Question 1

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

Accepted Answer

A cash payment that reduces a liability represents a decrease in the amount owed by the company, and therefore does not result in an expense. It is simply a reduction of the obligation to pay for something previously received or incurred.

Question 2

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

Accepted Answer

If estimates involved in earnings management are manipulated to a point where they are outside a reasonable range, the financial statements can be distorted and can mislead investors and stakeholders.

Question 3

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

Accepted Answer

Net income is calculated by subtracting total expenses from total revenue. If the revenue is overstated or expenses are understated by significant amounts, then the net income will be higher than the actual amount. This can be misleading for investors and stakeholders who rely on accurate financial statements to make decisions. Therefore, it is important to ensure that revenue and expenses are accurately recorded and reported.

Question 4

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

Accepted Answer

Net income is calculated by subtracting all expenses (including taxes) from total revenue, providing a more precise definition of the actual earnings of a business. Profit, on the other hand, can be used in a more general sense and often includes additional factors such as unrealized gains or losses.

Question 5

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

Accepted Answer

A company can set its own fiscal year, which can start and end at any point during the calendar year.

Question 6

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

Accepted Answer

The matching rule requires expenses to be matched with the revenues they helped generate, which is a principle of accrual accounting. The cash basis of accounting, on the other hand, only records transactions when cash changes hands, regardless of when revenue was earned or expenses were incurred.

Question 7

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

Accepted Answer

If a company is expected to survive, it is considered a going concern. This means that it has the ability to continue operating in the foreseeable future and meet its financial obligations.

Question 8

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

Accepted Answer

Expenses are commonly referred to as the cost of doing business or expired costs, as they are necessary expenditures incurred in order to generate revenue and operate a business.

Question 9

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

Accepted Answer

Fraudulent financial reporting refers to when a company intentionally prepares and releases financial statements that misrepresent the true financial condition of the company. This is done to deceive investors, creditors or other stakeholders of the company.

Question 10

Revenue is produced when accounts receivable are collected.

Accepted Answer

Revenue is recognized when it is earned, not when the cash is collected. Accounts receivable collection impacts cash flow, not revenue recognition.

Question 11

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

Accepted Answer

Decreases in stockholders' equity can also result from dividends, losses, and treasury stock purchases, not just expenses.

Question 12

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

Accepted Answer

The answer of The continuity assumption acknowledges that estimates of...

Question 13

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

Accepted Answer

The answer of When a net loss has been suffered,Retained...

Question 14

When expenses exceed revenues,a net income occurs.

Accepted Answer

When expenses exceed revenues, a net loss occurs, not a net income. A net income occurs when revenues exceed expenses.

Question 15

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

Accepted Answer

Revenue refers to the total amount of money earned from the sale of goods or services before any expenses are subtracted, and it does not necessarily equate to the cash received during an accounting period due to accrual accounting principles.

Question 16

Not all increases to cash represent revenues.

Accepted Answer

Increases to cash can also result from sources such as borrowings or sales of assets, which do not necessarily represent revenues.

Question 17

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

Accepted Answer

Accounting periods of less than a year are called interim periods, while periods of one year or longer are called fiscal years.

Question 18

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

Accepted Answer

Accounting periods should be of equal length, such as monthly, quarterly, or annually, to allow for consistent and accurate comparisons between periods. This also helps in creating and analyzing financial statements.

Question 19

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

Accepted Answer

This assumption is known as the going concern assumption and is a fundamental principle in accounting. It means that the financial statements are prepared with the belief that the business will continue to operate and generate profit in the future. This assumption helps users of financial statements to make informed decisions about the business's financial health and prospects. However, if there is evidence that the business is likely to cease operating, the financial statements may need to be adjusted or additional disclosures made.

Question 20

Assets become liabilities when they expire.

Accepted Answer

Assets do not become liabilities when they expire. Liabilities refer to obligations or debts that an entity owes to others, whereas assets are resources that an entity owns or controls that have economic value. When an asset expires, its value may decrease, but it does not become a liability.

Quiz 3: Measuring Business Income