Question 1

Unearned revenues are reported as liabilities on the balance sheet.

Accepted Answer

Unearned revenues represent payments received in advance for goods or services that have not yet been provided, and therefore the company has an obligation to fulfill them in the future. As a result, unearned revenues are classified as liabilities on the balance sheet until the revenue is recognized as earned.

Question 2

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

Accepted Answer

Selling inventory on account increases accounts receivable (an asset) and recognizes revenue (a revenue account). Therefore, both assets and revenues increase.

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.

Accepted Answer

The time period assumption assumes that the life of a business can be divided into time periods, typically quarters or years, in order to provide regular financial reporting. This allows for easier comparisons of financial performance over time.

Question 4

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

Accepted Answer

The answer of Interest revenue is reported as operating revenue...

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.

Accepted Answer

Generally accepted accounting principles (GAAP) require the use of the accrual basis of accounting for reporting revenues and expenses on the income statement. This means that revenues are recognized when earned and expenses are recognized when incurred, regardless of when cash is received or paid out.

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.

Accepted Answer

The revenue recognition principle recognizes revenue when goods or services are transferred to customers, not when cash is received. This principle is based on accrual accounting, which matches revenue with expenses incurred to generate that revenue, regardless of when cash is exchanged.

Question 7

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

Accepted Answer

Operating revenue is revenue generated from the sale of goods or services in the normal course of a company's operations. In this case, the sale of an automobile is a key revenue generator for a car dealership and represents operating revenue.

Question 8

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

Accepted Answer

The answer of A gain resulting from the sale of...

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.

Accepted Answer

Accrual accounting recognizes expenses when they are incurred, not when they are paid. Therefore, even though the rent for February was paid in January, it is recognized as an expense in February since that is when it was incurred.

Question 10

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

Accepted Answer

Expenses are costs incurred in order to generate revenues, and thus result in decreases in assets (such as cash or inventory) or increases in liabilities (such as accounts payable or accrued expenses).

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.

Accepted Answer

The revenue recognition principle states that revenue should be recognized when it is earned, not necessarily when cash is received. This means that revenue should be recognized when services are provided or goods are sold, even if the customer has not yet paid for them.

Question 12

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

Accepted Answer

If cash is received before providing goods or services, it is considered a form of prepayment or advance payment. This results in an increase in assets (cash) and liabilities (unearned revenue or deferred revenue) because the company has a responsibility to deliver the goods or service at a later point in time. Once the goods or service have been provided, the liability is decreased and revenue is recognized.

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.

Accepted Answer

The answer of Using cash to purchase office supplies, which...

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.

Accepted Answer

The expense recognition principle, also known as the matching principle, requires that expenses should be recognized in the same period as the revenues they help to generate. This principle is a fundamental concept in accounting and ensures that the income statement accurately reflects the financial performance of a business by matching expenses with the related 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.

Accepted Answer

The expense recognition principle states that expenses should be recognized on the income statement when they are incurred or when the related revenue is recognized, whichever comes first. Therefore, wages expense should be recognized when the employee provides the work, not when the wages are paid.

Question 16

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

Accepted Answer

Interest expense is not considered an operating expense, but rather a non-operating expense. It is typically reported below operating income on the income statement.

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.

Accepted Answer

This is correct. The operating cycle consists of the time it takes to complete a business's cash cycle, which begins with cash payment to suppliers for inventory purchases and ends with the collection of cash from customers for the sale of inventory.

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.

Accepted Answer

This is the basic principle of accrual basis accounting.

Question 19

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

Accepted Answer

A retail store typically purchases goods from suppliers, sells them to customers, and collects payment in a shorter timeframe than an automobile manufacturer, which must design, engineer, manufacture, and distribute vehicles to dealerships, with a longer timeframe for sales and revenue collection.

Question 20

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

Accepted Answer

This is true as per generally accepted accounting principles (GAAP) and International Financial Reporting Standards (IFRS). Earnings per share is a key financial ratio that measures the profit attributable to each share of stock outstanding and is required to be disclosed to investors. It can be reported on the income statement or in the notes to the financial statements.

Quiz 3: Operating Decisions and the Accounting System