Revenue and Expense Recognition: Master the Basics of Accounting

Question 1

Identify an accrued expense.

Accepted Answer

Salaries payable.

Answer

Rent receivable.

Answer

Interest receivable.

Answer

Supplies inventory.

Question 2

Differentiate between deferred revenue and accrued expenses.

Accepted Answer

Deferred revenue: Advance cash receipt; Accrued expenses: Unpaid incurred expenses.

Answer

Accrued expenses: Earned but unreceived revenue; Deferred revenue: Incurred but unpaid expenses.

Answer

Deferred revenue: Advance cash payment; Accrued expenses: Earned but unreceived revenue.

Answer

Accrued expenses: Incurred but unpaid expenses; Deferred revenue: Earned but unreceived revenue.

Question 3

Which transaction results in both revenue and expense recognition?

Accepted Answer

Sale of goods.

Answer

Equipment purchase.

Answer

Salary payment.

Answer

Stock issuance.

Question 4

Regarding expense recognition, which statement is accurate?

Accepted Answer

Expenses are recognized in the period in which the related revenue is earned

Answer

Expenses are always recognized in the period in which cash is paid

Answer

Expenses are recognized only when the payment is due

Answer

Expenses are not recognized until cash is received

Question 5

Which of the following is an example of a prepaid expense?

Accepted Answer

Rent paid in advance

Answer

Utilities consumed in the current period

Answer

Salaries payable

Answer

Insurance premium due next month

Question 6

Which account is specifically used to record deferred revenue?

Accepted Answer

Unearned Revenue

Answer

Accrued Expenses

Answer

Prepaid Expenses

Answer

Deferred Income Tax

Question 7

Under accrual accounting principles, which method is NOT acceptable for recognizing revenue?

Accepted Answer

Cash basis method

Answer

Percentage-of-completion method

Answer

Installment method

Answer

Completed contract method

Question 8

Which of the following illustrates the matching principle?

Accepted Answer

Expenses are recognized simultaneously with the revenues they generate.

Answer

Revenues are recorded in advance of the related expenses.

Answer

Expenses are allocated evenly over the useful life of an asset.

Answer

Revenues and expenses are only recognized when cash is received or paid.

Question 9

When should prepaid expenses be recognized as expenses?

Accepted Answer

When the asset is consumed or used.

Answer

When cash is paid.

Answer

When the related revenue is recognized.

Answer

When the invoice is received.

Question 10

Which of the following is NOT an objective of revenue recognition?

Accepted Answer

To provide information about the liquidity of the company.

Answer

To provide information about the timing of revenue.

Answer

To provide information about the profitability of the company.

Answer

To provide information about the growth potential of the company.

Question 11

In which scenario would the matching principle be most challenging to apply?

Accepted Answer

A construction company that undertakes large-scale projects.

Answer

A manufacturing company with a high volume of production.

Answer

A retail store with a diverse range of products.

Answer

A service company that provides consulting services.

Question 12

Under accrual accounting, when would unearned revenue be recognized as revenue?

Accepted Answer

When the service is performed.

Answer

When cash is received.

Answer

When the invoice is issued.

Answer

When the customer pays in full.

Question 13

Under the accrual accounting method, revenue is recognized:

Accepted Answer

When goods or services are delivered or performed.

Answer

When cash is received.

Answer

When an invoice is sent to the customer.

Answer

When the customer places an order for goods or services.

Question 14

One of the benefits of using accrual accounting is that it:

Accepted Answer

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

Answer

Simplifies the accounting process.

Answer

Reduces the risk of errors.

Answer

Improves cash flow.

Question 15

A company estimates that it will receive a sales commission of £10,000 over the next 6 months. Under the accrual accounting method, how should the revenue be recognized?

Accepted Answer

Over the 6-month period.

Answer

Immediately

Answer

When cash is received.

Answer

Not until the end of the 6-month period.

Question 16

According to the accrual accounting principle, when should revenue be recognized?

Accepted Answer

When the company has earned the revenue

Answer

When the order for goods or services is received

Answer

When the goods or services are delivered

Answer

When payment is received in cash

Question 17

Which factor is NOT considered in determining whether an expense has been incurred?

Accepted Answer

Payment of the expense in cash

Answer

Receipt of goods or services

Answer

Legal obligation to pay

Answer

Documentary evidence of the obligation

Question 18

What is the primary purpose of the matching principle?

Accepted Answer

To ensure that expenses are recognized in the same period as the revenue they generate

Answer

To prevent assets from being overstated

Answer

To simplify the accounting process

Answer

To meet legal requirements

Question 19

When should a company recognize a bad debt expense?

Accepted Answer

When the company estimates that the account will not be collected

Answer

When a customer declares bankruptcy

Answer

When an account receivable is past due

Answer

When payment is received from the customer

Question 20

A deferred revenue liability is recorded when:

Accepted Answer

Cash is received for future services

Answer

Services have been performed but not yet invoiced

Answer

Expenses have been paid but not yet incurred

Answer

Goods have been sold but not yet delivered

Question 21

Which transaction is not suitable for revenue recognition under accrual accounting? Explain your choice by describing the key limitations of accrual accounting in this situation.

Accepted Answer

Receipt of a cash advance from a customer

Answer

Sale of inventory

Answer

Incurring an expense for utilities

Question 22

Under accrual accounting, revenue is recognized when:

Accepted Answer

Performance has occurred and the amount can be reasonably estimated

Answer

Cash is received

Answer

A sales invoice is issued

Question 23

A construction company is providing services on a long-term project. Which of the following revenue recognition methods would be most appropriate in this scenario?

Accepted Answer

Percentage-of-completion method

Answer

Goods sold method

Answer

Cash method

Question 24

Depreciation expense is considered a:

Accepted Answer

Non-cash expense

Answer

Cash expense

Answer

Operating expense

Answer

Financing expense

Question 25

Which of the following statements best describes the principle of revenue recognition?

Accepted Answer

Revenue is recognized when it is both earned and realizable.

Answer

Revenue is recognized when cash is received.

Answer

Revenue is recognized when the goods or services are delivered.

Question 26

Under the accrual method of accounting, expenses are recognized:

Accepted Answer

When the obligation to pay them is incurred.

Answer

When the cash is received.

Answer

When the related revenue is earned.

Answer

When they are paid.

Question 27

When recognizing revenue from the sale of goods, which of the following is the usual point of recognition?

Accepted Answer

Delivery of the goods to the customer.

Answer

Invoicing the customer for the goods.

Answer

Receipt of payment from the customer.

Answer

Shipment of the goods to the customer.

Question 28

The primary purpose of the matching principle is to:

Accepted Answer

Match expenses with the revenues they generate, resulting in more accurate income measurement.

Answer

Match incomes with expenses.

Answer

Match debits with credits.

Answer

Match assets with liabilities.

Question 29

For services rendered, when is revenue typically recognized?

Accepted Answer

As the service is performed, based on the percentage of completion.

Answer

When the costs of performing the service are incurred.

Answer

Upon delivery of the service to the customer.

Answer

Upon receipt of payment from the customer.

Question 30

A distinctive feature of the accrual basis of accounting is that:

Accepted Answer

Transactions are recorded in the financial statements in the period they occur, regardless of cash flow.

Answer

Expenses are recognized only when cash is paid.

Answer

Revenue is recognized only when cash is received.

Question 31

The primary objective of revenue recognition is to:

Accepted Answer

Match revenues with the expenses incurred to generate those revenues, resulting in reliable financial reporting.

Answer

Maximize the amount of revenue recognized in the current period.

Answer

Minimize the amount of expenses recognized in the current period.

Answer

Ensure that the financial statements are accurate and reliable.

Question 32

What is the fundamental principle behind matching revenue and expenses?

Accepted Answer

Expenses should be recognized in the same period as the revenue they help generate.

Answer

Only cash transactions should be recorded.

Answer

Expenses should always be recorded before revenue.

Answer

Revenue should always be recorded before expenses.

Question 33

Which of the following is NOT a requirement for recognizing revenue?

Accepted Answer

The price is not fixed or determinable.

Answer

The company has delivered the goods or services.

Answer

The company is reasonably sure of collecting the payment.

Answer

The company has completed the earnings process.

Question 34

What is a key difference between GAAP and IFRS regarding revenue recognition?

Accepted Answer

IFRS may allow revenue recognition earlier than GAAP in certain cases.

Answer

IFRS requires more detailed disclosures than GAAP.

Answer

GAAP is more conservative than IFRS when recognizing expenses.

Answer

IFRS is more complex than GAAP.

Question 35

What is a major benefit of using accrual accounting?

Accepted Answer

It presents a more accurate picture of a company's financial performance.

Answer

It is required by law in most countries.

Answer

It simplifies the accounting process.

Question 36

Which of the following is NOT a factor to consider when determining the appropriate period to recognize an expense?

Accepted Answer

The taxpayer's income tax status.

Answer

The accrual basis of accounting.

Answer

The matching principle.

Answer

The significance of the expense.

Question 37

Which of the following statements about the matching principle is TRUE?

Accepted Answer

It aims to align expenses with the revenues they help generate in the same period.

Answer

It is only applicable to service businesses.

Answer

It requires all expenses to be recognized in the same period as their related revenues.

Question 38

Which of these adjusting entries is made at the end of an accounting period to recognize an expense incurred but not yet paid?

Accepted Answer

Debit Salaries Expense, Credit Salaries Payable.

Answer

Debit Unearned Revenue, Credit Service Revenue.

Answer

Debit Prepaid Insurance, Credit Insurance Expense.