Deck 3: Reporting Operating Results on the Income Statement

Question 1

If a company decides to record an expenditure made this period as an expense,when it should have been recorded as an asset,net income will be overstated in the current period as a result.

Answer 1

False

Question 2

When expenses exceed revenues in a period,stockholders' equity will increase.

Answer 2

False

Question 3

A company does not need to record the receipt of a bill for utilities used during this year if the company will not pay the bill until next year.

Answer 3

False

Question 4

GAAP does not allow cash basis accounting to be used in external financial reports.

Question 5

If the total of debits equals the total of credits on the trial balance,it means that the accounting records do not contain any errors.

Question 6

The period of time from buying goods and services to collecting cash from customers is the accounting cycle.

Question 7

If revenues are not growing faster than expenses,then net income will decrease.

Question 8

To evaluate a company's net profit margin,it is best to compare it to another company in the same industry.

Question 9

Dividing up the continuing life of a company into shorter periods is called the time period assumption.

Question 10

Net income is increased when accounts receivable are collected.

Question 11

Which of the following is not an operating activity?

A) Paying off a loan to the bank
B) Receiving cash from customers for services rendered
C) Paying employees for work completed
D) Billing customers for services rendered but not yet paid for

Question 12

Unearned Revenue is reported on the balance sheet as a liability.

Question 13

Net income is based on estimates.

Question 14

Which of the following would not be considered an operating activity?

A) Pay employees for work completed
B) Purchase supplies on account
C) Purchase equipment for cash
D) Sell goods to customers

Question 15

Expenses are the costs of operating the business that are paid for in the period covered by the income statement.

Question 16

A net profit margin of 15.4% means that the company used 84.6 cents of each sales dollar to cover costs and expenses.

Question 17

When cash is paid before the related expense is incurred,an asset is reported on the balance sheet.

Question 18

When accrual basis accounting is used,net income equals the amount of cash generated by the business.

Question 19

It is possible for a company to be profitable,yet not have enough cash to pay its bills.

Question 20

Costs that benefit future periods are reported as assets.

Question 21

Which of the following line items appear on an income statement?

A) Accounts Receivable
B) Cash
C) Supplies Expense
D) Salaries and Wages Payable

Question 22

A net loss results when:

A) assets are greater than liabilities.
B) revenues are less than expenses.
C) revenues are greater than expenses.
D) cash paid is less than cash received.

Question 23

Which of the following statements about the income statement and income statement accounts is correct?

A) The income statement reports the financial position of a company at a point in time.
B) The balance sheet reports financial activities only for the current accounting period.
C) Income statement accounts are temporary accounts, while balance sheet accounts are permanent accounts.
D) The income statement reports the cash received and paid during the period.

Question 24

Which of the following items is not a specific account in a company's chart of accounts?

A) Income Tax Expense
B) Sales Revenue
C) Unearned Revenue
D) Net Income

Question 25

Dividing the long life of a company into shorter periods such as months,quarters,or years for reporting purposes is called the:

A) time period assumption.
B) expense recognition principle ("matching").
C) revenue recognition principle.
D) Separation principle.

Question 26

If a company incorrectly records cash received for services to be provided in the future with a debit to Cash and credit to Sales Revenue,how will this error affect net income for the current period?

A) Net income will be too high.
B) Net income will be too low.
C) Net income will not be affected by this error.
D) Net income will be too high in the following period.

Question 27

Which of the following financial statements does not cover a period of time but rather reports amounts at a specific point in time?

A) Income statement
B) Balance sheet
C) Statement of cash flow
D) Statement of retained earnings

Question 28

The primary source of revenues and expenses comes from:

A) financing activities.
B) investing activities.
C) operating activities.
D) other activities.

Question 29

Salaries and Wages Expense appears on the _________,while Salaries and Wages Payable is a(n):

A) Income statement; liability on the balance sheet
B) Balance sheet; liability on the income statement
C) Income statement; expense on the income statement
D) Balance sheet; expense on the balance sheet

Question 30

Which of the following is an operating activity?

A) Repaying a bank loan
B) Paying a dividend to owners
C) Purchasing a new building
D) Purchasing goods to be offered for sale

Question 31

Which activity is part of the operating cycle?

A) Selling goods and services
B) Buying property, plant and equipment
C) Issuing new shares
D) Negotiating a long-term note, payable to a bank

Question 32

Which of the following will result in an increase in revenue?

A) Borrowing $10,000 from a bank
B) Stockholders investing $10,000 in a company
C) Selling concert tickets for $10,000 four months before the performance
D) Selling $10,000 of groceries

Question 33

During the year,Pizza Company,Inc.had $100,000 in revenues,$40,000 in expenses,and paid $3,000 in dividends.Net income equals:

A) $63,000.
B) $57,000.
C) $100,000.
C) $60,000.

Question 34

Which of the following represents a subtotal rather than an account?

A) Advertising Expense
B) Service Revenue
C) Supplies Expense
D) Total Revenues

Question 35

ABC Company's income statement shows Service Revenue of $40,000,Salaries and Wages Expense of $25,000 and net income of $1,000.The other expenses on ABC's income statement must equal:

A) $14,000.
B) $15,000.
C) $16,000.
C) $66,000.

Question 36

Which of the following line items appear on an income statement?

A) Inventory
B) Revenues
C) Accounts receivable
D) Salaries and Wages Payable

Question 37

If a company incorrectly records a payment as an asset instead of an expense,how will this error affect net income in the current period?

A) Net income will be too high.
B) Net income will be too low.
C) Net income will not be affected by this error in the current period, but will be too low in a later period
D) Net income will never be affected by this error because assets are reported on the balance sheet.

Question 38

Which of the following September transactions would impact the September income statement?

A) Collecting cash related to an account receivable
B) Providing services
C) Purchasing supplies
D) Issuing stock to new shareholders

Question 39

Which of the following items is reported on the income statement as an expense?

A) This month's cash sales
B) The purchase of supplies
C) This month's utility bill
D) The purchase of land

Question 40

The financial statement that reports revenues and expenses is the:

A) statement of retained earnings.
B) income statement.
C) balance sheet.
D) statement of cash flows.

Question 41

If an apartment leasing company receives the rent for January 2016 from a tenant in December 2015,this will be reported by the leasing company as:

A) revenue in 2015.
B) an expense in 2015.
C) a liability in 2015.
D) stockholders' equity in 2015.

Question 42

Reporting revenues when they are earned and expenses when they are incurred is called ______ basis accounting.

A) accrual
B) cash
C) expense recognition
D) cost

Question 43

Which of the following statements about the income statement of a company that was formed 10 years ago is correct?

A) Reports a Net Loss for the year if expenses are more than revenues.
B) Reports the financial effects of activities that have occurred since the company's inception.
C) Reports the amount of the increase in stockholders' equity this year as a result of the company's operations.
D) Reports Net Income which is not an account in the ledger.

Question 44

Which of the following would not be reported on the income statement?

A) Utilities expense in the amount of a bill received for utilities used during the current period but unpaid as of the end of the period.
B) Rent expense in the amount of rent paid during the period for use of a storage facility in the current period.
C) Revenue in the amount of services provided to customers who promise to pay in the next period.
D) Cost of land purchased with cash for future use.

Question 45

Which of the following statements about cash basis accounting and accrual basis accounting is correct?

A) Net income is generally larger under accrual basis accounting than cash basis accounting.
B) GAAP does not require the use of accrual basis accounting for external reporting.
C) Accrual basis accounting and cash basis accounting will always produce the same amount of net income.
D) Accrual basis accounting provides a better measure of operating performance than cash basis accounting.

Question 46

Which of the following statements about the cash basis of accounting is correct?

A) It can lead to a distorted view of the company's financial performance.
B) It is the only acceptable method for external reporting.
C) It reports revenues when earned and expenses when incurred.
D) It is used when cash is paid at the same time as the cost is incurred, but is not used when cash is paid before the expense is incurred.

Question 47

During May,Sea the World Cruises,Inc.collected $1,000 cash from a customer for services to be provided during June.Which of the following statements about this transaction is correct?

A) $1,000 of revenue should be recorded in May.
B) $500 of revenue should be recorded in May and $500 in June.
C) $1,000 of revenue should be recorded in June.
D) No revenue should be recorded for these events because they relate only to the balance sheet.

Question 48

Cash basis accounting may not work well for businesses for which of the following reasons?

A) Purchasing supplies for cash may be too small in amount to record.
B) Businesses have too many cash transactions.
C) Businesses have too few cash transactions.
D) When credit is used for most transactions.

Question 49

During June,the Grass is Greener Company mows 100 lawns a week; the company was paid in advance during May by those customers.The company uses the accrual basis of accounting.How will these events affect the company's financial statements?

A) The income statement shows the effects of the transactions in May.
B) The income statement shows the effects of the transactions in June.
C) The balance sheet shows no effect from the transactions in May.
D) The balance sheet shows no effect from these transactions in May or June.

Question 50

Which of the following statements about accrual basis accounting is correct?

A) If a company uses accrual basis accounting, the company should not record revenue until payments is actually received.
B) If a company uses accrual basis accounting, the company should, the company should record expenses in the same period as the revenues they generate.
C) IFRS does not allow accrual basis accounting for external reporting of income.
D) The items reported on the income statement continue to have an impact beyond the current period, whereas the items reported on the balance sheet impact just the current period.

Question 51

Which of the following situations results in unearned revenue?

A) Collected $100 from a customer who purchased goods a month ago
B) Received an order from a customer who will purchase and pay for goods in two weeks
C) Sold goods for $100 today with payment due from the customer in 30 days
D) Received $100 cash from a customer for an order of goods to be shipped next month

Question 52

When cash is received in advance of being earned,a(n)______ called _________ is recorded.

A) liability; Unearned Revenue
B) asset; Unearned Revenue
C) liability; Accounts Receivable
D) asset; Accounts Receivable

Question 53

During 2016,a company provided services for cash of $21,000 and services on credit of $15,000.The company collected accounts receivable of $8,000 and incurred operating expenses of $22,700,$14,000 of which were paid during the year.The amount of net income (loss)for the year is:

A) $13,300
B) ($1,700)
C) $22,700
D) $6,300

Question 54

The Fastbank Motorcycle Service Company wins a $10 million bid to provide the repair services for a recall on a popular brand of motorcycles.No money is exchanged.The repair services are expected to be performed early next year.How will these events affect the balance sheet prepared at the end of this year?

A) Accounts Receivable will increase by $10 million.
B) Both Accounts Receivable and Accounts Payable will each increase by $10 million.
C) Both Accounts Receivable and Stockholders' Equity will each increase by $10 million.
D) These events will not impact the balance sheet.

Question 55

Revenues are recognized when __________,even when cash is collected in a different accounting period than the revenue is earned.

A) cash is collected
B) bills are paid
C) services are performed
D) customers prepay for goods/services

Question 56

In accrual accounting,according to the __________ recognition principle,revenues should be recognized when they are earned,not necessarily when cash is received.

A) revenue
B) expense
C) cost
D) accrual

Question 57

During May,Just in Thyme,Inc.billed a customer $1,000 for services performed during May.During June,Just in Thyme collected the $1,000.Which of the following statements about this transaction is correct?

A) $1,000 of revenue should be recorded in May.
B) $500 of revenue should be recorded in May and $500 in June.
C) $1,000 of revenue should be recorded in June.
D) No revenue should be recorded for these events because they relate only to the balance sheet.

Question 58

The Rainbow House Painting Company has been contracted to paint a house for $3,600.One-half of that amount will be paid up front; the rest will be paid upon satisfactory completion.Rainbow should recognize the revenue when:

A) the work begins.
B) the first payment is received.
C) half of the work is complete and half of the payments have been received.
D) the work is complete.

Question 59

In its first year of business,Wok 'n' Roll,Inc.earned $100,000 of revenues of which $80,000 was collected.It also incurred $90,000 in expenses for which $80,000 was paid.Which of the following statements are correct?

A) Wok 'n' Roll should use cash basis accounting for external reporting purposes as required under GAAP and IFRS.
B) Wok 'n' Roll should report net income of $10,000 for external reporting purposes.
C) Wok 'n' Roll should report $0 net income for external reporting purposes.
D) Wok 'n' Roll should report net income of $20,000 for external reporting purposes.

Question 60

A company's revenue recognition policy:

A) affects the income statement but not the balance sheet.
B) defines when its revenue should be collected.
C) is usually described in the notes to a company's financial statements.
D) states that revenues should not be recorded until payments are received from customers.

Question 61

Time Warner is a publishing and communications company,specializing in magazines,cable television operation,television program development,and other telecommunication services.Its financial statements show $37,666 in an account called Unearned Revenue,which represents amounts that customers have paid in advance of receiving magazines,cable television,and internet services.What type of account is this and on what statement is it reported?

A) Asset; Balance Sheet
B) Liability; Balance Sheet
C) Revenue; Balance Sheet
D) Revenue; Income Statement

Question 62

In accordance with the expense recognition principle,expenses are recorded in the period the:

A) related revenues are recorded.
B) cash is paid.
C) related assets are recorded.

Question 63

Accruix,Inc.uses accrual basis accounting.Its balance sheets reported Accounts Receivable of $10,000 at the end of its first year and $15,000 at the end of its second year.Its income statement reported Sales Revenue of $100,000 in its second year.What would Accruix's revenues have been if it had used cash basis accounting?

A) $100,000
B) $95,000
C) $105,000
D) $10,000

Question 64

When employees work for a company in June but are not paid until July,the June financial statements will include ______ on the:

A) Salaries and Wages Payable; balance sheet
B) Prepaid Salaries and Wages; income statement
C) Salaries and Wages Payable; income statement
D) Prepaid Salaries and Wages; balance sheet

Question 65

During May,Many Happy Returns,Inc.earned $1,400,of which $1,000 was collected,and had expenses of $800,of which $700 was paid.Its net income equals:

A) $600 using accrual accounting versus $300 using cash basis.
B) $300 using accrual accounting versus $600 using cash basis.
C) $700 using accrual accounting versus $200 using cash basis.
D) $200 using accrual accounting versus $700 using bash basis.

Question 66

Unearned Revenue is a(n):

A) expense.
B) asset.
C) revenue.
D) liability.

Question 67

Under the accrual basis of accounting,the ________ recognition ("matching")principle requires that expenses be recognized in the same period as the related revenues.

A) expense
B) revenue
C) cost
D) separate

Question 68

In its first year of operation,Jetway Airlines paid Salaries expense of $40 million.On December 31,it accrued an additional Salaries expense of $2 million.What should Jetway report in the income statement and balance sheet for its first year ended December 31?

A) Income statement: Salaries and Wages Expense $42 million; Balance sheet: Salaries and Wages Payable $2 million
B) Income statement: Salaries and Wages Expense $40 million; Balance sheet: Salaries and Wages Payable $2 million
C) Income statement: Salaries and Wages Expense $40 million; Balance sheet: Salaries and Wages Payable $0
D) Income statement: Salaries and Wages Payable $2 million; Balance sheet: Salaries and Wages Expense $42 million

Question 69

A business purchased supplies for cash.The business will decrease its Cash account and:

A) increase its Supplies account.
B) decrease its Supplies account.
C) increase its Supplies Payable account
D) decrease stockholder's equity by recording Supplies Expense for the amount of the payment.

Question 70

If the cash is received before the related goods or services are delivered,which of the following will be recorded?

A) Unearned Revenue, a liability
B) Accounts Receivable, an asset
C) Pre-earned Revenue, which increases Retained Earnings
D) Service Revenue, which increases Retained Earnings

Question 71

During November 2015,Asler Inc.performs consulting services.The client does not pay Asler until January,2016.

A) Using the accrual basis of accounting, the revenue is reported in January 2016.
B) Using the cash basis of accounting, the revenue is reported in November 2015.
C) Using the accrual basis of accounting, the revenue is reported in November 2015.
D) Using the accrual basis of accounting, the revenue is reported when Asler's expenses are paid.

Question 72

Which of the following statements about cash basis accounting and accrual basis accounting is correct?

A) If payment is received at the same time a service is provided, it does not matter whether cash basis accounting or accrual basis accounting is used; both would record the transaction with the same journal entry.
B) The cash basis of accounting works best when a lengthy delay exists between the timing of cash flows and the underlying business activities to which they relate.
C) If a company receives a bill for rent for the period and decides to delay payment, the rent will not be recorded as an expense if accrual basis accounting is used.
D) If the cash basis of accounting is used, the Unearned Revenue account is increased when a company receives a deposit in advance of services to be performed by the company.

Question 73

Supplies are expensed when:

A) purchased.
B) paid for.
C) used.
D) purchased on account.

Question 74

In January,Pizza Company bought pizza ingredients on account for $100,with payment due to the supplier in 90 days.The pizza ingredients were used for pizzas made and delivered in January.In which month should Pizza Company record the cost of the pizza ingredients as an expense?

A) February
B) March
C) January
D) April

Question 75

Receiving cash from a customer to pay for a previously recorded account receivable will:

A) increase total assets.
B) have no effect on total assets.
C) decrease liabilities.
D) increase stockholder's equity.

Question 76

Which of the following statements about cash basis accounting and accrual basis accounting is correct?

A) Using the accrual basis of accounting, if payment is received before delivery of goods or a service, revenue is recorded at the time the payment is received.
B) Using the accrual basis of accounting, if payment is received after delivery of goods or a service, an asset is recorded at the time the good or service was delivered.
C) Using the cash basis of accounting, if payment is received before delivery of goods or a service, net income is affected when goods or services are delivered.
D) Using the cash basis, if payment is received after delivery of goods or a service, unearned revenue is recorded.

Question 77

The entry to record the payment of accounts payable:

A) decreases assets.
B) increases expenses.
C) increases liabilities.
D) increases stockholder's equity.

Question 78

The expense recognition principle ("matching")dictates:

A) where on the income statement expenses should be presented.
B) when revenues are recognized on the income statement.
C) the ordering of current assets and current liabilities on the balance sheet.
D) when costs are recognized as expenses on the income statement.

Question 79

ABC Company paid $6,000 cash for insurance in June that provides coverage for six months,from July through December.How much expense should be recognized in June to be in accordance with generally accepted accounting principles?

A) No expense should be recognized in June.
B) $6,000
C) $1,000 ($6,000 x 1/6 for the month of June)
D) $3,000

Question 80

What type of account is Accounts Receivable?

A) Asset
B) Liability
C) Expense
D) Revenue