Question 1

A firms decision to sell its headquarters building at a gain
A)would increase income in the year of sale.
B)is not part of the core business.
C)would be aggregated with other noncore, nonoperating items.
D)reported below operating income, probably as Other Income.
E)All of the above would result.

Accepted Answer

Selling a headquarters building at a gain would indeed increase income in the year of sale, is not part of the core business operations, would be aggregated with other noncore, nonoperating items, and is typically reported below operating income, often under "Other Income" or a similar category on the income statement.

Question 2

Which of the following is/are true?
A)Cost is the economic sacrifice made to acquire goods or services.
B)When the good or service acquired has reliably measurable future benefits to a firm, the cost is an asset.
C)When the firm consumes the good or service, the cost is an expense.
D)All of the above are true.
E)None of the above are true.

Accepted Answer

All of the statements are true. Cost is the economic sacrifice made to acquire goods or services. When the good or service acquired has reliably measurable future benefits to a firm, the cost is an asset. When the firm consumes the good or service, the cost is an expense.

Question 3

When assets and income from operations that a firm has decided to discontinue (and dispose of or abandon), separating the two income components allows users to form better predictions of
A)past earnings.
B)current earnings.
C)future earnings.
D)all of the above
E)none of the above

Accepted Answer

Separating the income components of discontinued operations allows users to form better predictions of future earnings. By separating these components, users can more accurately project the firm's ongoing operations without the impact of the discontinued assets and operations. Predicting past or current earnings is less important in this context.

Question 4

The firm recognizes an expense when the following condition(s) hold(s):
A)The consumption of the asset results from a transaction that leads to the recognition of revenue.
B)The consumption of the asset results from the passage of time.
C)The expenditures on advertising must be recognized as expense in the period of expenditure.
D)The expenditures on research must be recognized as expense in the period of expenditure.
E)all of the above

Accepted Answer

All the conditions listed (A, B, C, D) are situations where a firm would recognize an expense. A) Expenses are recognized when they are incurred to generate revenue. B) Some assets, like insurance, are consumed over time, leading to an expense recognition as time passes. C) Advertising costs are typically expensed in the period they are incurred unless they bring future economic benefits. D) Research costs are expensed in the period they are incurred because the future economic benefits are uncertain.

Question 5

What criterion or criteria must sales transactions meet in order for the seller to recognize revenues before collecting cash?
A)The revenues must be earned (the firm must have achieved substantial performance).
B)The amount to be received must qualify as an asset (there must be a future economic benefit and the amount must be measured with sufficient reliability).
C)The firm must have a reasonable expectation that it will collect the amount owed from the customer.
D)All of the above.
E)None of the above.

Accepted Answer

All of the criteria mentioned in options A, B, and C must be met before a seller can recognize revenues before collecting cash. The revenues must be earned, the amount to be received must qualify as an asset with a future economic benefit that can be measured with reliability, and the seller must have a reasonable expectation of collecting the amount owed from the customer.

Question 6

Which of the following is/are true?
A)After cost of sales, the income statement typically shows deductions for other expenses associated with operations (other operating expenses).
B)Many firms present a subtotal called operating income or operating profit, the difference between revenues and expenses associated with core operating activities.
C)Two common types of operating expenses are selling, general, and administrative expenses (SG&A) and research and development expenses (R&D).
D)All of the above are true.
E)None of the above are true.

Accepted Answer

All of the statements listed are true. The income statement typically shows deductions for operating expenses after cost of sales. Operating income (or operating profit) is a common subtotal that shows the difference between revenues and expenses associated with core operating activities. Two common types of operating expenses are selling, general and administrative (SG&A) expenses and research and development (R&D) expenses.

Question 7

Other (nonoperating) items follow operating expenses or the subtotal for operating profit.Most firms reporting under U.S.GAAP separately report financing costs, such as
A)principal payments.
B)interest revenue.
C)interest expense.
D)principal receipts.
E)none of the above.

Accepted Answer

Under U.S. GAAP, financing costs such as interest expense are reported separately from operating expenses and operating profit, typically as a line item below the operating profit subtotal. Principal payments and receipts would be reflected in the balance sheet as changes to outstanding debt or asset balances, and interest revenue would be reported as part of operating revenue, rather than financing costs.

Question 8

The matching convention assigns _____ to the related _____.
A)expenses; revenues
B)revenues; revenues
C)assets; liabilities
D)liabilities; assets
E)assets; shareholders' equity

Accepted Answer

The matching convention assigns expenses to the related revenues, meaning that the expenses incurred in generating the revenue should be recognized in the same period in which the revenue is recognized. This helps to provide a more accurate picture of the company's financial performance. The other choices are not consistent with the matching convention.

Question 9

Which equation is correct?
A)Assets = Liabilities + Contributed Capital - Dividends
B)Shareholders' Equity = Assets - Liabilities + Contributed Capital + Net Income
C)Shareholders' Equity = Contributed Capital + Retained Earnings + Net Income - Dividends
D)Retained Earnings = Net Income + Dividends
E)none of the above

Accepted Answer

The equation for shareholders' equity is Shareholders' Equity = Contributed Capital + Retained Earnings + Net Income - Dividends. This equation takes into account the initial investment made by shareholders (contributed capital), the profits earned by the company (net income and retained earnings), and any payments made to the shareholders (dividends). It correctly represents the relationship between the different parts of the equity section of the balance sheet.

Question 10

_____ present an ordered list, grouped by broad categories of revenues and expenses.They begin with revenues followed by a list of expenses.
A)Income Statement
B)Balance Sheets
C)Statement of Retained Earnings
D)Statement of Cash Flows
E)None of the above

Accepted Answer

The Income Statement presents an ordered list of revenues and expenses grouped by broad categories, beginning with revenues followed by a list of expenses.

Question 11

The income statement is not also called the statement of
A)operations
B)operating activity
C)profit and loss
D)receipts and disbursements
E)All of the above are different names assigned to the income statement.

Accepted Answer

The income statement is known by several names, including the statement of operations, statement of operating activity, and profit and loss statement, but it is not referred to as the statement of receipts and disbursements. The statement of receipts and disbursements is more akin to a cash flow statement, detailing the actual cash received and spent over a period, rather than the income statement's focus on revenues and expenses to show profit or loss.

Question 12

Subtraction of total operating expenses from sales yields:
A)net income.
B)gross margin.
C)operating profit.
D)all of the above.
E)none of the above.

Accepted Answer

Subtracting total operating expenses from sales yields operating profit. This is also referred to as operating income or earnings before interest and taxes (EBIT). Net income and gross margin have different calculations that do not include all operating expenses.

Question 13

_____ arise from relatively infrequent transactions, and there can be no assurance that they will recur in any future period.
A)Gains/Losses
B)Revenues
C)Expenses
D)Assets
E)Liabilities

Accepted Answer

Gains and losses arise from relatively infrequent transactions, and their occurrence cannot be predicted with confidence for future periods. Revenues and expenses are expected to occur regularly and frequently, while assets and liabilities are expected to exist continuously.

Question 14

U.S.GAAP and IFRS require separate income statement display of income from continuing operations and _____earnings that will not continue because the firm either sold, or made a decision to sell, a portion of its business).Such a requirement aids users of the income statement in predicting future earnings.
A)income from discontinued operations
B)extraordinary items
C)changes in accounting principles
D)sale of individual assets
E)none of the above

Accepted Answer

Both U.S.GAAP and IFRS require the separate income statement display of income from continuing operations and income from discontinued operations. Income from discontinued operations represents earnings from a portion of the business that has been sold or will not continue. This information is valuable for users of the income statement in predicting future earnings.

Question 15

Prepaid assets are valued on the balance sheet at
A)cost paid to acquire the asset.
B)acquisition cost less accumulated depreciation.
C)cost less expired portion.
D)replacement cost.
E)present value of future cash flows.

Accepted Answer

Prepaid assets are those expenses that have been paid in advance, such as prepaid rent, insurance, or taxes. These assets are recorded on the balance sheet at cost less the expired portion, since their value decreases as time goes by. For instance, if a company pays for a 12-month insurance policy on January 1st, but the policy covers from February 1st to January 31st of the following year, then at the end of each month, the company would reduce the prepaid asset by one-twelfth of the cost, to represent the portion that has expired or been used up. Therefore, the balance sheet should reflect the remaining (unexpired) portion of the prepaid asset, which represents a future economic benefit for the company.

Question 16

Common terminology, but not definitions in U.S.GAAP and IFRS, often refers to the difference between sales and cost of sales as gross
A)margin.
B)revenues.
C)expenses.
D)all of the above.
E)none of the above.

Accepted Answer

Gross margin refers to the difference between sales and cost of sales. Revenues and expenses are not specific to this calculation and are not accurate choices for the term being described.

Question 17

_____ are part of the ongoing central operations of the firm, so they are relatively persistent and sustainable.
A)Revenues
B)Expenses
C)Assets
D)Liabilities
E)Shareholders' equity

Accepted Answer

The answer of _____ are part of the ongoing central...

Question 18

A firm sells its headquarters building at a gain. This means that at the time of sale
A)the cash or other assets received were greater than the building's book value.
B)the cash or assets received in a transaction were less than the carrying value of the assets given up.
C)the cash or other assets received were greater than the building' carrying value.
D)the cash or assets received in a transaction were less than the building's book value.
E)Both choices a and c are correct.

Accepted Answer

A gain on the sale of an asset occurs when the cash or other assets received are greater than the carrying value (or book value) of the asset. Therefore, choices a and c are both correct.

Question 19

Subtracting nonoperating expenses from operating income yields:
A)income tax expense.
B)profit before income taxes.
C)net income.
D)gross profit.
E)none of the above.

Accepted Answer

Operating income is the income earned from a company's primary business activities, while nonoperating expenses are the expenses that are not related to the company's primary business activities. Therefore, when nonoperating expenses are subtracted from operating income, the result is profit before income taxes - which is the amount of profit that the company earned from its primary business activities before any taxes were paid.

Question 20

Which of the following is an example of a contra account?
A)Merchandise Inventory
B)Accounts Payable
C)Cost of Goods Sold
D)Accumulated Depreciation
E)Deferred income taxes payable

Accepted Answer

Accumulated Depreciation is an example of a contra account because it is subtracted from the related asset account, such as Equipment or Buildings, on the balance sheet to determine the net value of the asset. Contra accounts have opposite balances to their related accounts and are used to reduce the gross amount of the related account.

Quiz 3: The Basics of Record Keeping and Financial Statement Preparation: Income Statement

A firms decision to sell its headquarters building at a gain

Which of the following is/are true?

When assets and income from operations that a firm has decided to discontinue (and dispose of or abandon) , separating the two income components allows users to form better predictions of

The firm recognizes an expense when the following condition(s) hold(s) :

What criterion or criteria must sales transactions meet in order for the seller to recognize revenues before collecting cash?

Which of the following is/are true?

Other (nonoperating) items follow operating expenses or the subtotal for operating profit.Most firms reporting under U.S.GAAP separately report financing costs, such as

The matching convention assigns _ to the related _.

Which equation is correct?

_____ present an ordered list, grouped by broad categories of revenues and expenses.They begin with revenues followed by a list of expenses.

The income statement is not also called the statement of

Subtraction of total operating expenses from sales yields:

_____ arise from relatively infrequent transactions, and there can be no assurance that they will recur in any future period.

Prepaid assets are valued on the balance sheet at

Common terminology, but not definitions in U.S.GAAP and IFRS, often refers to the difference between sales and cost of sales as gross

_____ are part of the ongoing central operations of the firm, so they are relatively persistent and sustainable.

A firm sells its headquarters building at a gain. This means that at the time of sale

Subtracting nonoperating expenses from operating income yields:

Which of the following is an example of a contra account?