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Accrual basis
Accountancy (STI College)
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Activity 1. Multiple Choice (Adapted)
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.) Which of the following terms best describes financial statements whose basis of
accounting recognizes transactions and other events when they occur?
a. Accrual basis
b. Going concern basis
c. Cash basis
d. Invoice basis
3.) Which of the following statements regarding accrual versus cash basis accounting
is true?
a. The cash basis is appropriate for smaller entities, especially those in the
service industry.
b. The cash basis is less useful in predicting the timing and amounts of
future cash flows of an entity.
c. Application of the cash basis results in an income statement reporting
revenue and expenses.
d. The cash basis requires a complete set of double entry records.
4.) Under the cash basis of accounting
a. Revenue is recorded when earned
b. Accounts receivable would appear in the statement of financial position
c. The matching principle is ignored.
d. The matching principle is ignored.
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5.) Total net income over the life of the 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
6.) 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. Write off 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.
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
a. no effect
no effect
b. no effect
overstated
c. overstated
no effect
d. overstated
overstated
8.) An entity wants to convert its financial statements from accrual basis to cash basis.
Both supplies inventory and office salaries payable increased between the
beginning and ending balance. To obtain cash basis net income, how should these
increases be added or deducted from accrual basis net income?
Supplies inventory
office salaries payable
a. Deducted
deducted
b. Deducted
added
c. Added
deducted
d. Added
added
9.) Compared to the accrual basis of accounting, the cash basis 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 expense
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d. Accounts receivable but not of accrued expenses
10.) An entity’s inventory and accounts payable decreases balances increased.
Should these increases be added to or deducted from cash payments to suppliers
to arrive at cost of goods sold for the current year?
Increase in inventory increase in accounts payable
a. Added
deducted
b. Added
added
c. Deducted
deducted
d. Deducted
added
Let’s Analyze
In this activity, you are to compute the amount of revenue, expense, asset and liability to
be presented in the accounting records under the method as specified in the problem.
Problem 1 (Adapted)
During 2018, Karyl company had P100,000 in cash sales and P1,500,000 in credit
sales. The accounts receivable balances were P200,000 and 242,500 on December 31,
2017 and 2018, respectively.
a. If Karyl desires to prepare a cash basis income statement, how much should be
reported as sales for 2018? 1,557,500 (1,500,000+200,000-242,500) + 100,000
200,000
1500,000 1,457,500
242,500
b. If Karyl desires to prepare an accrual basis income statement, how much should be
reported as sales for 2018?
1,600,000
(100,000 + 1,500,000)
Problem 2 (Adapted)
Under Edelbert company’s accounting system, all insurance premiums paid are
debited to prepaid insurance. Information for the year ended December 31, 2018 is as
follows:
Prepaid Insurance on January 1
200,000
Charge to insurance expense
880,000
Prepaid insurance on December 31
240,000
What was the amount of insurance premium paid in 2018?
(880,000+240,000-200,000)
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920,000
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Insurance paid
?
PB
200,000
AE
PE
(240,000)
aB
Insurance expense
880,000
Problem 3 (Adapted)
Under accrual basis, rental income of Hamilton company for the current year is
P300,000. Additional information is as follows:
Unearned rental income, January 1
25,000
Unearned rental income, December 31
37,500
Accrued rental income, January 1
15,000
Accrued rental income, December 31
20,000
How much cash was received from rental in the current year?
(300,000+37,500-25,000+15,000-20,000)
Cash received
DB
AE
DE
AB
Income
307,500
307,500
25,000
20,000
(37,500)
(15,000)
300,000
Problem 4 (Adapted)
Rosel company, which began operations on January 1, 2017, has elected to use
cash basis accounting for tax purposes and accrual basis accounting for its financial
statements. Rosel reported sales of P3,500,000 and P1,600,000 in its tax returns for the
years ended December 31, 2018 and 2017, respectively. Rosel reported accounts
receivable of P600,000 and P1,000,000 in its statement of financial position on December
31, 2018 and 2017, respectively.
What amount should be reported as sales in the income statement for the year
ended December 31, 2018? 3,100,000 (3,500,000 + 600,000-1,000,000)
Problem 5 (Adapted)
Ciara company assigns patent rights for which royalties are received. During 2018,
Ciara received royalty remittance of P1,250,000. The following data are available:
2017
2018
Royalties Receivable
375,000
400,000
Unearned royalties
225,000
325,000
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What amount should be reported as royalty revenue for 2018?
(1,250,000 +400,000-375,000-325,000+225,000)
Royalties received
DB
AE
DE
aB
income
1,175,000
1,250,000
225,000
400,000
(325,000)
(375,000)
1,175,000
In a nutshell
In this activity, you are asked to apply your technical know-how in converting cash basis
net income to the accrual basis net income. Specifically, your task is to compute for the
net income under cash basis and net income under accrual basis. Make a brief
explanation sighting the difference between the two methods.
Problem 1
At the end of 20B, the accountant of Earland Company provided the following
accounting information kept on a cash basis: revenue, 2,865,000 and expenses,
1,213,500. The following amounts of accrued, prepaid and unearned items were ignoredat
the end of 20A and 20B:
20A
20B
Accrued revenue
136,500
109,500
Unearned revenue
99,000
162,000
Accrued expenses
73,500
97,500
Prepaid expenses
69,000
84,000
Revenue
Expenses
Net Income
Cash Basis
2,865,000
1,213,500
1,651,500
Accrual Basis
2,775,000
1,222,500
1,552,500
2,865,000+109,500-136,500+99,000-162,000=2,775,000
1,213,500+97,500-73,500+69,000-84,000=1,222,500
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