Free Accruals, Prepayments and Provisions MCQs with Answers
34 Accruals, Prepayments and Provisions MCQs from Accounting, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
Accruals and prepayments adjust income and expenses to the accounting period in which they are earned or incurred, following the matching principle. Provisions recognise expected obligations or losses when their amount or timing is uncertain, which distinguishes them from ordinary accruals and from general reserves.
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- A. Collected from the customer
- B. Earned by providing goods or services
- C. Included in the cash budget
- D. Transferred to the bank account
Explanation: Accrual accounting recognizes revenue when the earning activity occurs, regardless of when cash is collected.
Correct answer: Earned by providing goods or services- A. Trade receivable
- B. Prepaid expense
- C. Deferred income liability
- D. Accrued income asset
Explanation: The business still owes the customer goods or services, so the receipt creates a liability.
Correct answer: Deferred income liability- A. Cash is deposited
- B. Invoice is approved
- C. Economic benefit is consumed
- D. Supplier is selected
Explanation: A prepayment represents a future economic benefit, so it remains an asset until that benefit is used.
Correct answer: Economic benefit is consumed- A. Total assets remain unchanged
- B. Total assets decrease
- C. Total assets increase
- D. Total assets become liabilities
Explanation: The payment changes cash into a prepaid asset of equal value. Therefore, total assets do not change at that moment, although their…
Correct answer: Total assets remain unchanged- A. Are always paid in cash
- B. Do not create a present obligation
- C. Are recorded as capital assets
- D. Must be approved by auditors
Explanation: Future operating losses do not arise from a present obligation at the reporting date.
Correct answer: Do not create a present obligation- A. Announced a general cost-cutting intention
- B. Collected cash from its customers
- C. Created a valid expectation among affected parties
- D. Approved its annual depreciation budget
Explanation: A detailed plan alone is insufficient; the entity must also create a valid expectation that the restructuring will be carried out.
Correct answer: Created a valid expectation among affected parties- A. Inflation is completely absent
- B. The estimate has no uncertainty
- C. The liability is paid immediately
- D. The time value of money is material
Explanation: A provision is discounted when the time value of money is material, because settlement may occur in the future.
Correct answer: The time value of money is material- A. Reversed through profit or loss
- B. Transferred to share capital
- C. Added to inventory cost
- D. Kept permanently as a reserve
Explanation: A provision must represent a current obligation at the reporting date. When that obligation no longer exists, the unused provision is…
Correct answer: Reversed through profit or loss- A. Any future business expense
- B. The obligation for which it was recognized
- C. Dividend payments to shareholders
- D. General expansion activities
Explanation: A provision is linked to a particular present obligation and is not a general pool of funds.
Correct answer: The obligation for which it was recognized- A. Recognize a full provision
- B. Recognize an accrued expense
- C. Capitalize the expected outflow
- D. Make no provision or disclosure
Explanation: A remote outflow does not normally require recognition of a provision or disclosure as a contingent liability.
Correct answer: Make no provision or disclosure- A. Rs 74,000
- B. Rs 70,000
- C. Rs 66,000
- D. Rs 90,000
Explanation: Expense equals cash paid plus the closing accrual minus the opening accrual. Therefore, Rs 70,000 + Rs 12,000 - Rs 8,000 gives Rs 74,000.
Correct answer: Rs 74,000- A. Rs 14,000
- B. Rs 26,000
- C. Rs 30,000
- D. Rs 46,000
Explanation: Expense equals the opening prepaid balance plus payments made, less the closing prepaid balance.
Correct answer: Rs 26,00033. At each reporting date, an entity should review an existing provision and adjust it to reflect the:
- A. Original amount estimated
- B. Amount paid in the previous year
- C. Current best estimate of the obligation
- D. Total amount of related revenue
Explanation: IAS 37 requires provisions to be reviewed at each reporting date and adjusted to the current best estimate.
Correct answer: Current best estimate of the obligation- A. Possible
- B. Probable
- C. Legally demanded
- D. Virtually certain
Explanation: A contingent asset is not recognized while an inflow is merely possible or probable.
Correct answer: Virtually certain