Chapter 4: Adjusting/Cash vs Accrual Accounting

Accrual-basis accounting creates timing differences between:

• Cash inflows and related revenues

• Cash outflows and related revenues

• Revenues and expenses

• Cash inflows and outflows

Under accrual-basis accounting, revenues are recorded when:

• Cash is received

• Costs are incurred

• Goods and services are provided to customers

• Obligations occur

What happens when prepaid expenses arise?

• Cash is paid now, and the expense is recognized later

• Expenses are recognized now, cash is paid later

• Revenue is recognized now, and cash is paid later

• Revenue is deferred until payment is received

When does cash-basis accounting record revenues?

• When goods are sold

• When services are provided

• When cash is received

• When costs are used

What is the key difference between accrual-basis and cash-basis accounting?

• Accrual-basis records expenses when paid, while cash-basis records them when incurred

• Accrual-basis records revenues when goods/services are provided, cash-basis when cash is recieved

• Accrual-basis accounting is not part of GAAP, while cash-basis is

• Cash-basis accounting creates timing differences between cash inflows and outflows

Deferred revenue arises when a company:

• Receives cash but hasn't yet provided products or services

• Provides goods but hasn't yet received cash

• Incurs an expense but hasn't yet paid cash

• Receives cash after products are provided

Adjustments made under accrual accounting:

• Always involve cash transactions

• Involve only one balance sheet account

• Never involve cash and always include both an income statement and balance sheet account

• Involve only expense accounts

Accrued expenses occur when:

• A company receives cash in advance of providing goods

• An expense is recognized before cash is paid

• Goods and services are provided but not paid for

• Cash is paid now, and expenses are recognized later

In accrual-basis accounting, when are liabilities recorded?

• When expenses are paid

• When obligations occur

• When assets are created

• When cash is received

Accrued revenues arise when

• A company provides goods or services but hasn't yet received cash

• A company receives cash but hasn't provided goods or services yet

• A company has paid for an expense but hasn't recognized it yet

• An expense is incurred, but cash has not yet been paid