Deck 3: The Income Statement

Question 1

Under the accrual basis of accounting

A) cash must be received before revenue is recognized.
B) profit is calculated by matching cash outflows against cash inflows.
C) the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared.
D) 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.

Answer 1

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.

Question 2

All of the following statements about the cash-to-cash cycle are true except:

A) It includes normal buying / selling of goods to earn pro?t.
B) It includes normal day to day operating activities, investing activities, and ?nancing activities.
C) typical business operations involve an out?ow of cash followed by an in?ow of cash.
D) speci?c activities include purchasing inventory and selling product.

Answer 2

It includes normal day to day operating activities, investing activities, and ?nancing activities.

Question 3

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

A) efforts should be matched with accomplishments.
B) dividends should be matched with shareholder investments.
C) cash payments should be matched with cash receipts.
D) assets should be matched with liabilities.

Answer 3

efforts should be matched with accomplishments.

Question 4

If a heavy equipment manufacturer sold heavy equipment in the normal course of its operations, where would the related amount be reported on a multi-step income statement?

A) In income from discontinued operations
B) In non-operating income
C) In income from asset dispositions
D) In income from operations

Question 5

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

A) dividing the activities of a business into a series of time periods for accounting and reporting purposes.
B) the cut-off of revenue recognition only.
C) keeping the company's transactions separate from the owners' transactions.
D) the cut-off of expense recognition only.

Question 6

Which of the following statements about accumulated depreciation is NOT true?

A) It is consistent with the matching principle
B) It records the portion or how much of the asset has been used up
C) It is re?ected on the balance sheet
D) It helps determine the fair value of the asset

Question 7

During 20X2, New Company earned service revenues amounting to $200,000, of which $120,000 were collected in cash; the balance will be collected in January 20X3. The 20X2 statement of earnings of the company should report which of the following amounts for service revenues?

A) $80,000.
B) $120,000.
C) $200,000.
D) $320,000.

Question 8

Accrued revenues are

A) received and recorded as liabilities before they are earned.
B) earned and recorded as liabilities before they are received.
C) earned but not yet received or recorded.
D) earned and already received and recorded.

Question 9

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?

A) debit to Rent receivable.
B) credit to Rent receivable.
C) debit to Rent revenue collected in advance.
D) credit to Rent revenue.

Question 10

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

A) Advertising expense
B) Cost of sales
C) General administrative expenses
D) Income tax expense

Question 11

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

A) The sale of inventory to customers
B) The sale of old equipment
C) The wages and bene?ts paid to employees
D) Interest expense

Question 12

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

A) a loss.
B) a pro?t.
C) neither a pro?t nor a loss.
D) a decrease in shareholders' equity.

Question 13

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

A) whether the company has generated pro?ts from operations
B) if the company has invested too much cash in its inventory
C) whether the company has generated su?cient cash to pay its bills
D) if the company is collecting its receivables on time

Question 14

Which of the following amounts would be presented separately from the results of continuing operations in the income statement?

A) The loss from writing down obsolete inventory
B) A gain on the sale of land
C) The loss incurred due to a ?ood
D) The loss from a plant closure

Question 15

A company purchased and received $3,500 worth of goods on credit to be sold in their stores. How would the event be recorded?

A) Dr. Inventory $3,500, Cr. Expenses $2,500
B) Dr. Expenses $3,500, Cr. Accounts payable $2,500
C) Dr. Inventory $3,500, Cr. Accounts payable $3,500
D) the event would be disclosed in the notes to ?nancial statements only

Question 16

Which method of preparing income statements provides the most information about future cash ?ows?

A) accrual basis
B) cash basis
C) historical basis
D) actual basis

Question 17

The operating cycle of a business is best de?ned as which of the following?

A) the period of time for which we prepare our ?nancial statements
B) the length of time over which our plant and equipment assets are expected to be used by the company in generating revenues
C) 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
D) one year

Question 18

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

A) A retail chain such as Walmart
B) A jewelry manufacturer such as Mappins
C) A grocery chain such as Loblaws
D) A pizza franchise such as Pizza Pizza

Question 19

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.

A) 28.6%
B) 35%
C) 40%
D) It cannot be computed with the above information

Question 20

If a toy manufacturer sold a piece of equipment in the normal course of its operations, where would the related amount be reported on a multi-step income statement?

A) In income from discontinued operations
B) In non-operating income
C) In income from asset dispositions
D) In income from operations

Question 21

A company receives a $25,000 cash deposit from a customer on March 15 but will not deliver the goods until April 20. Which of the following statements is false?

A) Cash will be reported on the statement of cash ?ows for the month of March.
B) Revenue will be recorded and reported on the statement of earnings for April.
C) A liability will be reported on the statement of ?nancial position at the end of March.
D) Revenue will be recorded and reported on the statement of earnings for March.

Question 22

Nettleton Technologies has a December 31 year-end. They provided services worth $40,000 in December and were paid $10,000 in cash at that time with the rest paid in January. The employees who performed the services were paid $25,000 for their work in January. Under the matching concept how much net income would be reported in December?

A) ($15,000)
B) $15,000
C) $10,000
D) $40,000

Question 23

Savannah Spa sells gift certi?cates for spa services. These gift certi?cate sales should be recorded as:

A) a credit to unearned revenue
B) a credit to sales revenue
C) a debit to sales revenue
D) a credit to cash

Question 24

Fairchild had the following information related to the sale of its products during its first year of business: $$\begin{array} { | l | r | } \hline \text { Revenue } & \$ 1,000,000 \\\hline \text { Returns of goods sold } & \$ 100,000 \\\hline \text { Cash collected } & \$ 800,000 \\\hline \text { Cost of goods sold } & \$ 700,000 \\\hline\end{array}$$ Under the accrual basis of accounting, how much net revenue would be reported on Fairchild 's income statement?

A) $200,000
B) $800,000
C) $900,000
D) $700,000

Question 25

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

A) Recording the sale of merchandise on credit in sales revenue.
B) Recording rent received in advance as rent revenue.
C) Recording accrued interest revenue on a loan made to another party.
D) Recording the sale of merchandise for cash in sales revenue.

Question 26

In applying the revenue principle to a given transaction, the most important moment or period in time is when which of the following happens?

A) Related cash in?ows occur.
B) Related expenses are incurred.
C) Sales transaction is completed (i.e., ownership passes) or services are rendered.
D) The service contract is signed regarding service to be performed.

Question 27

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

A) expenses incurred but not yet paid.
B) expenses incurred but not yet recorded or paid.
C) expenses paid in advance.
D) expenses paid in advance and not recorded.

Question 28

Revenue is always recognized when which of the following occurs?

A) expenses are paid.
B) cash is collected.
C) it is earned.
D) the end of the period arrives.

Question 29

What would be the effect on December's statement of earnings of a utility bill received on December 27, 2013 but which will not be paid until January 10, 2014?

A) No expense will be recognized until the bill is paid in January
B) We would cause an increase in pro?t by recording the expense in December
C) Recording the expense in December when it is incurred will increase expenses
D) Pro?t will be decreased when we pay the bill in January

Question 30

Tony's Tune-Up Shop Ltd. follows the revenue recognition principle. Tony services a car on May 31. The customer picks up the vehicle on June 1 and mails the payment to Tony on June 5. Tony receives the cheque in the mail on June 6. When should Tony show that the revenue was earned?

A) May 31
B) June 5
C) June 1
D) June 6

Question 31

Which of the following is not normally a condition that must be met for revenue to be recognized (recorded) under the revenue principle?

A) The earnings process is complete or nearly complete.
B) The promise to perform an exchange in the future has been made.
C) Collection of receivables from credit sales is reasonably assured.
D) The amount of revenue can be measured reliably.

Question 32

The purchase of an asset for cash

A) increases assets and shareholders' equity.
B) increases assets and liabilities.
C) decreases assets and increases liabilities.
D) leaves total assets unchanged.

Question 33

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

A) Revenue principle.
B) Matching principle.
C) Timing principle.
D) Liability principle.

Question 34

Which of the following activities does not violate the revenue recognition principle?

A) Recording revenue in December 2013 for units manufactured but not yet sold to customers
B) Recording cash received in advance from customers as revenue when the product is not yet shipped
C) Not recording interest earned in 2013 until the cash is received in 2014
D) Recording cash received in advance from customers as a liability when the product is not yet shipped

Question 35

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

A) Wage, salary and bene?ts expense
B) Advertising
C) Cost of Sales
D) Income tax expense

Question 36

Cheeptravel.com sells ?ights for various airlines and destinations over the internet and receives a 25 percent commission for tickets sold. Cheeptravel collects the full amount from the customer and remits the net amount after commission to the airline. Unsold tickets are returned to the airline after 90 days. During 20X6, Cheeptravel had the following information: 1. Total sales price of tickets sold during 20X6 was $2,000,000. 2. Total commissions retained by Cheeptravel during 20X6 for these tick ets was $500,000. 3. Total expenses incurred for web site maintenance for Cheeptravel was $1,000 per month. How much revenue should Cheeptravel report on its 20X6 income statement?

A) $500,000
B) $2,000,000
C) $1,500,000
D) $488,000

Question 37

During the accounting period, Luxor Company had the following data: Sales of products:
Cash received $70 ,000
On credit (not yet received) $10 ,000

Expenses:
Cash paid $35, 000
On credit (not yet paid) $3, 000
What were the sales revenue and expenses? $$\begin{array} { | l | r | r | } \hline & \text { Sales Revenue } & \text { Expenses } \\\hline A & \$ 60,000 & \$ 32,000 \\\hline B & \$ 70,000 & \$ 35,000 \\\hline C & \$ 80,000 & \$ 35,000 \\\hline D & \$ 80,000 & \$ 38,000 \\\hline\end{array}$$

A) Choice A
B) Choice B
C) Choice C
D) Choice D

Question 38

Collection of a $600 accounts receivable

A) increases an asset $600; decreases a liability $600.
B) decreases a liability $600; increases shareholders' equity $600.
C) decreases an asset $600; decreases a liability $600.
D) has no effect on total assets.

Question 39

Accrued expenses are

A) paid and recorded in an asset account before they are used or consumed.
B) paid and recorded in an asset account after they are used or consumed.
C) incurred but not yet paid or recorded.
D) incurred and already paid or recorded.

Question 40

Which of the following is an advantage of accrual accounting?

A) It does not require the application of professional judgment
B) It provides more relevant information
C) It provides more timely information
D) It records all economic events

Question 41

On December 10, 20X6 Canadian Vessels placed an order for a new maintenance vessel from a German shipbuilder. The purchase price will be $620,000, and the equipment will be delivered in March 20X7. How would this event be reported in the December 31 20X6 year-end ?nancial statements of Canadian Vessels?

A) An increase in capital assets and an increase in accrued liabilities.
B) An increase in capital assets and an increase in accounts payable.
C) An increase in inventory and an increase in accrued liabilities.
D) The event would be disclosed in the notes to ?nancial statements only.

Question 42

Which of the following items has no effect on retained earnings?

A) expense
B) dividends
C) revenue
D) hiring a new employee

Question 43

A payment of a portion of accounts payable will

A) not affect total assets.
B) increase liabilities.
C) not affect shareholders' equity.
D) decrease net earnings.

Question 44

The equality of debits and credits is the basis for

A) the double-entry accounting system.
B) the single-entry accounting system.
C) the T account.
D) all accounting systems.

Question 45

For a merchandising company, the largest operating cash out?ow would result from which of the following?

A) payments to suppliers from whom we have purchased inventory on credit
B) payment of wages and bene?ts to employees
C) payment of taxes to the various government entities
D) payment of interest on notes payable

Question 46

Which one of the following represents the expanded basic accounting equation?

A) Assets = Liabilities + Contributed Capital + Retained Earnings + Revenues - Expenses - Dividends
B) Assets + Liabilities = Dividends + Expenses + Contributed Capital + Revenues
C) Assets - Liabilities - Dividends = Contributed Capital + Revenues - Expenses
D) Assets = Revenues + Expenses - Liabilities

Question 47

Asset turnover measures

A) how often a company replaces its assets.
B) how eficiently a company uses its assets to generate sales.
C) the portion of the assets that have been financed by creditors.
D) the overall rate of return on assets.

Question 48

Cash receipts from interest are classified as

A) financing activities.
B) investing activities.
C) operating activities.
D) either financing or investing activities.

Question 49

An account will have a credit balance if the

A) credits exceed the debits.
B) first transaction entered was a credit.
C) debits exceed the credits.
D) last transaction entered was a credit.

Question 50

On June 15, Tandem Toys signed a lease to rent a storefront starting on July 1st for the next two years at $1,000 per month. They paid the ?rst two months' rent in advance on signing the lease. On June 15, how would the transaction be recorded?

A) Dr. Rent expense $2,000, Cr. Cash $2,000
B) Dr. Prepaid rent $24,000, Cr Cash $2,000 Cr. Rent payable $22,000
C) Dr. Prepaid rent $2,000, Cr. Cash $2,000
D) Dr. Rent expense $24,000, Cr. Cash $24,000

Question 51

Operating cash in?ows and out?ows are primarily connected to which of the following?

A) acquisitions and sale of long lived assets
B) the sale of goods and services to customers and costs incurred to operate the business
C) issuance of shares, bank borrowings and repayments, and dividend payments
D) purchase and sale of long-term investments

Question 52

The category that is generally considered to be the best measure of a company's ability to continue as a going concern is

A) cash ?ows from investing activities.
B) cash ?ows from operating activities.
C) cash ?ows from ?nancing activities.
D) usually different from year to year.

Question 53

Which of the following liability accounts is likely to be satis?ed with other than payment of cash?

A) Wages payable
B) Deferred subscriptions revenue
C) Accounts Payable
D) Income taxes payable

Question 54

Recording revenue

A) increases assets and liabilities.
B) increases assets and shareholders' equity.
C) increases assets and decreases shareholders' equity.
D) has no effect on total assets.

Question 55

An accountant has debited an asset account for $500 and credited a revenue account for $1,000. What can be done to complete the recording of the transaction?

A) Nothing further must be done.
B) Debit a shareholders' equity account for $500.
C) Debit another asset account for $500.
D) Credit a different asset account for $500.

Question 56

Golden Company had these transactions during the accounting period: Sold merchandise for $600; its cost was $400. Collected $400 from a trade receivable. The account was established in the previous year . Used ofice supplies of $50. Golden's profit for the period would be which of the following

A) $50.
B) $150.
C) $600.
D) $900.

Question 57

The payment of a liability

A) decreases assets and shareholders' equity.
B) increases assets and decreases liabilities.
C) decreases assets and increases liabilities.
D) decreases assets and liabilities.

Question 58

Which of the following statements is true?

A) Debits increase assets and increase liabilities.
B) Credits decrease assets and decrease liabilities.
C) Credits decrease assets and increase liabilities.
D) Debits increase liabilities and decrease assets.

Question 59

On January 1, 20X2, Grover Inc., started the year with a $22,000 credit balance in its retained earnings account. During 20X2, the company earned profit of $40,000 and declared and paid dividends of $10,000. Also, the company received cash of $15,000 as an additional investment by its owners. Therefore, the balance in retained earnings on December 31, 20X2, would be which of the following?

A) $42,000.
B) $52,000.
C) $57,000.
D) $67,000.

Question 60

The right side of an account

A) is used to record increases.
B) is the credit side.
C) shows all the balances of the accounts in the system.
D) is used to record decreases.

Question 61

The statement of earnings provides investors with information about a company's investing activities.

Question 62

The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from the customers.

Question 63

If Pizza Pizza reports an asset turnover ratio of 2.34 for 2013 and their competitor Pizza Hut reports 3.79 for their 2013 ratio, it means which of the following?

A) Pizza Pizza is better able to pay their current obligations with their current assets.
B) Pizza Pizza has been more effective in managing the use and level of its assets.
C) Pizza Pizza has been less effective in managing the use and level of its assets.
D) Pizza Pizza is less able to pay off their current obligations with their current assets.

Question 64

Revenues are decreases in assets or settlements of liabilities from ongoing operations.

Question 65

It is not optimal to borrow any further funds when

A) the average borrowing costs start to equal or exceed the ROA.
B) the company's net profit margin falls below the average borrowing costs.
C) the company's debt-to-equity ratio exceeds 50%.
D) the average borrowing costs start to equal or exceed the ROE.

Question 66

A company reports sales revenue of $120 million this year and $110 million last year. Their total assets in the current year are $80 million and last year's total assets were $75 million. What is the current year's asset turnover ratio?

A) 1.46
B) 1.40
C) 1.55
D) 1.61

Question 67

Which of the following would be included in comprehensive income but not in net income?

A) Unrealized gains and losses on certain types of investments
B) A gain on the sale of land
C) The loss incurred due to a ?ood
D) The loss from a plant closure

Question 68

Income tax expense will appear on the statement of financial position.

Question 69

A Taco Bell restaurant would most likely have a longer operating cycle than Walmart.

Question 70

According to the periodicity assumption, to measure and report financial information periodically, we assume the long life of the company can be cut into shorter periods.

Question 71

When a growing company finds it needs to buy more inventory before cash has been collected from customers, they often use short term credit such as trade or notes payable to finance the inventory purchases.

Question 72

Which of the following statements about ROA is true?

A) ROA is the most important ratio for an equity investor.
B) ROA refiects the risk inherent in a company.
C) ROA is useful for determining how the company financed its assets.
D) ROA is useful for comparing companies in different industries.

Question 73

The profit of a business is computed by subtracting revenues from expenses.

Question 74

What is Other Comprehensive Income?

A) Income that is not related to normal earnings activities.
B) Income items that bypass the income statement.
C) Income included with continuing operations.
D) Income from unusual activities.

Question 75

The operating cycle is of a similar duration for most companies.

Question 76

Comprehensive income includes all changes in equity during a period except

A) gains and losses from discontinued operations
B) unrealized gains and losses on available for sale securities
C) gains and losses from irregular items.
D) those resulting from investments by owners and distributions to owners

Question 77

Operating revenues result from the sale of goods or services.

Question 78

How is Accumulated Comprehensive Income reported?

A) In the retained earnings section.
B) In net income.
C) In net income from continuing operations.
D) in shareholders' equity.

Question 79

The division of business activities into a series of equal periods for accounting purposes is known as the periodicity assumption.

Question 80

Losses are decreases in assets or increases in liabilities from peripheral activities.