Q: Which formula correctly calculates straight-line depreciation expense?

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

Q: What is the correct formula for calculating working capital?

$$\text{Working Capital} = \text{Total Current Assets} - \text{Total Current Liabilities}$$

Question 1

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

Accepted Answer

Accrual accounting records revenues when earned and expenses when incurred, regardless of cash flow, while cash-basis accounting records only cash transactions.

Question 2

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

Accepted Answer

When goods or services have been delivered or performed and collection is reasonably assured.

Question 3

Which of the following is an example of an accrual adjusting entry?

Accepted Answer

Recording salary expense incurred but not yet paid.

Question 4

A company pays $2,400 for a one-year insurance policy on July 1. What adjusting entry is required at July 31?

Accepted Answer

Debit Insurance Expense $$200; Credit Prepaid Insurance 200$$

Question 5

Which formula correctly calculates straight-line depreciation expense?

Accepted Answer

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

Question 6

Which of the following accounts is a contra asset account?

Accepted Answer

Accumulated Depreciation

Question 7

A company earned $1,000 in service revenue in June but will not receive payment until July. What adjusting entry should be made at June 30?

Accepted Answer

Debit Accounts Receivable $$1,000; Credit Service Revenue 1$$,000

Question 8

Which of the following is NOT a purpose of adjusting entries?

Accepted Answer

To close temporary accounts

Question 9

Which of the following accounts is closed at the end of the period?

Accepted Answer

Service Revenue

Question 10

What is the correct formula for calculating working capital?

Accepted Answer

$$	ext{Working Capital} = 	ext{Total Current Assets} - 	ext{Total Current Liabilities}$$

Question 11

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

Accepted Answer

$$2.0$$

Question 12

Which of the following best describes unearned service revenue?

Accepted Answer

A liability account for cash received before services are performed.

Question 13

If a company fails to make an adjusting entry for accrued expenses, what is the effect on the financial statements?

Accepted Answer

Liabilities are understated and net income is overstated.

Question 14

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

Accepted Answer

Transferring prepaid insurance to insurance expense.

Question 15

Which of the following is classified as a current asset?

Accepted Answer

Accounts Receivable

Question 16

A company’s debt ratio is calculated as:

Accepted Answer

$$	ext{Debt Ratio} = \frac{	ext{Total Liabilities}}{	ext{Total Assets}}$$

Question 17

Which of the following is NOT a step in closing the books?

Accepted Answer

Debiting the Dividends account for its credit balance

Question 18

Which of the following is a permanent account?

Accepted Answer

Accounts Payable

Question 19

If a company receives cash in advance for services to be performed in the future, which account is credited?

Accepted Answer

Unearned Service Revenue

Question 20

Which of the following best describes the time-period concept?

Accepted Answer

Accounting information is reported at regular intervals, such as monthly, quarterly, or annually.

Accrual Accounting and Income: Chapter 3 Study Notes

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