$$\text{Depreciation Expense} = \frac{\text{Cost of Asset} - \text{Salvage Value}}{\text{Useful Life}}$$

Question 1

Which of the following best describes the main difference between accrual accounting and cash-basis accounting?

Accepted Answer

Accrual accounting records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged.

Question 2

According to the revenue recognition principle, when should revenue be recognized?

Accepted Answer

When the company has delivered goods or performed services and expects to receive payment.

Question 3

A company pays $3,000 for three months’ rent in advance on June 1. What adjusting entry is required on June 30?

Accepted Answer

Debit Rent Expense $$1,000; Credit Prepaid Rent 1$$,000

Question 4

Which of the following is an example of an accrued expense?

Accepted Answer

Salaries earned by employees but not yet paid at the end of the period.

Question 5

What is the formula for calculating straight-line depreciation expense?

Accepted Answer

$$	ext{Depreciation Expense} = \frac{	ext{Cost of Asset} - 	ext{Salvage Value}}{	ext{Useful Life}}$$

Question 6

Why is accumulated depreciation recorded in a separate contra asset account instead of reducing the asset account directly?

Accepted Answer

To allow users to see both the original cost and the total depreciation taken to date.

Question 7

Which of the following transactions would require an adjusting entry at the end of the period?

Accepted Answer

Earned revenue for services performed but not yet billed.

Question 8

If a company fails to record an adjusting entry for accrued salaries at year-end, what is the effect on the financial statements?

Accepted Answer

Liabilities are understated and net income is overstated.

Question 9

Which of the following best describes the matching principle?

Accepted Answer

Expenses are recognized in the same period as the related revenues are earned.

Question 10

A company collected $400 in advance for services to be performed next month. What is the correct journal entry at the time of collection?

Accepted Answer

Debit Cash $$400; Credit Unearned Service Revenue 400$$

Question 11

Which of the following accounts is NOT closed at the end of the accounting period?

Accepted Answer

Accounts Receivable

Question 12

What is the formula for the current ratio?

Accepted Answer

$$	ext{Current Ratio} = \frac{	ext{Current Assets}}{	ext{Current Liabilities}}$$

Question 13

A company has current assets of $$50,000 and current liabilities of 25$$,000. What is its current ratio?

Accepted Answer

$$2.0$$

Question 14

Which of the following transactions would decrease the debt ratio?

Accepted Answer

Paying off a loan with cash.

Question 15

Which of the following is a characteristic of a contra asset account?

Accepted Answer

It has a normal credit balance and reduces the related asset account.

Question 16

Which of the following best describes the purpose of closing entries?

Accepted Answer

To transfer the balances of temporary accounts to retained earnings and prepare them for the next period.

Question 17

If a company fails to adjust for supplies used during the period, what is the effect on the financial statements?

Accepted Answer

Assets are overstated and net income is overstated.

Question 18

Which of the following is an example of a deferral adjusting entry?

Accepted Answer

Recording depreciation expense at year-end.

Question 19

Which financial statement reports assets, liabilities, and stockholders’ equity as of a specific date?

Accepted Answer

Balance Sheet

Accrual Accounting and Income: Comprehensive Study Notes (Chapter 3)

Study Guide - Practice Questions