Question 1

The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer. In the sale of services, revenue is recognized when the services are rendered.

Accepted Answer

The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer. In the sale of services, revenue is recognized when the services are rendered.

Question 2

Accrual basis accounting recognizes revenues when cash is received from the customer.

Accepted Answer

Accrual basis accounting recognizes revenues when they are earned, regardless of when the cash is received from the customer.

Question 3

Losses are decreases in assets or increases in liabilities from peripheral activities.

Accepted Answer

Losses are typically the result of peripheral activities that result in a decrease in assets or an increase in liabilities. Examples of peripheral activities that can result in losses include things like selling equipment for less than it is worth, having a customer default on a payment, or experiencing a natural disaster that damages your property.

Question 4

The double-entry accounting system records the dual effect of each transaction.

Accepted Answer

The double-entry accounting system records the dual effect of each transaction. Every transaction has two effects: a credit and a debit, which are recorded in corresponding accounts through the system.

Question 5

When a growing company finds it needs to buy more inventory before cash has been collected from customers, they often use short term credit such as trade or notes payable to finance the inventory purchases.

Accepted Answer

This statement is true. Companies often use short term credit such as trade or notes payable to finance inventory purchases before they have collected cash from customers. This helps them to maintain inventory levels and continue to grow their business while waiting for payments from customers.

Question 6

Using the accrual basis of accounting, a company recognizes expenses when they are paid.

Accepted Answer

Using the accrual basis of accounting, a company recognizes expenses when they are incurred (i.e. when the goods or services are received), regardless of when they are paid. This means that expenses may be recognized before or after they are actually paid.

Question 7

A decrease in a liability account is recorded by a debit.

Accepted Answer

A decrease in a liability account is recorded by debiting the account, as it represents a reduction in the amount owed by the company to its creditors.

Question 8

Income tax expense will appear on the statement of financial position.

Accepted Answer

Income tax expense does not appear on the statement of financial position. It appears on the income statement as part of the determination of net income.

Question 9

The revenue principle recognizes revenues when the earnings process is complete or nearly complete, an exchange has taken place, and collection is probable.

Accepted Answer

The revenue principle is based on these three criteria: completion of the earnings process, an exchange has taken place, and collection is probable. Therefore, the statement is true.

Question 10

Cost of sales is usually the largest expense for manufacturing or merchandising companies.

Accepted Answer

Cost of sales, also known as cost of goods sold (COGS), includes the direct expenses incurred in producing or purchasing a product for sale. This expense is typically the largest for manufacturing or merchandising companies as it directly relates to their core business and revenue generation.

Question 11

Accrual basis accounting records revenues when earned and expenses when incurred, regardless of when the related cash is received or paid.

Accepted Answer

This is the definition of accrual basis accounting. It recognizes revenue and expenses based on when they are earned or incurred, and not when the cash is received or paid.

Question 12

Operating revenues result from the sale of goods or services.

Accepted Answer

Operating revenues refer to the revenue generated from the sale of goods or services. Therefore, the statement is true.

Question 13

The normal balance of an asset is a credit.

Accepted Answer

The normal balance of an asset is a debit, not a credit. The normal balance of a liability and equity is a credit.

Question 14

The sale of merchandise on credit and the collection from the customer ten days later constitutes one transaction for accounting purposes.

Accepted Answer

The sale of merchandise on credit and the collection of cash from the customer are considered two separate transactions in accounting. The first transaction records the sale and accounts receivable, while the second transaction records the cash collection and reduces accounts receivable.

Question 15

A credit means that an account has been increased.

Accepted Answer

The answer of A credit means that an account has...

Question 16

The matching process recognizes liabilities when incurred in earning revenue.

Accepted Answer

The answer of The matching process recognizes liabilities when incurred...

Question 17

The operating cycle is of a similar duration for most companies.

Accepted Answer

The operating cycle can vary greatly between different industries and companies depending on factors such as inventory turnover, payment terms, and the nature of the product or service being offered.

Question 18

The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from the customers.

Accepted Answer

The operating cycle refers to the sequence of events involved in the production and sale of goods or services, including purchasing, payment, production, and collection of payment from customers.

Question 19

We record insurance as an expense when we pay for a three year policy.

Accepted Answer

Insurance is recorded as a prepaid expense when paid for a multi-year policy. The expense is then recognized over the period of coverage.

Question 20

A Taco Bell restaurant would most likely have a longer operating cycle than Walmart.

Accepted Answer

Walmart, being a diversified retailer, sells a wide range of products including perishables, electronics, and clothing, which can have varying operating cycles. Taco Bell, primarily dealing in fast food, typically has a shorter operating cycle due to the quick turnover of inventory and immediate revenue from sales.

Quiz 3: Operating Decisions and the Accounting System

The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer. In the sale of services, revenue is recognized when the services are rendered.

Accrual basis accounting recognizes revenues when cash is received from the customer.

Losses are decreases in assets or increases in liabilities from peripheral activities.

The double-entry accounting system records the dual effect of each transaction.

When a growing company finds it needs to buy more inventory before cash has been collected from customers, they often use short term credit such as trade or notes payable to finance the inventory purchases.

Using the accrual basis of accounting, a company recognizes expenses when they are paid.

A decrease in a liability account is recorded by a debit.

Income tax expense will appear on the statement of financial position.

The revenue principle recognizes revenues when the earnings process is complete or nearly complete, an exchange has taken place, and collection is probable.

Cost of sales is usually the largest expense for manufacturing or merchandising companies.

Accrual basis accounting records revenues when earned and expenses when incurred, regardless of when the related cash is received or paid.

Operating revenues result from the sale of goods or services.

The normal balance of an asset is a credit.

The sale of merchandise on credit and the collection from the customer ten days later constitutes one transaction for accounting purposes.

A credit means that an account has been increased.

The matching process recognizes liabilities when incurred in earning revenue.

The operating cycle is of a similar duration for most companies.

The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from the customers.

We record insurance as an expense when we pay for a three year policy.

A Taco Bell restaurant would most likely have a longer operating cycle than Walmart.