Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

Financial Accounting

3. Accrual Accounting Concepts

Introduction to Adjusting Journal Entries and Prepaid Expenses

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Multiple Choice

Which of the following situations involving prepaid expenses would result in a favorable variance?

No prepaid expenses were used during the period.

Actual prepaid expense used is less than the amount budgeted.

Actual prepaid expense used equals the amount budgeted.

Actual prepaid expense used is more than the amount budgeted.

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Verified step by step guidance

Understand the concept of prepaid expenses: Prepaid expenses are payments made in advance for goods or services to be received in the future. These are recorded as assets initially and expensed as they are used or consumed over time.

Define a favorable variance: A favorable variance occurs when actual results are better than expected or budgeted amounts. In the context of prepaid expenses, this means spending less than the budgeted amount while still meeting operational needs.

Analyze the options provided: Evaluate each scenario to determine its impact on the variance. For example, if no prepaid expenses were used during the period, it might indicate inefficiency rather than a favorable variance. Similarly, if actual prepaid expenses used equal the budgeted amount, there is no variance.

Focus on the correct answer: A favorable variance occurs when the actual prepaid expense used is less than the amount budgeted. This indicates cost savings while still utilizing the prepaid expenses effectively.

Conclude the reasoning: The correct answer is 'Actual prepaid expense used is less than the amount budgeted,' as this results in a favorable variance by spending less than planned while maintaining operational efficiency.