Accrual Accounting: A Comprehensive Guide for Business Studies Students

Question 1

What is the main advantage of accrual accounting over cash basis accounting?

Accepted Answer

Provides a more accurate representation of a company's financial performance.

Answer

Simplifies the accounting process.

Answer

Requires less frequent adjustments.

Answer

Eliminates the need for estimates.

Question 2

Which of the following is an example of an accrual?

Accepted Answer

Salaries earned but not yet paid.

Answer

Cash received for services to be performed in the future.

Answer

Equipment purchased on credit.

Answer

Supplies used in the current period.

Question 3

What is the purpose of an adjusting entry?

Accepted Answer

To update the accounts to reflect the accrual basis of accounting.

Answer

To correct errors made in previous accounting periods.

Answer

To close the accounting records at the end of the period.

Answer

To prepare the financial statements.

Question 4

What is the relationship between the income statement and the balance sheet under accrual accounting?

Accepted Answer

Both the income statement and the balance sheet report on an accrual basis.

Answer

The income statement reports revenues and expenses on an accrual basis, while the balance sheet reports assets, liabilities, and equity on a cash basis.

Answer

The income statement reports revenues and expenses on a cash basis, while the balance sheet reports assets, liabilities, and equity on an accrual basis.

Answer

Neither the income statement nor the balance sheet report on an accrual basis.

Question 5

According to which accounting standard are companies required to use accrual accounting?

Accepted Answer

Both IFRS and GAAP.

Answer

International Financial Reporting Standards (IFRS).

Answer

Generally Accepted Accounting Principles (GAAP).

Answer

Neither IFRS nor GAAP.

Question 6

Which of the following is NOT an advantage of accrual accounting?

Accepted Answer

Minimizes risk of fraud

Answer

Improves accuracy of financial reporting

Answer

Better timing of revenue and expenses

Question 7

Which of the following key advantages does accrual accounting offer over cash basis accounting?

Accepted Answer

Presents a more precise portrayal of an organization's financial performance

Answer

Simplifies the accounting procedures

Answer

Mitigates the likelihood of errors

Question 8

In accrual accounting, revenue is recognized when:

Accepted Answer

It is earned, irrespective of cash receipt

Answer

Cash is received, regardless of when earned

Answer

An invoice is issued to the customer

Answer

Goods or services are delivered

Question 9

Which of the following exemplifies an expense recorded under accrual accounting but not cash basis accounting?

Accepted Answer

Depreciation

Answer

Rent

Answer

Utilities

Answer

Salaries

Question 10

What is the primary purpose of an adjusting entry?

Accepted Answer

To update accounting records, reflecting transactions that have occurred but are yet to be recorded

Answer

To rectify errors in preceding entries

Question 11

Which financial statement is predominantly used to provide insights into a company's financial performance over a specified period?

Accepted Answer

Income statement

Answer

Statement of changes in equity

Answer

Statement of cash flows

Answer

Balance sheet

Question 12

In accrual accounting, what is the distinction between a debit and a credit?

Accepted Answer

Debits augment assets and expenses, while credits enhance liabilities and income

Answer

Debits augment liabilities and income, while credits augment assets and expenses

Answer

Debits represent positive values, and credits represent negative values

Question 13

Which of the following is excluded from the principles of accrual accounting?

Accepted Answer

Cash is the sole recognized asset

Answer

Revenue is recognized when earned

Answer

Expenses are matched to the period incurred

Answer

Transactions are recorded at the time of occurrence

Question 14

Which scenario necessitates an adjusting entry to record accrued revenue?

Accepted Answer

Services rendered but not yet invoiced

Answer

Cash received for services not yet performed

Answer

Salaries paid for the current period

Answer

Supplies purchased on account

Question 15

What is the primary purpose of a trial balance?

Accepted Answer

To verify the mathematical accuracy of accounting records

Answer

To prepare the financial statements

Answer

To pinpoint errors within the accounting system

Question 16

Which of the following is a primary advantage of using accrual accounting?

Accepted Answer

Provides a more accurate picture of a company's financial performance.

Answer

Minimizes taxes payable.

Answer

Avoids the need for adjusting entries.

Answer

Simplifies the accounting process.

Question 17

Under accrual accounting, when are revenues recognized?

Accepted Answer

When earned, regardless of when cash is received.

Answer

When services are performed.

Answer

When goods are shipped.

Answer

When cash is received.

Question 18

Which of the following is NOT a disadvantage of accrual accounting?

Accepted Answer

Provides a more timely view of a company's financial performance.

Answer

Can be more complex and time-consuming to implement.

Answer

May lead to misstatement of financial results.

Answer

Requires more subjective judgments.

Question 19

Accrued revenues are:

Accepted Answer

Revenues that have been earned but not yet received.

Answer

Assets that have been acquired but not yet used.

Answer

Expenses that have been incurred but not yet paid.

Answer

Liabilities that have been settled but not yet recorded.

Question 20

Which of the following types of transactions requires an adjusting entry to record accrued revenues?

Accepted Answer

Providing services on account.

Answer

Receipt of cash for goods sold.

Answer

Purchase of inventory for cash.

Answer

Payment of rent in advance.

Question 21

A company has accrued £1,000 in sales receivable. What is the impact on the balance sheet?

Accepted Answer

Increase in current assets, no change in equity.

Answer

Decrease in current assets, increase in equity.

Answer

Increase in current liabilities, decrease in equity.

Question 22

Which of the following is a type of contingent liability?

Accepted Answer

A potential obligation that depends on a future event.

Answer

A legal obligation that is certain to occur.

Answer

A liability that is expected to be paid within the next year.

Answer

A liability that is not recognized on the balance sheet.

Question 23

The prudence principle requires that:

Accepted Answer

Financial statements should not overstate assets or income.

Answer

Assets should be valued at their current market value.

Answer

Transactions should be recorded when cash changes hands.

Answer

Estimates should be made optimistically.

Question 24

Which of the following is a key advantage of accrual accounting compared to cash basis accounting?

Accepted Answer

It provides a more accurate reflection of a company's financial performance and position.

Answer

It is less complex and easier to implement.

Answer

It reduces the risk of fraud.

Question 25

In accrual accounting, which of the following types of expenses would be recorded as accrued?

Accepted Answer

Interest on a loan that has been incurred but not yet paid.

Answer

Receipt of payment for services rendered in the previous month.

Answer

Rent that has been paid for the current month.

Answer

Purchase of office supplies.

Question 26

What is the distinction between an accrued expense and a deferred expense?

Accepted Answer

An accrued expense represents an expense that has been incurred but not yet paid, while a deferred expense represents an expense that has been paid but not yet incurred.

Answer

An accrued expense reduces the company's net income, while a deferred expense increases it.

Answer

An accrued expense is recorded on the income statement, while a deferred expense is recorded on the balance sheet.

Question 27

Which of the following transactions would require an adjusting journal entry in accrual accounting?

Accepted Answer

Recording interest accrued on a loan payable.

Answer

Purchasing office supplies.

Answer

Receiving payment for services rendered in the previous month.

Answer

Paying rent for the current month.

Question 28

What is the primary purpose of a reversing entry?

Accepted Answer

To cancel out the effects of an adjusting entry made at the end of an accounting period, in preparation for the next period.

Answer

To correct an error that was made in a previous accounting period.

Answer

To record a transaction that was omitted from the accounting records.

Question 29

Which characteristic is essential for effective multiple-choice questions (MCQs)?

Accepted Answer

A clear and succinct question stem.

Answer

Based on obscure or insignificant information.

Answer

Designed to mislead or trick the test-taker.

Answer

Multiple correct answers.

Question 30

What is the primary benefit of providing feedback on MCQs?

Accepted Answer

To facilitate student learning from their mistakes and enhance understanding of the material.

Answer

There is no value in offering feedback on MCQs.

Answer

To demoralize students who answer incorrectly.

Answer

To penalize students for errors.

Question 31

When creating distractors for MCQs, what is the most crucial consideration?

Accepted Answer

Plausibility - Distractors should be believable and relevant to the question stem.

Answer

Confusion - Distractors should be intentionally misleading.

Answer

Difficulty - Distractors should be extremely challenging.

Answer

Irrelevance - Distractors should have no connection to the stem.

Question 32

Which of the following is a PRIMARY advantage of accrual accounting over cash basis accounting?

Accepted Answer

Provides a more accurate and comprehensive representation of a company's financial performance and position, resulting in more insightful decision-making.

Answer

Easier to implement and requires less accounting expertise.

Answer

More closely aligns with tax regulations in most jurisdictions.

Question 33

What is the fundamental difference between accrual accounting and cash basis accounting?

Accepted Answer

Accrual accounting records transactions when they occur, regardless of when cash is received or paid, while cash basis accounting records transactions only when cash is received or paid.

Answer

Accrual accounting uses double-entry bookkeeping, while cash basis accounting uses single-entry bookkeeping.

Question 34

Which of the following is an example of an accrued expense that would be recorded under accrual accounting but not under cash basis accounting?

Accepted Answer

Salaries payable (earned by employees but not yet paid).

Answer

Inventory (purchased but not yet sold).

Answer

Cash in bank.

Question 35

Which of the following is an example of an accrued revenue that would be recorded under accrual accounting but not under cash basis accounting?

Accepted Answer

Unearned revenue (received in advance but not yet earned).

Answer

Accounts payable.

Answer

Inventory (sold but not yet delivered).

Answer

Cash in bank.

Question 36

What is the primary purpose of the adjusting entries process in accrual accounting?

Accepted Answer

To update the accounting records and bring them into alignment with the matching principle, ensuring that revenues and expenses are recognized in the periods in which they are earned or incurred.

Answer

To allocate costs and expenses over multiple accounting periods.

Answer

To correct errors in the accounting records.

Question 37

When an accrued expense is recorded, what is the impact on the income statement and balance sheet?

Accepted Answer

The expense is recognized on the income statement, and a liability is recognized on the balance sheet, increasing total liabilities.

Answer

The expense is recognized on the income statement, and an asset is recognized on the balance sheet, decreasing total assets.

Answer

The expense is recognized on the balance sheet, and a liability is recognized on the income statement, decreasing total income.

Question 38

When an accrued revenue is recorded, what is the impact on the income statement and balance sheet?

Accepted Answer

The revenue is recognized on the income statement, and an asset is recognized on the balance sheet, increasing total assets.

Answer

The revenue is recognized on the balance sheet, and an asset is recognized on the income statement, decreasing total income.

Answer

The revenue is recognized on the income statement, and a liability is recognized on the balance sheet, increasing total liabilities.

Question 39

What is the primary purpose of a trial balance in accrual accounting?

Accepted Answer

To check the mathematical accuracy of the accounting records by ensuring that the total debits equal the total credits, providing a starting point for the preparation of financial statements and further analysis.

Answer

To identify and correct errors in the accounting records.

Answer

To allocate costs and expenses over multiple accounting periods.

Question 40

Which of the following is a key principle underlying accrual accounting?

Accepted Answer

Transactions and events are recorded when they occur, regardless of when cash is received or paid, ensuring that financial statements accurately reflect the economic reality of the business.

Answer

Transactions are recorded only when cash is received or paid, regardless of when they occur.

Answer

Only cash transactions are recorded, and non-cash transactions are ignored.

Question 41

Which fundamental difference distinguishes accrual accounting from cash basis accounting?

Accepted Answer

Revenue is recognized when earned, regardless of cash receipt.

Answer

Assets are valued at their current market price.

Answer

Expenses are recognized when paid, irrespective of when incurred.

Question 42

What is a primary advantage of accrual accounting compared to cash basis accounting?

Accepted Answer

Provides a more accurate representation of a company's financial performance.

Answer

Easier to comprehend and implement.

Answer

Complies with regulatory accounting standards.

Question 43

Under accrual accounting, when should an expense be recognized?

Accepted Answer

When incurred, regardless of payment status.

Answer

When an invoice is received.

Answer

When the corresponding revenue is earned.

Answer

When cash is disbursed.

Question 44

Which action qualifies as an adjusting entry in accrual accounting?

Accepted Answer

Recording accrued interest expense for the period.

Answer

Purchasing equipment on credit.

Answer

Paying employee wages.

Answer

Receiving customer payments.

Question 45

What is the primary purpose of a trial balance?

Accepted Answer

To verify the accuracy of accounting records by balancing total debits and credits.

Answer

To generate financial statements.

Answer

To record financial transactions.

Question 46

What is the significance of the matching principle in accrual accounting?

Accepted Answer

To align expenses with the revenues they generate, providing a clearer view of profitability.

Answer

To simplify the accounting process.

Answer

To ensure that assets are not overstated.

Question 47

What is the purpose of establishing a provision for doubtful debts?

Accepted Answer

To account for the estimated uncollectible portion of accounts receivable.

Answer

To reduce the reported accounts receivable balance.

Answer

To increase the bad debt expense reported on the income statement.

Question 48

Which assumption is fundamental to the practice of accrual accounting?

Accepted Answer

The going concern assumption, presuming the entity will continue operating in the foreseeable future.

Answer

The consistency assumption.

Answer

The historical cost assumption.

Answer

The materiality assumption.

Question 49

Under accrual accounting, which of the following transactions would be recognized as an expense in the period incurred, regardless of payment?

Accepted Answer

Purchase of office supplies on account.

Answer

Receipt of cash from a customer for goods sold.

Answer

Payment of salaries to employees.

Answer

Issuance of a share dividend.

Question 50

Which of the following accounts is used to record the difference between the cash received and the revenue earned?

Accepted Answer

Unearned Revenue

Answer

Deferred Revenue

Answer

Prepaid Expenses

Answer

Accrued Expenses

Question 51

In a trial balance prepared under accrual accounting, which of the following pairs of accounts would normally have equal balances?

Accepted Answer

Sales Revenue and Accounts Receivable

Answer

Prepaid Expenses and Accrued Expenses

Answer

Cash and Accounts Receivable

Question 52

Which of the following is a limitation of accrual accounting?

Accepted Answer

Requires more complex accounting procedures.

Answer

Reduces the risk of fraud.

Answer

Provides timely financial information.

Answer

Improves comparability of financial statements.

Question 53

When recording accrued expenses under accrual accounting, the adjusting entry includes a:

Accepted Answer

Debit to an expense account.

Answer

Credit to an expense account.

Answer

Credit to a liability account.

Answer

Debit to an asset account.

Question 54

Which of the following is NOT a factor to consider when determining the materiality of an adjusting entry?

Accepted Answer

The nature of the transaction.

Answer

The size of the business.

Answer

The amount involved.

Answer

The effect on future financial statements.

Question 55

Which of the following is a key difference between accrual accounting and cash basis accounting?

Accepted Answer

Timing of revenue recognition.

Answer

Use of adjusting entries.

Answer

Measurement of expenses.

Answer

Amount of revenue recognized.

Question 56

Under accrual accounting, which of the following events would be recorded as a revenue in the period earned, even though cash was not received?

Accepted Answer

Providing services to a customer on account.

Answer

Paying rent for the next month.

Answer

Purchasing inventory on credit.

Answer

Receiving cash for services performed in a previous period.

Question 57

Which of the following statements about accrual accounting is true?

Accepted Answer

It provides a more comprehensive and accurate view of a company's financial position and performance.

Answer

It is only used by large corporations.