Accrual Basis Income Statement
Self Test
Introduction to Accounting
Accrual Basis Income Statement
Self Test
Click the “Check Your Answer” box below each question to reveal the correct answer and explanation.
1. The cash basis of accounting requires that revenues be reported on the income statement during the period the company
a. expects to collect the cash
b. has provided all the service to the customer
c. collects the cash
d. has provided the service and expects to collect the cash
Answer
C. The cash basis of accounting reports cash collected and cash paid during the period the cash is exchanged.
2. The accrual basis of accounting requires revenues to be reported on the income statement for the period the company
a. expects to collect the cash
b. has provided all the service to the customer only
c. collects the cash
d. has provided the service and expects to collect the cash
Answer
D. The accrual basis of accounting reports revenues in the period the service is provided and the cash collection is reasonable assured; expected to be collected. When the cash is actually received does not matter to the accrual basis income statement.
3. The accrual basis of accounting reports an expense during the period the company
a. pays the cash
b. receives a service in order to provide goods or services
c. purchases an item with probable future economic benefit
d. promises to pay the cash
Answer
B. There are two instances that cause an expense to be reported during the period:
1) a service is provided to the company and 2) an asset is used up. When the cash is paid does not matter to the accrual basis income statement. An item with probable future economic benefit is reported as an asset.
4. The term “earned” implies that during the period
a. cash was collected from customers
b. cash was paid for services
c. goods were provided to the company and the company expects to pay
d. goods or services were provided to the customer and the company expects to be paid
Answer
D. “Earned” means revenue has occurred. This happens during the period when goods or services are provided to customers and the company expects to be paid. The company does not have to be paid during the period the goods or services are provided in order for revenue to be earned. When the cash occurs does not matter to the accrual basis income statement.
5. Depreciation expense is reported on the income statement for the period
a. the inventory is provided to the customer
b. the long-term asset is no longer available to be used
c. the inventory is no longer available for use
d. the long-term asset is used to produce revenue
Answer
D. According to the matching principle, costs incurred to produce revenue must be recorded in the same period the revenue is recorded. The cost to use long-term assets is spread over the time the asset is used to produce revenue and the income statement reports the cost for the period as “depreciation expense”.
6. The expense that is reported when inventory is provided to the customer is called
a. depreciation expense
b. cost of services
c. cost of goods sold
d. cost of revenue
Answer
C. Using the asset inventory is reported on the income statement as “cost of goods sold”. An asset used must be reported as an expense on the income statement during the period the asset is used.
7. The amount reported as depreciation expense on the income statement represents
a. the cost of using the asset for the period only
b. the cost of purchasing the asset
c. the cost of using the asset for all prior periods
d. the cost of using the asset for all prior periods and the current period
Answer
A. Depreciation expense represents the cost of using the asset for the current period only. All expenses reported on the income statement for the period are incurred in the period only; expenses are never cumulative.
8. The amount reported as accumulated depreciation on the balance sheet represents
a. the cost of using the asset for the period only
b. the cost of purchasing the asset
c. the cost of using the asset for all prior periods
d. the cost of using the asset for all prior periods and the current period
Answer
D. Accumulated depreciation reported on the balance sheet represents the total cost of using the long-term asset to date. To date means cumulative, and includes all prior periods and the current period. The account accumulated depreciation is a contra account that reduces the long-term asset on the balance sheet.
9. Which of the following statements is a true statement?
a. The matching principle requires that revenues be reported first and expenses are reported in the next period.
b. Employees working is reported as an expense only when the employees are paid in the period they work.
c. An expense is reported on the income statement in the period the company orders the service to be provided.
d. Revenues are always reported in the period the good or service is provided to the customer.
Answer
D. The accrual basis of accounting requires that revenues be reported in the period the goods or services are provided to the customer; regardless of when the order or payment occurs (as long as collection from the customer is expected.) The matching principle requires the revenues be reported when earned and all expenses to generate the revenue must be reported in the same period. Expenses are recorded in the period the service is provided to the company; when the service is ordered or paid does not matter.
10. Which of the following expenses is usually listed as its own category before income from continuing operations on the income statement?
a. cost of goods sold
b. rent expense
c. accrued expenses
d. tax expense
Answer
D. Tax expense is listed after income before tax on the bottom part of the income statement. Cost of goods sold is normally listed second after sales. Rent expense is an operating expense. Tax expense is not considered an operating expense that management can control. Accrued expense is a liability and is not reported on the income statement.
11. Which of the following is a true statement?
a. Expenses are always recorded when cash is paid.
b. Revenue is recognized when it is earned.
c. Expenses are not matched with revenues in the same period if the customer has not yet paid the company.
d. Cash received after services is provided is called unearned revenue.
Answer
B. Revenue is recognized when the goods or services have been provided to the customer; when earned. Expenses are recorded when they are incurred (use an asset or was provided a service.) When the cash is paid for an expense does not matter to the income statement. Cash received before the service is provided is a liability called unearned revenue.
12. The principle that states that all expenses incurred in the revenue generating process should be recorded in the same period as the revenue generated is
a. the revenue principle
b. the expense principle
c. the matching principle
d. the historical cost principle
Answer
C. This is the matching principle. The revenue recognition principle states revenues are recorded when earned. There is no such thing as the expense principle. The historical cost principle states that assets and liabilities are initially recorded at cost, which is not related to expenses.
13. Which of the following will be an expense on this period’s income statement?
a. cash paid this period for the utility bill last period
b. the amount of the utility bill for services provided this period
c. the estimated amount for advertising for next month paid this month
d. amounts paid this month in advance for insurance coverage for future months
Answer
B. To be an expense this period, the company must have incurred the expense this period. Incurred means the asset is used or the service has been provided to the company during this period. When cash is paid does not matter. Amounts paid in advance are assets called prepaid because they provide future benefit. Services provided to the company are expensed in the period the service is provided.
14. Which of the following will be recorded as revenue in this period’s income statement?
a. cash collected from customers for last month’s services provided
b. the value of services provided last month
c. cash collected for services to be provided next month
d. the value of services provided this month
Answer
D. To be recorded as a revenue this period, the goods or services have to be provided this period. When cash is collected does not matter. Services provided last month are last month’s revenues and services provided next month are next month’s revenues.
15. Which of the following situations is a violation of the revenue recognition principle?
a. Record revenues when the goods or service is provided.
b. Record expenses when the cost is incurred.
c. Record revenues when the cash is received and the service is provided in the same period.
d. Record revenues when the cash is received and the service has not yet been provided.
Answer
D. The revenue recognition principle states that revenues must be recorded in the period the goods or services are provided. When cash is received does not matter. As long as the goods or service is provided during this period, revenue is reported for this period. Expenses are not included in the revenue recognition principle.