THEORIES OF ACCOUNTS

QUESTION 61-5 Multiple choice (IAA)

1. Under the accrual basis of accounting, cash receipts and disbursements may
a. Precede, coincide with, or follow the period in which revenue and expenses are recognized.
b. Precede revenue or coincide and with expenses but never are recognized follow the period in which
c. Coincide with or follow but never precede the period in which revenue and expense are recognized.
d. Only coincide with the period in which revenue and expenses are recognized.
2. Which statement regarding accrual versus cash basis of accounting is true?
a. The cash basis is appropriate for some smaller entities
b. The cash basis is less useful in predicting the timing and amounts of future cash flows.
c. Application of the cash basis results in an income statement reporting revenue and expenses.
d. The cash basis requires a complete set of records.
3. Under the cash basis of accounting
a. Revenue is recorded when earned.
b. Accounts receivable should be recognized.
c. Depreciation of assets having an economic life of more than one year is not recognized.
d. The matching principle is ignored.
4. Total net income over the life of an entity is
a. Higher under the cash basis than under the accrual basis
b. Lower under the cash basis than under the accrual basis
c. The same under the cash basis as under the accrual basis
d. Not susceptible to measurement
5. Under cash basis revenue is recorded
a. When earned and realized.
b. When earned and realizable.
c. When. earned.
d. When realized
ANSWER 61-5

1.A 2. B 3. D 4. C 5. D

QUESTION 61-6 Multiple choice (IAA)

1.Under IFRS
a. The cash basis method of accounting is accepted.
b. Events are recorded in the period in which the event occurs.
c. Net income will be lower under the cash basis than accrual basis accounting.
d. All of the choice are correct.
2. If ending balance of accounts receivable exceeds the
a. Cash collections during the period exceed the amount of revenue earned.
b. Net income for the period under accrual basis is less than the amount of cash basis income.
c. No cash was collected during the period.
d. Cash collections. during the year are less than the amount of revenue earned.
3.When converting from cash basis to accrual basis of accounting, which of the following adjustments should be made to cash
collections from customers to determine accrual basis service revenue?
a. Subtract ending accounts receivable
b. Subtract beginning unearned service revenue
c. Add ending accounts receivable
d. Add cash sales
4. When converting from cash basis to accrual basis of accounting, which of the following adjustments should be made to cash
paid for operating expenses to determine accrual basis operating expenses?
a. Add beginning accrued liabilities
b. Subtract beginning prepaid expense
c. Subtract ending prepaid expense
d. Subtract interest expense
1. B 2. D 3. C 4. C
QUESTION 61-7 Multiple choice (AICPA Adapted)
1. Compared to cash basis net income for the current year; an entities accrual basis net income increased when it
a. Declared a cash dividend in the prior year that it paid in the current year.
b. Wrote off more accounts receivable than it reported as uncollectible accounts expense in the current year,
c. Had lower accrued expenses at the end of the current year than at the beginning of year.
d. Sold used equipment for cash at a gain in the Current year.
2. Prior to the current year, an entity used the cash basis of accounting. At the current year-end, the entity changed to the accrual
basis. The entity cannot determine the beginning balance of supplies inventory. What is the effect of the inability to determine
beginning supplies inventory on the accrual basis net income and year-end accrual basis owners? equity?
Net income Owners' equity
a. No effect No effect
b. No effect Overstated
c. Overstated No effect
D. Overstated Overstated
3. Entity wants to convert the financial statements from accrual basis to cash basis. Both supplies inventory and salaries payable
increased. To obtain cash basis net income, how should these be added to or deducted from accrual basis net income?
Supplies Office salaries
Inventory payable
a. Deducted Deducted
b. Deducted Added
c. Added Deducted
d. Added Added
4.Compared to the accrual basis of accounting, the cash basis understates income by the net decrease during the accounting period
of
a. Both accounts receivable and accrued expenses
b. Accrued expenses but not of accounts receivable
c. Neither accounts receivable nor of accrued expense
d. Accounts receivable but not of accrued expenses
5. The inventory and accounts payable balances increased Should these increases be added to or deducted from cash payments to
suppliers to arrive at cost of goods sold fi the current year?
Increase in Increase in
Inventory accounts payable
a. Added Deducted
b. Added Added
c. Deducted Deducted
d. Deducted Added
1. C 2. C 3. B 4. B 5. D
QUESTION 61-8 Multiple choice (AICPA Adapted)
1. The premium on a three-year in8urance policy expiring on December 31, 2020 wag paid in total on January 1, 2018. If the
entity has six-month, operating cycle, then on December 31, 2018, the prepaid insurance reported ag a current asset would be for
a. 6 months
b. 12 months
c. 18 months
d. 24 months
2. The premium on a three-year insurance policy expiring on December 31, 2020 was paid in total on January 1, 2018. The
original payment was initially debited to a prepaid asset account. The appropriate adjusting entry had been recorded on December
31, 2018. The balance in the prepaid asset account on December 31, 2018 should be
a. Zero
b. The same as it would have been if the original payment had been debited to an account
c. The same as the original payment
d. Higher than if the original payment had been debited to an expense account
3. The premium on a three-year policy expiring on December 31, 2020 was paid in total on January 1, 2018 If the original
payment was recorded as a prepaid asset, how would total assets and shareholders' equity be affected during 2018?
a. Total assets would decrease and shareholders’ equity
would increase
b. Both total assets and shareholders’ equity would decrease
c. Both asset and shareholders’ equity would increase
d. Neither total asset nor shareholders would change

1.B 2. B 3. B 4. A 5. B