Question 1

An increase in revenue always:
A) increases stockholders' equity.
B) increases assets.
C) decreases stockholders' equity.
D) decreases assets.

Accepted Answer

An increase in revenue leads to an increase in net income, which ultimately increases the retained earnings component of stockholders' equity.

Question 2

Your company orders and receives supplies in January,pays for them in February,provides services to customers that use those supplies in March,and is paid by its customers for the services in April.Using the accrual basis of accounting:
A) expenses are recorded in February and revenues are recorded in April.
B) expenses are recorded in February and revenues are recorded in March.
C) expenses and revenues are recorded in March.
D) expenses are recorded in January and revenues are recorded in April.

Accepted Answer

Under the accrual basis of accounting, expenses and revenues are recorded when they are earned or incurred, regardless of when cash is received or paid. In this scenario, the supplies are ordered and received in January, but the expense is not incurred until the company pays for them in February. The services provided in March generate the revenue for the company, which is recognized at that time. Therefore, both expenses and revenues are recorded in March.

Question 3

Revenues:
A) decrease assets.
B) increase stockholders' equity.
C) increase liabilities.
D) decrease expenses.

Accepted Answer

Revenues increase stockholders' equity by increasing retained earnings or net income.

Question 4

Which of the following statements about revenues and expenses is correct?
A) Both revenues and expenses typically have credit balances.
B) Revenues and expenses are considered assets and liabilities, respectively.
C) Revenue is the same as cash.
D) Expenses decrease the amount of stockholders' equity.

Accepted Answer

Expenses reduce the amount of stockholders' equity because they are costs incurred by a company to generate revenues, and as a result, they decrease net income and retained earnings. Revenues, on the other hand, increase stockholders' equity by increasing net income and retained earnings. Revenue is not the same as cash, and both revenues and expenses typically have debit balances, not credit balances. Revenues are not considered assets, and expenses are not considered liabilities.

Question 5

Which of the following statements regarding the expanded accounting equation is correct?
A) Debits reduce expenses.
B) The total credits recorded in revenue accounts must equal the total debits recorded in expense accounts.
C) Across all revenue accounts, the total value of all debits must equal the total value of all credits.
D) Credits increase revenues.

Accepted Answer

In the expanded accounting equation, credits increase revenues.

Question 6

A company had the following assets and liabilities at the beginning and end of the current year:

Common stock in the amount of $15,000 was issued and dividends of $5,000 were paid during the year.What is the amount of net income for the year?
A) $44,000.
B) $34,000.
C) $24,000.
D) $54,000.

Accepted Answer

To find the net income for the year, we need to use the basic accounting equation:

Assets = Liabilities + Stockholders' Equity

At the beginning of the year, the company's total stockholders' equity was:

$70,000 (common stock) + $9,000 (retained earnings) = $79,000

At the end of the year, the company's total stockholders' equity was:

$94,000 (common stock) + $14,000 (retained earnings) = $108,000

We know that common stock was issued in the amount of $15,000 and dividends of $5,000 were paid during the year. This means that the company's net income was:

Net income = (Ending stockholders' equity - Beginning stockholders' equity) - Common stock issued + Dividends paid
Net income = ($108,000 - $79,000) - $15,000 + $5,000
Net income = $29,000 - $10,000
Net income = $19,000

Therefore, the amount of net income for the year is $19,000, which corresponds to choice B.

Question 7

An expense:
A) will decrease the amount of net income on the income statement.
B) will decrease the amount of Common Stock on the balance sheet.
C) will be increased with a credit to the account.
D) normally has a credit balance.

Accepted Answer

An expense will decrease the amount of net income on the income statement, as it represents a cost incurred by the business in order to generate revenue. It does not affect the amount of Common Stock on the balance sheet, and is normally increased with a debit to the account, not a credit. While certain types of expenses may have a credit balance (such as prepaid expenses or accrued liabilities), in general expenses have a debit balance.

Question 8

Which of the following statements about revenue and expense accounts is correct?
A) Revenue accounts are a subset of assets, and expense accounts are subcategories of liabilities.
B) Both revenue accounts and expense accounts are subcategories of assets.
C) Both revenue accounts and expense accounts are subcategories of Retained Earnings.
D) Revenue accounts are a subcategory of Cash and expense accounts are a subcategory of Accounts Payable.

Accepted Answer

The answer of Which of the following statements about revenue...

Question 9

Your company contracted for a 30-second commercial (an advertisement)that aired during the Super Bowl at a cost of $1.2 million.It is legally obligated to pay for the commercial,but has not yet done so.How is your company's balance sheet affected on the day the commercial aired?
A) It increases both assets and liabilities by $1.2 million.
B) It increases assets and decreases stockholders' equity by $1.2 million each.
C) It does not affect the balance sheet.
D) It increases liabilities and decreases stockholders' equity by $1.2 million each.

Accepted Answer

The company's liability increases by $1.2 million because it has a legal obligation to pay for the commercial. This liability is offset by a decrease in stockholders' equity of $1.2 million because the company has incurred an expense that reduces its overall value. Therefore, the balance sheet is affected by an increase in liabilities and a decrease in stockholders' equity, but not in assets.

Question 10

Which of the following would eventually cause Retained Earnings to decrease?
A) Receiving contributions from investors
B) Earning unearned revenue
C) Billing customers for services provided
D) Using up supplies

Accepted Answer

Using up supplies would result in an expense, which would reduce the retained earnings in the long run.

Question 11

Which of the following statements about revenues and expenses is correct?
A) Credits increase both revenues and expenses.
B) Credits increase expenses and decrease revenues.
C) Credits increase revenues and decrease expenses.
D) Credits decrease both revenues and expenses.

Accepted Answer

According to the rules of accounting, revenues are increased by credits and expenses are decreased by credits. So, a credit increases revenue and decreases expenses. Therefore, option C is correct.

Question 12

The basic accounting equation may be expanded to include the income statement effects of operating activities.Which of the statements below is correct regarding the expanded accounting equation?
A) Expenses are increased by credits and revenues are increased by debits.
B) Net Income increases the Common Stock account.
C) Expenses are increased by debits and revenues are increased by credits.
D) Retained Earnings is reduced by net income.

Accepted Answer

Expenses are increased by debits and revenues are increased by credits according to normal accounting rules. Net Income increases Retained Earnings, not Common Stock.

Question 13

Your company received payment from a customer last month for a service that you provided this month.How will the business activity of the current month affect the basic accounting equation?
A) Assets will not change; liabilities will decrease; and stockholders' equity will increase.
B) Assets will increase, liabilities will increase, and stockholders' equity will not change.
C) Assets will increase, liabilities will not change, and stockholders' equity will increase.
D) Assets will decrease, liabilities will not change, and stockholders' equity will increase.

Accepted Answer

The answer of Your company received payment from a customer...

Question 14

The employees of Solo Company employees worked during April but are not paid their wages totaling $500 until May.Which of the following best indicates how to account for this transaction in April?
A) No journal entry needs to be made because payment has not yet been made.
B) A journal entry with a debit to Salaries and Wages Expense and a credit to Unearned Expense for $500 should be recorded.
C) A journal entry with a debit to Salaries and Wages Payable and a credit to Salaries and Wages Expense for $500 should be recorded.
D) A journal entry with a debit to Salaries and Wages Expense and a credit to Salaries and Wages Payable for $500 should be recorded.

Accepted Answer

The entry should reflect the liability that the company owes to its employees for the wages earned in April. Therefore, a journal entry with a debit to Salaries and Wages Expense and a credit to Salaries and Wages Payable for $500 should be recorded in April. This will properly reflect the liability owed by the company for the month of April. Option A is incorrect because a journal entry is required in the current period to reflect the wages earned. Option B is incorrect because Unearned Expense is a balance sheet account and should not be used to record wages. Option C is incorrect because Salaries and Wages Payable is a liability account and should be credited to reflect the company's obligation to pay the employees in May.

Question 15

Which of the following journal entries would decrease stockholders' equity?
A) Debit Prepaid Insurance and credit Cash
B) Debit Unearned Revenue and credit Service Revenue
C) Debit Supplies and credit Accounts Payable
D) Debit Insurance Expense and credit Cash

Accepted Answer

Debiting Insurance Expense, which is an expense account, and crediting Cash, which is an asset account, would reduce stockholders' equity since expenses decrease equity and assets increase or decrease equity depending on the type of account.

Question 16

On September 30,ABC Co.received a bill for $1,000 for running a newspaper ad in September.The bill will be paid in October.Which of the following statements is correct for September?
A) Liabilities are decreased by $1,000.
B) Assets are increased by $1,000.
C) Expenses are increased by $1,000.
D) Revenues are decreased by $1,000.

Accepted Answer

The company incurred an expense in September by running the newspaper ad, so expenses are increased by $1,000. The liability to pay for the expense is not yet recorded in September as it will be paid in October. There is no increase in assets or decrease in revenues in September.

Question 17

In September,a customer signed a contract to have his house painted and paid for the job in October.The painting company bought the paint in August on account and paid for it in September.The painting company painted the house in November.Assuming accrual basis accounting is used,the painting company should record the:
A) revenues in November and the expenses in September.
B) revenues and the expenses in September.
C) revenues and the expenses in November.
D) revenues in September and the expenses in August.

Accepted Answer

The painting company should recognize the revenues and expenses in the month that the painting was completed, which is November in this case. This is in accordance with the matching principle of accrual basis accounting, which requires that expenses be matched with the revenues they help to generate in the corresponding period. The fact that the customer paid in October and the paint was bought in August is irrelevant to the timing of recognition of revenues and expenses.

Question 18

Which of the following groups of accounts contains only those that normally have credit balances?
A) Accounts Payable, Service Revenue, and Retained Earnings
B) Cash, Equipment, and Common Stock
C) Notes Payable, Salaries and Wages Payable, and Rent Expense
D) Cash, Accounts Receivable, and Retained Earnings

Accepted Answer

The answer of Which of the following groups of accounts...

Question 19

Which of the following accounts has a normal credit balance?
A) Cash
B) Notes Receivable
C) Salaries and Wages Expense
D) Unearned Revenue

Accepted Answer

Unearned Revenue is a liability account which represents a company's obligation to provide goods or services in the future. As it is a liability account, it has a normal credit balance. Choice A (Cash) and B (Notes Receivable) are asset accounts with a normal debit balance, while choice C (Salaries and Wages Expense) is an expense account with a normal debit balance.

Question 20

Which of the following expressions correctly describes when revenues and expenses are recognized under accrual basis accounting?
A) Revenues when cash is received; expenses when cash is paid
B) Revenues when cash is received; expenses when the expense is incurred
C) Revenues when the revenue is earned; expenses when the expense is incurred
D) Revenues when the revenue is earned; expenses when cash is paid

Accepted Answer

Accrual basis accounting recognizes revenues when they are earned, regardless of when the cash is received, and expenses when they are incurred, regardless of when the cash is paid. This method provides a more accurate picture of a company's current financial situation and performance compared to cash basis accounting, which only recognizes transactions when cash is exchanged.

Quiz 3: Reporting Operating Results on the Income Statement

An increase in revenue always:

Your company orders and receives supplies in January,pays for them in February,provides services to customers that use those supplies in March,and is paid by its customers for the services in April.Using the accrual basis of accounting:

Revenues:

Which of the following statements about revenues and expenses is correct?

Which of the following statements regarding the expanded accounting equation is correct?

A company had the following assets and liabilities at the beginning and end of the current year: Common stock in the amount of $15,000 was issued and dividends of $5,000 were paid during the year.What is the amount of net income for the year?

An expense:

Which of the following statements about revenue and expense accounts is correct?

Your company contracted for a 30-second commercial (an advertisement) that aired during the Super Bowl at a cost of $1.2 million.It is legally obligated to pay for the commercial,but has not yet done so.How is your company's balance sheet affected on the day the commercial aired?

Which of the following would eventually cause Retained Earnings to decrease?

Which of the following statements about revenues and expenses is correct?

The basic accounting equation may be expanded to include the income statement effects of operating activities.Which of the statements below is correct regarding the expanded accounting equation?

Your company received payment from a customer last month for a service that you provided this month.How will the business activity of the current month affect the basic accounting equation?

The employees of Solo Company employees worked during April but are not paid their wages totaling $500 until May.Which of the following best indicates how to account for this transaction in April?

Which of the following journal entries would decrease stockholders' equity?

On September 30,ABC Co.received a bill for $1,000 for running a newspaper ad in September.The bill will be paid in October.Which of the following statements is correct for September?

Which of the following groups of accounts contains only those that normally have credit balances?

Which of the following accounts has a normal credit balance?

Which of the following expressions correctly describes when revenues and expenses are recognized under accrual basis accounting?