Question

When the amount of revenue collected in advance decreases during an accounting period:(A) Accrual-basis revenues exceed cash collections from customers.(B) Accrual-basis net income exceeds cash-basis net income.(C) Accrual-basis revenues are less than cash collections from customers.(D) May exceed, equal or be less than cash payments to suppliers.

Answer 1

Answer:

The correct answer is letter "A": Accrual-basis revenues exceed cash collections from customers.

Explanation:

Revenue collected in advance are profits collected usually at the beginning of a contractual agreement that implies obligations from the firm for a certain time. For instance, insurance companies charging a one-time payment for an annual policy fall into this category.

The accrual basis of accounting states that profits are reported on the income statement as they are earned. In that case, if the revenue collected in advance decreases, the accrual-basis revenues will be higher than the cash collections from customers under the advanced payment method.