Question 1

The prepayment of rent for the next three months (not including this month):
A)reduces total assets.
B)has no effect on total assets.
C)increases expenses.
D)decreases stockholders' equity.

Accepted Answer

An expense is recorded in the same period as the revenues to which it relates or,if it cannot be directly associated with revenues,it is recorded in the period that the underlying business activity occurs.Since this rent is not associated with generating revenue or any other business activity for this month,it is not this month's expense but rather an exchange of one asset (Cash)for another asset (Prepaid Rent).

Question 2

On Time Computer Repair uses accrual basis accounting.A computer was repaired on July 15.The customer picked up the computer on August 1 and mailed the payment on August 5.On Time Computer Repair received the check in the mail on August 10.The revenue should be recognized on which date?
A)July 15
B)August 1
C)August 5
D)August 10

Accepted Answer

Revenues are recognized when the performance obligation is satisfied.In this case the company performed the act promised to the customer when the computer was repaired,on July 15.

Question 3

Melody's Piano School operations for the month of May were limited to the following transactions: Provided $800 of piano lessons to students who paid in cash.
Provided $200 of piano lessons on account.
Collected $600 from students who took piano lessons during April.
Paid April's piano rental bill of $200.
Received May's piano rental bill of $300 and set it aside for payment in June.
Assuming the company uses accrual basis accounting,what is net income for May?
A)$800.
B)$600.
C)$700.
D)$1,200.

Accepted Answer

Net Income = Revenues − Expenses
= ($800 + $200)− $300 = 700

Question 4

The expense recognition principle ("matching")matches:
A)cash receipts with cash disbursements.
B)expenses with the revenues to which they relate.
C)assets with liabilities.
D)prepaid expenses with deferred revenues.

Accepted Answer

The expense recognition principle ("matching")is the practice under accrual basis accounting to record expenses in the same period as the revenues they generate,not necessarily the period in which cash is paid for them.

Question 5

During June,Parker's Lawn Service mows 100 lawns a week.Parker received payment in advance,during May,for these services.The company uses the accrual basis of accounting.Which financial statement is impacted by these transactions?
A)The income statement shows the effects of the transactions in June.
B)The income statement shows the effects of the transactions in May.
C)The revenue should be recognized equally in May and in June.
D)The transactions have no effect on the balance sheet.

Accepted Answer

The requirement under accrual basis accounting is to record revenues when the performance obligation is satisfied.This means the company has done what it promised to do (mow lawns)in the month of June.The related revenues will be reported on the June income statement.Since the customers paid for these services in May,an asset,Cash,would be increased and a liability,Deferred Revenue,would be increased.In June,a liability,Deferred Revenue would be reduced and Service Revenue would be increased.

Question 6

Your company receives advance payment in October for services that are provided during November.Which of the following statements is correct?
A)A liability is recorded in October and revenue will be recorded in November.
B)Revenue is recorded in October and an expense will be recorded in November.
C)An expense is recorded in October and revenue will be recorded in November.
D)Revenue and expenses are recorded in October.

Accepted Answer

When cash is received before the related services are provided,a liability,called Deferred Revenue,is recorded.That liability will be recorded in October when the cash is received.Revenue will be reported in November,when goods or services are provided in exchange for the gift card.

Question 7

Sparkling Pools performed $2,400 of pool maintenance services during July;the customers had paid in advance for these services in June.The company performed $1,500 of pool maintenance services during July and collected payment from those customers in August.Also,during July,the company accepted an order to perform $750 of pool maintenance services in August;the customers will pay for these services in August.The company uses accrual basis accounting.The Service Revenue account should be credited for:
A)$2,400 in June,$1,500 in July,and $750 in August.
B)$2,400 in June,$0 in July,and $2,250 in August.
C)$0 in June,$2,400 in July,and $2,250 in August.
D)$0 in June,$3,900 in July,and $750 in August.

Accepted Answer

The requirement under accrual basis accounting is to record revenues when the performance obligation is satisfied.This means the company has done what it promised to do.No services were performed during June and,as a result,no revenue is recorded in that month.Services totaling $3,900 (or $1,500 + $2,400)would be credited to the Service Revenue account in July and $750 would be credited to the Service Revenue account in August.

Question 8

This month,a company performed $517,000 of services and incurred total expenses of $438,000.The company was paid in cash for all its services and paid cash for all its expenses.These transactions would cause:
A)revenues to increase by $517,000,expenses to increase by $438,000,and Retained Earnings to decrease by $79,000.
B)Cash to increase by $517,000,expenses to increase by $438,000,and Common Stock to increase by $79,000.
C)revenues to increase by $517,000,expenses to increase by $438,000,and Cash to increase by $79,000.
D)revenues to increase by $79,000,expenses to increase by $438,000,and Cash to increase by $517,000.

Accepted Answer

The summary entries to record these transactions would (1)increase the Cash account and increase the company's revenue accounts by $517,000 and (2)increase the company's expense accounts and decrease its Cash account by $438,000.As a result,the Cash account would increase by $79,000 (or increases of $517,000 − decreases of $438,000).Since revenues are greater than expenses,the resulting net income would increase (rather than decrease)Retained Earnings.

Question 9

During September,the Bug-B-Gone Company buys and pays for a six-month supply of pesticides in order to receive a bulk discount.The company uses accrual basis accounting.The cost of the pesticides is recorded:
A)immediately as an expense.
B)as a liability,which will later be reduced as the pesticides are used.
C)partially as an expense and partially as a liability.
D)as an asset,which will later be reduced as the pesticides are used.

Accepted Answer

It is common for businesses to pay for something that provides benefits only in future periods.Those costs are reported as assets because they benefit future periods;assets are reported on the balance sheet.For example,a company might buy pesticides now but not use them until the following six months.The pesticides are reported as an asset when purchased.The expense from using the pesticides will be reported as they are used.

Question 10

Which of the following is an expense of this period?
A)Costs of items used up this period but paid for next period
B)Costs of items paid for in this period but used up next period
C)Cost of land purchased and paid for this period
D)Repayment of debt from a loan in a prior period

Accepted Answer

Expenses are costs of operating the business,incurred to generate revenues in the period covered by the income statement.Expenses are reported when the company uses something in the current period.Expenses do not include the purchase of land (an asset)or the repayment of debt (a liability),both of which affect only the balance sheet.

Question 11

The expense recognition principle indicates:
A)where expenses should be presented on the income statement.
B)how expenses should be split between the income statement and the balance sheet.
C)the ordering of current assets and current liabilities on the balance sheet.
D)when costs are recognized as expenses on the income statement.

Accepted Answer

The expense recognition principle states that expenses should be recorded in the same period as the revenues they generate,not necessarily the period in which cash is paid for them.As a result,it indicates when costs are recognized as expenses on the income statement.

Question 12

Somerdale Corp.received an order from a customer on November 10.It manufactured the ordered items on November 15,shipped the goods on November 17,and received payment on December 2.Under the accrual basis of accounting,Somerdale should record revenue on:
A)November 10.
B)November 15.
C)November 17.
D)December 2.

Accepted Answer

Under the accrual basis of accounting,revenues are recorded when the performance obligation is satisfied.Typically,that occurs when goods are shipped to a customer,which in this case it would be November 17.

Question 13

Which of the following statements about the income statement is not correct?
A)Amounts received from customers for services performed in the current month would be revenues on the income statement.
B)Costs incurred in the current month but not paid as of the end of the month would be expenses on the income statement for the current month.
C)Amounts received from customers in payment of their accounts arising from service in the prior month would be revenues in the income statement for the current month.
D)Amounts received from customer as deposits for services to be rendered next month will not be recorded as revenues on the income statement for the current month.

Accepted Answer

The revenue recognition principle states that revenue is recorded when the performance obligation is satisfied and the expense recognition principle says expenses are reported in the same period as the revenues they helped to generate.Amounts received from customers in payment of their accounts arising from service in the prior month would be revenues in the income statement for the prior month when the services were performed,rather than in the current month,when payment was received.

Question 14

Melody's Piano School operations for the month of May were limited to the following transactions: Provided $800 of piano lessons to students who paid in cash.
Provided $200 of piano lessons on account.
Collected $600 from students who took piano lessons during April.
Paid April's piano rental bill of $200.
Received May's piano rental bill of $300 and set it aside for payment in June.
Assuming that the company uses cash basis accounting,what is net income for May?
A)$1,600.
B)$600.
C)$750.
D)$1,200.

Accepted Answer

Cash basis accounting net income = Cash receipts − Cash payments
= ($800 + $600)− $200 = $1,200

Question 15

When cash is paid for something that provides benefits only in future periods:
A)a liability must be recorded.
B)a journal entry does not need to be recorded at the time of the payment.
C)an asset must be recorded at the time of the payment.
D)an unearned expense must be recorded at the time of the payment.

Accepted Answer

It is common for businesses to pay for something that provides benefits only in future periods.Under the expense recognition principle,the expense from using these benefits is reported as an expense when the benefit is used to earn revenue,not in the current month,when the payment was made.Instead,an asset (such as Supplies,Prepaid Rent,or Prepaid Insurance)is recorded when the payment is made.

Question 16

Expenses include all of the following except:
A)using supplies.
B)making a payment on account.
C)paying for electricity used during the current period.
D)paying wages for production workers for work performed during the current period.

Accepted Answer

Expenses are costs of operating the business,incurred to generate revenues in the period covered by the income statement.Expenses are reported when the company uses something.Making a payment on account has no impact on expenses;it decreases Cash and Accounts Payable.

Question 17

Which of the following statements about accrual basis accounting is not correct?
A)It uses the revenue recognition principle.
B)It uses the expense recognition principle.
C)It is required for external accounting reports.
D)It requires the timing of cash receipts be in the same period as revenues are recognized.

Accepted Answer

The two basic accounting principles that determine when revenues and expenses are recognized under accrual basis accounting are called the revenue recognition and expense recognition principles.According to GAAP,the accrual basis is the only acceptable method for external reporting of income.All companies expect to receive cash in exchange for providing goods and services,but the timing of cash receipts does not dictate when revenues are recognized.

Question 18

A dance studio accepts $1,500 to provide a series of dance lessons to a youth group during the month of July.The studio decides to record the revenue in July.The studio incurs rent,utilities,and salaries expenses in July.The studio decides to record those expenses in August,when it pays for them.One or both of these decisions:
A)violate the expense recognition principle.
B)are an example of accrual accounting.
C)violate the revenue recognition principle.
D)violate both the expense recognition and revenue recognition principles.

Accepted Answer

Under accrual basis accounting,expenses are recognized in the same period as the revenues to which they relate.Expenses are reported when the company uses something in the current period.Recording the July rent,utilities,and salaries expenses in August violates the expense recognition principle.According to the revenue recognition principle,revenues should be recognized when the performance obligation is satisfied.Since the dance lessons will be provided in July,the related revenue should be recorded in July.

Question 19

Assume that accrual basis accounting is used.Which of the following errors would most likely lead to an overstatement of net income in the current year?
A)Recording revenue when the cash is collected next year although the performance obligation is satisfied in the current year.
B)Recording an expense when paid next year although it is incurred this year.
C)Failing to adjust the Deferred Revenue account for the portion of rent earned this year.
D)Recording revenue earned in the current year when cash is collected this year.

Accepted Answer

The expense recognition principle states that expenses should be recorded in the same period as the revenues they generate,not necessarily the period in which cash is paid for them.As a result,not recording an expense even though it was incurred this year would understate expenses and overstate net income for the current year.Not recording revenue even though it was earned would understate net income in the current year.Failing to adjust the Deferred Revenue account for the portion earned this year would also understate net income in the current year.Recording revenue earned in the current year would result in correctly stating net income.

Question 20

Assume accrual basis accounting is used.Which of the following statements about income statement accounts is correct?
A)Costs incurred to help generate revenue are only reported as expenses on the income statement if they are paid in cash in the same period as the revenue received.
B)Revenue accounts are shown after the amount of expense accounts on the income statement.
C)Revenue accounts include Cash,Accounts Receivable,and Deferred Revenue.
D)There is no Net Income account.

Accepted Answer

Net income,the excess of revenues over expenses,is a total on the income statement;it is not an account.

Quiz 3: The Income Statement

The prepayment of rent for the next three months (not including this month) :

On Time Computer Repair uses accrual basis accounting.A computer was repaired on July 15.The customer picked up the computer on August 1 and mailed the payment on August 5.On Time Computer Repair received the check in the mail on August 10.The revenue should be recognized on which date?

The expense recognition principle ("matching") matches:

During June,Parker's Lawn Service mows 100 lawns a week.Parker received payment in advance,during May,for these services.The company uses the accrual basis of accounting.Which financial statement is impacted by these transactions?

Your company receives advance payment in October for services that are provided during November.Which of the following statements is correct?

This month,a company performed $517,000 of services and incurred total expenses of $438,000.The company was paid in cash for all its services and paid cash for all its expenses.These transactions would cause:

During September,the Bug-B-Gone Company buys and pays for a six-month supply of pesticides in order to receive a bulk discount.The company uses accrual basis accounting.The cost of the pesticides is recorded:

Which of the following is an expense of this period?

The expense recognition principle indicates:

Somerdale Corp.received an order from a customer on November 10.It manufactured the ordered items on November 15,shipped the goods on November 17,and received payment on December 2.Under the accrual basis of accounting,Somerdale should record revenue on:

Which of the following statements about the income statement is not correct?

When cash is paid for something that provides benefits only in future periods:

Expenses include all of the following except:

Which of the following statements about accrual basis accounting is not correct?

Assume that accrual basis accounting is used.Which of the following errors would most likely lead to an overstatement of net income in the current year?

Assume accrual basis accounting is used.Which of the following statements about income statement accounts is correct?