Deck 3: The Income Statement

Question 1

The cash basis of accounting works best when a lengthy delay exists between the timing of cash flows and the underlying business activities to which they relate.

Answer 1

False

Question 2

The total credits recorded in revenue accounts must equal the total debits recorded in expense accounts.

Answer 2

False

Question 3

When a business receives a payment on account from a customer,the total assets of the business are unchanged.

Answer 3

True

Question 4

Revenues and expenses are considered assets and liabilities,respectively.

Question 5

Net income of a company is the same as the amount of cash flow generated by the business during the period.

Question 6

If payment is received at the same time a service is produced and sold,there is no difference between how cash and accrual accounting record the transaction.

Question 7

GAAP (Generally Accepted Accounting Principles)requires the use of accrual basis of accounting for external financial reporting purposes.

Question 8

Both revenues and expenses typically have credit balances.

Question 9

Using the accrual basis of accounting,if payment is received after delivery of a good or service,an asset is recorded at the time the good or service was delivered.

Question 10

All operating activities will increase a company's resources.

Question 11

When a company uses it resources to generate revenues during a period it records an expense.

Question 12

Cash basis accounting measures financial performance very well when a business sells its customers on account.

Question 13

Recording a Debit in an expense account will reduce expenses.

Question 14

Accrual basis of accounting is the only acceptable method for external reporting of financial statements under both ASPE and IFRS.

Question 15

An increase in net income does not affect Shareholders' equity.

Question 16

Revenues come solely from selling a company's goods or services.

Question 17

Deferred Revenue is a liability account.

Question 18

Using the accrual basis of accounting,if payment is received before delivery of a good or service,a liability is recorded at the time the payment is received.

Question 19

If expenses grow faster than revenues compare to the previous period,the net income will increase.

Question 20

Deferred Revenue is an alternative name for the Shareholders' equity account typically known as Retained Earnings.

Question 21

The expense recognition principle requires that expenses be determined first and then revenues be "matched" to those expenses.

Question 22

Operating activities are the primary source of revenues and expenses

Question 23

The balances for each account reported on an unadjusted trial balance are determined by adding the amounts on the "+" side and subtracting the amounts on the "-" side of each ledger or T-account.

Question 24

If number of debits equal number of credits in the unadjusted trial balance,you have made no errors in preparing and posting journal entries.

Question 25

Businesses adhere to roughly the same steps in the operating cycle,regardless of what industry they are in.

Question 26

When cash is received,but no service is provided by the company,net income is zero under accrual accounting.

Question 27

Under IFRS and ASPE cash basis accounting can never be used for reporting.

Question 28

According to the Revenue Recognition Principle,a company should not record the revenue from a transaction until it is actually received in cash.

Question 29

Corporate income taxes cannot be calculated until all adjustments are made to net income.

Question 30

Revenue recognition conditions are generally met at the point of payment of goods and services

Question 31

Company's net income is the sole determinant of its value for the period the net income is generated.

Question 32

The time period assumption refers to the accounting convention of using a calendar year,as the fiscal period.

Question 33

During August,your company sells $10,000 of services that cost $8,000 to provide.You report the revenue in August and the expenses (that is,the costs incurred to provide those services)in September and October when they are paid.This is an acceptable accounting procedure.

Question 34

Operating cycle is the time period from buying raw material to provide goods and services to customers through to collecting cash from them.

Question 35

Across all revenue accounts,the total value of all debits must equal the total value of all credits.

Question 36

To ensure revenue reporting is consistent over time,a business adopts a revenue recognition policy that defines the time at which they report revenues from providing goods or services to customers.

Question 37

An increase in deferred revenue would have an impact on the income of the company.

Question 38

A trial balance is included in the full set of external financial statements,just like an income statement.

Question 39

Net income for the accounting period will increase retained earnings account.

Question 40

When a business uses up its resources to generate revenues for the period,it reports an expense only when it pays for them.

Question 41

During November 2017,Asler,Inc.,performs consulting services.The client does not pay Asler until January 2018.

A)Using the accrual basis of accounting,the revenue is reported in January 2018
B)Using the cash basis of accounting,the revenue is reported in November 2017.
C)Using the accrual basis of accounting,the revenue is reported in November 2017.
D)Using the accrual basis of accounting,the revenue is reported when Asler's expenses are paid.

Question 42

Which of the following represents a subtotal rather than an account?

A)Advertising Expense.
B)Sales Revenues.
C)Cost of Goods Sold.
D)Operating Income.

Question 43

A toy manufacturer sells land for $180,000 that it bought four years ago for $320,000.This transaction,when recorded,would be:

A)an operating expense.
B)operating revenue.
C)a loss.
D)non-operating revenue.

Question 44

Pet Sitters,Inc.,sold $27,000 of pet-care services that cost $19,000 to provide.The company also incurred $6,000 in income tax and interest expenses.Net income was:

A)$41,000.
B)$19,000.
C)$8,000.
D)$2,000. Revenue - expenses = Net income,27,000 - (19,000 + 6,000)= $2,000.

Question 45

Guessco reported the following amounts on its income statement: total revenues,$31,500; interest expense,$300; net income,$1,600; income tax expense,$900; and operating income,$2,800.What was the amount of Guessco's income before income tax expense?

A)$1,300.
B)$2,500.
C)$29,000.
D)$29,900.

Question 46

Net income divided by net profit margin is equivalent to total revenue.

Question 47

The Fastbank Motorcycle Company (FMC)receives a $10 million order from dealers wanting to buy its most popular model on credit.No money changes hands.Due to excess demand,FMC cannot supply the motorcycles until next quarter.How will these events affect the balance sheet?

A)Accounts Receivable will increase by $10 million this quarter and Inventories will decrease next quarter.
B)Both Accounts Receivable and Accounts Payable will increase by $10 million this quarter.
C)Both Accounts Receivable and Shareholders' Equity will increase by $10 million this quarter.
D)These events will not impact the balance sheet this quarter.

Question 48

Which of the following items is not a specific account in a company's chart of accounts?

A)Income Tax Expense.
B)Sales Revenue.
C)Deferred Revenue.
D)Net Income.

Question 49

An account that measures interest earned on investments might include which of the following terms in its title?

A)Gain.
B)Loss.
C)Revenue.
D)Expense.

Question 50

Under accrual basis accounting,the expense recognition principle stipulates expenses are to be recorded in the same period in which cash is paid for them

Question 51

During June,The Grass Is Greener Company mows 100 lawns a week and is paid in July by those customers.The company uses the accrual basis of accounting.How will these events affect the company's financial statements?

A)The income statement shows the effects of the transactions in June.
B)The income statement shows the effects of the transactions in July.
C)The balance sheet shows no effect from the transactions in June.
D)The transactions have no effect on the balance sheet.

Question 52

Which of the following is not an expense and would not show on income statement?

A)Paying for supplies.
B)Paying a dividend.
C)Paying for electricity used by production equipment.
D)Paying wages for production workers.

Question 53

Prepaid Rent was incorrectly debited to rent expense,as a result the unadjusted trial balance will not balance.

Question 54

Net profit margin indicates how much revenue is earned from each dollar of profit.

Question 55

When cash is paid before the expense is incurred to generate revenue,costs are stated as:

A)Prepaid (asset).
B)Payable (liability).
C)Receivable (asset).
D)Shareholders' equity.

Question 56

Which of the following is an example of a non-operating expense?

A)Interest expense.
B)Rent expense.
C)Advertising expense.
D)Salaries and Wages Expense.

Question 57

Rogers Communications is a communications company,specializing in cable television operation,television program development,and other telecommunication services.Its financial statements show $37,666 in an account called "Deferred Subscriber Revenue," which represents amounts that customers have paid in advance of receiving cable television and internet services.What type of account is this and on what statement is it reported? $$\begin{array} { | l | l | l | } \hline & \text { Type of Account } & \text { Financial statement } \\\hline \text { A) } & \text { Asset } & \text { Balance Sheet } \\\hline \text { B) } & \text { Liability } & \text { Balance Sheet } \\\hline \text { C) } & \text { Revenue } & \text { Balance Sheet } \\\hline \text { D) } & \text { Reverue } & \text { Income Staternent } \\\hline\end{array}$$

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

Question 58

An account that measures the amount of income taxes incurred might include which of the following terms in its title?

A)Gain.
B)Loss.
C)Revenue.
D)Expense.

Question 59

During June,the Grass is Greener Company mows 100 lawns a week; the company was paid in advance during May by those customers.The company uses the accrual basis of accounting.How will these events affect the company's financial statements?

A)The income statement shows the effects of the transactions in May.
B)The income statement shows the effects of the transactions in June.
C)The balance sheet shows no effect from the transactions in May.
D)The transactions have no effect on the balance sheet.

Question 60

Operating income refers to:

A)operating revenue minus operating expenses.
B)revenue generated by day-to-day business activities.
C)gains minus losses.
D)the net income of the company during the relevant time period.

Question 61

Galvan Corporation (GC)capitalized a $20,000 automobile.Which of the following is true?

A)GC recorded a liability for $20,000.
B)GC recorded an asset for $20,000.
C)GC recorded an expense for $20,000.
D)GC recorded Contributed Capital for $20,000.

Question 62

Your company receives advance payment in October for services that are provided during November.Which of the following is true?

A)A liability is recorded in October; in November the liability is reduced and revenue is recorded.
B)Revenue is recorded in October and expenses are recorded in November.
C)An asset is recorded in October; in November,the asset is reduced and revenue is recorded.
D)Revenue and expenses are recorded in October.

Question 63

If a company provides a service and receives payment at the same time:

A)only one journal entry is needed.
B)Cash will be debited.
C)a revenue account will be increased with a credit.
D)all of the choices are correct.

Question 64

A customer purchased $1,500 of services on credit two months ago and has just paid the bill.The receipt of the payment from the customer is recorded as a

A)debit to Cash and a credit to Accounts Receivable.
B)debit to Cash and a credit to Inventory.
C)debit to Expenses and a credit to Revenue.
D)debit to Accounts Receivable and a credit to Retained Earnings.

Question 65

Which of the following is a true statement?

A)Revenue accounts are a subset of assets,and expense accounts are a subset of liabilities.
B)Both revenue accounts and expense accounts are subsets of contributed capital.
C)Both revenue accounts and expense accounts are subsets of retained earnings.
D)Revenue accounts are a subset of cash,and expense accounts are a subset of accounts payable.

Question 66

Which of the following is true?

A)Credits increase both assets and liabilities.
B)Credits increase expenses and decrease liabilities.
C)Credits increase revenues and decrease expenses.
D)Credits decrease both assets and liabilities.

Question 67

Under IFRS,the following is not part of the revenue recognition principle:

A)promised goods or services have been transferred.
B)when control to the goods and services has not been transferred to the customer
C)the transaction price is determinable
D)the obligated performance is satisfied

Question 68

Company A receives $10,000 in advance this month for work to be performed next month.This month,the company should:

A)Debit Inventory $10,000 and credit Sales Revenue $10,000.
B)Debit Cash $10,000 and credit Deferred Revenue $10,000.
C)Debit Inventory $10,000 and credit Accounts Payable $10,000.
D)Debit Accounts Payable $10,000 and credit Cash $10,000.

Question 69

Expenses

A)represent the costs that arise when a company sacrifices its resources during the accounting period.
B)are reported in the period in which they are incurred to generate revenue.
C)reduce Shareholders' equity.
D)all of the choices.

Question 70

During March,the Long Life Consulting Company provides $23,000 in consulting services of which $12,000 is immediately paid for and $11,000 is on account.

A)Cash increases $12,000,revenue increases $11,000,and Shareholders' equity increases $23,000.
B)Cash increases $12,000,Accounts Receivable increases $11,000,and revenues increase $23,000.
C)Accounts Receivable increases $11,000,liabilities decrease $12,000,and Shareholders' equity decreases $1,000.
D)Revenues increase $12,000,liabilities decrease $12,000,and Shareholders' equity is unchanged.

Question 71

If a company is paid in full for services provided this month,how will the basic accounting equation be affected?

A)Liabilities will decrease.
B)Shareholders' equity will increase as revenue is recorded.
C)Liabilities will increase.
D)Shareholders' equity will increase as gains are recorded.

Question 72

Which of the following is most likely to be reported as an accrued liability?

A)Supplies.
B)Wages Expense.
C)Prepaid Rent.
D)Property and Equipment.

Question 73

Cansing Company collected $5,000 from a customer on account.What journal entry will Cansing record?

A)Debit Cash,credit Accounts Receivable.
B)Debit Cash,credit Revenue.
C)Debit Accounts Receivable,credit Revenue.
D)Debit Accounts Receivable,credit Cash.

Question 74

When should a company recognize revenue under GAAP?

A)When delivery has occurred or services have been provided (rendered).
B)When the price is measurable.
C)When the promised performance has been satisfied.
D)All of the choices are necessary to recognize revenue.

Question 75

WestJet Corporation issued a $1,000 gift certificate.What journal entry will WestJet Corporation record?

A)Debit Cash,credit Sales Revenue.
B)Debit Cash,credit Deferred Revenue.
C)Debit Deferred Revenues,credit Cash.
D)Debit Accounts Receivable,credit Cash.

Question 76

Your company bought a 30-second advertisement that aired during the Stanley Cup finals at a cost of $1.2 million.It is legally obligated to pay for the ad but has not yet done so.How does the purchase and use of the ad time affect your company's balance sheet?

A)It increases both assets and liabilities by $1.2 million.
B)It increases assets and decreases Shareholders' equity by $1.2 million each.
C)It does not affect the balance sheet.
D)It increases liabilities and decreases Shareholders' equity by $1.2 million each.

Question 77

When a customer buys services on account,it should be recorded as:

A)a debit to Cash and a credit to Accounts Receivable.
B)a credit to Revenue and a debit to Accounts Receivable.
C)a credit to Deferred Revenue and a debit to Inventory.
D)a debit to Cash and a credit to Accounts Payable.

Question 78

Your company orders and receives goods in January,pays for them in February,sells them in March and is paid by customers 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.

Question 79

During April,the Grass is Greener Company buys and pays for a six-month supply of fertilizer in order to receive a bulk discount.The cost of fertilizer is recorded:

A)immediately as an expense.
B)as a liability,which will later be reduced as the fertilizer used.
C)partially as an expense and partially as a liability.
D)as an asset,which will later be reduced as the fertilizer is used.

Question 80

In October,your company prepays rent of $7,000 for November and December.Which of the following describes the effects of this transaction in October?

A)Assets decrease $7,000 and liabilities decrease $7,000.
B)Assets increase $7,000 and Shareholders' equity increases $7,000.
C)There is no change to total assets,liabilities or Shareholders' equity.
D)Liabilities decrease $7,000 and Shareholders' equity increases $7,000.