Exam 3: Operating Decisions and the Accounting System

Which of the following correctly applies the revenue realization principle?

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

Which of the following accounts does not have a credit balance?

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.

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

The revenue realization principle requires four conditions to be met. Which of the following is one of the four conditions?

Describe the difference(s) with respect to the cash basis of accounting and the accrual basis of accounting.

The following income statement was reported for Bauer Inc. for the first year of operations ending December 31, 2014 reported (in thousands of dollars): Sales revenue \ 24,500 Expenses: Cost of Sales \ 12,100 Salaries and Wages 5,300 Rent 900 Utilities 500 Miscellaneous Total Expenses Income before taxes 5.100 Income tax expense Net income \ 3.315 Requirement: A. Calculate net profit margin. B. Calculate earnings per share if there are 200,000 weighted average shares of common stock outstanding.

Boone's Cleaning Service performed cleaning services during December 2014, but had not collected any cash from its customers as of December 31, 2014. What impact did performing these services have on the accounting equation?

World Services Inc. has provided the following information pertaining to the month ended October 31, 2014: Sales revenue \ 100,000 Supplies expense \ 1,500 Interest expense 6,900 Rent expense 4,000 Cost of goods sold 60,000 Salaries expense 9,500 Dividends paid 5,000 Utilities expense 1,100 Advertising expense 4,500 Loss on sale of land 3,200 Dividends declared 7,100 Income tax expense 3,800 Unearned revenues 6,100 Prepare an income statement through operating income for the month ended October 31, 2014.

Which of the following statements is false?

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

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

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