Deck 3: The Basics of Record Keeping and Financial Statement Preparation: Income Statement

Question 1

Common terminology, but not definitions in U.S.GAAP and IFRS, often refers to the difference between sales and cost of sales as gross margin, gross profit, or gross income.

Answer 1

True

Question 2

Gains/Losses arise from relatively infrequent transactions, and there can be no assurance that they will recur in any future period.

Answer 2

True

Question 3

If Moore pays a $600 insurance premium for a one-year policy on January 31 for coverage from February 1 of Year1 through January 31 of Year 2, the journal entry to be made at the end of February Year 1 would include a debit to Insurance Expense for $600.

Answer 3

False

Question 4

Expenses measure the outflow of net assets consumed in the process of generating revenues.

Question 5

Most firms display the components of cost of sales.

Question 6

The last step in the accounting record-keeping process is preparing the balance sheet from amounts in the balance sheet accounts.

Question 7

Retained earnings measures the cumulative excess of net income over dividends for the life of a firm.Cumulative means that retained earnings aggregates all undistributed earnings.

Question 8

Items classified as operating expenses reflect management's judgment that the item is a cost of the core business.

Question 9

The income statement typically provides information about the operating results of business segments.

Question 10

The statement of cash flows begin with revenues; for this reason, analysts often refer to revenue growth as "top-line" growth.

Question 11

Adjusting entries may increase or decrease balances in balance sheet accounts and income
statement accounts.

Question 12

The beginning balance of the shareholders' equity account Retained Earnings plus net income from the income statement less dividends equals the ending balance of Retained Earnings.

Question 13

Adjusting entries are part of the measurement of net income for the period and financial position at the end of the period.

Question 14

Current accounting practice takes the viewpoint of shareholders by reporting the amount of net income available to shareholders after subtracting from revenues all expenses incurred in generating the revenue by claimants (for example, employees, lenders, governments) other than shareholders.

Question 15

Operating risk arises from the asset side of the business, and financing risk arises from debt.

Question 16

Expenses provide future benefits, and assets measure the consumption of those benefits.

Question 17

Revenues measure the inflow of net assets from operating activities.

Question 18

Expenditures on advertising and research must be recognized as expense in the period of expenditure, regardless of the firm's expectation of future benefits.

Question 19

All transactions that increase net assets affect income.

Question 20

Cost is the economic sacrifice made to acquire goods or services.

Question 21

The stockholders' equity of a firm can be defined as

A)net current assets.
B)net noncurrent assets.
C)a residual interest.
D)total assets plus total liabilities.
E)the owners' claim to the assets and liabilities.

Question 22

Recording revenues and expenses directly in the Retained Earnings account suppresses information about the causes of net income.

Question 23

Which of the following is/are true?

A)Revenues measure the inflow of net assets from operating activities.
B)Expenses measure the outflow of net assets consumed in the process of generating revenues.
C)Recognizing revenues and expenses always involves a simultaneous entry in an asset and/or liability account.
D)Adjusting entries almost always involve an entry in at least one income statement and one balance sheet account.
E)All of the above answer choices are true.

Question 24

Once revenue and expense accounts serve their purpose of accumulating specific revenue and expense items for an accounting period, they have no further purpose for that period.

Question 25

The last step in the accounting record-keeping process is:

A)making adjusting journal entries to the accounts to correct errors and to reflect the financial statement impacts of items that occur because of usage or the passage of time.
B)preparing the income statement for the period from amounts in the income statement accounts.
C)closing the temporary income statement accounts to retained earnings.
D)preparing the balance sheet from amounts in the balance sheet accounts.
E)preparing the statement of cash flows from balance sheet amounts and from details of transactions affecting the cash account.

Question 26

The income statement links the beginning and ending balance sheets.

Question 27

A T-account is a device or convention for organizing and accumulating the accounting entries of transactions that affect an individual account. Which of the following is/are true?

A)Increases in assets appear on the left side, and decreases in assets appear on the right side of T-accounts.
B)Increases in liabilities appear on the right side, and decreases in liabilities appear on the left side of T-accounts.
C)Increases in shareholders' equity appear on the right side, and decreases in shareholders' equity appear on the left side of T-accounts.
D)All of the above are true.
E)None of the above are true.

Question 28

Under accrual accounting, revenue is recognized when

A)the firm has performed all, or most of, the services it expects to provide.
B)the firm has received cash, or some other asset such as a receivable, whose cash-equivalent value it can measure with reasonable precision.
C)the firm has significant uncertainty about the amount and timing of the cash inflows and outflows from the sales transaction.
D)both a and b must be present.
E)none of the above.

Question 29

The equation that describes the relationship between the balance sheet and the income statement through the Retained Earnings account is as follows:
Retained Earnings (beginning) + Net Income - Dividends = Retained Earnings (ending)

Question 30

The accounting system uses a device called an account.An account

A)is created each time a transaction takes place.
B)accumulates the increases and decreases that occur during the period for a single item.
C)is created only for income statement items.
D)is created only for balance sheet items.
E)None of these answer choices is correct.

Question 31

The _____ convention, links the timing of some expenses with revenue recognition.

A)going concern
B)conservatism
C)matching
D)materiality
E)objectivity

Question 32

To record the purchase of equipment that is fully financed by the seller, you would

A)debit a liability and credit an asset.
B)debit an asset and credit cash.
C)debit an asset and credit a liability.
D)debit an asset and credit shareholders' equity.
E)debit a liability and credit shareholders' equity.

Question 33

Which of the following is/are false?

A)Firms do not necessarily recognize revenues when they receive cash
B)Firms do not necessarily recognize expenses when they disburse cash.
C)Net income will not necessarily equal cash flow from operations each period.
D)A profitable firm will likely borrow funds in order to remain in business, but eventually operations must generate cash to repay the borrowing.
E)None of the above are false

Question 34

A seller of goods can easily associate (or match) the consumption of the benefits of the asset sold with revenues from its sale.At the time of sale and revenue recognition, the seller

A)removes the asset (inventory) from the seller's balance sheet.
B)recognizes revenue.
C)recognizes a reduction in an asset (inventory).
D)records the cost of goods sold expense in the same amount by which inventory decreases.
E)All of the answer choices are correct.

Question 35

When the accountant transfers the balance in each temporary revenue and expense account
to the Retained Earnings account, this procedure is known as the closing of accounts.

Question 36

The accrual basis of accounting is often contrasted with the cash basis of accounting.Which of the following is true of the cash basis of accounting?

A)The cash basis is not subject to manipulation
B)Most larger companies use the cash basis of accounting
C)The cash basis of accounting provides a strong basis to determine the total assets of the company
D)The cash basis provides an inferior picture of operating performance
E)The cash basis provides an superior picture of operating performance

Question 37

Over sufficiently long time periods, the amount of net income equals

A)cash inflows minus cash outflows from operating activities.
B)cash inflows minus cash outflows from operating and investing activities.
C)cash inflows minus cash outflows from operating, investing, and debt servicing activities.
D)cash inflows minus cash outflows from operating and debt servicing activities.
E)cash inflows minus cash outflows from investing and debt servicing activities.

Question 38

U.S.GAAP and IFRS require firms to initially report the results of most income transactions in the

A)retained earnings bypassing the income statement.
B)income statement instead of bypassing the income statement and reporting the amounts in some other shareholders' equity account.
C)paid-in-capital bypassing the income statement.
D)retained earnings bypassing the income statement.
E)treasury stock bypassing the income statement.

Question 39

Many firms provide similar types of airline services with similar types of assets.They each received unqualified opinions from their independent auditors.Yet, Flash Airlines appears to apply its accounting principles more aggressively in income-enhancing ways relative to its competitors.The choices for Flash Airlines in applying generally accepted accounting principles under the accrual basis of accounting include(s):

A)depreciable lives for buildings and equipment.
B)estimated uncollectibles for accounts receivable.
C)estimated warranty costs.
D)all of the above.
E)none of the above.

Question 40

Which of the following concepts best characterizes the accrual basis of accounting?

A)Conservatism
B)Matching
C)Understandability
D)Going concern
E)Unit of measurement

Question 41

A firms decision to sell its headquarters building at a gain

A)would increase income in the year of sale.
B)is not part of the core business.
C)would be aggregated with other noncore, nonoperating items.
D)reported below operating income, probably as Other Income.
E)All of the above would result.

Question 42

Which of the following is/are true?

A)Cost is the economic sacrifice made to acquire goods or services.
B)When the good or service acquired has reliably measurable future benefits to a firm, the cost is an asset.
C)When the firm consumes the good or service, the cost is an expense.
D)All of the above are true.
E)None of the above are true.

Question 43

When assets and income from operations that a firm has decided to discontinue (and dispose of or abandon), separating the two income components allows users to form better predictions of

A)past earnings.
B)current earnings.
C)future earnings.
D)all of the above
E)none of the above

Question 44

The firm recognizes an expense when the following condition(s) hold(s):

A)The consumption of the asset results from a transaction that leads to the recognition of revenue.
B)The consumption of the asset results from the passage of time.
C)The expenditures on advertising must be recognized as expense in the period of expenditure.
D)The expenditures on research must be recognized as expense in the period of expenditure.
E)all of the above

Question 45

What criterion or criteria must sales transactions meet in order for the seller to recognize revenues before collecting cash?

A)The revenues must be earned (the firm must have achieved substantial performance).
B)The amount to be received must qualify as an asset (there must be a future economic benefit and the amount must be measured with sufficient reliability).
C)The firm must have a reasonable expectation that it will collect the amount owed from the customer.
D)All of the above.
E)None of the above.

Question 46

Which of the following is/are true?

A)After cost of sales, the income statement typically shows deductions for other expenses associated with operations (other operating expenses).
B)Many firms present a subtotal called operating income or operating profit, the difference between revenues and expenses associated with core operating activities.
C)Two common types of operating expenses are selling, general, and administrative expenses (SG&A) and research and development expenses (R&D).
D)All of the above are true.
E)None of the above are true.

Question 47

Other (nonoperating) items follow operating expenses or the subtotal for operating profit.Most firms reporting under U.S.GAAP separately report financing costs, such as

A)principal payments.
B)interest revenue.
C)interest expense.
D)principal receipts.
E)none of the above.

Question 48

The matching convention assigns _____ to the related _____.

A)expenses; revenues
B)revenues; revenues
C)assets; liabilities
D)liabilities; assets
E)assets; shareholders' equity

Question 49

Which equation is correct?

A)Assets = Liabilities + Contributed Capital - Dividends
B)Shareholders' Equity = Assets - Liabilities + Contributed Capital + Net Income
C)Shareholders' Equity = Contributed Capital + Retained Earnings + Net Income - Dividends
D)Retained Earnings = Net Income + Dividends
E)none of the above

Question 50

_____ present an ordered list, grouped by broad categories of revenues and expenses.They begin with revenues followed by a list of expenses.

A)Income Statement
B)Balance Sheets
C)Statement of Retained Earnings
D)Statement of Cash Flows
E)None of the above

Question 51

The income statement is not also called the statement of

A)operations
B)operating activity
C)profit and loss
D)receipts and disbursements
E)All of the above are different names assigned to the income statement.

Question 52

Subtraction of total operating expenses from sales yields:

A)net income.
B)gross margin.
C)operating profit.
D)all of the above.
E)none of the above.

Question 53

_____ arise from relatively infrequent transactions, and there can be no assurance that they will recur in any future period.

A)Gains/Losses
B)Revenues
C)Expenses
D)Assets
E)Liabilities

Question 54

U.S.GAAP and IFRS require separate income statement display of income from continuing operations and _____earnings that will not continue because the firm either sold, or made a decision to sell, a portion of its business).Such a requirement aids users of the income statement in predicting future earnings.

A)income from discontinued operations
B)extraordinary items
C)changes in accounting principles
D)sale of individual assets
E)none of the above

Question 55

Prepaid assets are valued on the balance sheet at

A)cost paid to acquire the asset.
B)acquisition cost less accumulated depreciation.
C)cost less expired portion.
D)replacement cost.
E)present value of future cash flows.

Question 56

Common terminology, but not definitions in U.S.GAAP and IFRS, often refers to the difference between sales and cost of sales as gross

A)margin.
B)revenues.
C)expenses.
D)all of the above.
E)none of the above.

Question 57

_____ are part of the ongoing central operations of the firm, so they are relatively persistent and sustainable.

A)Revenues
B)Expenses
C)Assets
D)Liabilities
E)Shareholders' equity

Question 58

A firm sells its headquarters building at a gain. This means that at the time of sale

A)the cash or other assets received were greater than the building's book value.
B)the cash or assets received in a transaction were less than the carrying value of the assets given up.
C)the cash or other assets received were greater than the building' carrying value.
D)the cash or assets received in a transaction were less than the building's book value.
E)Both choices a and c are correct.

Question 59

Subtracting nonoperating expenses from operating income yields:

A)income tax expense.
B)profit before income taxes.
C)net income.
D)gross profit.
E)none of the above.

Question 60

Which of the following is an example of a contra account?

A)Merchandise Inventory
B)Accounts Payable
C)Cost of Goods Sold
D)Accumulated Depreciation
E)Deferred income taxes payable

Question 61

The following balances have been excerpted from Bain balance sheets: $\begin{array}{lcr}& \text { December 31, 2014}& \text { December 31,2013}\\\hline \text { Prepaid Insurance }&66,000 & \$ 7,500 \\\text { Interest Receivable }&3,700 & 14,500 \\\text { Salaries Payable }&61,500 & 53,000\\\\\text { Bain Company paid or collected during } 2014 \text { the following items: }\\\text { Insurance premiums paid. }&\$41,500\\\text { Interest collected }&123,500\\\text { Salaries paid }&481,000\end{array}$ The salary expense on the income statement for 2014 was

A)$366,500.
B)$472,500.
C)$489,500.
D)$595,500.
E)None of these answer choices is correct.

Question 62

Which of the following is not a period expense?

A)administrative expenditures
B)expenditures on advertising
C)expenditures on research
D)cost of goods sold
E)all of the above are period expenses

Question 63

Manufacturing overhead include(s):

A)costs that the firm cannot associate with particular products.
B)expenditures for factory utilities, property taxes, insurance, and depreciation on manufacturing plant and equipment.
C)expenditures for supervisors' salaries.
D)costs that jointly benefit all goods produced during the period, not any one particular item.
E)all of the above.

Question 64

Which of the following is/are true?

A)The seller measures revenue as the amount of cash, or the cash-equivalent value of other assets, that it receives from customers.
B)The seller measures revenue amounts as the exchange price between buyer and seller at the time of sale.
C)If the firm has not performed all of its obligations, it may make adjustments in the form of sales discounts and allowances.
D)If the firm has not performed all of its obligations, it may make adjustments in the form of sales returns.
E)all of the above are true

Question 65

Which of the following is not an example of a period expense?

A)the president's salary
B)insurance for the home office
C)accounting and information systems costs
D)support activity costs such as legal services, employee training, and corporate planning.
E)the factory foreman's salary

Question 66

Revenues from marketable securities and investments in securities, interest expense on borrowings, and gains and losses from peripheral activities appear as _____.The firm expects these sources of earnings to continue.

A)income from continuing operations
B)income, gains, and losses from discontinued operations
C)extraordinary gains and losses
D)retained earnings
E)paid-in-capital

Question 67

Dividends

A)are a period cost.
B)are a distribution of assets to owners.
C)enter into the calculation of net income.
D)appear on both the balance sheet and income statement.
E)none of the above.

Question 68

Which of the following is not a period expense?

A)salaries and commissions of the sales staff
B)costs to produce catalogs
C)marketing costs, such as advertising
D)costs to produce sales literature
E)direct labor

Question 69

As a general principle, under the accrual basis of accounting, the firm recognizes revenue when the transaction meets which of the following conditions?

A)Revenue is recognized when there is completion of the earnings process, only.
B)Revenue is recognized when there is receipt of assets from the customer, only.
C)Revenue is recognized when there is completion of the earnings process and receipt of assets from the customer.
D)Revenue is recognized when there is expiration of the warranty period, only.
E)Revenue is recognized when there is receipt of the final payment, only.

Question 70

Revenue and expense accounts

A)are permanent accounts.
B)are temporary accounts.
C)reflect cumulative changes in each account since the organization of the firm.
D)record all cash receipts and cash disbursements.
E)none of the above.

Question 71

Shareholders of Augusta Corporation have received $35,000 in dividends in the current year.At year end the corporation has total assets of $500,000, total liabilities equal to $300,000, and contributed capital totaling $100,000.If retained earnings at the beginning of the year was $80,000, what was Augusta's net income for the current year?

A)$80,000
B)$215,000
C)$55,000
D)$10,000
E)$45,000

Question 72

At the end of the third year of operation, Forgione Corporation has total assets equal to $100,000, liabilities totaling $90,000, and contributed capital of $30,000.What is the balance in retained earnings?

A)$40,000 (Dr)
B)$40,000 (Cr)
C)$20,000 (Dr)
D)$20,000 (Cr)
E)$10,000 (Cr)

Question 73

Recognition of revenue usually occurs when

A)the firm pays for the related expenses.
B)the revenue is earned, such as at the time of the sale or delivery of the goods.
C)a signed, legally binding contract is received.
D)an advance payment for the goods is received.
E)none of the above.

Question 74

A manufacturing firm has manufacturing costs which become product costs. These manufacturing costs do not include:

A)direct material costs (or raw material costs).
B)direct labor costs.
C)manufacturing overhead costs (sometimes called indirect manufacturing costs).
D)expenditures for administrative staff.
E)expenditures for supervisors' salaries, factory utilities, property taxes, insurance, and depreciation on manufacturing plant and equipment.

Question 75

Which section includes income derived from a firm's primary business activities as well as from activities peripherally related to operations? (Assume the firm expects these sources of earnings to continue.)

A)income from continuing operations
B)income, gains, and losses from discontinued operations
C)extraordinary gains and losses
D)retained earnings
E)paid-in-capital

Question 76

For manufacturing firms, the cost of completed products remains on the balance sheet as __________ assets until the firm sells the products; upon sale, the cost of the assets becomes a cost of goods sold expense.

A)Direct Materials Inventory
B)Work-in Progress Inventory
C)Finished Goods Inventory
D)Cost of Products Ready for Sale
E)none of the above

Question 77

Which of the following is not presented in an income statement?

A)Net Sales
B)Other Expenses
C)Net income
D)Dividends
E)Provision for Income Taxes

Question 78

Which financial statement reports operating performance for a specific period of time?

A)Balance sheet
B)Income statement
C)Statement of changes in shareholders' equity
D)Statement of retained earnings
E)Statement of Cash Flows

Question 79

Which of the following is correct?

A)Retained Earnings normally has a debit balance.
B)Retained Earnings normally has a credit balance.
C)Retained Earnings is closed at the end of the fiscal year.
D)Retained Earnings is a nominal account.
E)None of these answer choices is correct.

Question 80

Which of the following is not true?

A)Net income or profit for a period is the difference between revenues from selling goods and services and the expenses incurred to generate those revenues, plus some gains or losses of the period.
B)If the expenses plus losses exceed the revenues plus gains, the result is a net loss.
C)U.S.GAAP and IFRS require the accrual basis of accounting, which detaches the recognition of revenue from the receipt of cash.
D)A seller recognizes revenues when it has performed all, or nearly all, of its obligations to the customer and when it has received cash or an asset that is convertible to cash.
E)The firm recognizes and reports expenses that have a causal link with revenues, such as cost of sales, in the next accounting period.