Accrual Accounting MCQ Quiz Questions And Answers

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Accrual Accounting MCQ Quiz Questions And Answers - Quiz

Get ready to test your knowledge with these Accrual Accounting MCQ quiz questions and answers that we have here for you. The quiz below has a few questions that you need to answer correctly. The quiz is also a good way to enhance your knowledge, understanding, and conceptual clarity through these questions. So, let's see how well you perform. We wish you luck as you take this test. Have fun!
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Questions and Answers
  • 1. 

    According to the FASB, a company that wishes to comply with GAAP will use:

    • A.

      The cash basis, since the accrual basis, takes the focus off of the company’s cash flows

    • B.

      Either basis, depending on which results in the company wants to give to financial statement users

    • C.

      The cash basis of accounting for small companies only

    • D.

      The accrual basis of accounting

    Correct Answer
    D. The accrual basis of accounting
    Explanation
    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.

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  • 2. 

    The systematic and rational allocation of the cost of a long-lived item from asset to expense is called:

    • A.

      Matching

    • B.

      Recognition

    • C.

      Depreciation

    • D.

      Realization

    Correct Answer
    C. Depreciation
    Explanation
    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.

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  • 3. 

    Accrual accounting focuses on the:

    • A.

      Earnings process

    • B.

      Legal considerations of the business entity

    • C.

      Articulation of the financial statements

    • D.

      Cash flows of the business

    Correct Answer
    A. Earnings process
    Explanation
    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.

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  • 4. 

    When the relationship between revenue and expenses has no direct cause and effect, the expense can be immediately recognized:

    • A.

      When the allocation of the cost of a purchased item provides no additional useful information

    • B.

      If an item has no discernable future benefit

    • C.

      Answers a and b are both correct.

    • D.

      None of these answers is correct.

    Correct Answer
    C. Answers a and b are both correct.
    Explanation
    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.

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  • 5. 

    Jason pays $180 for insurance coverage on his motorcycle for a three-month policy starting June 1. If Jason makes this payment on June 1, what is the amount of deferred revenue the insurance company will have remaining at the end of July?

    • A.

      $90

    • B.

      $0

    • C.

      $60

    • D.

      $120

    Correct Answer
    C. $60
    Explanation
    Jason pays $180 for insurance coverage for a three-month policy starting June 1. This means that the insurance company will recognize $60 of revenue for each month of coverage. Since Jason makes the payment on June 1, the insurance company will have $60 of deferred revenue remaining at the end of July, as there will still be one month of coverage left that has not been recognized as revenue yet.

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  • 6. 

    Under accrual accounting, we recognize revenue when it is:

    • A.

      Received, no matter when it is earned

    • B.

      Earned, as long as payment for it occurs in the same time period

    • C.

      Earned, no matter when paying for it is received

    • D.

      Received, as long as payment for it occurs in the same time period

    Correct Answer
    C. Earned, no matter when paying for it is received
    Explanation
    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.

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  • 7. 

    Which statement below is incorrect regarding cash basis revenue recognition?

    • A.

      A company recognizes revenue only when it receives the associated cash with the transaction.

    • B.

      Cash basis accounting considers only cash received as a result of the earnings process to be revenue.

    • C.

      When a business borrows money, the cash it receives is a liability, not a revenue.

    • D.

      Under cash basis accounting, we recognize revenue only when we earn revenues.

    Correct Answer
    D. Under cash basis accounting, we recognize revenue only when we earn revenues.
  • 8. 

    When the estimated life of an asset is less than the physical life of the asset, it probably will have a:

    • A.

      Salvage value

    • B.

      Residual value

    • C.

      Scrap value

    • D.

      All of these answers are correct.

    Correct Answer
    D. All of these answers are correct.
    Explanation
    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.

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  • 9. 

    From the seller’s standpoint, an example of money that is owed to a business from a legally enforceable claim for goods or services provided is:

    • A.

      A receivable

    • B.

      Cash

    • C.

      Answers b and d are both correct.

    • D.

      Inventory

    Correct Answer
    A. A receivable
    Explanation
    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.

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  • 10. 

    Which item below is considered an expense on the income statement on a cash basis?

    • A.

      A dividend paid in cash to stockholders

    • B.

      A liability incurred to pay employee wages

    • C.

      Depreciation expense

    • D.

      Buying copy paper for cash from a local office supply store

    Correct Answer
    A. A dividend paid in cash to stockholders
    Explanation
    A dividend paid in cash to stockholders is considered an expense on the income statement on a cash basis because it represents a distribution of profits to the owners of the company. This payment reduces the company's retained earnings and is recorded as an expense on the income statement, reflecting the outflow of cash from the business.

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  • 11. 

    Two criteria are required for a firm to recognize revenue under accrual accounting. One is that the revenue must be earned, and the other is that it must:

    • A.

      Be realizable

    • B.

      Be paid before earning

    • C.

      Have received cash

    • D.

      None of these answers is correct.

    Correct Answer
    A. Be realizable
    Explanation
    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.

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  • 12. 

    The first step in the accrual matching process is:

    • A.

      To determine which expenses helped to generate specific revenue

    • B.

      To determine in which income statement period a company should recognize a particular revenue

    • C.

      To match those expenses paid in the same period with the revenues received in cash during the same period

    • D.

      To recognize only those expenses actually paid in the same period as the revenue they helped to generate

    Correct Answer
    B. To determine in which income statement period a company should recognize a particular revenue
    Explanation
    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.

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  • 13. 

    Mon’s Pet Store has purchased a cash register for $2,500. Charlie Mon plans to use the cash register for five years, at which time he thinks he will be able to sell it for $400. How much is the depreciation expense each year under the straight-line method?

    • A.

      $420

    • B.

      $500

    • C.

      $410

    • D.

      $400

    Correct Answer
    A. $420
    Explanation
    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.

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  • 14. 

    The Cold Storage Company has one delivery truck. It paid $24,000 cash for the truck on January 1, 200X. Cold Storage estimates that the truck will be worth $4,000 in five years at the end of its useful life. Cold Storage will use straight-line depreciation to recognize the appropriate cost of the truck for each income statement period. Using accrual accounting, the amount of depreciation Cold Storage will show on its income statement on December 31, 200X, is:

    • A.

      $4,000

    • B.

      $20,000

    • C.

      $4,800

    • D.

      $24,000

    Correct Answer
    A. $4,000
    Explanation
    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.

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  • 15. 

    When dealing with an asset, the phase “allocation to the periods benefited” means:

    • A.

      There is a direct cause-and-effect relationship between revenues and expense

    • B.

      The item has no discernible benefit to future income statement periods

    • C.

      The expense will generally be recognized in the period after the revenue it helped to produce is recognized

    • D.

      That the cost of the asset is transferred from the balance sheet to the income statement as time passes

    Correct Answer
    D. That the cost of the asset is transferred from the balance sheet to the income statement as time passes
    Explanation
    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.

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  • 16. 

    The basic approach(es) to recording economic activity is(are):

    • A.

      The true net income basis

    • B.

      The cash basis and the accrual basis

    • C.

      The cash basis

    • D.

      The accrual basis

    Correct Answer
    B. The cash basis and the accrual basis
    Explanation
    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.

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  • 17. 

    Adam’s Chili Bowl and Space Burgers purchases a grill for $5,000. The company expects to use it for four years. If the company thinks that it can sell the grill at the end of the fourth year for $500, how much is the annual depreciation expense of the grill using the straight-line method of depreciation?

    • A.

      $1,250

    • B.

      $4,500

    • C.

      $1,125

    • D.

      $500

    Correct Answer
    C. $1,125
    Explanation
    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.

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  • 18. 

    The amount of the cost of the long-lived asset that is never allocated to the periods in which the asset provides benefit to a company is called the:

    • A.

      Residual value

    • B.

      Purchase price

    • C.

      Depreciation expense

    • D.

      Depreciable base

    Correct Answer
    A. Residual value
    Explanation
    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.

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  • 19. 

    When no direct cause and effect exist between revenues and expenses, and no future benefit from the expense is discernible, then this expense should be:

    • A.

      Recognized immediately

    • B.

      Depreciated

    • C.

      Ignored

    • D.

      Allocated to future periods

    Correct Answer
    A. Recognized immediately
    Explanation
    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.

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  • 20. 

    Reality and the measurement of reality are not the same things. Which activity listed below is not an actual business event but a measurement of an actual business event?

    • A.

      Paying employees

    • B.

      Purchasing inventory

    • C.

      Recording a check in the check register

    • D.

      Providing services

    Correct Answer
    C. Recording a check in the check register
    Explanation
    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.

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  • 21. 

    A situation where the cash has either been received or paid, but the income statement effect is delayed until a later period is a(n):

    • A.

      Deferral

    • B.

      Error

    • C.

      Realization

    • D.

      Accrual

    Correct Answer
    A. Deferral
    Explanation
    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.

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  • 22. 

    Mr. and Mrs. Jacobi pay Johnny Elam of Elam’s Landscaping $75 in June to mow their lawn during July while they are on vacation. For the month of June, Mr. and Mrs. Jacobi should recognize this as a (n):

    • A.

      Deferred expense

    • B.

      Accrued revenue

    • C.

      Accrued expense

    • D.

      Deferred revenue

    Correct Answer
    A. Deferred expense
    Explanation
    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).

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  • 23. 

    For the month of January, the Cold Storage Company paid its employees $11,000 in wages. Cold Storage owes its employees $2,500 for work done during January, which has not yet been paid. Under accrual accounting, Cold Storage’s wage expense for January is:

    • A.

      $2,500

    • B.

      $4,000

    • C.

      $13,500

    • D.

      $11,000

    Correct Answer
    C. $13,500
    Explanation
    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.

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  • 24. 

    The accounting principle that relates the expenses to the revenues for a particular income statement period is known as the:

    • A.

      Realization principle

    • B.

      Recognition principle

    • C.

      Depreciation principle

    • D.

      Matching principle

    Correct Answer
    D. Matching principle
    Explanation
    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.

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  • 25. 

    A weakness of the accrual basis accounting system is that it takes the focus off of:

    • A.

      Stock

    • B.

      Inventory

    • C.

      Notes payable

    • D.

      Cash

    Correct Answer
    D. Cash
    Explanation
    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.

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  • Current Version
  • Jun 19, 2023
    Quiz Edited by
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  • Feb 19, 2011
    Quiz Created by
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