QUESTION 58-7 Multi 1 . Accrual accounting a ple choice (IAA) Under IFRS The cash basis of accounting is accepted. Events are recorded in the period the events occur, Net income is lower under the cash basis than accrual, All of the choices are correct. pelea dheres to which of the following? Matching principle Historical cost principle : Oe Matching principle and historical cost principle Neither matching principle nor historical cost ao OB) | Which statement does not describe a deferral? 4) Deferral of revenue occurs when cash is received and recognized in financial income. b. Deferral typically results in the recognition of a liability or prepaid expense. c. Cash collected in advance of services being rendered. d. Cash paid up front for a one-year insurance policy. . Under accrual, a deferral is a transaction that impacts a. Cash and'the income statement at the same time b. The income statement before impacting cash © Cash before impacting the income statement . The statement of financial position before impacting cash . Which statement is true about accrual and cash basis? a. Under accrual, if the earning process is not complete, revenue is nevertheless recorded. @) Under cash basis, if cash has been collected, revenue is recorded regardless of earning process. c. Under cash basis, revenue is recognized when the receivable is initially recorded. d. All of these statements are true. 696ee vnder the accrual basis of accounting, cash receipts and p gisbursements may precede, coincide with, revenue and expenses a: b precede or coincide with "which revenue and expe Coincide with or follow b which revenue and expe y. Only coincide with the expenses are recognized or follow the period in which re recognizedi?" ‘ but never follow the period in nses are recognized. ut never precede the period in mses are recognized. period in which revenue and Which statement regarding accrual versus cash basis of accounting is true? a. The cash basis is appropriate for some smaller entities. p, The cash basis is less useful in predicting the timing and amounts of future cash flows c. Application of the statement reporting d. The cash basis requ cash basis results in an income revenue and expenses. ures a complete set of records, . Under cash basis of accounting a. Revenue is recorded when earned. b. Accounts receivable sh ts 3 ould be recognized. c. Depreciation of an asset having an economic life of more than one year is not recognized. d, The matching principle is ignored. Total net income over the life of an entity is a. Higher under cash basis than under accrual basis b. Lower under cash basis than under accrual. basis @ The same under the cash basis and accrual basis d. Not susceptible to measurement : 0. Under cash basis, revenue is recorded a. When earned and realized. en earned and realizable. c. When earned. © When realized. SWER 58-7 ob 8. al 5. b 4D 9. ¢ 7 4.e 6. a 8d 10. dfo = STION 58-8 Multiple choice (AICPA Adapted) h basis net income for the current ye 5 net income increased when the entity QUE 1. Compared to cas! the accrual basi a, Declared a cash dividend in the prior year that it paig in the current year. b. Wrote off more accounts receivable than it reported ag uncollectible accounts expense 1n the current year, © Had lower accrued expenses at the end of the current i year than at the beginning ofyear; : d. Sold used equipment for cash at a gain in the current year. 2, Prior to the current year, an entity used the cash basis of accounting. At the current year-end, the entity changed to the accrual basis. The entity cannot determine the beginning balance of supplies inventory. What is the effect of the inability to determine beginning supplies inventory on the accrual basis net income and year-end accrual basis owners’ equity? Net income Owners’ equity a. No effect "No effect b. No effect Overstated € Overstated No effect d. Overstated Overstated we An entity wants to convert the financial statements from accrual basis to cash basis. Both supplies inventory and office salaries payable increased. » To obtain cash basis net income, how should these increases be added to or deducted from accrual basis net income? Supplies Office salaries inventory payable a. Deducted Deducted (6) Deducted Added c. Added Deducted d. Added Added 698Compared to the accrual basis of accounting, : pasis understates income by the net decrease d accounting period of the cash uring ‘the a, Both accounts receivable and accrued expenses p. Accrued expenses but not of accounts receivable c. Neither accounts receivable nor of accrued expenses d, Accounts receivable but not of accrued expenses 5. The inventory and accounts payable balances increased. Should these increases be added to or deducted from cash payments to suppliers to arrive at cost of goods sold for the current year? Increase in Increase in inventory accounts payable a. Added Deducted b. Added Added c. Deducted Deducted ad. Deducted Added ANSWER 58-8ee | QUESTIO 1. . The premiui N 58-9 Multiple choice (AICPA Adapted) year insurance policy expiring op aid in total on January 1, 2022, I¢ h operating cycle,the prepaiq ent asset on December 31, 2099 The premium on a three- December 31, 2024 was P: the entity has six-mont insurance reported as a curr would be for a. 6months b. 12 months c. 18 months d. 24 months m on a three-year insurance policy expiring on December 31, 2024 was paid in total on January 1, 2022. The original payment was initially debited to a prepaid asset account. The appropriate adjusting entry had been recorded on December 31, 2022. The balance in the prepaid asset account on December 31, 2022 should be a. Zero os (6) The same as it would have been if the original payment had been debited initially to an expense account c. The same as the original payment d. Higher than if the original payment had been debited initially to an expense account. . The premium on a three-year insurance policy expiring on December 31, 2024 was paid in total on January 1, 2022. If the original payment was recorded as a prepaid asset, how would total assets and shareholders’ equity be affected during 2022? Total assets would decrease and shareholders’ equity would increase Both total assets and shareholders’ equity would decrease Both total assets and shareholders’ equity would increase Neither total assets nor shareholders’ equity would change 2 Be sy 700y The premium on a four-year insurance policy expiring on pecember 31, 2025 was paid in total on January 1, 2022. If ihe original payment was recorded as a prepaid asset, the palance in prepaid asset on December 31, 2023 would be a Lower than the balance on December 31, 2022 p. Lower than the balance on December 31, 2024 c. The same as the balance on December 31, 2024 d. The same as the original payment . At the beginning of the current year, an entity signed a 5-year contract enabling it to use a patented manufacturing process beginning in the current year. A royalty is payable for each product produced, subject to a minimum annual fee. Any royalties in excess of the minimum will be paid annually. On the contract date, the entity prepaid a sum equal to two years’ minimum annual fees. In the current year, only minimum fees were incurred. The royalty prepayment shall be reported in the current year-end financial statement as a, An expense only b/ A current asset and an expense c. A current asset and noncurrent asset d. A noncurrent asset ANSWER 58-9 oe 701