Week 3

Question 1

What is the CASH BASIS formula for profit?

Answer 1

Profit = Cash Inflows from Income - Cash Outflows from Expenses

Question 2

What is the ACCRUAL BASIS formula for profit?

Answer 2

Profit = Income Earned - Expenses Incurred

Question 3

What is the accounting entity assumption?

Answer 3

The assumption that a business entity is separate and distinct from its owners and from other business entities.

Question 4

What is the accrual accounting assumption?

Answer 4

An attempts to match income to the period in which it is earned and expenses to the period in which they are incurred.

Question 5

What is the accounting period assumption?

Answer 5

The life of the business is broken up into equal accounting periods.

Question 6

What is the going concern assumption?

Answer 6

In the absence of evidence to the contrary, the entity is assumed to have an indefinite life.

Question 7

What are deferrals?

Answer 7

Deferrals include items that have been prepaid.

i.e. Prepaid Expenses

Question 8

What are accruals?

Answer 8

1. Accruals include expenses incurred but not yet paid 2. Income earned not received.

Question 9

Adjustment entries will always

Answer 9

Adjustment entries will always involve an Income Statement item and a Balance Sheet item.

Question 10

Adjustment entries will never

Answer 10

Adjustment entries never

1. adjust the cash account.
2. adjust Accounts Receivable or Accounts Payable as these are control accounts (in this Unit).

Question 11

Types of adjusting entries?

Answer 11

– Prepaid Expenses (a)
– Unearned Income (b)
– Supplies used (c)
– Depreciation (d)

Question 12

What is depreciation?

Answer 12

Depreciation is an accounting method that is used
to allocate the historic cost of the asset over the
accounting periods in which it is used.

Question 13

What is accumulated depreciation? Account type.

Answer 13

Accumulated depreciation is a Contra Asset account.

Question 14

The purpose of depreciation is (and what it is not).

Answer 14

The purpose of depreciation is cost allocation, not

market valuation.

Question 15

What is the definition of HIstoric Cost?

Answer 15

1. Assets are recorded at the amount of cash or equivalents used to acquire them.
2. Liabilities are recorded at the amount of cash or
   equivalents that will need to be paid out to satisfy them.

Question 16

When are events/transactions recognised under accrual basis accounting?

Answer 16

Under the accrual basis assumption, transactions
and events are recognised in the accounting period
they occur and not when cash is received or paid.

Question 17

Per accrual basis accounting, income is recognised when

Answer 17

Income = recognised when earned

Question 18

Per accrual basis accounting, expenses are recognised when

Answer 18

Expenses = recognised when incurred

Question 19

Per accrual basis accounting, expenses are recognised when

Answer 19

Expenses = recognised when incurred

Question 20

The accounting period assumption is the assumption that

Answer 20

The life of a business entity can be divided into arbitrary equal time intervals for reporting periods

Question 21

The going concern assumption is the assumption that

Answer 21

In the absence of evidence to the contrary, a business will continue in the future and use its assets in operations rather than sell them.

Question 22

The accounting entity assumption is the assumption that

Answer 22

A business entity is separate and distinct from its owners and from other business entities

Question 23

What are deferrals?

Answer 23

Items where the cash has been received/paid, but the
income/expense has not yet been recognised.

Cash NOW – Recognition LATER

Question 24

What are accruals?

Answer 24

Items in which the income/expense has been recognised, but the cash has not yet been received/paid.

Recognition NOW – Cash LATER

Question 25

What is depreciation?

Answer 25

Decrease in value of an asset (common English usage

of the term)

Question 26

Assets are recorded at their

Answer 26

Historic Cost