Monetary Current Assets and Liabilities: Comprehensive Guide for CPA Preparation

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When preparing for the CPA exam, understanding Monetary Current Assets and Monetary Current Liabilities is vital, as these are fundamental concepts in financial accounting. The classification of assets and liabilities into current categories reflects a company’s short-term financial health and liquidity. This guide will provide detailed explanations, simplified examples, journal entries, and practical CPA exam tips to help you excel. Monetary Current Assets: Deep Dive Monetary current assets are assets that are expected to be converted into cash or used up within one year or within a company's normal operating cycle, whichever is longer. These assets are considered liquid since they are easily convertible into cash. The key types include: 1. Cash and Cash Equivalents Cash and cash equivalents refer to all money available immediately, such as cash on hand, checking accounts, and short-term, highly liquid investments. These are considered the most liquid of all assets. Exampl...
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📘 30 CPA-Style MCQs on Matching of Revenues and Expenses

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Q1. Under the matching principle, when should expenses be recognized?

A. When paid
B. When incurred
C. When budgeted
D. When invoice is received

Q2. Which of the following is an example of an accrued expense?

A. Prepaid rent
B. Salaries payable
C. Unearned revenue
D. Cash dividends

Q3. A company pays ₹1,20,000 for a 12-month insurance policy on April 1. What amount is expense on June 30?

A. ₹30,000
B. ₹10,000
C. ₹40,000
D. ₹90,000

Q4. Which entry records revenue earned but not yet billed?

A. Dr. Cash Cr. Revenue
B. Dr. Accounts Receivable Cr. Revenue
C. Dr. Deferred Revenue Cr. Revenue
D. Dr. Revenue Cr. Unearned Revenue

Q5. A company receives ₹6,00,000 for a 6-month magazine subscription. What is revenue recognized after 2 months?

A. ₹6,00,000
B. ₹2,00,000
C. ₹1,00,000
D. ₹4,00,000

Q6. What is the impact of expensing a capital asset?

A. Overstated net income
B. Understated liabilities
C. Understated assets
D. Overstated assets

Q7. Rent of ₹1,80,000 is paid for 6 months starting November 1. What is prepaid rent on December 31?

A. ₹1,20,000
B. ₹60,000
C. ₹90,000
D. ₹30,000

Q8. Which statement is TRUE regarding the matching principle?

A. It is followed only under cash basis
B. It ensures revenues and expenses match in timing
C. It ignores deferrals
D. It is applied only to manufacturing firms

Q9. Unearned revenue is a:

A. Liability
B. Asset
C. Expense
D. Revenue

Q10. An accrued revenue will result in:

A. Increase in liability
B. Increase in asset
C. Increase in expense
D. Decrease in equity

Q11. Revenue is earned but not yet received. Which journal entry applies?

A. Dr. Unearned Revenue Cr. Revenue
B. Dr. Accounts Payable Cr. Revenue
C. Dr. Accounts Receivable Cr. Revenue
D. Dr. Revenue Cr. Cash

Q12. Under the accrual basis of accounting:

A. Revenues are recorded when cash is received
B. Expenses are recorded when paid
C. Revenues are recorded when earned
D. Expenses are ignored unless paid

Q13. A ₹1,50,000 salary is paid on January 3 for work done in December. How is it recorded?

A. Salary expense in January
B. Salary expense in December
C. No entry until payment
D. Debit to prepaid salary in January

Q14. Which is a deferred expense?

A. Salary payable
B. Rent paid in advance
C. Unearned revenue
D. Inventory

Q15. Which entry records the adjusting journal for a prepaid insurance that has expired?

A. Dr. Insurance Expense Cr. Prepaid Insurance
B. Dr. Cash Cr. Prepaid Insurance
C. Dr. Prepaid Insurance Cr. Insurance Expense
D. Dr. Insurance Payable Cr. Insurance Expense

Q16. A customer pays ₹1,20,000 in advance for 12-months of services. Monthly revenue is?

A. ₹12,000
B. ₹10,000
C. ₹1,20,000
D. ₹1,000

Q17. An expense is incurred but not yet paid. It should be:

A. Ignored
B. Recorded when paid
C. Recorded as prepaid
D. Recorded as payable

Q18. Deferred revenue becomes earned revenue when:

A. Cash is received
B. Work is completed
C. Invoice is issued
D. Period ends

Q19. Which of the following is a timing difference corrected by AJE?

A. Unrecorded bank charges
B. Cheque issued not yet cleared
C. Rent paid in advance
D. Loan principal repayment

Q20. Which financial statement is affected by depreciation?

A. Cash Flow only
B. Income Statement and Balance Sheet
C. Balance Sheet only
D. Trial Balance only

Q21. If an error causes an expense to be recorded twice, net income is:

A. Understated
B. Overstated
C. Not affected
D. Zero

Q22. When correcting a prior-period expense error, which account is usually impacted?

A. Sales
B. Depreciation Expense
C. Retained Earnings
D. Cash

Q23. Which principle requires prepaid expenses to be amortized?

A. Revenue Recognition
B. Conservatism
C. Matching
D. Cost

Q24. Accrued interest expense at year-end is:

A. An asset
B. A liability
C. A revenue
D. Ignored

Q25. An asset purchased is mistakenly recorded as expense. What is the fix?

A. Dr. Expense, Cr. Asset
B. Dr. Retained Earnings, Cr. Asset
C. Dr. Asset, Cr. Expense
D. Dr. Expense, Cr. Retained Earnings

Q26. Matching revenue with expenses ensures:

A. Higher income
B. Faithful representation
C. Cash flow accuracy
D. Reduced tax

Q27. AJE ensures:

A. Cash matches revenue
B. Expenses are deferred
C. Accruals and deferrals are recorded
D. Assets are revalued

Q28. Revenue is recognized when:

A. Collected
B. Earned
C. Deposited
D. Reported

Q29. Wages earned by employees but unpaid is:

A. Deferred expense
B. Accrued expense
C. Unearned revenue
D. Prepaid liability

Q30. Matching principle applies to:

A. Revenue only
B. Expenses only
C. Revenues and Expenses
D. Assets and Liabilities

✅ Answer Key and Explanations

QAnsExplanation
1BExpenses are recognized when incurred, not when paid.
2BSalaries payable = expense incurred but not paid.
3A₹1,20,000 ÷ 12 = ₹10,000/month × 3 months = ₹30,000.
4BRevenue earned but not yet billed → accounts receivable.
5B₹6,00,000 ÷ 6 = ₹1,00,000/month × 2 = ₹2,00,000.
6CAsset should be capitalized. Expensing reduces assets.
7C₹1,80,000 ÷ 6 = ₹30,000/month. 4 months prepaid = ₹1,20,000.
8BThe principle matches revenue and related expense in the same period.
9AUnearned revenue = liability until earned.
10BAccrued revenue increases receivables (asset).
11CRevenue earned = Dr. A/R, Cr. Revenue.
12CAccrual basis recognizes revenue when earned.
13BMatched to when service was received (December).
14BDeferred = prepaid = paid but not yet incurred.
15AExpense the used-up prepaid insurance.
16B₹1,20,000 ÷ 12 = ₹10,000/month.
17DRecord as a liability (payable).
18BRevenue is earned when service/work is completed.
19CRent paid early = timing difference → needs adjusting.
20BDepreciation affects both the income and balance sheet.
21ADouble expense = lower income (understated).
22CCorrections affect retained earnings (prior periods).
23CMatching requires recognizing expense over useful periods.
24BUnpaid interest is a liability.
25CReverse the mistake → capitalize as asset.
26BIt provides faithful representation of financials.
27CAJE helps record all accruals and deferrals.
28BRevenue is recognized when earned, not when collected.
29BWages earned but unpaid = accrued expense.
30CMatching applies to both revenues and related expenses.

If you have answered this I have more challenging questions for you to practice. Please comment howmany you got right?

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