(Week 5) Accounting Concepts – Accrual Accounting

Questions and Answers

When are revenues recognized under accrual accounting?

When earned (correct)

When cash is received

At the end of the financial year

Only when expenses are recorded

Accrual accounting requires that expenses be recognized when cash is paid.

False

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

To ensure revenues and expenses are recorded in the correct accounting period.

Accrued revenue creates an asset account called __________.

Accrued Revenue or Revenue Receivable Signup and view all the answers

Match the following concepts with their descriptions:

Accrued Revenue = Revenue that has been earned but not received Accrued Expenses = Expenses that have been incurred but not paid Prepayments = Payments made before the expense is incurred Adjustments = Entries made to correct revenues and expenses Signup and view all the answers

Which of the following is an example of accrued revenue?

Interest earned on a term deposit Signup and view all the answers

Accrued expenses are liabilities that have been paid.

False Signup and view all the answers

What must be recorded at the end of the month for accrued revenue from a $100,000 term deposit at 6% interest?

$500 Signup and view all the answers

Adjustments help ensure the correct amount of __________ for a period.

profit or loss Signup and view all the answers

What happens to accrued revenue once cash is received?

It is transferred to a cash account Signup and view all the answers

What is the correct accounting treatment for accrued expenses?

Expense included when incurred Signup and view all the answers

Accrued expenses are considered a long-term liability on the balance sheet.

False Signup and view all the answers

What is the term used for cash received before the revenue has been earned?

Prepaid Revenue Signup and view all the answers

The ____________ method estimates accounts receivable expected to be uncollectible.

Allowance Signup and view all the answers

Match the following terms with their definitions:

Accrued Expenses = Current liabilities owed to creditors Prepaid Expenses = Assets paid in advance for future use Bad Debts = Accounts receivable deemed uncollectible Allowance for Doubtful Debts = Estimate of bad debts included in financial statements Signup and view all the answers

Which of the following is not a method of accounting for bad debts?

Accrual Method Signup and view all the answers

When writing off a bad debt using the direct write-off method, a new expense is recognized.

True Signup and view all the answers

What account is used to record cash received for prepaid expenses?

Bank Signup and view all the answers

A prepaid revenue is classified as a ____________ on the balance sheet.

liability Signup and view all the answers

What report must be included under AASB 107 along with the income statement and balance sheet?

Statement of Cash Flows Signup and view all the answers

What does a Statement of Cash Flows primarily assess regarding an entity?

Liquidity Signup and view all the answers

Cash flow statements only report cash inflows and neglect outflows.

False Signup and view all the answers

What are the three main types of activities reported in a Statement of Cash Flows?

Operating, Investing, Financing Signup and view all the answers

The acquisition and disposal of non-current assets and other investments fall under ______ activities.

Investing Signup and view all the answers

Match the following cash flow activities to their classifications:

Sale of shares = Investing activity Interest paid = Operating activity Proceeds from loans = Financing activity Payments to employees = Operating activity Signup and view all the answers

Which of the following is included as a cash outflow in financing activities?

Dividends paid Signup and view all the answers

Operating activities include all day-to-day revenue-producing activities of the entity.

True Signup and view all the answers

Name one cash inflow type from investing activities.

Sale of property, plant, and equipment for cash Signup and view all the answers

The net cash flows from operating, investing, and financing activities are summarized under the net ______ in the Statement of Cash Flows.

change Signup and view all the answers

Which of the following statements best describes the role of the cash flow statement?

To supplement profit reporting and assess liquidity Signup and view all the answers

Study Notes

Accrual Accounting

Revenues are recognized when earned, irrespective of cash flow (e.g., credit sales).
Expenses are recognized when incurred or used, regardless of payment (e.g., utility bills).
Adjustments are necessary to ensure revenues and expenses are recorded in the correct period.

Importance of Adjustments

Adjustments account for income earned but not received and expenses incurred but not paid.
They affect the correct calculation of profit or loss and the accurate reporting of assets, liabilities, and equity.
Main types include accruals and prepayments.

Accrued Revenue (Asset)

Accrued Revenue is revenue earned but not yet received or recognized, creating an asset account.
Common examples include interest, dividends, and rental income.
Timing involves recognizing revenue when earned and cash when received (e.g., interest on deposits).

Accrued Expenses (Liability)

Accrued Expenses are incurred expenses not yet paid, creating a liability for the company.
Expenses appear in the Profit or Loss Statement when incurred, regardless of payment timing.
Examples include outstanding phone bills that are recorded as liabilities.

Prepaid Revenue (Liability)

Prepaid Revenue involves cash received for future revenues not yet earned.
Creates a liability called Prepaid Revenue or Unearned Revenue until the service is provided.
Examples include advance payments for services like rent or tickets.

Prepaid Expenses (Asset)

Prepaid Expenses are payments made before goods/services are consumed, treated as assets.
They are recognized as expenses when the benefits are realized (e.g., prepaid insurance).
They are recorded as a reduction in assets as the service is consumed over time.

Bad and Doubtful Debts

Bad Debts arise when credit sales have uncollectible amounts, often resulting from poor credit practices.
Accounting methods include the Direct Write-off Method and the Allowance Method for estimating doubtful debts.

Direct Write-Off Method

Used when a specific account becomes uncollectible, directly writing it off as an expense.
Criticized for causing discrepancies in reporting, as it can impact a different accounting period.

Allowance Method

Estimates bad debts based on accounts receivable, recognizing a corresponding expense beforehand.
Creates an Allowance for Doubtful Debts, reducing the accounts receivable balance shown on the balance sheet.

Statement of Cash Flows (AASB 107)

Requires reporting cash inflows and outflows in addition to other financial statements.
Divided into Operating, Investing, and Financing Activities to assess liquidity and financial structure.

Differences Between Cash and Accrual Accounting

Accrual accounting recognizes transactions based on their timing, while cash flow focuses on actual cash receipts and payments.
A cash flow statement is vital to understand an entity's liquidity, as high profits do not guarantee cash availability.

Cash Flow Statement Sections

Operating Activities: Revenue-generating activities, including receipts from customers and payments to suppliers.
Investing Activities: Acquisition/disposal of non-current assets, such as purchasing equipment or selling property.
Financing Activities: Changes in the entity's capital structure, including issuing or repaying loans and dividends.

Format of Cash Flow Statement Presentation

Includes headings, net cash flows from all activities, net change in cash flows, and beginning and ending cash balances.

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Description

This quiz focuses on the principles of accrual accounting, including the recognition of revenues and expenses regardless of cash flow. It will cover reasons for adjustments in the accounting period and the importance of accurate financial reporting.

(Week 5) Accounting Concepts – Accrual Accounting

Questions and Answers

When are revenues recognized under accrual accounting?

Accrual accounting requires that expenses be recognized when cash is paid.

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

Accrued revenue creates an asset account called __________.

Match the following concepts with their descriptions:

Which of the following is an example of accrued revenue?

Accrued expenses are liabilities that have been paid.

What must be recorded at the end of the month for accrued revenue from a $100,000 term deposit at 6% interest?

Adjustments help ensure the correct amount of __________ for a period.

What happens to accrued revenue once cash is received?

What is the correct accounting treatment for accrued expenses?

Accrued expenses are considered a long-term liability on the balance sheet.

What is the term used for cash received before the revenue has been earned?

The ____________ method estimates accounts receivable expected to be uncollectible.

Match the following terms with their definitions:

Which of the following is not a method of accounting for bad debts?

When writing off a bad debt using the direct write-off method, a new expense is recognized.

What account is used to record cash received for prepaid expenses?

A prepaid revenue is classified as a ____________ on the balance sheet.

What report must be included under AASB 107 along with the income statement and balance sheet?

What does a Statement of Cash Flows primarily assess regarding an entity?

Cash flow statements only report cash inflows and neglect outflows.

What are the three main types of activities reported in a Statement of Cash Flows?

The acquisition and disposal of non-current assets and other investments fall under ______ activities.

Match the following cash flow activities to their classifications:

Which of the following is included as a cash outflow in financing activities?

Operating activities include all day-to-day revenue-producing activities of the entity.

Name one cash inflow type from investing activities.

The net cash flows from operating, investing, and financing activities are summarized under the net ______ in the Statement of Cash Flows.

Which of the following statements best describes the role of the cash flow statement?

Study Notes

Accrual Accounting

Importance of Adjustments

Accrued Revenue (Asset)

Accrued Expenses (Liability)

Prepaid Revenue (Liability)

Prepaid Expenses (Asset)

Bad and Doubtful Debts

Direct Write-Off Method

Allowance Method

Statement of Cash Flows (AASB 107)

Differences Between Cash and Accrual Accounting

Cash Flow Statement Sections

Format of Cash Flow Statement Presentation

Studying That Suits You

Description

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