Deck 4: Income Measurement and Accrual Accounting

Question 1

Most companies use the cash basis of accounting.

Answer 1

False

Question 2

The recognition of revenue may result from the settlement of a liability rather than from the acquisition of an asset.

Answer 2

True

Question 3

Under the accrual method,expenses are recognized when revenue is earned.

Answer 3

False

Question 4

The income statement tells the reader about the actual cash inflows during a period of time.

Question 5

The unit of measure in Japan is the U.S.dollar.

Question 6

When initially recording the cost of land purchased,most companies use the cost of the land at the time it is purchased.

Question 7

The revenue recognition principle involves two factors: paid and incurred.

Question 8

All financial statements are prepared using the accrual basis of accounting.

Question 9

The revenue recognition principle does not pertain to situations where revenue is recognized over time such as long-term contracts,franchises,commodities,and installment sales.

Question 10

The justification for the accrual basis of accounting lies in the needs of financial statement users for periodic information on the financial position and the profitability of the entity.

Question 11

The process of recording an item in the financial statements is called measurement.

Question 12

Expired costs are called assets.

Question 13

Because of its objective nature,historical cost is the attribute used to measure many of the assets recognized on the balance sheet.

Question 14

The accounting profession is currently experimenting with financial statements adjusted for the changing value of the dollar since inflation is increasing.

Question 15

The statement of cash flows reflects the revenues actually earned by the business,regardless of whether cash has been collected.

Question 16

When a company recognizes the portion of supplies used during a year,the effect is to decrease net income.

Question 17

An asset is always involved when revenue is recognized.

Question 18

Recognition is the process of formally recording or incorporating an item into the financial statements.

Question 19

The amount of cash that could be received by selling an asset currently is called historical cost.

Question 20

Revenue is always earned continuously over time.

Question 21

Accumulated depreciation is increased when depreciation is recognized.

Question 22

A company that forgets to recognize depreciation for the year overstates its income and assets.

Question 23

Matching can occur directly (like cost of goods sold),indirectly (like plant assets),or immediately when no future benefits from the cost are expected.

Question 24

Every adjustment involves at least one income statement and one balance sheet account.

Question 25

While most companies make adjustments and prepare statements monthly,companies complete the accounting cycle only once per year.

Question 26

The amount of interest accrued is added to the Note Payable account and reported in the Liabilities section of the balance sheet.

Question 27

Every company prepares only four adjustments-one for each of the four types of adjustments.

Question 28

Costs incurred for purchases of merchandise result in an asset,Merchandise Inventory,and are eventually matched with revenue at the time the product is sold.

Question 29

Financial statements should be prepared before any adjustments are made.

Question 30

Three months before year-end,Billings Company signed a $100,000,12%,six-month note.Principal and interest will be paid at maturity.No interest should be accrued at year-end because the company has no obligation to pay the interest until the note matures.

Question 31

Conceptually,anytime a cost is incurred,an asset is acquired.

Question 32

Accountants often prepare work sheets at the end of an accounting period in place of financial statements.

Question 33

When an expense is incurred prior to the payment of cash for that expense,an adjustment that increases an expense account and decreases an asset is prepared.

Question 34

An entry that includes the Cash account is probably an adjustment.

Question 35

Adjustments are recorded for all transactions involving outside entities.

Question 36

When revenue is earned before the receipt of cash,an adjustment that increases a receivable and decreases a liability account is recorded.

Question 37

When cash is paid before an expense is incurred,an accrual is necessary.

Question 38

The balance in the account,Rent Collected in Advance,is reported as an asset on the balance sheet of the landlord.

Question 39

A cost can be an asset or expense depending on whether the future economic benefits have expired or not.

Question 40

One effect of recognizing depreciation is a decrease in net income.

Question 41

A pool cleaning service signs a contract with a new customer on May 1.The pool is vacuumed and "shocked" for the customer on June 1,and the bill for the services is paid on July 1.Under the accrual basis,the business should recognize revenue on

A)December 31.
B)July 1.
C)June 1.
D)May 1.

Question 42

Closing entries serve two important purposes: (1)to return the balances in all temporary or nominal accounts to zero to start the next accounting period and (2)to transfer the net income (or net loss)and the dividends of the period to the Retained Earnings account.

Question 43

Which of the following is the attribute used to measure many assets that are recognized on a balance sheet,because it is more objective and verifiable?

A)Market value
B)Historical cost
C)Liquidation value
D)Current replacement cost

Question 44

Adjustments are recorded at the end of each accounting period so that net income is accurately reflected in the financial statements for the period.

Question 45

Hensley Painting Company painted four houses in June at $500 each.At the end of June,three homeowners had paid Hensley cash for the jobs.Under the accrual basis,what amounts will be reported on the income statement and the statement of cash flows for June?
$\begin{array}{l}\text { Income Statement }&\text { Statement of Cash Flows }\end{array}$
a.
$\begin{array}{cc}&&&\$2,000&&&&&&\$2,000\end{array}$

b.
$\begin{array}{cc}&&&\$2,000&&&&&&\$1,500\end{array}$

c.
$\begin{array}{cc}&&&\$1,500&&&&&&\$1,500\end{array}$

d.
$\begin{array}{cc}&&&\$500&&&&&&&\$500\end{array}$

Question 46

During December,Horn Inc.purchased $800 of supplies on account for use in its business.At the end of December,20% of the supplies were still on hand,but only 75% had been paid.What amounts will appear on the company's balance sheet on December 31?
$\begin{array}{cc} \text { Supplies on Hand } & \text { Accounts Payable } \\\end{array}$
a.
$\begin{array}{cc}&&&\$800&&&&&&&\$600\end{array}$
b.
$\begin{array}{cc}&&&\$160&&&&&&&\$200\end{array}$
c.
$\begin{array}{cc}&&&\$640&&&&&&&\$200\end{array}$
d.
$\begin{array}{cc}&&&\$160&&&&&&&\$800\end{array}$

Question 47

Fox Auto sold merchandise to a customer for $3,000 on credit on March 10.The customer paid Fox Auto the amount due on March 31.Under the accrual basis of accounting,which of the following statements is true?

A)Fox Auto will recognize the revenue on March 31.
B)The March 10 transaction increases revenue,but has no effect on assets because cash has not been received.
C)Revenue is recognized after the cost of the merchandise sold has been paid by Fox Auto.
D)The March 31 transaction has no effect on total assets under the accrual basis.

Question 48

Balance sheet accounts are called real accounts.

Question 49

Holten Farm sells new tractors and pays each salesperson a commission of $1,000 for each tractor sold.During the month of August,a salesperson,Fred,sold three new tractors.Holten Farm pays Fred on the 10th day of the month following the sale.Fred operates on the cash basis;Holten Farm operates on the accrual basis.Which of the following statements is true?

A)Fred will recognize commission revenue earned in the amount of $3,000 in August.
B)Holten Farm will recognize commission expense in the amount of $3,000 in August.
C)Fred will recognize commission expense in the amount of $3,000 in September.
D)Fred will recognize revenue in the same month that the tractor dealer recognizes expense.

Question 50

Why is the use of the U.S.dollar as a unit of measure for financial statement data in the United States widely accepted?

A)The U.S.dollar remains stable over a long period of time.
B)The U.S.dollar is universally recognized as a reliable financial measure.
C)The U.S.dollar is the medium of monetary exchange in the United States.
D)The U.S.dollar is required for financial statement presentation by the FASB and SEC.

Question 51

Alexander City Consultants started business on January 1,2017,and immediately purchased $1,000 of supplies on credit to use in the business.At the end of the month,25% of the supplies remain unpaid and 20% are still on hand.What amounts should appear on the financial statements for January 2017? $\begin{array}{l}\text { Income Statement }&\text { Statement of Cash Flows }\end{array}$
a.
$\begin{array}{cc}&&&\$1,000&&&&&&\$1,000\end{array}$

b.
$\begin{array}{cc}&&&\$1,000&&&&&&\$750\end{array}$

c.
$\begin{array}{cc}&&&\$800&&&&&&&\$25\end{array}$

d.
$\begin{array}{cc}&&&\$800&&&&&&&\$750\end{array}$

Question 52

Expense accounts are closed or zeroed out in the closing process.

Question 53

Interim financial statements are prepared annually.

Question 54

An accountant describes the effects of an economic event on an entity by recording the transaction and reporting the amount on the financial statements.What is this called?

A)Measurement
B)Recognition
C)Disclosure
D)Matching

Question 55

Camp Consulting Services started business on January 1,2017.Camp performed services for customers totaling $100,000 of which 40% remain uncollected at the end of December.Under the accrual basis,what amounts would appear on Camp Consulting's financial statements for 2017?
$\begin{array}{l}\text { Income Statement }&\text { Statement of Cash Flows }\end{array}$
a.
$\begin{array}{cc}&&&\$100,000&&&&&&\$60,000\end{array}$

b.
$\begin{array}{cc}&&&\$100,000&&&&&&\$100,000\end{array}$

c.
$\begin{array}{cc}&&&\$60,000&&&&&&&\$60,000\end{array}$

d.
$\begin{array}{cc}&&&\$60,000&&&&&&&\$100,000\end{array}$

Question 56

Which one of the following statements is true?

A)Recognition is concerned with the dollar amount of each economic effect that should be reported in the financial statements.
B)Measurement is concerned with how economic effects should be quantified.
C)The stability concept is concerned with identification of the specific entity for which economic effects are to be recognized and measured.
D)The monetary unit assumption is concerned with the valuation of economic effects in terms of current purchasing power.

Question 57

A decline in purchasing power is evidenced by all of the following except

A)inflation.
B)a continuing rise in the general level of prices in an economy.
C)buying the same amount of goods or services for a higher price a year later.
D)current value is equal to historical cost.

Question 58

Measurement of the economic effects on an entity involves each of the following except

A)quantification of effects.
B)identification of the attribute to be measured.
C)selection of an appropriate unit of measure.
D)recording the economic effects in the financial statements.

Question 59

Sally's Choice sells season memberships for $200 each.During January 2017,60 season memberships were sold.As of March 31,2017,$3,000 of season membership fees had been collected from customers.The season runs for four months starting March 1,2017.Which one of the following is an amount reported on the financial statements for the period ending March 31,2017?

A)Unearned membership revenue of $3,000
B)Unearned membership revenue of $9,000
C)Accounts receivable of $3,000
D)Membership revenue of $9,000

Question 60

The selection of historical cost over current value as the attribute to be measured for assets is an example of the trade-off of

A)reliability over relevance.
B)costs over benefit.
C)comparability over consistency.
D)understandability over verifiability.

Question 61

Which one of the following is an example of a deferred revenue?

A)Sales are made to customers on credit.
B)Interest has been earned by a bank deposit,but it has not been recorded.
C)Cash is received prior to providing the services to customers.
D)Cash sales are made to customers.

Question 62

Which of the following concepts is important to accrual accounting?

A)Time period,because accrual accounting divides earnings into time periods
B)Monetary unit,because inflation is a big factor in the environment
C)Cash basis,because if cash is not received,revenue is not accrued
D)Entity concept,because personal transactions must be separated from business transactions

Question 63

When is revenue from the sale of merchandise normally recognized?

A)On the date the sale is made
B)When the customer pays for the merchandise
C)Either on the date on which the sale occurs,or the date on which the customer pays
D)When the merchandise is sold,if sold for cash,or when payment is received,if sold on credit

Question 64

As a general rule,revenue is recognized at the point of sale.Which one of the following situations illustrates this rule?

A)Products are sold to customers on credit with payment due in 30 days.
B)Employees are paid wages the week after the wages are earned.
C)Products are purchased for resale purposes.
D)Interest is collected from amounts loaned to employees.

Question 65

Under which method are revenues and expenses recognized in the same accounting period that cash receipts and payments occur?

A)Under the cash basis of accounting
B)Under the accrual basis of accounting
C)Under the adjusting method of accounting
D)Under both the cash and accrual basis of accounting

Question 66

Expenses can be matched against revenue

A)if the earnings process is not complete.
B)when cash is collected from the sale of products.
C)through allocation to the accounting periods in which the benefits are recognized.
D)when payment is made for costs related to revenue.

Question 67

Harvest Catering is a local catering service.Conceptually,when should Harvest recognize revenue from its catering service?

A)On the date the customer places the order
B)On the date the meals are catered
C)On the date the invoice is mailed to the customer
D)On the date the customer's payment is received

Question 68

Expenses originate from

A)using an asset or recognizing liabilities.
B)incurring liabilities or providing services to customers.
C)collecting cash from customers.
D)paying off liabilities.

Question 69

On January 1,2017,ABC,Inc.purchased a copier for $9,000 cash and decided to depreciate it over five years.What amounts associated with the copier will appear on ABC's financial statements for the year ending December 31,2017?
$\begin{array}{l}\text { Income Statement }&\text { Statement of Cash Flows }\end{array}$
a.
$\begin{array}{cc}&&&\$1,800&&&&&&\$9,000\end{array}$

b.
$\begin{array}{cc}&&&\$1,800&&&&&&\$0\end{array}$

c.
$\begin{array}{cc}&&&\$9,000&&&&&&&\$0\end{array}$


d. None of these are correct.

Question 70

What effect does recognizing an accrued liability for utilities at the end of the accounting period have on the accounting equation?

A)Assets decrease and stockholders' equity decreases.
B)Liabilities increase and stockholders' equity increases.
C)Assets decrease and liabilities decrease.
D)Liabilities increase and stockholders' equity decreases.

Question 71

Which of the following statements does not present financial information based on the accrual basis of accounting?

A)Balance sheet
B)Income statement
C)Statement of retained earnings
D)Statement of cash flows

Question 72

What does the phrase "Revenue is recognized at the point of sale" mean?

A)Revenue is recorded in the accounting records when the goods are received from a supplier and reported on the income statement when sold to the customer.
B)Revenue is recorded in the accounting records and reported on the income statement when the cash is received from the customer.
C)Revenue is recorded in the accounting records when the goods are sold to a customer and reported on the income statement when the cash payment is received from the customer.
D)Revenue is recorded in the accounting records and reported on the income statement when goods are sold and delivered to a customer.

Question 73

On October 31,Michael Corporation signed a one-year contract to provide services to Love Company for $80,000 throughout the next year.Love will pay for the services on November 1.Using the accrual basis of accounting,when should Michael Corporation recognize revenue?

A)November 1 of the current year when the cash is received from Love
B)On October 31 of the next year when all services have been provided
C)Throughout the year as the revenue is earned
D)At December 31 of the current year and October 31 of the next year

Question 74

Remaz Corp.purchased equipment at a cost of $220,000 in January,2016.As of January 1,2017,depreciation of $160,000 had been recorded on this asset.Depreciation expense for 2017 is $50,000.After the adjustments are recorded and posted at December 31,2017,what are the balances for Equipment and Accumulated Depreciation?

$\begin{array}{cc} \text { Equipment} & \text { Accumulated Depreciation } \\\end{array}$

a.
$\begin{array}{cc}&\$220,000&&&\$210,000\end{array}$

b.
$\begin{array}{cc}&\$220,000&&&&\$0\end{array}$

c.
$\begin{array}{cc}&\$160,000&&&\$50,000\end{array}$

d.
$\begin{array}{cc}&\$120,000&&&\$210,000\end{array}$

Question 75

Which one of the following is not a recognized method of recognizing assets as expenses in a particular accounting period?

A)Customers' account balances in accounts receivable are assigned to expense in the period in which each customer pays.
B)Prepaid insurance is assigned to expense as the insurance expires.
C)A building is depreciated and its cost is assigned to the current and future accounting periods in which the building is expected to be used.
D)Merchandise inventory is assigned to cost of goods sold in the period the goods are sold.

Question 76

Grove Corp.purchased equipment at a cost of $260,000 in January 2016.As of January 1,2017,depreciation of $88,000 had been recorded on this asset.Depreciation expense for 2017 is $22,000.After the adjustments are recorded and posted at December 31,2017,what are the balances for Depreciation Expense and Accumulated Depreciation?
$\begin{array}{cc} \text { Depreciation Expense} & \text { Accumulated Depreciation } \\\end{array}$

a.
$\begin{array}{cc}&&&\$22,000&&&&&&\$110,000\end{array}$

b.
$\begin{array}{cc}&&&\$20,000&&&&&&\$88,000\end{array}$

c.
$\begin{array}{cc}&&&\$110,000&&&&&\$110,000\end{array}$

d.
$\begin{array}{cc}&&&\$110,000&&&&&\$88,000\end{array}$

Question 77

What effect does recognizing revenue at the end of the accounting period for rent previously received in advance have on the accounting equation for an insurance company?

A)Stockholders' equity increases and liabilities increase.
B)Assets increase and stockholders' equity increases.
C)Assets decrease and liabilities decrease.
D)Liabilities decrease and stockholders' equity increases.

Question 78

Sun Corp.sells merchandise to customers.Sun should normally recognize

A)cash revenue only and the related expenses in the same accounting period as earned whether payment is received or not.
B)revenue when the cash is collected and the expenses when Sun pays its creditor for the merchandise.
C)revenue and expenses after all payments are collected.
D)cash and credit revenue in the same accounting period as earned and the related expenses incurred whether payment is received or not.

Question 79

All of the following describe a revenue except a revenue

A)can result in the inflow of assets.
B)can result in the settlement of liabilities from the delivery or distribution of goods.
C)can result in the settlement of liabilities from rendering services.
D)must involve an inflow of assets.

Question 80

Which of the following statements is true concerning assets?

A)Assets represent future economic sacrifices.
B)Assets are expired costs.
C)Assets become expenses at the time they are paid in cash.
D)Assets become expenses when their economic benefits expire.