Wyrnkaa - Chapter 4 Review Questions

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Wyrnkaa - Chapter 4 Review Questions - Quiz


This quiz will test your understanding of the material covered in the fourth chapter of "What You Really Need to Know About Accounting". Visit https://www. Notforaccountants. Com/learning-tools. Php for more quizzes.


Questions and Answers
  • 1. 

    Current Assets have which of the following characteristics:

    • A.

      They can be used to satisfy Current Liabilities

    • B.

      They tend to be more liquid than Long Term Liabilities

    • C.

      They show up first on the Balance Sheet

    • D.

      All of the above

    Correct Answer
    D. All of the above
    Explanation
    Current Assets are more liquid than other assets, and show up at the top of the Balance Sheet. They are generally the assets that would be used to cover Current Liabilities.

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  • 2. 

    Prepaid Expenses are Current ________

    • A.

      Assets

    • B.

      Liabilities

    • C.

      Revenues

    • D.

      Expenses

    Correct Answer
    A. Assets
    Explanation
    Prepaid Expenses are Current Assets. Even though the word "expense" is in the name, Prepaid Expenses are those that are paid before the expense is actually incurred. Because the expense has not been incurred yet, the prepaid amounts are considered assets.

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  • 3. 

    Accounts Receivable is a Current __________

    • A.

      Asset

    • B.

      Liability

    • C.

      Revenue

    • D.

      Expense

    Correct Answer
    A. Asset
    Explanation
    Accounts Receivable is a Current Asset. Receivables are amounts owed to the business by customers.

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  • 4. 

    In order for Revenue to be recorded or "recognized", it must be:

    • A.

      Earned and the cash received

    • B.

      Unearned but cash received

    • C.

      Earned and cash received or likely to be received

    • D.

      Earned and agreed with the customer that payment will never be made

    Correct Answer
    C. Earned and cash received or likely to be received
    Explanation
    Revenue cannot be recorded ("recognized") until it is BOTH earned and received/receivable ("realized/realizable").

    The first answer choice is incorrect because cash does not have to be received in order for revenue to be recognized. It has to be received OR receivable (hence, 'Accounts Receivable').

    The second answer choice would be a Deferred Revenue (a liability). The last answer choice would not qualify as revenue - it is volunteer work.

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  • 5. 

    Revenue for products is generally earned when:

    • A.

      The product is created

    • B.

      Risk of ownership passes to the customer

    • C.

      The customer first uses the product

    • D.

      The product is made available for sale

    Correct Answer
    B. Risk of ownership passes to the customer
    Explanation
    The best answer is the second answer choice.

    None of the others indicate that revenue has been earned.

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  • 6. 

    If you receive cash before earning it, the statements that will be affected are:

    • A.

      The Income Statement

    • B.

      The Balance Sheet

    • C.

      Both the Income Statement and the Balance Sheet

    • D.

      Neither the Income Statement nor the Balance Sheet

    Correct Answer
    B. The Balance Sheet
    Explanation
    Receiving cash for products or services before that cash is earned results in an increase in Cash and an increase in Deferred Revenue. These are both Balance Sheet items.

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  • 7. 

    Cash received before the Revenue is earned is:

    • A.

      Account Receivable

    • B.

      Prepaid Expense

    • C.

      Deferred Revenue

    • D.

      Prepaid Revenue

    Correct Answer
    C. Deferred Revenue
    Explanation
    Cash received prior to earning the revenue is Deferred Revenue, which is a liability.

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  • 8. 

    When Revenue is earned, but the cash will be received in the future, this results in a(n):

    • A.

      Account Payable

    • B.

      Deferred Revenue

    • C.

      Deferred Expense

    • D.

      Account Receivable

    Correct Answer
    D. Account Receivable
    Explanation
    When revenue is earned, and cash will be received in the future, this results in the creation of an Account Receivable (an Asset).

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  • 9. 

    The purchase of a large asset is typically recorded on:

    • A.

      The Balance Sheet

    • B.

      The Income Statement

    • C.

      Both the Balance Sheet and the Income Statement

    • D.

      Neither the Balance Sheet nor the Income Statement

    Correct Answer
    A. The Balance Sheet
    Explanation
    Asset purchases result in an increase in assets for the item purchased, and either 1) a corresponding decrease in cash (an asset) or 2) a corresponding increase in accounts payable (a liability). Either way, the entire transaction takes place on the Balance Sheet.

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  • 10. 

    Puchasing Inventory results in the creation of:

    • A.

      An Expense on the Income Statement

    • B.

      An Expense on the Balance Sheet

    • C.

      An Asset on the Income Statement

    • D.

      An Asset on the Balance Sheet

    Correct Answer
    D. An Asset on the Balance Sheet
    Explanation
    The purchase of Inventory is the purchase of an Asset. Asset purchases take place on the Balance Sheet.

    Also, remember that there are no Expenses on the Balance Sheet and no Assets on the Income Statement.

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