Accounting & Auditing
Accrual and Matching Concepts
Accrual accounting improves comparability of performance because it:
A. Reduces timing distortions caused solely by cash receipts and payments
B. Eliminates all estimates
C. Guarantees equal profits
D. Records no liabilities
Correct Answer: A
Recognizing events in the periods they relate to makes performance less dependent on cash timing.
Accounting & Auditing
Accrual and Matching Concepts
Which concept prevents charging the entire cost of a multi-year machine as expense merely when cash is paid?
A. Accrual/matching through capitalization and depreciation
B. Cash basis
C. Materiality in every case
D. Entity concept alone
Correct Answer: A
A long-term asset is capitalized and its depreciable amount allocated over useful periods rather than expensed solely based on cash payment.
Accounting & Auditing
Accrual and Matching Concepts
Unearned income appears generally as:
A. A liability
B. An asset
C. Expense
D. Drawings
Correct Answer: A
It represents an obligation until the related goods/services are provided.
Accounting & Auditing
Accrual and Matching Concepts
Prepaid expense appears generally as:
A. An asset
B. A liability
C. Revenue
D. Equity
Correct Answer: A
A prepayment represents a future economic benefit.
Accounting & Auditing
Accrual and Matching Concepts
An outstanding expense appears generally as:
A. A liability
B. An asset
C. Revenue
D. Drawings
Correct Answer: A
An unpaid expense creates an obligation to pay.
Accounting & Auditing
Accrual and Matching Concepts
Accrued revenue appears in the statement of financial position generally as:
A. An asset
B. A liability
C. Equity
D. An expense
Correct Answer: A
A receivable arises for revenue earned but not yet received.
Accounting & Auditing
Accrual and Matching Concepts
The adjusting entry for revenue earned from an advance receipt generally includes:
A. Debit unearned revenue; credit revenue
B. Debit revenue; credit cash
C. Debit expense; credit payable
D. Debit cash; credit capital
Correct Answer: A
As the obligation is fulfilled, the liability decreases and revenue is recognized.
Accounting & Auditing
Accrual and Matching Concepts
The adjusting entry for expired prepaid insurance generally includes:
A. Debit insurance expense; credit prepaid insurance
B. Debit cash; credit insurance expense
C. Debit prepaid insurance; credit revenue
D. Debit liability; credit cash
Correct Answer: A
The expired portion is transferred from the prepaid asset to expense.
Accounting & Auditing
Accrual and Matching Concepts
The adjusting entry for accrued wages generally includes:
A. Debit wages expense; credit wages payable
B. Debit cash; credit wages expense
C. Debit wages payable; credit revenue
D. Debit capital; credit cash
Correct Answer: A
The entry recognizes current expense and the unpaid liability.
Accounting & Auditing
Accrual and Matching Concepts
Rent received in advance for next period should generally be:
A. Deferred as a liability until earned
B. Recognized fully as current revenue
C. Charged as expense
D. Added to inventory
Correct Answer: A
Advance receipts create an obligation to provide future use/service.
Accounting & Auditing
Accrual and Matching Concepts
A commission earned in March but collected in April belongs under accrual accounting to:
A. March
B. April
C. Both equally
D. The next financial year always
Correct Answer: A
The commission is recognized when earned.
Accounting & Auditing
Accrual and Matching Concepts
Matching is especially relevant to determining:
A. Periodic profit
B. Bank account number
C. Legal ownership only
D. Audit fee only
Correct Answer: A
Matching helps determine the expenses attributable to a reporting period and hence periodic profit.
Accounting & Auditing
Accrual and Matching Concepts
Which is NOT an example of a prepayment?
A. Salary owing at year-end
B. Insurance paid in advance
C. Rent paid in advance
D. Annual subscription paid ahead
Correct Answer: A
Salary owing is an accrued expense.
Accounting & Auditing
Accrual and Matching Concepts
Which is NOT an example of an accrual?
A. Rent paid for next year
B. Wages owing
C. Interest receivable
D. Utilities consumed but unpaid
Correct Answer: A
Rent paid for a future period is a prepayment, not an accrual.
Accounting & Auditing
Accrual and Matching Concepts
The accrual basis recognizes the effects of transactions:
A. In the periods in which economic events occur
B. Only when cash moves
C. Only at liquidation
D. Only after audit
Correct Answer: A
Accrual accounting records economic effects when they arise.
Accounting & Auditing
Accrual and Matching Concepts
The cash basis recognizes expenses primarily when:
A. Cash is paid
B. Expense is incurred
C. Goods are ordered
D. Budget is approved
Correct Answer: A
Cash basis accounting focuses on cash receipts and payments.
Accounting & Auditing
Accrual and Matching Concepts
If unearned revenue is incorrectly treated entirely as earned, profit will generally be:
A. Overstated
B. Understated
C. Unaffected
D. Equal to cash flow
Correct Answer: A
Recognizing unearned amounts as revenue prematurely overstates revenue and profit.
Accounting & Auditing
Accrual and Matching Concepts
Failure to record accrued income will usually:
A. Understate income and assets
B. Overstate income and liabilities
C. Overstate expenses
D. Understate liabilities only
Correct Answer: A
Earned but unrecorded income and the related receivable are both understated.
Accounting & Auditing
Accrual and Matching Concepts
Failure to adjust a prepaid expense will usually:
A. Overstate expense and understate assets
B. Understate expense and overstate liabilities
C. Overstate revenue
D. Have no effect
Correct Answer: A
If the future benefit remains in expense, current expense is too high and the prepaid asset too low.
Accounting & Auditing
Accrual and Matching Concepts
Failure to accrue an outstanding expense will usually:
A. Overstate profit and understate liabilities
B. Understate profit and overstate liabilities
C. Understate assets only
D. Have no effect
Correct Answer: A
Omitting an accrued expense understates expenses/liabilities and therefore overstates profit.