Deck 3: Measuring Business Income

Question 1

A cash payment that reduces a liability does not result in an expense.

Answer 1

True

Question 2

When the estimates involved in earnings management begin moving outside a reasonable range,the financial statements can become misleading.

Answer 2

True

Question 3

Net income is misleading when revenue is overstated or expenses are understated by significant amounts.

Answer 3

True

Question 4

Instead of the word profit,accountants use net income because the latter term can be defined more precisely.

Question 5

A company's fiscal year need not correspond to the calendar year.

Question 6

The matching rule is most closely related to the cash basis of accounting.

Question 7

If a company is expected to survive,it is considered a going concern.

Question 8

Expenses are often called the cost of doing business or expired costs.

Question 9

The intentional preparation of misleading financial statements is referred to as fraudulent financial reporting.

Question 10

Revenue is produced when accounts receivable are collected.

Question 11

All decreases in stockholders' equity are a result of expenses.

Question 12

The continuity assumption acknowledges that estimates of net income are still useful.

Question 13

When a net loss has been suffered,Retained Earnings will contain a negative balance.

Question 14

When expenses exceed revenues,a net income occurs.

Question 15

Revenue is equal to the cash received by a company during an accounting period.

Question 16

Not all increases to cash represent revenues.

Question 17

Accounting periods of greater than a year are called interim periods.

Question 18

Accounting periods should be of equal length to facilitate comparisons between periods.

Question 19

When preparing financial statements,the accountant assumes that the business will continue to operate indefinitely unless there is evidence to the contrary.

Question 20

Assets become liabilities when they expire.

Question 21

One of the applications of accrual accounting is adjusting the accounts.

Question 22

Revenue cannot be recognized unless delivery of goods has occurred or services have been rendered.

Question 23

Recording incurred but unpaid expenses is an example of an accrual.

Question 24

Revenue should be recognized,even when collectability is not reasonably assured.

Question 25

Accrual accounting is an application of the matching rule.

Question 26

Adjusting entries are useful in apportioning costs among two or more accounting periods.

Question 27

Accrual accounting recognizes revenues and expenses at the point that cash changes hands.

Question 28

A deferral is the recognition of an expense that has arisen but not yet recorded.

Question 29

A contra account is an account whose balance is subtracted from an associated account in the financial statements.

Question 30

In applying the matching rule,expenses should be recognized in the same accounting period as the revenues to which they are related..

Question 31

Revenue for which the service has been performed but no entry has been made in the accounting records is accrued revenue.

Question 32

Expenses that have been paid for and recorded are called accrued expenses.

Question 33

Adjusting entries affect only the cash flows of the current period.

Question 34

Assets are converted to revenues as they benefit the company.

Question 35

When an asset's depreciation is recorded,it's carrying value increases.

Question 36

The cash basis of accounting is prohibited for income tax purposes.

Question 37

An adjusting entry includes at least one balance sheet account and at least one income statement account.

Question 38

When there is no direct connection between revenues and costs,the costs are systematically allocated among the periods benefited from the costs.

Question 39

Direct cause-and-effect relationships between revenues and expenses can be identified easily.

Question 40

The accrual basis of accounting results in a more accurate measurement of net income for the period than does the cash basis of accounting.

Question 41

After all closing entries have been posted,the balance of the Income Summary account will be zero.

Question 42

Closing entries result in the transfer of net income or loss into the Retained Earnings account.

Question 43

Closing entries are journal entries made at the beginning of an accounting period.

Question 44

The heading of an adjusted trial balance might contain the line "For the Month Ended May 31,20xx."

Question 45

In the accounting cycle,information from source documents is initially recorded in the journal.

Question 46

Financial statements cannot be prepared until the accounts have been adjusted.

Question 47

The carrying value of equipment is the estimated dollar amount the equipment could be sold for.

Question 48

The dollar amount of Cash on the trial balance and on the adjusted trial balance should be identical.

Question 49

An adjusted trial balance will probably list more accounts than are listed in the trial balance.

Question 50

Nominal account balances are reduced to zero by closing entries.

Question 51

Closing entries deal primarily with the balances of real accounts.

Question 52

In the accounting cycle,closing entries are prepared before adjusting entries.

Question 53

The only accounts that are closed are income statement accounts.

Question 54

The adjusted trial balance facilitates the preparation of the financial statements.

Question 55

A depreciable asset's original cost can typically be obtained by referring to the balance sheet.

Question 56

Allowance for depreciation is another term for depreciation expense.

Question 57

An adjusted trial balance must be prepared before the adjusting entries can be recorded.

Question 58

Depreciation Expense-Equipment is an example of a contra account.

Question 59

An adjusted trial balance proves the balance of the ledger accounts after the adjusting entries have been posted.

Question 60

Accounts Receivable is a real account.

Question 61

Which of the following transactions results in the recognition of an expense?

A) Expiration of the usefulness of equipment during the accounting period
B) Payment on an account payable
C) Declaration and payment of a dividend
D) Payment on the principal portion of a loan

Question 62

Profitability is best determined from cash flow information.

Question 63

Net income results in a(n)

A) increase in stockholders' equity.
B) increase in revenues.
C) decrease in expenses.
D) decrease in liabilities.

Question 64

The cost of doing business is also known as

A) a liability.
B) an expense.
C) revenue.
D) an asset.

Question 65

Cash is a nominal account.

Question 66

The manipulation of revenues and expenses to achieve a specific outcome is called

A) earnings management.
B) the matching rule.
C) adjusting entries.
D) revenue recognition.

Question 67

Net income provides a good measure of a business's debt-paying ability.

Question 68

When expenses exceed revenues,

A) a net income will result.
B) a net loss occurs.
C) stockholders' equity increases.
D) a liability is created.

Question 69

When a credit sale takes place,

A) revenue account will increase.
B) liabilities will increase.
C) one asset account will increase and another will decrease.
D) assets will be unaffected.

Question 70

Depreciation Expense-Equipment is a permanent account.

Question 71

Supplies Expense is a temporary account.

Question 72

A net loss results in a decrease in

A) expenses.
B) liabilities.
C) stockholders' equity.
D) assets.

Question 73

Which of the following transactions results in an increase in expenses?

A) Payment on accounts payable
B) Usage of utilities
C) Repayment of principal of bank loan
D) Purchase of office equipment on credit

Question 74

A revenue account is closed with a credit to the revenue account and a debit to Income Summary.

Question 75

Which of the following actions can distort company records and result in fraudulent financial reporting?

A) Prepaying an expense and recording it as an asset
B) Collecting revenue in advance of earning it
C) Recording income that has not yet been earned
D) Recording an expense that has been incurred but has not yet been paid

Question 76

The recording of an expense could result in a corresponding increase in

A) stockholders' equity.
B) revenue.
C) a liability.
D) an asset.

Question 77

Expenses are incurred

A) to generate revenue.
B) to produce liabilities.
C) only during the adjustment process.
D) to produce assets.

Question 78

Which of the following transactions will not result in an increase in revenues?

A) Sale of goods on credit
B) Sale of services for cash
C) Accumulation of interest in bank account
D) Sale of stock to investors for cash

Question 79

Which of the following transactions results in an increase in revenues?

A) Sale of a service on credit
B) Receipt of cash from bank loan
C) Sale of land at cost for cash
D) Collection of cash on account

Question 80

Which of the following transactions will not result in the recognition of an expense?

A) Interest accrued on a bank loan
B) Declaration and payment of a dividend
C) Use of machinery during the period
D) Expiration of prepaid insurance