Question 1

Financial analysts look to the income statement to determine which of the following?

Accepted Answer

The income statement provides information about a company's revenues and expenses, which helps determine if the company has generated income from its operations.

Question 2

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 in applying the revenue principle is when the sales transaction is completed (i.e., ownership passes) or services are rendered. This is the point at which revenue can be recognized and recorded in the financial statements. Related cash inflows and expenses may occur before or after this point, but they are not as significant in determining when revenue should be recognized. The signing of a service contract is also not as important as the completion of the service itself.

Question 3

Which of the following is not considered an asset?

Accepted Answer

Dividends are distributions of earnings to shareholders and are not considered an asset. Equipment, trade receivables, and inventory are all examples of assets.

Question 4

At the end of December,the owner of an apartment complex realized that the December rent had not been collected from one of the tenants.December 31 was the end of the accounting year; therefore,the owner made the appropriate adjusting entry at that time.When the December rent was collected in January of the following year,the entry made by the apartment owner should include which of the following?

Accepted Answer

The answer of At the end of December,the owner of...

Question 5

Revenue is always recognized when which of the following occurs?

Accepted Answer

Revenue is recognized when it is earned, which means that the seller has provided goods or services to the customer and is entitled to receive payment for them. This is true even if payment has not yet been received and even if expenses have not yet been paid. The end of the period or collection of cash are not necessarily related to revenue recognition.

Question 6

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

Accepted Answer

The matching principle is based on the idea that expenses incurred in generating revenue should be recorded in the same accounting period as the associated revenue. This principle helps to ensure that financial statements accurately reflect the results of a company's operations for a given period. By matching revenues and expenses, the financial statements provide a more accurate picture of a company's profitability, as well as its financial position. Thus, option A is the best choice because it explains the rationale behind the matching principle.

Question 7

Accrued expenses which must be recorded in adjusting entries represent which of the following?

Accepted Answer

The answer of Accrued expenses which must be recorded in...

Question 8

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

Accepted Answer

Income tax expense is usually listed last on the income statement, after all other expenses have been deducted. This is because income tax expense is calculated based on the company's taxable income, which is the amount of income remaining after all other expenses have been deducted.

Question 9

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

Accepted Answer

The periodicity assumption is the basis for dividing the activities of a business into a series of time periods for accounting and reporting purposes. This allows for better organization and analysis of financial information over specific time frames, such as monthly, quarterly, or annually.

Question 10

Which of the following businesses would most likely have the shortest operating cycle?

Accepted Answer

A pizza franchise such as Pizza Pizza would most likely have the shortest operating cycle as the entire process of receiving an order, preparing the pizza, delivering it and receiving payment happens within a relatively short period of time (typically 30 minutes or less). In comparison, the other businesses listed involve longer lead times for acquiring inventory, manufacturing products, and selling them to customers.

Question 11

Which principle holds that all of the expenses incurred in earning revenue should be identified with the revenue recognized and reported for the same period?

Accepted Answer

The matching principle holds that all of the expenses incurred in earning revenue should be identified with the revenue recognized and reported for the same period. This principle ensures that companies accurately reflect their financial performance by matching expenses with the revenue generated.

Question 12

Which of the following costs is most likely to be the largest expense item on the income statement of a merchandising chain such as Walmart?

Accepted Answer

Cost of sales, also known as the cost of goods sold, is the direct cost of purchasing the goods sold by the company. For a merchandising chain like Walmart, this would be the cost of purchasing the products they sell. As the cost of sales is subtracted from the revenue to determine the gross profit, it is typically the largest expense item on the income statement.

Question 13

Calculate the effective tax rate for a company that reports an income tax expense of $3.0 million,profit of $7.5 million,and income before taxes of $10.5 million.

Accepted Answer

Effective tax rate = Income tax expense / Income before taxes= $3.0 million / $10.5 million= 28.57% (rounded to 28.5%)

Question 14

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 and pay for goods or services from suppliers, sell those goods or services to customers, and collect cash from the customers. It involves the various steps involved in the production and sale of goods or services and includes all the processes and activities that occur from the beginning of the production cycle to the collection of cash from customers.

Question 15

Why is the cash basis of accounting not appropriate for use by publicly traded corporations?

Accepted Answer

The cash basis of accounting only takes into account cash transactions and does not consider any assets or liabilities other than cash. This means that it would not give a clear and accurate picture of a publicly traded corporation's financial position. As such, such corporations must use accrual basis accounting, which accounts for all assets and liabilities.

Question 16

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 income statement of the company should report which of the following amounts for service revenues?

Accepted Answer

The income statement should report the total service revenues earned during the period, regardless of when the cash is collected. Therefore, $200,000 should be reported as service revenues for 20B.

Question 17

Which of the following is not an example of the application of the revenue principle?

Accepted Answer

The revenue principle requires that revenue is recognized when it is earned, regardless of when the cash is received. In option B, rent received in advance is not yet earned; it is a liability (unearned revenue) until the period it covers passes. Therefore, it does not follow the revenue recognition principle until the service period occurs.

Question 18

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

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 19

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, regardless of whether cash has been received, and expenses are recognized when they are incurred, regardless of whether cash has been paid. The accrual basis provides a more accurate picture of a company's financial performance than the cash basis, which only records transactions when cash is received or paid.

Question 20

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

Accepted Answer

If total revenues equal total expenses, it means there is a break-even situation where there is neither profit nor loss.

Quiz 3: Operating Decisions and the Accounting System