Multiple-Choice Questions

1. Which of the following statements is true?

a. Under cash-basis accounting, revenues are recorded when earned and expenses are recorded when incurred.

b. Generally accepted accounting principles require companies to use cash-basis accounting.

c. The key elements of accrual-basis accounting are the revenue recognition principle, the matching principle, and the historical cost principle.

d. Accrual-basis accounting records both cash and noncash transactions when they occur.

2. In December 2009, Swanstrom, Inc., receives a cash payment of $3,000 for services performed in December 2009 and a cash payment of $10,000 for services to be performed in January 2010. Swanstrom also receives the December utility bill for $800. For December 2009, under the accrual basis of accounting, Swanstrom would recognize:

a. $13,000 of revenue and $800 of expense

b. $13,000 of revenue and $0 of expense

c. $3,000 of revenue and $800 of expense

d. $3,000 of revenue and $0 of expense

3. Which transaction would require adjustment at December 31?

a. The sale of merchandise for cash on December 30.

b. A one-year insurance policy (which is immediately effective) was purchased on December 1.

c. Common stock was issued on November 30.

d. Salaries were paid to employees on December 31 for work performed in December.

4. Which of the following statements is not true?

a. The cash account will always be affected by adjusting journal entries.

b. Adjusting entries are necessary because timing differences exist between when a revenue or expense is recognized and cash is received or paid.

c. Adjusting entries always affect one revenue or expense account and one asset or liability account.

d. Adjusting entries can be classified as either accruals or deferrals.

5. Dallas Company loaned $10,000 to Ewing Company on December 1, 2009. Ewing will pay Dallas $600 of interest ($50 per month) on November 30, 2010. Dallas’s adjusting entry at December 31, 2009 is:

a. Interest Expense 50

Cash 50

b. Interest Receivable 50

Interest Revenue 50

c. Cash 50

Interest Revenue 50

d. No adjusting entry is required.