Multiple Choice
Which of the following is NOT an advantage of the average rate of return method when evaluating investment projects?
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3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
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Which of the following is an example of a prepaid expense?
A
Rent paid in advance for the next six months
B
Salaries owed to employees but not yet paid
C
Accounts payable to suppliers
D
Revenue received but not yet earned
Verified step by step guidance1
Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services that will be received or used in the future. These are recorded as assets initially and expensed over time as the benefit is consumed.
Analyze the first option: 'Rent paid in advance for the next six months.' This fits the definition of a prepaid expense because the payment is made upfront for a service (use of property) that will be utilized in the future.
Evaluate the second option: 'Salaries owed to employees but not yet paid.' This represents accrued expenses, not prepaid expenses, as it is a liability for services already received but not yet paid.
Examine the third option: 'Accounts payable to suppliers.' This is also a liability, representing amounts owed to suppliers for goods or services already received, not a prepaid expense.
Review the fourth option: 'Revenue received but not yet earned.' This is unearned revenue, a liability, as it represents money received for services or goods that have not yet been provided. It is not a prepaid expense.
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