Question 1

If total revenues are the same as total expenses, then a company has which of the following?

Accepted Answer

If total revenues are the same as total expenses, the company has neither made a profit nor a loss. This is known as breaking even.

Question 2

Accrued expenses are

Accepted Answer

Accrued expenses are expenses that have been incurred by a company but have not yet been paid or recorded in the company's accounting system. These expenses are typically recorded at the end of an accounting period through an adjusting entry, and are recognized as liabilities on the company's balance sheet until they are paid. Examples of accrued expenses include salaries and wages, interest, and utilities.

Question 3

A company receives a $25,000 cash deposit from a customer on March 15 but will not deliver the goods until April 20. Which of the following statements is false?

Accepted Answer

Revenue is recognized when goods or services are delivered, not when cash is received. Therefore, revenue will not be recorded in March but in April when the goods are delivered.

Question 4

Tony's Tune-Up Shop Ltd. follows the revenue recognition principle. Tony services a car on May 31. The customer picks up the vehicle on June 1 and mails the payment to Tony on June 5. Tony receives the cheque in the mail on June 6. When should Tony show that the revenue was earned?

Accepted Answer

According to the revenue recognition principle, revenue is recognized when it is earned and realizable, regardless of when payment is received. In this case, the service was completed on May 31, so the revenue should be recognized on that date.

Question 5

The operating cycle of a business is best defined as which of the following?

Accepted Answer

The operating cycle of a business refers to the time it takes for a company to purchase goods or services from suppliers, sell those goods or services to customers, and collect cash from customers. This cycle is essential to understanding a company's cash flow and liquidity. It is not necessarily tied to a specific time period, such as a year or the lifespan of assets.

Question 6

In applying the revenue principle to a given transaction, the most important moment or period in time is when which of the following happens?

Accepted Answer

The most important moment in time when applying the revenue principle is when the sales transaction is completed (i.e., ownership passes) or services are rendered. This is because revenue cannot be recognized until the goods or services have been delivered to the customer. Related cash inflows, service contracts, and expenses are important considerations, but they do not have the same impact on revenue recognition as the completion of the sales transaction or the delivery of services.

Question 7

Which of the following items has no effect on retained earnings?

Accepted Answer

Hiring a new employee is an expense that affects the company's net income, but it does not have a direct impact on retained earnings. Retained earnings are affected by revenues, expenses, and dividends.

Question 8

The purchase of an asset for cash

Accepted Answer

When purchasing an asset for cash, there is no change in liabilities. Therefore, the total assets remain unchanged.

Question 9

Under the accrual basis of accounting

Accepted Answer

Under the accrual basis of accounting, events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. This means that revenue is recognized when it is earned, even if cash has not yet been received, and expenses are recognized when they are incurred, even if cash has not yet been paid. This results in a more accurate reflection of a company's financial performance.

Question 10

A payment of a portion of accounts payable will

Accepted Answer

Paying off accounts payable reduces liabilities and cash (an asset) equally, leaving shareholders' equity unchanged.

Question 11

The matching principle states that expenses should be matched with revenues because

Accepted Answer

The matching principle states that expenses should be matched with revenues because it is the most appropriate way to measure a company's profitability. This principle allows for a fair representation of the expenses incurred in generating revenue, by recognizing the effort put into generating that revenue, and ensuring that expenses related to those efforts are matched with the corresponding revenues.

Question 12

Which of the following expenses is usually listed last on the statement of earnings?

Accepted Answer

Income tax expense is typically listed last on the statement of earnings, after all other expenses and deductions have been taken into account.

Question 13

Asset turnover measures

Accepted Answer

Asset turnover measures how efficiently a company uses its assets to generate sales. Therefore, option D is the correct answer. Options A, B, and C do not accurately describe asset turnover ratio.

Question 14

Which of the following activities will most likely result in a reported loss on the statement of earnings?

Accepted Answer

The sale of old equipment can result in a reported loss if the equipment is sold for less than its book value.

Question 15

Which of the following is not normally a condition that must be met for revenue to be recognized (recorded) under the revenue principle?

Accepted Answer

The promise to perform an exchange in the future is not a condition that must be met for revenue to be recognized. Rather, it is the promise to perform an exchange in the present or near future that triggers revenue recognition. The other conditions, such as the ability to measure revenue reliably and the completion of the earnings process, are necessary for revenue to be recognized. The collection of receivables from credit sales being reasonably assured is also a common condition, as it indicates that the seller has a high likelihood of actually receiving payment for the goods or services provided.

Question 16

On January 1, 20B, Grover Inc., started the year with a $22,000 credit balance in its retained earnings account. During 20B, the company earned profit of $40,000 and declared and paid dividends of $10,000. Also, the company received cash of $15,000 as an additional investment by its owners. Therefore, the balance in retained earnings on December 31, 20B, would be which of the following?

Accepted Answer

The answer of On January 1, 20B, Grover Inc., started...

Question 17

The right side of an account

Accepted Answer

The right side of an account is the credit side and is used to record increases, while the left side is the debit side and is used to record decreases. Therefore, option B is the correct answer. Option A is incorrect as the right side records increases, not decreases. Option C is incorrect as the right side records increases, not decreases. Option D is incorrect as it refers to the trial balance, not the right side of an account.

Question 18

Accrued revenues are

Accepted Answer

Accrued revenues refer to such revenues that have been earned but not yet received or recorded. This means that even though the company has completed the service or delivered the goods, the payment for the same has not been received or recognized as revenue in the accounts. Accrued revenues are recorded as assets in the balance sheet and recognized as revenues in the income statement once they are collected. Option A refers to accrued expenses, option C refers to unearned revenues, and option D refers to recognized revenues.

Question 19

The periodicity assumption is the basis for which of the following?

Accepted Answer

The periodicity assumption states that the activities of a business should be divided into a series of time periods (usually a year) for accounting and reporting purposes. This allows for the timely recognition of revenues and expenses during the relevant period, and enables financial statements to be prepared at regular intervals. The periodicity assumption does not relate to separating a company's transactions from the owners' transactions or the cut-off of expense or revenue recognition.

Question 20

During 20B, New Company earned service revenues amounting to $200,000, of which $120,000 were collected in cash; the balance will be collected in January 20C. The 20B statement of earnings of the company should report which of the following amounts for service revenues?

Accepted Answer

The statement of earnings should report the total amount of service revenues earned during the period, regardless of whether they have been collected in cash or not. Therefore, the amount of service revenues should be $200,000.

Quiz 3: Operating Decisions and the Accounting System