INTERMEDIATE ACCOUNTING QUIZ 6. CASE
SCENARIO QUESTIONS WITH ANSWERS
PROVIDED. 2024 UPDATE
1. On December 31, Year 1 Adam Company incurred $3,000 of
accrued salary expense. The Year 2 recognition of the cash
payment for these expenses
A. decreases the amount of liabilities shown on the Year 2 balance
sheet.
B. increases the amount of salary expense recognized in Year
2.
C. decreases the amount of salary expense recognized in Year
2.
D. increases the amount of liabilities shown on the Year 2 balance
sheet.: A
Recognizing accrued salary expense in Year 1 caused liabilities
(salaries payable) to increase. In Year 2 when cash is paid to settle
the obligation, assets (cash) and liabilities (salaries payable)
decrease. The expense recognition occurs in Year 1. Paying off the
liability in Year 2 does not affect the recognition of salary expense.
2. A cost may be recorded as an expense or as an asset
purchase. This statement is True
False: True
A cost is incurred when a company pays cash or incurs a liability as a
result of its operating or investing activities. For example, a company
may pay cash or increase its salaries payable to compensate its
employees who have completed work for the company. In this case,
,the company would recognize an expense because it has already used
the labor provided by the employees. In other words, there is no
future benefit associated with the cost because the benefit was
obtained in the past when the work was done. Alternatively, a
company could pay cash to purchase supplies that it plans to use in
the future. Under this circumstance, a benefit will occur in the future
when the supplies are used in the process of producing revenue. As a
result, the company would record the cost as the purchase of an asset.
In summary, when a company incurs a cost that has no future benefit
it recognizes an expense. When a company incurs a cost that has a
future benefit is records the purchase of an asset. Note carefully, that
in accounting terms, a cost and an expense do not mean the same
thing.
3. When a company purchases supplies on account
A. expenses increase.
B. total assets decrease.
C. cash flow from investing activities decreases.
D. liabilities increase.: D
Purchasing on account means that the buyer does not pay cash at the
time of purchase. Instead, the buyer incurs an obligation (accounts
payable) to pay cash in the future. When supplies are purchased on
account assets (supplies) and liabilities (accounts payable) increase.
The cash flow associated with the purchase of supplies is an
operating activity not an investing activity.
4. Which of the following shows how paying cash to purchase
supplies will affect a company's financial statements?
, INTERMEDIATE ACCOUNTING QUIZ 6. CASE
SCENARIO QUESTIONS WITH ANSWERS
PROVIDED. 2024 UPDATE
A. Balance Sheet Income Statement of
Cash Flows
Assets = Liab. + Equity Rev. Exp. = Net Inc.
B. Balance Sheet Income Statement
Statement of Cash Flows
Assets = Liab. + Equity Rev. Exp. = Net Inc.
NA NA NA OA
C. Balance Sheet Income Statement
Statement of Cash Flows
Assets = Liab. + Equity Rev. Exp. = Net Inc.
D. Balance Sheet Income Statement
Statement of Cash Flows
Assets = Liab. + Equity Rev. Exp. = Net Inc.
Paying cash to purchase supplies is an asset exchange transaction. One
asset (cash) decreases and another asset (supplies) increases. Total assets
is not affected. The income statement is not affected at the time supplies
are purchased. Instead, the income statement will be affected at the time
the number of supplies used is determined at the end of the accounting
period. Since cash was paid to purchase the supplies, there will be a cash
outflow from operating activities shown on the statement of cash flows.
SCENARIO QUESTIONS WITH ANSWERS
PROVIDED. 2024 UPDATE
1. On December 31, Year 1 Adam Company incurred $3,000 of
accrued salary expense. The Year 2 recognition of the cash
payment for these expenses
A. decreases the amount of liabilities shown on the Year 2 balance
sheet.
B. increases the amount of salary expense recognized in Year
2.
C. decreases the amount of salary expense recognized in Year
2.
D. increases the amount of liabilities shown on the Year 2 balance
sheet.: A
Recognizing accrued salary expense in Year 1 caused liabilities
(salaries payable) to increase. In Year 2 when cash is paid to settle
the obligation, assets (cash) and liabilities (salaries payable)
decrease. The expense recognition occurs in Year 1. Paying off the
liability in Year 2 does not affect the recognition of salary expense.
2. A cost may be recorded as an expense or as an asset
purchase. This statement is True
False: True
A cost is incurred when a company pays cash or incurs a liability as a
result of its operating or investing activities. For example, a company
may pay cash or increase its salaries payable to compensate its
employees who have completed work for the company. In this case,
,the company would recognize an expense because it has already used
the labor provided by the employees. In other words, there is no
future benefit associated with the cost because the benefit was
obtained in the past when the work was done. Alternatively, a
company could pay cash to purchase supplies that it plans to use in
the future. Under this circumstance, a benefit will occur in the future
when the supplies are used in the process of producing revenue. As a
result, the company would record the cost as the purchase of an asset.
In summary, when a company incurs a cost that has no future benefit
it recognizes an expense. When a company incurs a cost that has a
future benefit is records the purchase of an asset. Note carefully, that
in accounting terms, a cost and an expense do not mean the same
thing.
3. When a company purchases supplies on account
A. expenses increase.
B. total assets decrease.
C. cash flow from investing activities decreases.
D. liabilities increase.: D
Purchasing on account means that the buyer does not pay cash at the
time of purchase. Instead, the buyer incurs an obligation (accounts
payable) to pay cash in the future. When supplies are purchased on
account assets (supplies) and liabilities (accounts payable) increase.
The cash flow associated with the purchase of supplies is an
operating activity not an investing activity.
4. Which of the following shows how paying cash to purchase
supplies will affect a company's financial statements?
, INTERMEDIATE ACCOUNTING QUIZ 6. CASE
SCENARIO QUESTIONS WITH ANSWERS
PROVIDED. 2024 UPDATE
A. Balance Sheet Income Statement of
Cash Flows
Assets = Liab. + Equity Rev. Exp. = Net Inc.
B. Balance Sheet Income Statement
Statement of Cash Flows
Assets = Liab. + Equity Rev. Exp. = Net Inc.
NA NA NA OA
C. Balance Sheet Income Statement
Statement of Cash Flows
Assets = Liab. + Equity Rev. Exp. = Net Inc.
D. Balance Sheet Income Statement
Statement of Cash Flows
Assets = Liab. + Equity Rev. Exp. = Net Inc.
Paying cash to purchase supplies is an asset exchange transaction. One
asset (cash) decreases and another asset (supplies) increases. Total assets
is not affected. The income statement is not affected at the time supplies
are purchased. Instead, the income statement will be affected at the time
the number of supplies used is determined at the end of the accounting
period. Since cash was paid to purchase the supplies, there will be a cash
outflow from operating activities shown on the statement of cash flows.
