Deck 3: Operating Decisions and the Accounting System

Question 1

Unearned revenues are reported as liabilities on the balance sheet.

Answer 1

True

Question 2

Selling inventory to a customer on account results in an increase in both assets and revenues.

Answer 2

True

Question 3

The time period assumption implies that the life of a business entity can be reported in time periods such as quarters and years.

Answer 3

True

Question 4

Interest revenue is reported as operating revenue and therefore increases operating income.

Question 5

Application of generally accepted accounting principles requires that the accrual basis of accounting be used for reporting revenues and expenses on the income statement.

Question 6

The revenue recognition principle recognizes revenue when the goods or services are transferred to customers, regardless of the timing of the cash collection from customers.

Question 7

An example of operating revenue would be the revenue created by the sale of an automobile by a car dealership.

Question 8

A gain resulting from the sale of buildings and equipment is not reported as operating income on the income statement.

Question 9

Under accrual accounting, rent expense for February, 2016 would be recognized on the income statement in February, 2016 even though it had been paid for in January of 2016.

Question 10

Expenses are the result of decreases in assets or increases in liabilities incurred in order to generate revenues.

Question 11

According to the revenue recognition principle, revenue is recognized at the time that cash is collected from a customer for services to be provided in the future.

Question 12

Cash received prior to the providing of the goods or service results in an increase in both assets and liabilities.

Question 13

Using cash to purchase office supplies, which will be consumed later, results in an increase in expenses and a decrease in assets at the time of purchase.

Question 14

The expense recognition principle requires expenses to be recorded on the income statement in the same period they are incurred in generating revenues.

Question 15

According to the expense recognition principle, wages expense is recognized on the income statement when the wages are paid rather than when the employee provides the work.

Question 16

Interest expense is reported on the income statement as an operating expense.

Question 17

The operating cycle is the time that elapses between a company's cash payment to suppliers for inventory purchases and the collection of cash from sale of inventory to customers.

Question 18

Under accrual basis accounting, revenues are recognized when goods or services are transferred to customers, and expenses are recognized when incurred to generate that revenue.

Question 19

A retail store would likely have a shorter operating cycle than an automobile manufacturer.

Question 20

Earnings per share must be either reported on the income statement or disclosed in the notes to the financial statements.

Question 21

Reporting revenues on the income statement that were previously reported as unearned revenues on the balance sheet results in a decrease in liabilities and an increase in net income, retained earnings, and stockholders' equity.

Question 22

Cash paid to suppliers for inventory is an investing activity.

Question 23

Dividends declared decrease net income.

Question 24

Which of the following statements is false?

A)The income statement covers a period of time.
B)A loss on the sale of plant and equipment is considered a peripheral activity and is not reported on the income statement.
C)Rent expense is a component of operating income.
D)Interest expense is not a component of operating income.

Question 25

The trial balance needs to be prepared prior to preparation of the income statement.

Question 26

Which of the following describes the reporting of interest expense on the income statement?

A)It is reported as an operating expense.
B)It is a component of operating income.
C)It is deducted from operating income.
D)It is added to operating income.

Question 27

Collections from customers are cash flows from operating activities.

Question 28

Which of the following best describes the time period assumption?

A)It assumes we value a business as of the end of every month.
B)It is the cutoff point for asset and liability recognition.
C)It implies that financial statements are prepared at the end of a business entity's operating cycle.
D)It assumes we divide the long life of a business into a series of shorter time periods for accounting and reporting purposes.

Question 29

Revenue accounts have credit balances because they increase stockholders' equity.

Question 30

When the board of directors declares a cash dividend, the retained earnings account is debited.

Question 31

The primary difference between revenues and gains is:

A)Gains are increases in net assets from periodically selling assets other than inventory while revenues are increases from major or central ongoing operations of a business.
B)Revenues increase operating income and gains have no impact on net income.
C)Revenues cause increases in net assets as a result of infrequent activities and gains cause increases through ongoing activities.
D)Gains result in an increase in operating income whereas revenues do not impact operating income.

Question 32

Which of the following costs is most likely to be the largest expense reported on the income statement of a merchandiser such as Wal-Mart Stores?

A)Utilities expense.
B)Cost of goods sold.
C)Advertising expense.
D)Income tax expense.

Question 33

The net profit margin ratio is a measure of how much profit was created per sales dollar.

Question 34

The net profit margin ratio is calculated by dividing net sales by net income.

Question 35

Which of the following best describes the operating cycle?

A)It is the length of the manufacturing process.
B)It is the time that elapses from the purchase of inventory on account to the sale of inventory on account.
C)It is the time that elapses from the completion of the manufacturing process to the cash collection from sale of the manufactured goods.
D)It is the time that elapses from the cash payment to suppliers to collection of cash from customers.

Question 36

Which of the following businesses would most likely not report cost of goods sold on their income statement?

A)A law firm.
B)An automobile dealership.
C)A pizza restaurant.
D)A computer chip manufacturer.

Question 37

Purchasing a six-month insurance policy results in a debit to insurance expense and a credit to cash at the date of purchase.

Question 38

Expense accounts have debit balances because they decrease net income, retained earnings, and stockholders' equity.

Question 39

An income statement with each line divided by net sales and shown as a percentage is called a common statement.

Question 40

Which of the following would lengthen the operating cycle?

A)Faster collection of accounts receivables.
B)Selling inventory in a shorter period of time.
C)Increasing the number of customers who paid cash.
D)Relaxing credit terms and allowing customers more time to pay.

Question 41

Lantz Company has provided the following information: • Cash sales totaled $255,000.
• Credit sales totaled $479,000.
• Cash collections from customers for services yet to be provided totaled $88,000.
• A $22,000 loss from the sale of property and equipment occurred.
• Interest income was $7,700.
• Interest expense was $19,900.
• Supplies expense was $336,000.
• Rent expense for the store was $36,000.
• Wages expense was $49,000.
• Other operating expenses totaled $79,000.
• Unearned revenue was $4,000.
What is the amount of Lantz's operating revenues?

A)$734,000.
B)$822,000.
C)$826,000.
D)$833,700.

Question 42

Colby Corporation has provided the following information: • Operating revenues from customers were $199,700.
• Operating expenses for the store were $111,000.
• Interest expense was $9,200.
• Gain from sale of plant and equipment was $3,300.
• Dividend payments to Colby's stockholders were $7,700.
• Income tax expense was $36,000.
• Prepaid rent expense was $5,000.
What is the amount of Colby's operating revenues?

A)$88,000.
B)$91,300.
C)$199,700.
D)$203,000.

Question 43

Colby Corporation has provided the following information: • Operating revenues from customers were $199,700.
• Operating expenses for the store were $111,000.
• Interest expense was $9,200.
• Gain from sale of plant and equipment was $3,300.
• Dividend payments to Colby's stockholders were $7,700.
• Income tax expense was $36,000.
• Prepaid rent expense was $5,000.
What is the amount of Colby's operating income (income from operations)?

A)$81,000.
B)$83,700.
C)$88,700.
D)$92,000.

Question 44

Which of the following statements is correct?

A)Dividend revenue is a component of Income from Operations.
B)Income from Operations is decreased by a loss from the sale of plant assets.
C)A gain on the sale of a stock investment increases Income from Operations.
D)Income before taxes occurs before Other Items on the income statement.

Question 45

Which of the following expenses does not affect the reporting of operating income?

A)Income tax expense.
B)Cost of goods sold.
C)Depreciation expense.
D)Rent expense.

Question 46

Which of the following correctly describes the impact of collecting cash from customers for services to be provided in the future?

A)Assets and stockholders' equity increase.
B)Assets and revenues increase.
C)Assets and liabilities increase.
D)Assets and operating income increase.

Question 47

Lantz Company has provided the following information: • Cash sales totaled $255,000.
• Credit sales totaled $479,000.
• Cash collections from customers for services yet to be provided totaled $88,000.
• A $22,000 loss from the sale of property and equipment occurred.
• Interest income was $7,700.
• Interest expense was $19,900.
• Supplies expense was $336,000.
• Rent expense for the store was $36,000.
• Wages expense was $49,000.
• Other operating expenses totaled $79,000.
• Unearned revenue was $4,000.
What is the amount of Lantz's total operating expenses?

A)$421,000.
B)$500,000.
C)$522,000.
D)$541,900.

Question 48

Lantz Company has provided the following information: • Cash sales totaled $255,000.
• Credit sales totaled $479,000.
• Cash collections from customers for services yet to be provided totaled $88,000.
• A $22,000 loss from the sale of property and equipment occurred.
• Interest income was $7,700.
• Interest expense was $19,900.
• Supplies expense was $336,000.
• Rent expense for the store was $36,000.
• Wages expense was $49,000.
• Other operating expenses totaled $79,000.
• Unearned revenue was $4,000.
What is the amount of Lantz's income before income taxes?

A)$553,800.
B)$465,800.
C)$199,800.
D)$531,800.

Question 49

Which of the following is not reported as an operating expense on the income statement?

A)Wages expense.
B)Rent expense.
C)Interest expense.
D)Cost of goods solD.Interest expense is the result of borrowing money and not of day-to-day operations of making and/or selling products and/or services.Therefore, interest expense is not listed as an operating expense.

Question 50

The following information has been provided by Hable Company: • Advertising expense $9,900
• Interest expense $3,700
• Rent expense for store $12,000
• Loss on sale of property and equipment $5,700
• Cost of goods sold $21,300
• Depreciation expense $7,100
• Prepaid insurance expense $1,000
What is the amount included in the Other Items section of Hable's income statement?

A)$19,300.
B)$9,400.
C)$3,700.
D)$13,800.

Question 51

Which of the following best describes operating revenues?

A)They are increases in assets or increases in liabilities as a result of peripheral transactions.
B)They are decreases in assets or decreases in liabilities as a result of central ongoing operations.
C)They are increases in assets or decreases in liabilities as a result of central ongoing operations.
D)They are decreases in assets or increases in liabilities as a result of peripheral transactions.

Question 52

Lantz Company has provided the following information: • Cash sales totaled $255,000.
• Credit sales totaled $479,000.
• Cash collections from customers for services yet to be provided totaled $88,000.
• A $22,000 loss from the sale of property and equipment occurred.
• Interest income was $7,700.
• Interest expense was $19,900.
• Supplies expense was $336,000.
• Rent expense for the store was $36,000.
• Wages expense was $49,000.
• Other operating expenses totaled $79,000.
• Unearned revenue was $4,000.
What is the amount of Lantz's income from operations (operating income)?

A)$221,800.
B)$212,000.
C)$199,800.
D)$234,000.

Question 53

Colby Corporation has provided the following information: • Operating revenues from customers were $199,700.
• Operating expenses for the store were $111,000.
• Interest expense was $9,200.
• Gain from sale of plant and equipment was $3,300.
• Dividend payments to Colby's stockholders were $7,700.
• Income tax expense was $36,000.
• Prepaid rent expense was $5,000.
What is the amount of Colby's total operating expenses?

A)$111,000.
B)$114,300.
C)$116,000.
D)$120,200.

Question 54

Which of the following statements is false?

A)An expense is a cost incurred to generate revenues.
B)Selling assets at a gain does not result in earning revenue.
C)Revenues are reported on the income statement as they are earned.
D)Revenues result in an increase in net income and additional paid-in capital.

Question 55

The following information has been provided by Hable Company: • Advertising expense $9,900
• Interest expense $3,700
• Rent expense for store $12,000
• Loss on sale of property and equipment $5,700
• Cost of goods sold $21,300
• Depreciation expense $7,100
• Prepaid insurance expense $1,000
How much were Hable's total expenses in calculating operating income?

A)$50,300.
B)$54,000.
C)$56,000.
D)$43,200.

Question 56

Which of the following transactions will result in an increase in operating income as of the date of the transaction?

A)The sale of investments at a gain.
B)Collection of cash from a customer for services to be provided at a later date.
C)Providing a service to a customer on account.
D)The receipt of cash dividends from an investment.

Question 57

Colby Corporation has provided the following information: • Operating revenues from customers were $199,700.
• Operating expenses for the store were $111,000.
• Interest expense was $9,200.
• Gain from sale of plant and equipment was $3,300.
• Dividend payments to Colby's stockholders were $7,700.
• Income tax expense was $36,000.
• Prepaid rent expense was $5,000.
What is the amount of Colby's income before income taxes?

A)$70,100.
B)$75,100.
C)$82,800.
D)$92,000.

Question 58

Colby Corporation has provided the following information: • Operating revenues from customers were $199,700.
• Operating expenses for the store were $111,000.
• Interest expense was $9,200.
• Gain from sale of plant and equipment was $3,300.
• Dividend payments to Colby's stockholders were $7,700.
• Income tax expense was $36,000.
• Prepaid rent expense was $5,000.
How much was Colby's net income?

A)$39,100.
B)$48,300.
C)$52,700.
D)$46,800.

Question 59

Trend Decorations Company provides decorating services for store displays. Trend sold equipment that it had been using to create decorations. Of the following choices, which will Trend report on its income statement when it sells the equipment?

A)Operating revenue: Sales revenue
B)Operating expenses: Loss on disposal of equipment
C)Other items: Loss on sale of equipment
D)General and administrative expenses: Sale of decorating equipment

Question 60

Smith Corporation has provided the following information: Cash sales totaled $125,000.
Credit sales totaled $279,000.
Cash collections from customers for services yet to be provided totaled $38,000.
An $11,000 gain from the sale of property and equipment occurred.
Interest income totaled $7,700.
How much of these items were included in operating income?

A)$415,000.
B)$411,700.
C)$442,000.
D)$460,700.

Question 61

McNeil Company owed its employees for services performed and recorded a liability for the wages owed the employees. Which of the following correctly describes the impact on the financial statements when the employee wages are subsequently paid?

A)Operating expenses are increased.
B)Retained earnings decreases.
C)Operating income does not change.
D)Total assets remain the same.

Question 62

Yelena Company received cash from a customer in advance of providing the service to the customer. Which of the following does not accurately describe the impact on the financial statements when Yelena later provides the service?

A)Liabilities are decreased.
B)Operating income increases.
C)Retained earnings increases.
D)Assets are increaseD.When Yelena provides the service revenue is recognized and the unearned revenue account is reduced.Assets are not affected.

Question 63

Which of the following statements is false?

A)A liability is created when cash is received prior to delivery of the goods or services to a customer.
B)Revenue is recognized at the time of delivery of the goods or services to customers if cash is received.
C)Revenue is not recognized at the time of delivery of goods and services to customers if cash is received after delivery of the goods and services.
D)Collecting cash after delivery of a good or service to a customer does not create revenue on the income statement at the date of collection.

Question 64

Daring Dolls, Inc. received an order to provide SuperDolls for a big department store. The store paid Daring Dolls in advance for the order of SuperDolls. Which of the following describes what will occur when Daring Dolls recognizes revenue?

A)Cash will be increased.
B)Accounts receivable will be increased.
C)Deferred revenue will be decreased.
D)Deferred revenue will be increaseD.When promised goods are delivered, and cash has already been received, a liability account, Deferred Revenue, is decreased, and the account Sales Revenue is increased.

Question 65

Which of the following best describes the expense recognition principle?

A)It requires expenses to be recorded when they are paid for.
B)It requires expenses to be recorded when incurred to generate revenues.
C)It requires expenses to be recorded consistent with the cash basis of accounting.
D)It does not allow expenses to be recorded if they are incurred prior to being paiD.The expense recognition principle requires that expenses be recorded when incurred in generating revenue.

Question 66

During 2016, Sigma Company earned service revenue amounting to $700,000, of which $630,000 was collected in cash; the balance will be collected in January, 2017. Also in 2016 there were collections of cash prior to the delivery of goods/services totaling $10,000. What amount should the 2016 income statement report for service revenue?

A)$630,000.
B)$700,000.
C)$70,000.
D)$570,000.

Question 67

Which of the following statements does not properly describe the accrual basis of accounting?

A)Expenses are recognized when incurred in generating revenues regardless of the timing of cash flows.
B)Revenues are recognized when the company transfers promised goods or services to customers regardless of the timing of cash flows.
C)Generally accepted accounting principles require use of the accrual basis.
D)Accrual accounting should not be used when providing financial statements to external decision makers.

Question 68

June's Printing Shop had the following information for office supplies: • Ordered $1,200 of supplies March 3
• Received half the order of supplies on March 16
• Used one-third of the supplies during March
What is the total amount that should be reported as supplies expense for the month of March?

A)$100.
B)$200.
C)$400.
D)$600.

Question 69

The core revenue recognition principle has two requirements for recognizing revenue. Which of the following is one of these requirements?

A)The customer has paid for the goods or services.
B)Delivery of goods or performance of service has occurred or is scheduled to occur.
C)The amount the company expects to receive is determinable.
D)The customer has signed a contract.

Question 70

Which of the following is not a step pertaining to the revenue recognition principle beginning in year 2018, for more complex customer contracts, according to both U.S. GAAP and to International Financial Reporting Standards (IFRS)?

A)Determine the transaction price.
B)Identify the performance obligations.
C)Identify the contract between the company and its supplier of goods.
D)Allocate the transaction price to the performance obligations.

Question 71

Which of the following journal entries is prepared when cash is received from a customer prior to delivery of the goods or services?

A)Cash xxx
Revenue
Xxx
B)Cash xxx
Unearned revenue
Xxx
C)Unearned revenue xxx
Cash
Xxx
D)Cash

Question 72

A company purchased supplies for cash, which will be consumed during future months. Which of the following does not correctly describe the impact on the financial statements when the supplies are used during future months?

A)Total assets will remain unchanged.
B)Total assets will decrease.
C)Operating expenses will increase.
D)Operating income will decrease.

Question 73

Revenue may be recognized:

A)Before goods are delivered
B)After goods are delivered
C)When goods are delivered
D)Either before goods are delivered, after goods are delivered, or when goods are delivereD.The revenue recognition principle specifies that a company recognizes revenue when goods or services are transferred to customers.

Question 74

Which of the following journal entries is prepared by an auto repair shop when a customer will pay cash subsequent to delivery of goods or services?

A)Accounts receivable xxx
Revenue
Xxx
B)Cash xxx
Unearned revenue
Xxx
C)Unearned revenue xxx
Cash
Xxx
D)Revenue

Question 75

A landlord collected $5,000 cash from a tenant for December 2016's rent but the tenant's rent for December is $8,000. Which of the following is true with respect to the landlord's financial statements using generally accepted accounting principles?

A)$8,000 would be reported on the statement of cash flows.
B)$8,000 would appear on the balance sheet as rent receivable.
C)$8,000 would appear on the income statement as rent revenue.
D)$5,000 would appear on the balance sheet as prepaid rent.

Question 76

Which of the following journal entries correctly records the receipt of a utility bill, which will be paid for in later weeks?

A)Utilities payable xxx
Utilities expense
Xxx
B)Utilities expense xxx
Utilities payable
Xxx
C)Utilities expense xxx
Retained earnings
Xxx
D)Retained earnings

Question 77

Which of the following journal entries is correct when a company has incurred an expense for work performed but has not yet paid for theses wages to employees?

A)Wages expense xxx
Operating income
Xxx
B)Wages expense xxx
Accrued expenses payable
Xxx
C)Accrued expenses payable xxx
Cash
Xxx
D)Retained earnings

Question 78

Toby Toy Store has noticed the following items that need to be considered for its income statement for the year ended December 31, 2016: • Commissions of $3,000 for salespeople who made sales in December will be paid January 3, 2017.
• The phone bill of $400 for December was received and will be paid January 20, 2017.
• The store rent of $2,000 for January, 2017 was paid on December 28, 2016.
• At the beginning of November, Toby paid $1,500 for advertising in a monthly magazine that is distributed in November and December of 2016, and January of 2017.
What is the proper amount of expenses to be included in the income statement for the year?

A)$4,400.
B)$6,900.
C)$6,400.
D)$5,900.

Question 79

A company purchased supplies for cash, which will be consumed during future months. Which of the following correctly describes the impact of the supplies purchase on the financial statements?

A)Total assets will remain unchanged.
B)Total assets will decrease.
C)Operating expenses will increase.
D)Operating income will decrease.

Question 80

Which of the following does not correctly describe the cash basis of accounting?

A)It is not accepted for external reporting purposes.
B)Revenues are recognized when cash is collected from customers.
C)Expenses are recognized when they are paid for.
D)Cash payments for long-term assets are recognized as an expense at the time of payment.