Q: Which formula correctly calculates profit using accrual accounting?

$$\text{Profit} = \text{Revenue Earned} - \text{Expenses Consumed}$$

Question 1

Which of the following best describes the accrual principle in financial accounting?

Accepted Answer

Revenue and expenses are recognized when they are earned or consumed, regardless of cash flow.

Question 2

A company receives €50,000 in December for an event to be held in January. At year-end, how should this amount be reported?

Accepted Answer

As unearned revenue (liability) on the balance sheet.

Question 3

Which journal entry correctly records the sale of inventory for €100, where the cost of goods sold is €80?

Accepted Answer

DL Cash 100; Cr Revenue 100; DL Cost of Goods Sold 80; Cr Inventory 80

Question 4

What is the effect of a debit entry on the asset side of the balance sheet?

Accepted Answer

It increases assets.

Question 5

According to the matching principle, when should the cost of goods sold be recognized?

Accepted Answer

When the goods are sold to customers.

Question 6

A company buys a machine for €100. How is this transaction recorded?

Accepted Answer

DL Machines 100; Cr Cash 100

Question 7

Which of the following is an example of a period cost?

Accepted Answer

Marketing and selling expenses

Question 8

If a company borrows €200 from the bank, what is the correct journal entry?

Accepted Answer

DL Cash 200; Cr Bank Loan 200

Question 9

What does 'deferred revenue' represent on the balance sheet?

Accepted Answer

A liability for goods or services owed to customers.

Question 10

Starbucks issues a stamp card: buy 9, get the 10th cup free. How do accountants recognize revenue for this offer?

Accepted Answer

Recognize revenue for 9 cups at full price and defer the 10th cup's value.

Question 11

Which formula correctly calculates profit using accrual accounting?

Accepted Answer

$$	ext{Profit} = 	ext{Revenue Earned} - 	ext{Expenses Consumed}$$

Question 12

A company recognizes depreciation expense of €10 per year for a machine purchased for €100. What is the net book value of the machine at the end of year 5?

Accepted Answer

€50

Question 13

Which of the following best describes the difference between cash flow and profit?

Accepted Answer

Cash flow measures only cash transactions, while profit measures earned revenue and consumed expenses.

Question 14

Which of the following is NOT a current asset on the balance sheet?

Accepted Answer

Unearned revenue

Question 15

When is revenue considered 'realizable'?

Accepted Answer

When the amount expected to be collected can be reasonably measured.

Question 16

Which of the following transactions would result in a credit to cash?

Accepted Answer

Paying salaries to employees.

Question 17

If a company incurs marketing expenses that cannot be directly matched to revenue, how should these be recorded?

Accepted Answer

As a period cost in the period incurred.

Question 18

Which equation represents the fundamental accounting equation?

Accepted Answer

$$	ext{Assets} = 	ext{Liabilities} + 	ext{Equity}$$

Question 19

Which of the following is an example of an accrual?

Accepted Answer

Invoices to be received

Question 20

A company offers retroactive accumulative discounts based on annual purchase volume. When should the discount be recognized as an expense?

Accepted Answer

When the purchase threshold is reached and the amount is reasonably measurable.

Accruals and Presentation of Financial Statements: Key Concepts in Financial Accounting

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