Book 2 - Chapter 2

Multiple Choice

d	Business income (or loss) is more properly measured using accrual basis accounting because accrual basis accounting recognizes (records) noncash revenues as well as cash revenues, and noncash expenses as well as cash expenses.

3. d

4. b

5. d

6. b

7. c

8. a

a	Expenses must be matched with revenues. Also, concerning (d) remember that a cash basis balance sheet will never show receivables or payables, because revenues and expenses cannot be accrued—they must always be received or paid in cash.

Reinforcement Problems

2-1. The periodicity (time-period) assumption is the assumption that the life of a business can
be divided into regular, fixed time intervals. The revenue recognition principle tells accountants
how to determine the amount of revenue that should be recorded in any particular time period.
The matching principle tells accountants how to determine the amount of expense that should be
recorded in any particular time period.

2-2.

a. When cash basis is used, accounts receivable and accounts payable do not appear on the balance sheet. An account receivable results from noncash revenue. Noncash revenue transactions are not recorded on a cash basis. Accounts payable result from noncash expenses or purchases not paid for. Because there are no cash payments, these transactions would not be recorded.
b. Unlike cash basis, accrual basis accounting records all revenues (cash and noncash), so it is not necessary for cash to be received in order to record revenue. However, all receipts of cash are not revenue. Examples:Loans and owner investments are not revenue.
c. Unlike cash basis, accrual basis accounting records all expenses (cash and noncash), so it is not necessary for cash to be paid in order to record an expense. However, all payments of cash are not expenses. Examples: Buying assets for cash and paying back loans.
d. The manager is incorrect because it is not yet earned. The order is not yet finished and delivered to the customer, so no revenue can be recorded. Intentionally recording the revenue on December 31 would be a violation of the revenue recognition principle, would overstate the year's revenue, and would be a fraudulent transaction.

2-3.

Situation	Which principle?	Period to record: Revenue / Expense
a. Cape Fear Company performed $500 of repair services in January and was paid in March.	revenue recognition	$500 January revenue
b. Wilkes Delivery Company used $250 of automotive supplies in August.	matching	$250 August expense. This expense can- not be traced to any particular revenue.

Learning Goal 2

SOLUTIONS

Learning Goal 2: Explain the Basic Principles for Recording Revenues and Expenses

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