(CHP47) CASH AND ACRRUAL BASIS.docx

CASH AND ACCRUAL BASIS 1. Under the accrual basis of accounting, cash receipts and disbursements may a. Precede, coincide with, or follow the period in which revenue and expenses are recognized b. Precede or coincide with but never follow the period in which revenue and expenses are recognized c. Coincide with or follow but never precede the period in which revenue and expenses are recognized d. Only coincide with the period in which revenue and expenses are recognized 2. Under the cash basis of accounting a. Revenues are recorded when they are earned b. Accounts receivable would appear on the statement of financial position c. Depreciation of assets having an economic life of more than one year is not recognized d. The matching principle is ignored 3. Total net income over the life of an entity is a. Higher under the cash basis than under the accrual basis b. Lower under the cash basis than under the accrual basis c. The same under the cash basis as under the accrual basis d. Not susceptible to measurement 4. Incomplete accounting records using only a cash book is a characteristic of a. Cash basis b. Accrual basis c. Single entry system

d. Double entry system

5. Compared to cash basis net income for the current year, an entity’s accrual basis net income increased when it a. Declared a cash dividend in the prior year that it 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. 6. Compared to the accrual basis of accounting, the cash basis of accounting understates income by the 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 accrued expenses 7. Prior to the current year, an entity used the cash basis of accounting. At the current year-end, the entity changed to the accrual basis. The entity cannot determine the beginning balance of supplies inventory. What is the effect of the entity’s inability to determine beginning supplies inventory on its accrual basis net income and year-end accrual basis owner’s equity? Net Income Owner’s Equity Net Income Owner’s Equity a. No effect No effect c. Overstated No effect b. No effect Overstated d. Overstated Overstated 8. The premium on a three-year insurance policy expiring on December 31, 2017 was paid in total on January 1, 2015. The original payment was initially debited to a prepaid asset account. The appropriate journal entry had been recorded on December 31, 2015. The balance in the prepaid asset account on December 31, 2015 should be a. Zero b. The same as it would have been if the original payment had been debited initially to an expense account c. The same as the original payment d. Higher than if the original payment had been debited initially to an expense account 9. The premium on a three-year insurance policy expiring on December 31, 2017 was paid in total on January 1, 2015. The original payment was recorded as a prepaid asset. How would total assets and shareholders’ equity be affected during 2015? a. Total assets would decrease and shareholders’ equity would increase b. Both total assets and shareholders’ equity would decrease c. Both total assets and shareholders’ equity would increase

d. Neither total assets nor shareholders’ equity would change 10. Segacious Company reported sales revenue of P4,600,000 in the income statement for 2015. Additional information for the current year is as follows: January 1 December 31 Accounts receivable 1,000,000 1,300,000 Allowance for doubtful accounts 60,000 110,000 Advances from customers 200,000 300,000 The entity wrote off uncollectible accounts totaling P50,000 during the current year. Under cash basis, What amount should be reported as sales revenue for the current year? a. 4,900,000 b. 4,250,000 c. 4,350,000 d. 4,400,000 11. During 2015, Sensible Company reported gross cash sales of P3,000,000 with related returns and allowances of P100,000 and gross credit sales of P5,000,000 with related discounts of P400,000. On January 1, 2015, customers owned the entity P1,000,000. On December 31, 2015, customers owned the entity P1,500,000. The entity used the direct write-off method for bad debts. No bad debts were recorded in 2015. Under cash basis, what amount of sales revenue should be reported for the current year? a. 7,000,000 b. 8,000,000 c. 7,500,000 d. 8,500,000 12. Skeptical Company began operations on January 1, 2015. The entity has elected to use cash basis of accounting for tax purposes and accrual basis for financial reporting. The entity reported sales of P8,750,000 and P4,000,000 in the tax returns for 2016 and 2015, respectively. The entity reported accounts receivable of P1,500,000 and P2,500,000 on December 31, 2016 and December 31, 2015, respectively. What amount should be reported as sales in the income statement for 2016? a. 7,250,000 b. 7,750,000 c. 9,750,000 d. 3,000,000 13. Splendid Company reported the following balances for the current year: December 31 Inventory 2,600,000 Accounts payable 750,000

January 1 2,900,000 500,000

The entity paid suppliers P4,900,000 during the current year. Under accrual basis, what amount should be reported as cost of goods sold for the current year? a. 5,450,000 b. 4,950,000 c. 4,850,000 d. 4,350,000 14. Taboo Company has apprehensions of possible pilferage in its stock of merchandise at December 31, 2015. The following data were available for the current year: January 1 December 31 Physical Inventory, at cost 600,000 1,000,000 Sales 4,000,000 Cost of sales 2,400,000 Accounts receivable 1,200,000 1,350,000 Accounts payable 1,500,000 1,850,000 During the current year, accounts written off amounted to P100,000. Sales returns with credit memo were P150,000 and purchase returns, P50,000. Cash receipts from customers after P200,000 discounts totaled P6,000,000 while cash payments to trade creditors amounted to P4,000,000. Cash paid to customers for goods returned was P50,000. On this transaction, accounts receivable was debited. Under accrual basis, what is the amount of gross sales? a. 6,600,000 b. 6,550,000 c. 6,650,000 d. 6,350,000 15. Temporal Company maintains the accounting records on the cash basis but restates the financial statements to the accrual basis. The entity had P6,000,000 in cash basis net income for 2015. The following information pertains to the entity’s operations: December 31 January 1 Accounts receivable 4,000,000 2,000,000 Accounts payable 1,500,000 3,000,000 Under accrual basis, what amount of net income should be reported for 2015? a. 2,500,000 b. 5,500,000 c. 6,500,000 d. 9,500,000

16. Timid Company borrowed money under various loan agreement involving notes discounted and notes requiring interest payments at maturity. During the year ended December 31, 2015, the entity paid interest totaling P6,000,000. The statement of financial position included the following: January 1 December 31 Prepaid interest 500,000 1,500,000 Interest payable 2,000,000 2,500,000 What amount of interest expense should be reported for the current year? a. 5,500,000 b. 4,500,000 c. 7,500,000 d. 6,500,000 17. Trivial Company assigned some of its patents to other entities under a variety of licensing agreements. The following data are gathered for 2015: January 1 December 31 Unearned royalties 600,000 400,000 Royalties receivable 900,000 850,000 During the current year, the entity received royalty remittance of P2,000,000. What amount should be reported as royalty income for the current year? a. 1,950,000 b. 2,150,000 c.2,200,000 d. 2,250,000