Multiple Choice
Which of the following is required to compute interest expense for a prepaid expense? Select the correct answer.
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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 the best advice for someone who tends to save money only as an afterthought, especially in relation to managing prepaid expenses?
A
Only save if you receive unexpected income, such as bonuses or gifts.
B
Wait until the end of the month to see what money is left over before saving.
C
Set up automatic transfers to a savings account before spending on other expenses.
D
Focus on paying all bills first and consider saving only if you have extra funds.
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 in the future. Examples include insurance premiums, rent, or subscriptions. These are recorded as assets initially and expensed over time as the benefit is consumed.
Recognize the importance of prioritizing savings: Saving money should be a proactive and intentional activity rather than an afterthought. Setting up automatic transfers ensures that saving becomes a consistent habit, rather than relying on leftover funds or unexpected income.
Analyze the options provided: Evaluate each option based on its effectiveness in promoting disciplined financial behavior. For example, waiting until the end of the month or saving only unexpected income may lead to inconsistent savings habits.
Identify the best practice: Setting up automatic transfers to a savings account ensures that saving is prioritized before spending on other expenses. This approach aligns with sound financial management principles and helps avoid the temptation to overspend.
Apply this advice to prepaid expenses: When managing prepaid expenses, ensure that savings are accounted for first. This helps maintain a balanced financial approach, ensuring that both savings and necessary expenses are managed effectively.
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