CBAD 201 Chapter 3 Final Exam Review –
Objectives 1, 2, 3, 5 Study Guide
What is accrual accounting? - ANSWER ✨✔---Accrual accounting records the impact of a business
trANSWERaction as it occurs, regardless of cash flow.
What does cash-basis accounting record? - ANSWER ✨✔---Cash-basis accounting records only cash
trANSWERactions—cash receipts and cash payments.
What principle do Generally Accepted Accounting Principles (GAAP) require? - ANSWER ✨✔---
GAAP requires accrual accounting.
When is revenue recorded in accrual accounting? - ANSWER ✨✔---Revenue is recorded when it is
earned, not necessarily when cash is received.
What is the impact of making a sale on account in accrual accounting? - ANSWER ✨✔---Making a
sale on account increases wealth by the difference between the sale price and the cost of inventory.
What happens when cash is collected later after a sale on account? - ANSWER ✨✔---Collecting
cash later merely swaps receivable for cash; it does not create wealth.
What is a major issue with cash-basis accounting? - ANSWER ✨✔---It can lead to incomplete
information, affecting decision-making.
, What is the consequence of not recording a sale on account in cash-basis accounting? -
ANSWER ✨✔---The balance sheet will understate assets because accounts receivable will not be
recorded.
How does cash-basis accounting affect the income statement? - ANSWER ✨✔---Ignoring sales on
account understates revenue and net income.
What is the time-period concept in accounting? - ANSWER ✨✔---The time-period concept ensures
accounting information is reported at regular intervals.
What is the basic accounting period for most businesses? - ANSWER ✨✔---The basic accounting
period is one year.
What fiscal year do most retailers use? - ANSWER ✨✔---Most retailers use a fiscal year that ends
on or near January 31.
What is the revenue principle? - ANSWER ✨✔---The revenue principle determines when to record
revenue and what amount to record.
When should revenue be recognized according to the revenue principle? - ANSWER ✨✔---Revenue
should be recognized after it has been earned.
What are some examples of cash trANSWERactions recorded in accrual accounting? -
ANSWER ✨✔---Collecting cash from customers, paying salaries, and borrowing money.
What are examples of noncash trANSWERactions in accrual accounting? - ANSWER ✨✔---Sales on
account, purchases of inventory on account, and depreciation expense.
What is the significance of accounts receivable on the balance sheet? - ANSWER ✨✔---Accounts
receivable represents a claim to receive cash in the future and is an asset.
Objectives 1, 2, 3, 5 Study Guide
What is accrual accounting? - ANSWER ✨✔---Accrual accounting records the impact of a business
trANSWERaction as it occurs, regardless of cash flow.
What does cash-basis accounting record? - ANSWER ✨✔---Cash-basis accounting records only cash
trANSWERactions—cash receipts and cash payments.
What principle do Generally Accepted Accounting Principles (GAAP) require? - ANSWER ✨✔---
GAAP requires accrual accounting.
When is revenue recorded in accrual accounting? - ANSWER ✨✔---Revenue is recorded when it is
earned, not necessarily when cash is received.
What is the impact of making a sale on account in accrual accounting? - ANSWER ✨✔---Making a
sale on account increases wealth by the difference between the sale price and the cost of inventory.
What happens when cash is collected later after a sale on account? - ANSWER ✨✔---Collecting
cash later merely swaps receivable for cash; it does not create wealth.
What is a major issue with cash-basis accounting? - ANSWER ✨✔---It can lead to incomplete
information, affecting decision-making.
, What is the consequence of not recording a sale on account in cash-basis accounting? -
ANSWER ✨✔---The balance sheet will understate assets because accounts receivable will not be
recorded.
How does cash-basis accounting affect the income statement? - ANSWER ✨✔---Ignoring sales on
account understates revenue and net income.
What is the time-period concept in accounting? - ANSWER ✨✔---The time-period concept ensures
accounting information is reported at regular intervals.
What is the basic accounting period for most businesses? - ANSWER ✨✔---The basic accounting
period is one year.
What fiscal year do most retailers use? - ANSWER ✨✔---Most retailers use a fiscal year that ends
on or near January 31.
What is the revenue principle? - ANSWER ✨✔---The revenue principle determines when to record
revenue and what amount to record.
When should revenue be recognized according to the revenue principle? - ANSWER ✨✔---Revenue
should be recognized after it has been earned.
What are some examples of cash trANSWERactions recorded in accrual accounting? -
ANSWER ✨✔---Collecting cash from customers, paying salaries, and borrowing money.
What are examples of noncash trANSWERactions in accrual accounting? - ANSWER ✨✔---Sales on
account, purchases of inventory on account, and depreciation expense.
What is the significance of accounts receivable on the balance sheet? - ANSWER ✨✔---Accounts
receivable represents a claim to receive cash in the future and is an asset.
