurate representation of a company's financial position and performance over a given period of time. The cash basis, on the other hand, only records transactions when cash is received or paid, which can distort the financial statements and mislead users. Therefore, the correct answer is the accrual basis of accounting.

In this scenario, Mr. and Mrs. Jacobi pay Johnny Elam in advance ($75 in June) to mow their lawn in July while they are on vacation. Since the payment is made in one period (June) for the service that will be received in a future period (July), it is considered a deferred expense. This means that the expense is recognized and recorded in June, but the benefit or service will be received in a later period (July).

Deferred revenue is money received for services or goods that haven't yet been delivered. Here's how to break down the insurance company's deferred revenue:

June 1: Jason pays $180 for three months of coverage. The insurance company has $180 in deferred revenue.

End of June: One month of coverage has been provided. The company has earned $60 (180 / 3 months = $60 per month). Deferred revenue is now $120 ($180 - $60).

End of July: Another month of coverage has been provided. The company has earned another $60. Deferred revenue is now $60 ($120 - $60).

When the relationship between revenue and expenses has no direct cause and effect, it means that the expenses incurred are not directly linked to generating revenue. In such cases, the expense can be immediately recognized because it does not provide any additional useful information for allocating the cost of a purchased item. Additionally, if an item has no discernible future benefit, there is no need to delay recognizing the expense. Therefore, both answers a and b are correct as they explain situations where the expense can be immediately recognized.

Cash basis accounting focuses on the actual exchange of cash. Revenue is recognized when cash is received, not necessarily when it is earned. This is in contrast to accrual accounting, where revenue is recognized when it is earned, regardless of when cash is received.  

The first step in the accrual matching process is to determine in which income statement period a company should recognize a particular revenue. This means that the company needs to identify the specific period in which the revenue was earned, regardless of when the cash was received. By doing this, the company can accurately match the revenue with the expenses incurred during the same period, providing a more accurate representation of the company's financial performance.

Accrual accounting recognizes revenues and expenses when they are earned or incurred, regardless of when cash is received or paid. This contrasts with cash basis accounting, which only records transactions when cash changes hands. The other options are key principles of accrual accounting:  

Revenue recognition: Revenue is recognized when it is earned, not necessarily when payment is received.

Matching principle: Expenses are matched to the revenues they generate.

Going concern: The assumption that the business will continue to operate in the foreseeable future.

The phrase "allocation to the periods benefited" refers to the process of gradually transferring the cost of an asset from the balance sheet to the income statement over time. This means that the expense associated with the asset will be recognized in the period after the revenue it helped to produce is recognized. This method ensures that the cost of the asset is matched with the revenue it generates, reflecting the cause-and-effect relationship between revenues and expenses.