Module 3 Part 5-7

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

• Accrual basis recognizes revenues and expenses when earned/incurred, while cash basis recognizes them when cash is exchanged.

• Accrual basis is only used for large corporations, while cash basis is used for small businesses.

• Cash basis is more accurate for determining profitability.

• Accrual basis is more complex than cash basis.

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

• Salaries owed to employees

• Interest earned on a savings account

• Rent paid in advance for the next month

• Depreciation expense

What is the accounting equation?

• Assets = Liabilities + Equity

• Revenues = Expenses + Net Income

• Assets = Liabilities - Equity

• Revenues - Expenses = Net Income

Accrued expenses are:

• Expenses that have been incurred but not yet paid.

• Expenses that have been paid but not yet incurred.

• Assets that have been purchased but not yet used.

• Liabilities that have been incurred but not yet paid.

Unearned revenue is:

• Revenue that has been earned but not yet received.

• Revenue that has been received but not yet earned.

• An expense that has been incurred but not yet paid.

• A liability that has been incurred but not yet paid.

The matching principle requires that:

• Revenues and expenses be recognized in the same period.

• Revenues be recognized when cash is received and expenses when cash is paid.

• Revenues be recognized when earned and expenses when incurred.

• Both a and c.

What is the purpose of adjusting entries?

• To correct errors in the accounting records.

• To update the accounts for the current period.

• To prepare the financial statements for the end of the accounting period.

• All of the above.

Which financial statement shows the profitability of a business?

• Balance sheet

• Income statement

• Statement of cash flows

• Statement of retained earnings

What is the difference between a debit and a credit?

• Debits increase assets and expenses, while credits increase liabilities and equity.

• Debits increase liabilities and equity, while credits increase assets and expenses.

• Debits increase assets and liabilities, while credits increase expenses and equity.

• Debits increase expenses and equity, while credits increase assets and liabilities.

The balance sheet shows the:

• Profitability of a business.

• Financial position of a business at a specific point in time.

• Cash inflows and outflows of a business.

• Changes in equity of a business.