Question 1

Measurement of the economic effects on an entity involves each of the following except

Accepted Answer

Recording the economic effects in the financial statements is not part of the measurement process but rather a reporting process after the measurement is completed. The other options (quantification, identification, selection of unit of measure) are all necessary steps in the measurement process.

Question 2

Which of the following is the attribute used to measure many assets that are recognized on a balance sheet, because it is more objective and verifiable?

Accepted Answer

Historical cost is the attribute that measures many assets recognized on a balance sheet because it is the original cost incurred to purchase or acquire the asset, which is a more objective and verifiable measure than other options like market value or current replacement cost. Liquidation value may be used for some specific assets that might be sold quickly in a distressed situation, but it is not a general attribute used for all assets on the balance sheet.

Question 3

The justification for the accrual basis of accounting lies in the needs of financial statement users for periodic information on the financial position and the profitability of the entity.

Accepted Answer

The statement is correct as the accrual basis of accounting provides a more accurate and timely view of an entity's financial position and performance. This allows financial statement users to make informed decisions.

Question 4

The revenue recognition principle does not pertain to long-term contracts, franchises, commodities, and installment sales.

Accepted Answer

The revenue recognition principle applies to all types of sales transactions, including long-term contracts, franchises, commodities, and installment sales. It requires revenue to be recognized when earned and realized or realizable, regardless of the type of transaction.

Question 5

Conceptually, anytime a cost is incurred, an asset is acquired.

Accepted Answer

According to the accrual accounting concept, whenever a cost is incurred, it is recognized as an expense in the income statement and a corresponding asset is acquired or increased in the balance sheet. This relationship forms the basis of the balance sheet equation: Assets = Liabilities + Owner's Equity.

Question 6

The revenue recognition principle involves two factors: paid and incurred.

Accepted Answer

The revenue recognition principle involves the recognition of revenue when it is earned and realized or realizable, regardless of when payment is received. It does not involve the factor of payment or incurred expenses.

Question 7

Why is the use of the U.S.dollar as a unit of measure for financial statement data in the U.S.widely accepted?

Accepted Answer

The U.S. dollar is the medium of exchange in the United States, and therefore widely accepted as a unit of measure for financial statement data in the U.S.

Question 8

Because of its objective nature, historical cost is the attribute used to measure many of the assets recognized on the balance sheet.

Accepted Answer

Historical cost is often used to measure assets such as property, plant, and equipment, as well as inventory, which are recognized on the balance sheet. This is because historical cost reflects the actual cost incurred to acquire these assets and is an objective and verifiable measure.

Question 9

Costs incurred for purchases of merchandise result in an asset, Merchandise Inventory, and are eventually matched with revenue at the time the product is sold.

Accepted Answer

This statement is true. Purchases of merchandise are recorded as an asset on the balance sheet (Merchandise Inventory) until the merchandise is sold, at which point the cost of the merchandise is matched with the revenue generated from the sale.

Question 10

The selection of historical cost over current value as the attribute to be measured for assets is an example of the trade-off of

Accepted Answer

Selecting historical cost over current value prioritizes reliability over relevance. Historical cost is a reliable measure because the original transaction price is objective and verifiable, whereas current value may be subjective and difficult to measure. However, historical cost may not provide relevant information about the true value of the asset at present.

Question 11

The statement of cash flows reflects the revenues actually earned by the business, regardless of whether cash has been collected.

Accepted Answer

The statement of cash flows only reflects the cash inflows and outflows during a period, not the revenues earned. The income statement reflects the revenues earned, regardless of whether cash has been collected.

Question 12

Dom's Motor Mart sold merchandise to a customer for $3,000 on credit on March 10.The customer paid Fox Auto the amount due on March 31.Under the accrual basis of accounting, which of the following statements is true?

Accepted Answer

Under the accrual basis of accounting, revenue is recognized when earned, not when cash is received. The March 10th transaction increases both revenue and accounts receivable (an asset). The March 31st transaction converts accounts receivable to cash, so total assets remain unchanged.

Question 13

During December, Horn Inc.purchased $800 of supplies for use in its business.At the end of December, 20% of the supplies were still on hand, but only 75% had been paid.What amounts will appear on the company's balance sheet on December 31? ​ $$\begin{array}{l}
&\text {Supplies on Hand }&\text { Accounts Payable}\
\hline a.&(\$800)&(\$600)\
b.&(\$160)&(\$200)\
c.&(\$640)&(\$200)\
d.&(\$160)&(\$800)\
\end{array}$$

Accepted Answer

The answer of During December, Horn Inc.purchased $800 of supplies...

Question 14

Alexander City Consultants started business on January 1, 2016, and immediately purchased $1,000 of supplies to use in the business.At the end of the month, 25 percent of the supplies remains unpaid and 20% are still on hand.What amounts should appear on the financial statements for January, 2016? $$\begin{array}{l}
&\text {Income Statement }&\text { Statement of Cash Flows}\
\hline a.&(\$1,000)&(\$1,000)\
b.&(\$1,000)&(\$750)\
c.&(\$800)&(\$25)\
d.&(\$800)&(\$750)\
\end{array}$$

Accepted Answer

The answer of Alexander City Consultants started business on January...

Question 15

The income statement tells the reader about the actual cash inflows during a period of time.

Accepted Answer

The income statement shows the revenues and expenses incurred by a company during a period of time, but it does not necessarily reflect the actual cash inflows or outflows. This information is found on the statement of cash flows.

Question 16

Sally's Choice sells season memberships for $200 each.During January of 2016, 60 season memberships were sold.As of March 31, 2016, only $3,000 of season membership fees had been collected from customers.The season runs for 4 months starting May 15, 2016.Which one of the following is an amount reported on the financial statements for the period ending March 31, 2016?

Accepted Answer

As of March 31, 2016, only $3,000 of season membership fees had been collected from customers, so the remaining $9,000 ($200 x 60 memberships) is unearned membership revenue. Therefore, the amount reported on the financial statements for the period ending March 31, 2016, is unearned membership revenue of $3,000.

Question 17

Which one of the following statements is true?

Accepted Answer

Recognition is concerned with deciding whether an economic effect should be recorded in the financial statements, while measurement is concerned with how to quantify the effect. Option A is incorrect because recognition is not concerned with the dollar amount but rather whether an economic effect should be recorded in the financial statements. Option C is incorrect because the entity concept is concerned with identifying the specific entity for which the financial statements are prepared, not the recognition and measurement of economic effects. Option D is incorrect because the monetary unit assumption assumes that the currency used in the financial statements is stable and consistent over time, not tied to current purchasing power.

Question 18

Hensley Painting Company painted four houses in June at $500 each.At the end of June, three homeowners had paid Hensley cash for the jobs.Under the accrual basis, what amounts will be reported on the income statement and the statement of cash flows for June? ​ $$\begin{array}{l}
&\text {Income Statement }&\text { Statement of Cash Flows}\
\hline a.&(\$2,000)&(\$2,000)\
b.&(\$2,000)&(\$1,500)\
c.&(\$1,500)&(\$1,500)\
d.&(\$500)&(\$500)\
\end{array}$$

Accepted Answer

The answer of Hensley Painting Company painted four houses in...

Question 19

Camp Consulting Services started business on January 1, 2016.Camp performed services for customers totaling $100,000 of which 40% remain uncollected at the end of December.Under the accrual basis, what amounts would appear on Camp Consulting's financial statements for 2016? $$\begin{array}{l}
&\text {Income Statement }&\text { Statement of Cash Flows}\
\hline a.&(\$100,000)&(\$60,000)\
b.&(\$100,000)&(\$100,000)\
c.&(\$60,000)&(\$60,000)\
d.&(\$60,000)&(\$100,000)\
\end{array}$$
 ​

Accepted Answer

The answer of Camp Consulting Services started business on January...

Question 20

An accountant describes the effects of an economic event on an entity by recording the transaction and reporting the amount on the financial statements.What is this called?

Accepted Answer

Recognition is the process of recording an economic event in the financial statements, which includes identifying the type of transaction that occurred and determining the amounts to be recorded. Measurement is the process of determining the monetary value of the transaction. Disclosure refers to the presentation of the financial information in the financial statements. Matching is the process of matching revenues with the expenses incurred to generate those revenues in the same accounting period.

Quiz 4: Income Measurement and Accrual Accounting

Measurement of the economic effects on an entity involves each of the following except