Midterm Review Questions for Accounting 5001

Topics: Generally Accepted Accounting Principles, Balance sheet, Expense Pages: 9 (1977 words) Published: May 1, 2013
ACCT5001 Sem 2, 2012

Solutions to Mid-Semester Quiz Practice Questions



Multiple-Choice 1. b is not a primary objective of financial reporting. It may be part of an objective of internal controls instead. none will cause the trial balance not to balance, even though mistakes have occurred this is an internal allocation transaction that does not involve an external party (all the other transactions involve an external party) both accounts receivable (asset), and Service revenue (equity) increase here There is no cash involved in this transaction accrual accounting recognizes revenue when earned and expenses when incurred in earning that revenue (irrespective of when cash is received or paid) adjustments are usually involve prepayments or accruals. If expense is recognized when cash is paid, there is no need to adjust as there is no prepayment or accrual involved. This involves reducing the liability ‘subscriptions received in advance (liability decrease) and recognizing it as subscription revenue (equity increase) Beginning retained earnings $70,000 + profit ($600,000 - $565,000) – dividends $20,000 = $ ending retained earnings $85,000 If depreciation is not recorded, the contra asset accumulated depreciation will not increase to reduce the written down cost of the asset by $5,500 and depreciation expense will not be recorded to reduce profit (and therefore equity) by $5,500

2. d.

3. c

4. b

5. c

6. d

7. d

8. d

9. c

ACCT5001 Sem 2, 2012

Solutions to Mid-Semester Quiz Practice Questions


Discussion/Narrative (Note: the following is a suggested answer. Other answers may be acceptable depending on the accuracy of statements made and how convincing the argument is.) Suggested answer 1 Total 4 marks, so we are looking for four main points in the time available

a) Revenue is recognised when it is satisfies the definition of revenue and the revenue recognition criteria, which is usually when the revenue is earned. (1) At the point that the customer pays the deposit the revenue is not earned as the customer has the right to receive a refund and the firm still has an obligation to provide the bus service. (1) After the customer takes the trip the company has completed all work required and now has a claim on the customer for the remaining balance of the trip. Therefore it is at this point that revenue should be recognized and assets increase (90% of the remaining amount is now an accounts receivable) and liabilities decrease (the 10% deposit is not longer unearned income (revenue received in advance), but can be transferred to revenue. (1) b) The point at which revenue is recognised will make no difference to the amount of cash the firm has. Revenue recognition is when it is earned, irrespective of when the cash is received. (1)


Once again, you can’t just agree or disagree that it is or is not a simple matter, you need to explain why it is or is not, making six points for 6 marks Determining profit on an accrual basis is not a simple matter of a deduction of cash received from cash paid during the period. (0) Under accrual-based accounting the effects of financial transactions and events are recognized when they occur (not when cash is received or paid). (1) Financial statements prepared on an accrual basis not only report past transactions of cash received and cash paid, but also obligations to pay cash in the future for resources received, and of future benefits that will be received in the future from financial transactions or events. (1) Determining profit under accrual accounting requires measuring income earned for the period, against the expenses incurred in earning that income within the same period. (1)

ACCT5001 Sem 2, 2012

Solutions to Mid-Semester Quiz Practice Questions


Revenue is recognized when it meets the definition and recognition criteria, i.e. when it is probable that an increase in future...
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