Financial Accounting Quiz: Accrual Vs Cash Accounting
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Accrual Vs Cash AccountingQuestion 1 of 20

A company's cash-basis net income for the year was $200,000. Its Accounts Receivable increased by $25,000 during the year, while its Accounts Payable decreased by $10,000. Assuming these are the only relevant adjustments, what was the company's accrual-basis net income?

$165,000
$185,000
$215,000
$235,000
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Financial Accounting Quiz

Financial Accounting Quiz: Accrual Vs Cash Accounting

Practice Accrual Vs Cash Accounting in Financial Accounting with focused quiz questions that help you check what you know, review explanations, and build confidence with test-style prompts.

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This quiz focuses on Accrual Vs Cash Accounting, giving you a quick way to practice the rules, question types, and explanations that matter most for Financial Accounting.

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Question 1

A company's cash-basis net income for the year was $200,000. Its Accounts Receivable increased by $25,000 during the year, while its Accounts Payable decreased by $10,000. Assuming these are the only relevant adjustments, what was the company's accrual-basis net income?

  1. $165,000
  2. $185,000
  3. $215,000 (correct answer)
  4. $235,000
Explanation: To convert from cash-basis to accrual-basis net income, we adjust for changes in operating assets and liabilities using the formula: Accrual NI = Cash NI + Increase in A/R - Decrease in A/P Calculation:
  • Start with cash-basis net income: $200,000
  • Add increase in A/R: $25,000 (represents revenue earned but not yet collected)
  • Subtract decrease in A/P: $10,000 (represents additional cash paid beyond current period expenses)
Accrual NI = $200,000 + $25,000 - $10,000 = $215,000

Question 2

Use the following selected year-end data for a company to answer the question:

Cash collected from customers: $250,000 Cash paid for operating expenses: $140,000 Increase in accounts receivable during the year: $30,000 Increase in wages payable during the year: $10,000

Based on the data provided, what is the company's accrual-basis net income for the year?

  1. $80,000
  2. $110,000
  3. $120,000
  4. $130,000 (correct answer)
Explanation: To calculate accrual-basis net income, we must first determine accrual-basis revenues and accrual-basis expenses.
  1. Calculate Accrual Revenue: Accrual Revenue = Cash Collected from Customers + Increase in Accounts Receivable Accrual Revenue = $250,000 + $30,000 = $280,000
  2. Calculate Accrual Operating Expenses: Accrual Operating Expenses = Cash Paid for Operating Expenses + Increase in Wages Payable Accrual Operating Expenses = $140,000 + $10,000 = $150,000
  3. Calculate Accrual-Basis Net Income: Accrual Net Income = Accrual Revenue − Accrual Operating Expenses Accrual Net Income = $280,000 − $150,000 = $130,000

Question 3

Retail Dynamics purchased inventory costing $50,000 on December 15, 2023, on credit terms of net 30 days. The company paid for this inventory on January 10, 2024. Half of the inventory was sold for $40,000 cash on December 28, 2023.

How would these transactions affect the December 2023 financial statements under accrual versus cash accounting?

  1. Accrual shows $15,000 gross profit and $50,000 accounts payable; Cash shows $40,000 gross profit and no payable
  2. Accrual shows $40,000 revenue and $25,000 cost of goods sold; Cash shows $40,000 revenue and no cost of goods sold
  3. Accrual shows $15,000 net income impact; Cash shows $40,000 net income impact (correct answer)
  4. Both methods show identical $40,000 revenue, but different expense recognition timing creates different profit margins
Explanation: Under accrual accounting: Revenue $40,000 - COGS $25,000 = $15,000 gross profit impact. Under cash accounting: Revenue $40,000 - COGS $0 (not paid yet) = $40,000 impact. Choice A incorrectly states cash accounting shows gross profit and ignores payable differences. Choice B focuses only on components rather than the complete impact. Choice D incorrectly suggests identical revenue treatment when the expense recognition creates the key difference.

Question 4

A company reported accrual-basis revenue of $850,000 for the year. The beginning and ending balances of its Accounts Receivable were $70,000 and $95,000, respectively. What was the total amount of cash collected from customers during the year?

  1. $825,000 (correct answer)
  2. $850,000
  3. $875,000
  4. $945,000
Explanation: To find the cash collected from customers, we can analyze the changes in the Accounts Receivable T-account. The formula is: Cash Collections = Beginning A/R + Accrual Revenue − Ending A/R. Plugging in the given values: Cash Collections = $70,000 + $850,000 − $95,000 = $825,000. An increase in Accounts Receivable of 25,000(25,000 (95,000 - $70,000) means that the company recognized $25,000 more in revenue than it collected in cash. Therefore, cash collections are $25,000 less than accrual revenue.

Question 5

On April 1, Year 1, a software company receives $60,000 cash from a client for a 2-year service contract. The company has a December 31 year-end. Under the accrual basis of accounting, how much revenue from this contract should the company recognize in Year 1?

  1. $18,750
  2. $22,500 (correct answer)
  3. $30,000
  4. $60,000
Explanation: Under accrual accounting, revenue is recognized as it is earned, not when cash is received. The $60,000 payment covers a 24-month period. The monthly revenue is $60,000 / 24 months = $2,500. In Year 1, the service is provided from April 1 to December 31, which is a period of 9 months. The revenue to be recognized in Year 1 is: $2,500/month × 9 months = $22,500.

Question 6

The compensation plan for a division manager includes a significant bonus based on the division's 'net cash flow from operations' for the fiscal year. To maximize her bonus for the current year, which of the following actions is the manager most likely to pursue in the final weeks of the year?

  1. Aggressively pursue sales to new customers by offering extended payment terms (net 120 days).
  2. Delay payments on outstanding invoices to suppliers until the beginning of the next fiscal year. (correct answer)
  3. Initiate a major purchase of new equipment that will improve long-term efficiency.
  4. Recognize a large, non-cash restructuring charge for planned layoffs.
Explanation: The manager's bonus is based on net cash flow, which is cash inflows minus cash outflows. To maximize this figure, the manager is incentivized to accelerate cash inflows and/or delay cash outflows. Delaying payments to suppliers (Choice B) directly reduces cash outflows for the current period, thus increasing the net cash flow and the manager's bonus. Offering extended payment terms (Choice A) would delay cash inflows. Purchasing equipment (Choice C) is a large cash outflow for investing, not operations, but still reduces cash. A non-cash charge (Choice D) affects accrual net income but has no immediate impact on cash flow.

Question 7

On November 1, Year 1, a company paid $24,000 for a one-year advertising contract that began on that date. The company's fiscal year ends on December 31. For Year 1, how much more advertising expense will be recognized under the cash basis than under the accrual basis?

  1. $2,000
  2. $4,000
  3. $20,000 (correct answer)
  4. $24,000
Explanation: First, calculate the advertising expense for Year 1 under each accounting method. Cash Basis: The entire cash payment is recognized as an expense in the period it was paid.
  • Cash-Basis Expense in Year 1 = $24,000
Accrual Basis: The cost is allocated over the period the service is received.
  • Monthly Expense = $24,000 / 12 months = $2,000
  • In Year 1, the company receives the service for 2 months (November and December).
  • Accrual-Basis Expense in Year 1 = $2,000/month × 2 months = $4,000
Difference: Difference = Cash-Basis Expense − Accrual-Basis Expense Difference = $24,000 − $4,000 = $20,000

Question 8

A company's Prepaid Rent account had a beginning balance of $8,000 and an ending balance of $11,000. During the year, the company recognized $60,000 of Rent Expense on its accrual-basis income statement. What was the amount of cash paid for rent during the year?

  1. $57,000
  2. $60,000
  3. $63,000 (correct answer)
  4. $68,000
Explanation: We can determine the cash paid for rent by analyzing the activity in the Prepaid Rent T-account. The relationship is: Ending Prepaid Rent = Beginning Prepaid Rent + Cash Paid for Rent − Rent Expense Rearranging the formula to solve for Cash Paid for Rent: Cash Paid for Rent = Ending Prepaid Rent − Beginning Prepaid Rent + Rent Expense Plugging in the given values: Cash Paid for Rent = $11,000 − $8,000 + $60,000 = $63,000.

Question 9

A law firm began the year with $50,000 in its Unearned Retainer Fees account. During the year, the firm collected $400,000 in cash from clients as retainers. At the end of the year, the Unearned Retainer Fees account had a balance of $35,000. What was the amount of legal service revenue recognized by the firm for the year under the accrual basis?

  1. $385,000
  2. $400,000
  3. $415,000 (correct answer)
  4. $450,000
Explanation: The Unearned Retainer Fees account is a liability that represents cash received from clients before legal services are provided. Revenue is recognized when the services are actually performed. We can determine the revenue recognized by analyzing the change in the Unearned Retainer Fees account. The formula is: Accrual Revenue = Beginning Unearned Revenue + Cash Received − Ending Unearned Revenue Plugging in the given values: Accrual Revenue = $50,000 + $400,000 − $35,000 = $415,000.

Question 10

On January 1, Year 1, a company purchased equipment for $200,000 cash. The equipment has a 5-year useful life and no salvage value, and the company uses straight-line depreciation. What is the difference between the total expense recognized for this equipment over Year 1 and Year 2 combined under the cash basis versus the accrual basis?

  1. The cash basis recognizes $120,000 more expense. (correct answer)
  2. The cash basis recognizes $160,000 more expense.
  3. The accrual basis recognizes $80,000 more expense.
  4. The two methods recognize the same total expense over the two years.
Explanation: First, calculate the total expense under each method for the two-year period (Year 1 + Year 2). Cash Basis: The entire cash outflow is expensed at the time of purchase.
  • Expense in Year 1 = $200,000
  • Expense in Year 2 = $0
  • Total Cash-Basis Expense = $200,000
Accrual Basis: The cost is allocated over the asset's useful life as depreciation expense.
  • Annual Depreciation = ($200,000 − $0) / 5 years = $40,000
  • Expense in Year 1 = $40,000
  • Expense in Year 2 = $40,000
  • Total Accrual-Basis Expense = $80,000
Difference: Difference = Total Cash-Basis Expense − Total Accrual-Basis Expense Difference = $200,000 − $80,000 = $120,000 The cash basis recognizes $120,000 more expense over the first two years.

Question 11

A construction company completes a long-term project for a client in December but, per the contract terms, does not receive payment until the following February. Under accrual accounting, the company recognizes the full revenue for the project in December. Which accounting principle is the primary justification for this treatment?

  1. Matching Principle
  2. Revenue Recognition Principle (correct answer)
  3. Conservatism Principle
  4. Going Concern Assumption
Explanation: The Revenue Recognition Principle dictates that revenue should be recognized when it is earned (i.e., when the performance obligation is satisfied), regardless of when the cash is received. In this case, the company satisfied its obligation by completing the project in December, so the revenue is earned and must be recognized in December. The Matching Principle relates expenses to revenues, not the timing of revenue itself. The Conservatism Principle suggests caution when facing uncertainty, but does not override the core recognition principle. The Going Concern Assumption is the idea that the business will continue to operate, which underlies all accrual accounting but does not specifically govern the timing of revenue.

Question 12

On July 1, Year 1, a company paid a $36,000 premium for a 24-month insurance policy. The company's fiscal year ends on December 31. What is the total insurance expense the company will recognize for this policy in Year 2 under the accrual basis and cash basis, respectively?

  1. Accrual: $18,000; Cash: $0 (correct answer)
  2. Accrual: $9,000; Cash: $36,000
  3. Accrual: $18,000; Cash: $36,000
  4. Accrual: $9,000; Cash: $0
Explanation: Under the cash basis, the entire $36,000 cash payment is recognized as an expense in the period it was paid, which is Year 1. Therefore, the cash-basis expense for Year 2 is $0. Under the accrual basis, the cost of the insurance policy is allocated systematically over the 24-month period it covers. The monthly expense is $36,000 / 24 months = $1,500. Year 2 covers a full 12 months (from January 1 to December 31). Therefore, the accrual-basis insurance expense for Year 2 is 12 months * $1,500/month = $18,000.

Question 13

Zenith Corp. is a management consulting firm that bills clients upon completion of projects, often several months after work begins. Apex Retail is a grocery store chain with nearly all sales in cash. Both companies are experiencing similar, steady growth in business volume. Which statement most accurately compares the likely relationship between net income (NI) and cash flow from operations (CFO) for the two firms?

  1. For Zenith, NI will likely be very close to CFO; for Apex, NI will be significantly higher than CFO.
  2. For Zenith, NI will likely be significantly higher than CFO; for Apex, NI and CFO will be reasonably close. (correct answer)
  3. For both companies, NI will likely be significantly lower than CFO due to non-cash charges like depreciation.
  4. For both companies, NI and CFO will be approximately equal, as timing differences average out over a fiscal year.
Explanation: For Zenith, a growing service firm with credit terms, growth means Accounts Receivable will constantly increase. This is because revenue is recognized as it's earned, but cash collection lags. A growing A/R balance means accrual net income will be significantly and persistently higher than cash flow from operations. For Apex, a cash-based retailer, revenue recognition is nearly simultaneous with cash collection. While differences between NI and CFO will exist due to changes in inventory, payables, and non-cash expenses like depreciation, the primary driver of large discrepancies (accounts receivable) is absent. Thus, its NI and CFO will be much more closely aligned than Zenith's.

Question 14

A bookkeeper using accrual accounting mistakenly recorded a $50,000 cash payment received in advance from a customer as Service Revenue. The service will not be performed until the next fiscal year. The error is discovered before the financial statements are issued. Which of the following describes the net effect of the entry required to correct this error?

  1. Total assets will decrease by $50,000, and total liabilities will decrease by $50,000.
  2. Total liabilities will increase by $50,000, and stockholders' equity will decrease by $50,000. (correct answer)
  3. Total assets will increase by $50,000, and stockholders' equity will increase by $50,000.
  4. Net income will be unchanged, but liabilities will increase and assets will decrease by $50,000.
Explanation: The incorrect entry was Debit Cash $50,000 and Credit Service Revenue $50,000. The correct entry should have been Debit Cash $50,000 and Credit Unearned Revenue $50,000. To correct this error, the bookkeeper must reverse the revenue and recognize the liability. The correcting entry is: Debit Service Revenue $50,000 Credit Unearned Revenue $50,000 This correcting entry has the following effects:
  1. Decreases Service Revenue by $50,000, which reduces net income and thus stockholders' equity by $50,000.
  2. Increases the liability account Unearned Revenue by $50,000. There is no effect on total assets.

Question 15

During the year, a retail company paid $300,000 cash to its suppliers. The company's Inventory balance increased by $40,000, and its Accounts Payable balance decreased by $15,000 over the year. What is the company's Cost of Goods Sold for the year under the accrual basis?

  1. $245,000 (correct answer)
  2. $275,000
  3. $325,000
  4. $355,000
Explanation: This is a two-step problem. First, convert cash paid to suppliers to purchases. Second, use purchases and the change in inventory to calculate Cost of Goods Sold (COGS). Step 1: Calculate Purchases. Purchases = Cash Paid to Suppliers − Decrease in Accounts Payable Purchases = $300,000 − $15,000 = $285,000 (A decrease in A/P means cash paid was more than current period's purchases, so purchases are lower than cash paid.) Step 2: Calculate Cost of Goods Sold. COGS = Purchases − Increase in Inventory COGS = $285,000 − $40,000 = $245,000 (An increase in inventory means not all purchases were sold, so COGS is lower than purchases.)

Question 16

A company reports cash-basis net income of $120,000 for its first year of operations. The following information is available from its records at year-end:

  • Accounts Receivable increased from $0 to $35,000.
  • Unearned Revenue increased from $0 to $15,000.
  • Accounts Payable increased from $0 to $20,000.
  • Prepaid Insurance increased from $0 to $5,000.

What is the company's net income on an accrual basis for the year?

  1. $125,000
  2. $115,000
  3. $155,000 (correct answer)
  4. $85,000
Explanation: To convert from cash-basis net income to accrual-basis net income, adjust for changes in asset and liability accounts that reflect deferred or accrued revenues and expenses. The formula is: Accrual NI = Cash NI + Δ Accounts Receivable − Δ Unearned Revenue + Δ Accounts Payable − Δ Prepaid Expenses
  1. Start with cash-basis net income: $120,000
  2. Adjust for Accounts Receivable: An increase of 35,000meansthecompanyearnedmorerevenuethanitcollectedincash.Addthisamount.(+35,000 means the company earned more revenue than it collected in cash. Add this amount. (+35,000)
  3. Adjust for Unearned Revenue: An increase of 15,000meansthecompanycollectedcashforservicesnotyetrendered.Thisisnotyetearnedrevenue.Subtractthisamount.(−15,000 means the company collected cash for services not yet rendered. This is not yet earned revenue. Subtract this amount. (−15,000)
  4. Adjust for Accounts Payable: An increase of 20,000meansthecompanyincurredmoreexpensesthanitpaidincash.Addthisamounttoreflecttheunpaidexpenses.(+20,000 means the company incurred more expenses than it paid in cash. Add this amount to reflect the unpaid expenses. (+20,000)
  5. Adjust for Prepaid Insurance: An increase of 5,000meansthecompanypaidcashforanexpensethathasnotyetbeenincurred.Subtractthiscashpaymentasitisnotyetanexpense.(−5,000 means the company paid cash for an expense that has not yet been incurred. Subtract this cash payment as it is not yet an expense. (−5,000)
Calculation: $120,000 + $35,000 − $15,000 + $20,000 − $5,000 = $155,000.

Question 17

A new consulting firm had the following transactions in its first month:

  1. Provided services worth $25,000 on credit.

  2. Collected $10,000 cash from the credit services provided above.

  3. Paid $8,000 in cash for salaries earned and paid in the month.

  4. Incurred $4,000 of administrative expenses on credit, to be paid next month.

What is the difference between the firm's accrual-basis net income and its cash-basis net income for the month?

  1. Accrual basis is $11,000 higher. (correct answer)
  2. Accrual basis is $2,000 higher.
  3. Accrual basis is $15,000 higher.
  4. Accrual basis is $19,000 higher.
Explanation: First, calculate net income under both methods. Accrual-Basis Net Income: Revenue is recognized when earned, and expenses are recognized when incurred.
  • Revenue: $25,000 (services provided)
  • Expenses: $8,000 (salaries) + $4,000 (admin) = $12,000
  • Accrual NI = $25,000 − $12,000 = $13,000
Cash-Basis Net Income: Revenue is recognized when cash is received, and expenses are recognized when cash is paid.
  • Revenue: $10,000 (cash collected)
  • Expenses: $8,000 (cash paid)
  • Cash NI = $10,000 − $8,000 = $2,000
Difference: Difference = Accrual NI − Cash NI = $13,000 − $2,000 = $11,000. Accrual basis net income is $11,000 higher than cash basis net income.

Question 18

A new, rapidly growing technology firm makes all of its sales on credit. The firm is considering switching from cash-basis to accrual-basis accounting for its internal management reports. Which of the following describes the most likely immediate impact of this change on the firm's working capital (Current Assets − Current Liabilities)?

  1. Working capital will decrease, because the recognition of Accounts Payable will exceed the recognition of Accounts Receivable.
  2. Working capital will increase, because the recognition of Accounts Receivable will exceed the recognition of Accounts Payable. (correct answer)
  3. Working capital will not change, because the increase in current assets will be exactly offset by the increase in current liabilities.
  4. The impact on working capital cannot be determined without knowing the firm's specific credit and payment terms.
Explanation: Switching from cash to accrual basis will cause the firm to recognize current assets like Accounts Receivable and current liabilities like Accounts Payable. For a rapidly growing firm whose sales are all on credit, Accounts Receivable will likely be substantial and growing quickly. While Accounts Payable will also be recognized, the growth in receivables (tied to revenue) is often much larger than the growth in payables for a profitable, expanding company. Therefore, the increase in Current Assets (from A/R) is likely to be greater than the increase in Current Liabilities (from A/P), leading to an increase in working capital.

Question 19

For the year, a company reported $720,000 in accrual-basis revenue. Its cash-basis revenue (i.e., cash collections from customers) for the same period was $680,000. If the Accounts Receivable balance at the beginning of the year was $110,000, what was the Accounts Receivable balance at the end of the year?

  1. $40,000
  2. $70,000
  3. $150,000 (correct answer)
  4. $180,000
Explanation: The difference between accrual-basis revenue and cash collections from customers represents the net change in the Accounts Receivable balance for the period. Change in A/R = Accrual Revenue − Cash Collections Change in A/R = $720,000 − $680,000 = $40,000 increase To find the ending balance, add the increase to the beginning balance: Ending A/R = Beginning A/R + Change in A/R Ending A/R = $110,000 + $40,000 = $150,000.

Question 20

Medical Associates received $15,000 cash in December 2023 for services to be performed in January 2024. The company also provided $12,000 worth of services in December 2023 but has not yet billed the patient due to insurance verification delays.

What amounts should be reported in Medical Associates' December 2023 financial statements under each accounting method?

  1. Accrual accounting: $12,000 revenue, $15,000 liability; Cash accounting: $15,000 revenue, no liability recorded (correct answer)
  2. Accrual accounting: $27,000 revenue, no liability; Cash accounting: $15,000 revenue, $12,000 liability
  3. Accrual accounting: $15,000 revenue, $12,000 receivable; Cash accounting: $12,000 revenue, $15,000 liability
  4. Accrual accounting: $12,000 revenue, $12,000 receivable; Cash accounting: $15,000 revenue, $15,000 liability
Explanation: Under accrual accounting, only the $12,000 of services performed in December is recognized as revenue, with the $15,000 prepayment recorded as unearned revenue (liability). Under cash accounting, the $15,000 received is recorded as revenue with no liability recognition since cash accounting doesn't typically record unearned revenue. Choice B incorrectly includes both amounts as accrual revenue. Choice C reverses the accounting methods. Choice D incorrectly shows a liability under cash accounting.