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Page 1 of 4 Cash Basis, Accrual and Error 1.

Under the accrual system of accounting, cash receipt and disbursements may a. Precede, coincide with, or follow the period in which revenue and expenses are recognized. b. Precede or coincide with but ever follow the period in which revenue and expenses are recognized. c. Coincide with or follow but never precede the period in which the revenue and expenses are recognized. d. Only coincide with the period in which revenue and expenses are recognized. 2. Which of the following statements is incorrect? a. Accrual basis financial statements may be prepared from single entry records. b. Single entry accounting is synonymous with cash basis accounting. c. No adjusting entries are necessary when accounting records are kept on a pure cash basis. d. Over the entire life of the business enterprise, there would be no difference between income on a cash basis and income on an accrual basis. 3. Compared to its cash basis net income for the current year, an entitys accrual basis net income increase when it a. Declared a cash dividend in the prior year that is paid in the current year. b. Wrote off more accounts receivable than it reported as uncollectible accounts expense in the current year. c. Had lower accrued expenses on December 31 of the current year than on January 1. d. Sold used equipment for cash at a gain in the current year. 4. Compared to the accrual basis of accounting, the cash basis of accounting understates income by net decrease during the accounting period of a. Both accounts receivable and accrued expenses b. Accrued expenses but not of accounts receivable c. Neither accounts receivable nor of accrued expenses d. Accounts receivable but not of accrual expenses. 5. Prior to the current year, an entity used the cash basis of accounting. As of December 31 of the current year, the entity changed to the accrual basis. The entity cannot determine the beginning balance of supplies inventory. What is the effect of the entitys inability to determine beginning supplies inventory on its accrual basis net income and December 31 accrual basis owners equity? Net Income Owners Equity a. No Effect No Effect b. No Effect Overstated c. Overstated No Effect d. Overstated Overstated 6. The premium on a three-year insurance policy expiring on December 31, 2011 was paid in total on January 1, 2009. If the company has six-month operating cycle, then on December 31. 2009, the prepared insurance reported as a current asset would be for a. 6 months c. 18 months b. 12 months d.24 months 7. The premium on a three-year insurance policy expiring on December 31, 2011 was paid in total on January 1, 2009. Assuming that the original payment was recorded as prepaid asset, how would total assets and stockholders equity be affected during 2009? a. Total assets would decrease and stockholders equity would increase b. Both total assets and stockholders equity would decrease.

Page 2 of 4 c. Both total assets and stockholders equity would increase. d. Neither total assets nor stockholders equity would change. 8. The premium on a four-year insurance policy expiring on December 31, 2011 was paid in total on January 1, 2008. Assuming that the original payment was recorded as a prepaid asset, the balance in the prepaid asset account on December 31, 2009 would be a. Lower than the balance on December 31, 2008 b. Lower than the balance on December 31, 2010 c. The same as the balance on December 31, 2011 d. The same as the original payment. 9. PAS provides that an entity shall correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by: Statement 1: Restating the comparative amounts for the prior period presented in which the error occurred. Statement 2: Restating the opening balances of assets, liabilities and equity for the earliest prior period presented if the error occurred before the earliest period presented. a. b. c. d. Only statement 1 is acceptable Only statement 2 is acceptable Both statements are acceptable Both statements are not acceptable

10. Statement 1: The correction of a prior period error is excluded from profit or loss for the period in which the error is discovered. Statement 2: The correction of a prior period error is an adjustment of the beginning balance of retained earnings of the earliest period presented. a. Only statement 1 is correct b. Only statement 2 is correct c. Both statements are correct d. Both statements are wrong

11. Which of the following errors will not self-correct in the next year? a. Accrued expenses not recognized at year end b. Accrued revenues that have not been collected not recognized at year-end. c. Prepaid expenses not recognized at year-end. d. Prepaid expenses not recognized in year-end. 12. In its accrual basis income statement for the year ended December 31, 2011, Daria Company reported revenue of P3, 000, 000. Additional information was as follows: Accounts Receivable January 1 400, 000 Uncollectible accounts written off 20, 000 Accounts receivable December 31 500, 000 Under the cash basis, how much should Daria report as revenue for 2011? a. 2, 900, 000 c. 3, 000, 000 b. 2, 880, 000 d. 3, 120, 000 13. Adam Company reported cash basis sales revenue of P2, 300, 000 for the year ended December 31, 2011. Additional information was as follows: December 31, 2010 500, 000 150, 000 December 31, 2011 650, 000 200, 000

Accounts Receivable Notes receivable

Page 3 of 4 During 2011, uncollectible account of P10, 000 were written off and note receivable of P100, 000 was discounted for net proceeds of P90, 000 and credited directly to notes receivable. Under accrual basis, Adam Company would report sales at a. 2, 610, 000 c. 2, 600, 000 b. 2. 510, 000 d. 2, 500, 000 14. Zeta Company reported sales revenue of P4, 600, 000 in its income statement for the year ended December 31, 2011. Additional information are as follows: 12/31/2010 12/31/2011 Accounts receivable 1, 000, 000 1, 300, 000 Allowance for uncollectible accounts 60, 000 110, 000 Zeta wrote off uncollectible accounts totalling P20, 000 during 2011. Under the cash basis of accounting, Zeta would have reported 2011 sales of a. 4, 900, 000 b. 4, 350, 000 c. 4, 300, 000 d. 4, 280, 000

15. Hard Company maintains its accounting records on the cash basis but restates its financial statements to the accrual method of accounting. Hard had P6, 000, 000 in cash-basis income for 2011. The following information pertains to the operations for the years ended December 31, 2011 and 2010. 2011 2010 Accounts receivable 4, 000, 000 2, 000, 000 Accounts payable 1, 500, 000 3, 000, 000 Under the accrual method, what amount of income should Hard report in its 2011 income statement? a. 2, 500, 000 c. 6, 500, 000 b. 5, 500, 000 d. 9, 500, 000 16. Under Easter Companys accounting system, all insurance premiums paid are debited to prepaid insurance. Information for the year ended December 31, 2011, is as follows: Prepaid insurance at January 1 Charge to insurance expenses Prepaid insurance at December 31 100, 000 440, 000 120, 000

What was the amount of insurance premium paid in 2011? a. 340, 000 b. 420, 000 c. 440, 000 d. 460, 000

17. Rice Companys salaried employees are paid biweekly. Advances made to employees are paid back by payroll deductions. Information relating to salaries follows: 12/31/2010 12/31/2011 Employee Advances 24, 000 36, 000 Accrued Salaries payable 40, 000 ? Salaries expense during the year 420, 000 Salaries paid during the year (gross) 390, 000 In Rices December 31, 2011 statement of financial position, accrued salaries payable was a. 94, 000 c. 70, 000 b. 82, 000 d. 30, 000 18. Sweet Company provides the following information for 2011: Interest paid 800, 000

Page 4 of 4 Decrease in prepaid interest Increase in accrued interest expense What is the amount of interest expense? a. 930, 000 c. 730, 000 b. 800, 000 d. 870, 000 100, 000 30, 000

19. Moon Corporation reported rental revenue of P2, 210, 000 in its cash basis income tax return for the year ended December 31, 2011. Additional information is as follows: Rent receivable December 31 Rent receivable January 1 Uncollectible rent written off during the year 1, 060, 000 800, 000 30, 000

Under the accrual basis, Moon should report rental revenue of a. 1, 920, 000 c. 2, 440, 000 b. 1, 980, 000 d. 2, 500, 000 20. Trend Company provide the following information for the year 2011: Net Loss 100, 000 Total assets at December 31 3, 000, 000 Common Stock at December 31 1, 000, 000 Additional Paid in capital 500,000 Dividend Declared 700, 000 The debt-equity ratio (liabilities/equity) is 50% at December 31, 2011.What is the retained earnings accounts balance on January 1, 2011? a. 1, 100, 000 b. 1, 300, 000 c. 500, 000 d. 600, 000

21. Following data are selected information for Martel Company for the current year: Cash Balance, January 1 130, 000 Accounts Receivable, January 1 190, 000 Collections from customers 2, 100, 000 Stockholders equity, January 1 380, 000 Total Assets, January 1 750, 000 Total Assets, December 31 880, 000 Cash balance, December 31 160, 000 Accounts receivable, December 31 360, 000 Total liabilities, December 31 390, 000 The net income for the current year is a. 490, 000 c. 110, 000 b. 150, 000 d. 70, 000 ***NOTHING FOLLOWS***