Deck 3: Operating Decisions and the Accounting System

Question 1

The matching principle requires expenses to be recorded on the income statement when incurred in generating revenues.

Answer 1

True

Question 2

According to the revenue realization principle, revenue is recognized at the time that cash is collected from a customer for services to be provided in the future.

Answer 2

False

Question 3

Using cash to purchase office supplies, which will be consumed later, results in an increase in expenses and a decrease in assets at the time of purchase.

Answer 3

False

Question 4

The operating cycle is the time that elapses between a company's cash payment to suppliers for inventory purchases and the collection of cash from sale of inventory to customers.

Question 5

The revenue realization principle recognizes revenue when the goods or services are provided, regardless of the timing of the cash collection from customers.

Question 6

A retail store would likely have a shorter operating cycle than an automotive manufacturer.

Question 7

Selling inventory to a customer on account results in an increase in both assets and revenues.

Question 8

Expenses are the result of decreases in assets or increases in liabilities incurred in order to generate revenues.

Question 9

According to the matching principle, salary expense is recognized on the income statement when the salaries are paid rather than when the employee provides the work.

Question 10

Cash received prior to the providing of the goods or service results in an increase in both assets and liabilities.

Question 11

An example of operating revenue would be the revenue created by the sale of an automobile by a car dealership.

Question 12

Unearned revenues are reported as liabilities on the balance sheet.

Question 13

Under accrual basis accounting, revenues are recognized when earned and expenses are recognized when incurred.

Question 14

Application of generally accepted accounting principles requires that the accrual basis of accounting be used for reporting revenues and expenses on the income statement.

Question 15

A gain resulting from the sale of plant and equipment is not reported as operating income on the income statement.

Question 16

Earnings per share must be either reported on the income statement or disclosed in the notes to the financial statements.

Question 17

Investment income is reported as operating revenue and therefore increases operating income.

Question 18

The time period assumption implies that the life of a business entity can be reported in time periods such as quarters and years.

Question 19

Under accrual accounting, rent expense for February, 2015 would be recognized on the income statement in February, 2015 even though it had been paid for in January.

Question 20

Interest expense is reported on the income statement as an operating expense.

Question 21

Which of the following businesses would most likely not report cost of goods sold on their income statement?

A) A law firm.
B) An automobile dealership.
C)A pizza restaurant.
D)A computer chip manufacturer.

Question 22

An income statement with each line divided by net sales and shown as a percentage is called a common statement.

Question 23

Reporting revenues on the income statement that were previously reported as unearned revenues on the balance sheet results in a decrease in liabilities and an increase in net income, retained earnings, and stockholders' equity.

Question 24

Due to the relationship of financial statements, the statement of retained earnings links the income statement to the balance sheet.

Question 25

Which of the following would lengthen the operating cycle?

A) Faster collection of accounts receivables.
B) Selling inventory in a shorter period of time.
C)Increasing the number of customers who paid cash.
D)Relaxing credit terms and allowing customers more time to pay.

Question 26

Which of the following costs is most likely to be the largest expense reported on the income statement of a merchandiser such as Wal-Mart stores?

A) Utilities expense.
B) Cost of goods sold.
C)Advertising expense.
D)Income tax expense.

Question 27

Cash paid to suppliers for inventory is an investing activity.

Question 28

The net profit margin ratio is calculated by dividing net sales by net income.

Question 29

The trial balance needs to be prepared prior to preparation of the income statement.

Question 30

Revenue accounts have credit balances because they increase stockholders' equity.

Question 31

Which of the following describes the reporting of interest expense on the income statement?

A) It is reported as an operating expense.
B) It is a component of operating income.
C)It is deducted from operating income.
D)It is added to operating income.

Question 32

Purchasing a six-month insurance policy results in a debit to insurance expense and a credit to cash at the date of purchase.

Question 33

Which of the following statements is false?

A) The income statement covers a period of time.
B) A loss on the sale of plant and equipment is considered a peripheral activity and is not reported on the income statement.
C)Rent expense is a component of operating income.
D)Interest expense is not a component of operating income.

Question 34

Expense accounts have debit balances because they decrease net income, retained earnings, and stockholders' equity.

Question 35

Collections from customers are cash flows from operating activities.

Question 36

Which of the following best describes the time period assumption?

A) It assumes we value a business as of the end of every month.
B) It is the cutoff point for asset and liability recognition.
C)It implies that financial statements are prepared at the end of a business entity's operating cycle.
D)It assumes we divide the long life of a business into a series of shorter time periods for accounting and reporting purposes.

Question 37

Which of the following best describes the operating cycle?

A) It is the length of the manufacturing process.
B) It is the time that elapses from the purchase of inventory on account to the sale of inventory on account.
C)It is the time that elapses from the completion of the manufacturing process to the cash collection from sale of the manufactured goods.
D)It is the time that elapses from the cash payment to suppliers to collection of cash from customers.

Question 38

When the board of directors declares a cash dividend, the retained earnings account is debited.

Question 39

The primary difference between revenues and gains is:

A) Gains are increases in net assets from peripheral activities while revenues are increases from ongoing activities.
B) Revenues increase operating income and gains have no impact on net income.
C)Revenues cause increases in net assets as a result of peripheral activities and gains cause increases through ongoing activities.
D)Gains result in an increase in operating income whereas revenues do not impact operating income.

Question 40

The net profit margin ratio is a measure of how much profit was created per sales dollar.

Question 41

Which of the following statements does not properly describe the accrual basis of accounting?

A) Expenses are recognized when incurred regardless of the timing of cash flows.
B) Revenues are recognized when earned regardless of the timing of cash flows.
C)Generally accepted accounting principles require use of the accrual basis.
D)It should not be used when providing financial statements to external decision makers.

Question 42

Which of the following journal entries is prepared by an auto repair shop when a customer will pay cash subsequent to delivery of goods or services? A. Accounts receivable
$\quad$ Revenues
B. Cash
$\quad$ Unearned revenues
C. Unearned revenues
$\quad$ Cash
D. Revenues
$\quad$ Accounts receivable

A) Option A
B) Option B
C)Option C
D)Option D

Question 43

Which of the following statements is false?

A) An expense is a cost incurred to generate revenues.
B) Selling assets at a gain does not result in earning revenue.
C)Revenues are reported on the income statement as they are earned.
D)Revenues result in an increase in net income and additional paid-in capital.

Question 44

Colby Corporation has provided the following information: Operating revenues were $199,700.
Operating expenses were $111,000.
Interest expense was $9,200.
Gain from sale of plant and equipment was $3,300.
Dividend payments to Colby's stockholders were $7,700.
Income tax expense was $36,000.
Prepaid rent expense was $5,000.
How much was Colby's net income?

A) $39,100.
B) $48,300.
C)$52,700.
D)$46,800.

Question 45

Which of the following journal entries is prepared when cash is received from a customer prior to delivery of the goods or services? A. Cash
$\quad$ Revenues
B. Cash
$\quad$ Unearned revenues
C. Unearned revenues
$\quad$ Cash
D. Cash
$\quad$ Accounts receivable

A) Option A
B) Option B
C)Option C
D)Option D

Question 46

Which of the following statements is false?

A) A liability is created when cash is received prior to delivery of the goods or services.
B) Revenue is recognized at the time of delivery of the goods or services if cash is received.
C)Revenue is not recognized at the time of delivery of goods and services if cash is received after delivery of the goods and services.
D)Collecting cash after delivery of a good or service does not create revenue on the income statement at the date of collection.

Question 47

A landlord collected $5,000 cash from a tenant for December 2015's rent but the tenant's rent for December is $8,000. Which of the following is true with respect to the landlord's financial statements?

A) $8,000 would be reported on the statement of cash flows.
B) $8,000 would appear on the balance sheet as rent receivable.
C)$8,000 would appear on the income statement as rent revenue earned.
D)$5,000 would appear on the balance sheet as prepaid rent.

Question 48

Which of the following does not correctly describe the cash basis of accounting?

A) It is not accepted for external reporting purposes.
B) Revenues are recognized when cash is collected from customers.
C)Expenses are recognized when they are paid for.
D)Cash payments for long-term assets are recognized as an expense at the time of payment.

Question 49

Which of the following statements is correct?

A) Dividend income is a component of operating income.
B) Operating income is decreased by the loss from the sale of plant assets.
C)A gain on the sale of a stock investment does not increase operating income.
D)Income before taxes does not change when a gain results from the sale of plant assets.

Question 50

Lantz Company has provided the following information: Cash sales totaled $255,000.
Credit sales totaled $479,000.
Cash collections from customers for services yet to be provided totaled $88,000.
A $22,000 loss from the sale of property and equipment occurred.
Interest income was $7,700.
Interest expense was $19,900.
Cost of goods sold was $336,000.
Rent expense was $36,000.
Salaries expense was $49,000.
Other operating expenses totaled $79,000.
Unearned revenue was $4,000.
How much was Lantz's operating income?

A) $221,800.
B) $322,000.
C)$199,800.
D)$234,000.

Question 51

Which of the following transactions will result in an increase in operating income as of the date of the transaction?

A) The sale of plant and equipment at a gain.
B) Collection of cash from a customer for services to be provided at a later date.
C)Providing a service to a customer on account.
D)The receipt of cash dividends from an investment.

Question 52

Yelena Company received cash from a customer in advance of providing the service to the customer. Which of the following does not accurately describe the impact on the financial statements when Yelena later provides the service?

A) Liabilities are decreased.
B) Operating income increases.
C)Retained earnings increases.
D)Assets are increaseD.When Yelena provides the service revenue is recognized and the unearned revenue account is reduced. Assets are not affected.

Question 53

Smith Corporation has provided the following information: Cash sales totaled $125,000.
Credit sales totaled $279,000.
Cash collections from customers for services yet to be provided totaled $38,000.
An $11,000 gain from the sale of property and equipment occurred.
Interest income totaled $7,700.
How much were Smith's operating revenues?

A) $404,000.
B) $411,700.
C)$442,000.
D)$460,700.

Question 54

Which of the following is not reported as an operating expense on the income statement?

A) Salaries expense.
B) Rent expense.
C)Interest expense.
D)Cost of goods solD.Interest expense is the result of borrowing money and not of day-to-day operations of making and/or selling products and/or services. Therefore, interest expense is not listed as an operating expense.

Question 55

Which of the following best describes operating revenues?

A) They are increases in assets or increases in liabilities as a result of peripheral transactions.
B) They are decreases in assets or decreases in liabilities as a result of ongoing operations.
C)They are increases in assets or decreases in liabilities as a result of ongoing operations.
D)They are decreases in assets or increases in liabilities as a result of peripheral transactions.

Question 56

Which of the following is not a criterion pertaining to the revenue realization principle?

A) The goods or services have been delivered.
B) The selling price is fixed or determinable.
C)Collection is reasonably assured.
D)The cash payment has been receiveD.Under accrual accounting, the revenue realization principle states that revenues are recognized when goods or services are delivered, there is persuasive evidence of an arrangement for customer payment, the price is fixed or determinable, and collection is reasonably assured.

Question 57

The following information has been provided by Hable Company: Advertising expense $9,900;
Interest expense $3,700;
Rent expense $12,000;
Loss on sale of property and equipment $5,700;
Cost of goods sold $21,300;
Depreciation expense $7,100;
Prepaid insurance expense $1,000.
How much were Hable's operating expenses?

A) $50,300.
B) $54,000.
C)$59,700.
D)$43,200.

Question 58

Which of the following correctly describes the impact of collecting cash from customers for services to be provided in the future?

A) Assets and stockholders' equity increase.
B) Assets and revenues increase.
C)Assets and liabilities increase.
D)Assets and operating income increase.

Question 59

Lantz Company has provided the following information: Cash sales totaled $255,000.
Credit sales totaled $479,000.
Cash collections from customers for services yet to be provided totaled $88,000.
A $22,000 loss from the sale of property and equipment occurred.
Interest income was $7,700.
Interest expense was $19,900.
Cost of goods sold was $336,000.
Rent expense was $36,000.
Salaries expense was $49,000.
Other operating expenses totaled $79,000.
Unearned revenue was $4,000.
How much was Lantz's income before income taxes?

A) $553,800.
B) $465,800.
C)$199,800.
D)$531,800.

Question 60

Which of the following expenses does not affect operating income?

A) Income tax expense.
B) Cost of goods sold.
C)Depreciation expense.
D)Rent expense.

Question 61

Which of the following best describes the expense matching principle?

A) It requires expenses to be recorded when they are paid for.
B) It requires expenses to be recorded when incurred to generate revenues.
C)It requires expenses to be recorded consistent with the cash basis of accounting.
D)It does not allow expenses to be recorded if they are incurred prior to being paiD.The matching principle requires that expenses be recorded when incurred in earning revenue.

Question 62

Which of the following liability accounts is likely to be satisfied without a future cash payment?

A) Wages payable.
B) Unearned subscriptions revenue.
C)Accounts payable.
D)Taxes payable.

Question 63

The revenue realization principle requires four conditions to be met. Which of the following is one of the four conditions?

A) The customer has paid for the goods or services.
B) Delivery of goods or performance of service has occurred or is scheduled to occur.
C)The price is fixed or determinable.
D)The customer has signed a contract.

Question 64

Which of the following journal entries is correct when a company has incurred an expense for work performed but has not yet paid for theses salaries to employees? A. Salaries expense
$\quad$ Operating income
B. Salaries expense
$\quad$ Accrued expenses payable
C. Accrued expenses payable
$\quad$ Cash
D. Retained earnings
$\quad$ Salaries expense

A) Option A
B) Option B
C)Option C
D)Option D

Question 65

Which of the following accounts normally have a credit balance?

A) Unearned revenues; Prepaid rent; Revenues.
B) Revenues; Expenses; Retained earnings.
C)Revenues; Cash; Unearned revenue.
D)Accounts payable; Retained earnings; Revenues.

Question 66

During 2014, Sigma Company earned service revenues amounting to $700,000, of which $630,000 was collected in cash; the balance will be collected in January, 2015. Also in 2014 there were collections of cash prior to the delivery of goods/services totaling $10,000. What amount should the 2014 income statement report for service revenues?

A) $630,000.
B) $700,000.
C)$70,000.
D)$570,000.

Question 67

Which of the following journal entries correctly records the receipt of a utility bill, which will be paid for in later weeks? A. Utilities payable
$\quad$ Utilities expense
B. Utilities expense
$\quad$ Utilities payable
C. Utilities expense
$\quad$ Retained earnings
D. Retained earnings
$\quad$ Utilities payable

A) Option A
B) Option B
C)Option C
D)Option D

Question 68

Which of the following journal entries correctly records a transaction where services were provided to a customer on account? A. Cash
$\quad$ Revenues
B. Unearned revenue
$\quad$ Revenues
C. Accounts receivable
$\quad$ Revenues
D. Revenues
$\quad$ Accounts receivable

A) Option A
B) Option B
C)Option C
D)Option D

Question 69

A company purchased supplies for cash, which will be consumed during future months. Which of the following correctly describes the impact of the supplies purchase on the financial statements?

A) Total assets will remain unchanged.
B) Total assets will decrease.
C)Operating expenses will increase.
D)Operating income will decrease.

Question 70

A company receives a $50,000 cash deposit from a customer on October 15 but will not deliver the goods until November 20. Which of the following statements is true?

A) Cash will be reported on the statement of cash flows for the month of November.
B) Revenue will be recorded and reported on the income statement for October.
C)A liability will be reported on the balance sheet at the end of October.
D)A prepaid asset will be reported on the balance sheet at the end of October.

Question 71

Which of the following correctly applies the revenue realization principle?

A) Recording revenue in December 2014 for products manufactured but not yet delivered to customers.
B) Recording cash received in advance from customers as revenue when the product is not yet shipped.
C)Not recording dividend revenue in 2014 until the cash is received in 2015.
D)Recording revenue in December 2014 for products sold but not yet paid for in full.

Question 72

A company purchased supplies for cash, which will be consumed during future months. Which of the following does not correctly describe the impact on the financial statements when the supplies are used during future months?

A) Total assets will remain unchanged.
B) Total assets will decrease.
C)Operating expenses will increase.
D)Operating income will decrease.

Question 73

McNeil Company owed its employees for services performed and recorded a liability for the wages owed the employees. Which of the following correctly describes the impact on the financial statements when the employee wages are subsequently paid?

A) Operating expenses are increased.
B) Retained earnings decreases.
C)Operating income does not change.
D)Total assets remain the same.

Question 74

Which of the following is an example of revenue or expense to be recognized in the current period's income statement?

A) Cash received from a client before the service is provided.
B) Inventory purchased for sale to customers.
C)Wages owed to employees who worked during the period.
D)Cash collected from an account receivable.

Question 75

Which of the following statements is false?

A) Expense accounts have a debit balance.
B) Revenue accounts have a credit balance.
C)Gain accounts have a credit balance.
D)Loss accounts have a credit balance.

Question 76

During 2014, Sensa Corporation incurred operating expenses amounting to $100,000 of which $75,000 was paid in cash; the balance will be paid during 2015. Which of the following is correct for the 2014 year-end balance sheet?

A) Stockholders' equity decreases $75,000 and assets decrease $75,000.
B) Assets decrease $100,000 and stockholders' equity decreases $100,000.
C)Assets decrease $100,000, liabilities increase $25,000, and stockholders' equity decreases $100,000.
D)Stockholders' equity decreases $100,000, assets decrease $75,000, and liabilities increase $25,000.

Question 77

Which of the following statements is correct?

A) Expense accounts result in decreases in net income and stockholders' equity and therefore have credit balances.
B) Revenue accounts result in increases in net income and stockholders' equity and therefore have debit balances.
C)Loss accounts result in decreases in net income and stockholders' equity and therefore have debit balances.
D)Gain accounts result in increases in net income and stockholders' equity and therefore have debit balances.

Question 78

Which of the following is not a proper application of the revenue realization principle?

A) Recording the sale of merchandise on credit as sales revenue.
B) Recording rent received in advance as unearned rent revenue.
C)Recording interest revenue when cash is collected rather than when earned.
D)Reducing the unearned service revenue account for service revenue performed at the end of the accounting perioD.Revenue is recorded when earned, not upon the collection of cash.

Question 79

A company purchased $20,000 of inventory during February and will pay for it during March. Which of the following statements is false, assuming the inventory was sold during March?

A) The company's accounts payable will include the $20,000 on the February month-end balance sheet.
B) The statement of cash flows will report an operating cash outflow of $20,000 during March.
C)The income statement will report cost of goods sold of $20,000 during February.
D)The company's inventory will include the $20,000 on the February month-end balance sheet.

Question 80

Which of the following accounts normally have a debit balance?

A) Prepaid expenses, Wages payable, Dividends.
B) Cash, Utilities expense, Accounts receivable.
C)Retained earnings, Cost of goods sold, Wages expense.
D)Utilities expense, Prepaid expenses, Wages payable.