Wyrnkaa - Chapter 4 Review Questions - Quiz, Flashcards & Trivia

1. Current Assets have which of the following characteristics:

They can be used to satisfy Current Liabilities

They tend to be more liquid than Long Term Liabilities

They show up first on the Balance Sheet

All of the above

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.

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.

2. Prepaid Expenses are Current ________

Assets

Liabilities

Revenues

Expenses

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.

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.

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

Account Payable

Deferred Revenue

Deferred Expense

Account Receivable

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

Explanation

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

4. Revenue for products is generally earned when:

The product is created

Risk of ownership passes to the customer

The customer first uses the product

The product is made available for sale

The best answer is the second answer choice.

None of the others indicate that revenue has been earned.

Explanation

The best answer is the second answer choice.

None of the others indicate that revenue has been earned.

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

Earned and the cash received

Unearned but cash received

Earned and cash received or likely to be received

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

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.

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.

6. Accounts Receivable is a Current __________

Asset

Liability

Revenue

Expense

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

Explanation

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

7. The purchase of a large asset is typically recorded on:

The Balance Sheet

The Income Statement

Both the Balance Sheet and the Income Statement

Neither the Balance Sheet nor the Income Statement

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.

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.

8. Puchasing Inventory results in the creation of:

An Expense on the Income Statement

An Expense on the Balance Sheet

An Asset on the Income Statement

An Asset on the Balance Sheet

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.

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.

9. Cash received before the Revenue is earned is:

Account Receivable

Prepaid Expense

Deferred Revenue

Prepaid Revenue

Cash received prior to earning the revenue is Deferred Revenue, which is a liability.

Explanation

Cash received prior to earning the revenue is Deferred Revenue, which is a liability.

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

The Income Statement

The Balance Sheet

Both the Income Statement and the Balance Sheet

Neither the Income Statement nor the Balance Sheet

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.

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.