Deck 3: Measuring Business Income

Question 1

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

Answer 1

True

Question 2

When a net loss has been suffered, the Owner's Capital account will contain a negative balance.

Answer 2

False

Question 3

All increases to cash are from revenues.

Answer 3

False

Question 4

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

Question 5

Assets become liabilities when they expire.

Question 6

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

Question 7

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

Question 8

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

Question 9

Revenue is produced when accounts receivable are collected.

Question 10

All decreases in owner's equity are a result of expenses.

Question 11

Expenses can be described as expired costs.

Question 12

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

Question 13

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

Question 14

When expenses exceed revenues, a net income has occurred.

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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 25

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

Question 26

Assets are converted to revenues as they benefit the company.

Question 27

As an asset's depreciation is recorded, its carrying value increases.

Question 28

Adjusting entries affect cash flows in the current period.

Question 29

In applying the matching rule, revenue recognition should come before the matching (assignment) of expense.

Question 30

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

Question 31

One application of accrual accounting is adjusting the accounts.

Question 32

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

Question 33

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

Question 34

Accrual accounting is an application of the matching rule.

Question 35

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

Question 36

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

Question 37

A revenue for which the service has been performed but that has not been recorded is an accrued revenue.

Question 38

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

Question 39

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

Question 40

Direct cause-and-effect relationships between revenues and costs can usually be demonstrated.

Question 41

When a credit sale takes place,

A) 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 42

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

Question 43

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

Question 44

A net loss results in a decrease in

A) expenses.
B) liabilities
C) owner's equity.
D) assets.

Question 45

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

Question 46

Financial statements may be prepared from an adjusted trial balance.

Question 47

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

Question 48

Profitability is best determined from cash flow information.

Question 49

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 revenue that has not yet been earned
D) Recording an expense that has been incurred but has not yet been paid

Question 50

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

Question 51

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

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

Question 52

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 53

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) Withdrawal of cash by the owner
D) Payment on the principal portion of a loan

Question 54

In accounting, depreciation refers to the decline in value of a plant asset.

Question 55

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

Question 56

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

Question 57

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 58

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

Question 59

Net income results in a(n)

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

Question 60

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

Question 61

As the usefulness of a plant asset expires,

A) an amount is transferred from one asset account to another.
B) a related expense account is reduced.
C) a liability is created.
D) the cost of the asset is allocated to an expense account.

Question 62

Retailers often end their fiscal years .

A) during the slack season
B) during the peak of the busy season.
C) at different times each year, depending on the tax consequences.
D) on June 30.

Question 63

When a direct cause-and-effect relationship cannot be established between revenues and costs, the costs are

A) not expensed and remain as assets on the balance sheet.
B) expensed among the accounting periods that benefit from the costs.
C) expensed immediately in their entirety.
D) expensed equally each year.

Question 64

The going concern assumption is not applied to

A) companies that have sustained losses for the previous two years.
B) companies about to file for bankruptcy.
C) the partnership form of business.
D) companies that have been in existence for less than a year.

Question 65

The cost of doing business is also known as

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

Question 66

Which of the following accounts probably would need to be adjusted at year end?

A) Notes Payable
B) Land
C) Supplies
D) Owner's Withdrawals

Question 67

When expenses exceed revenues,

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

Question 68

The going concern assumption helps solve the

A) matching issue.
B) accounting period issue.
C) revenue recognition issue.
D) continuity issue.

Question 69

Expenses are incurred

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

Question 70

Financial statement time periods should be of equal length

A) and should end during the peak season.
B) to make comparison easier.
C) and should correspond to the calendar year.
D) to comply with income tax regulations.

Question 71

Which of the following is the most difficult to assign to specific time periods?

A) The incurrence of wages expense
B) The accrual of interest
C) The use of equipment
D) The expiration of insurance

Question 72

The matching rule is applied

A) because it is required by the Internal Revenue Code.
B) by expensing certain items immediately and in their entirety.
C) to help make the bookkeeper's job easier.
D) to help produce an accurate measurement of a company's performance.

Question 73

The periodicity assumption recognizes that

A) the company may continue indefinitely.
B) all financial statements should cover a fiscal year.
C) net income is an estimate.
D) the value of an asset may vary from month to month.

Question 74

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

A) Interest accrued on a bank loan
B) A cash withdrawal by the owner
C) Use of machinery during the period
D) Expiration of prepaid insurance

Question 75

Equipment might be depreciated over 15 years because

A) it will lose most of its market value in 15 years.
B) it will be paid for in 15 years.
C) it will help to generate revenue for the company over 15 years.
D) income tax provisions require depreciation over 15 years.

Question 76

A customer's promise to pay for goods or services

A) decreases the company's liabilities.
B) increases the company's Cash account.
C) creates a liability for the company.
D) increases the assets of the company.

Question 77

Which of the following is not an application of accrual accounting?

A) Recognizing revenues when earned and expenses when incurred
B) Applying the matching rule
C) Adjusting the accounts
D) Recording on the basis of actual receipt and payment of cash

Question 78

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

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

Question 79

The matching rule relates the least to

A) systematic and rational allocation.
B) the cash basis of accounting.
C) revenues and expenses.
D) cause-and-effect relationships.

Question 80

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) An investment into the business by the owner