Deck 3: The Income Statement

Question 1

If revenues are not growing faster than expenses,then net income will decrease.

Answer 1

True
Explanation:If revenues are increasing,but expenses are increasing even faster,then the amount of Net Income (Revenues − Expenses)will decrease.

Question 2

If the total of debits equals the total of credits on the trial balance,the accounting records may still contain errors.

Answer 2

True
Explanation:Even if debits equal credits on the trial balance,it is still possible that the wrong account was used,an entry was omitted or recorded twice,and/or the wrong amount was entered as both a debit and a credit.

Question 3

Which of the following would not be considered an operating activity?

A)Pay employees for work completed
B)Purchase supplies on account
C)Purchase equipment for cash
D)Sell goods to customers

Answer 3

C
Explanation:Paying employees,purchasing supplies,and selling goods to customers are all operating activities.The purchase of equipment is an investing activity.

Question 4

Dividing up the continuing life of a company into shorter periods is called the time period assumption.

Question 5

In general,the lower a company's net profit margin,the better the performance of the company.

Question 6

GAAP does not allow cash basis accounting to be used in external financial reports.

Question 7

Deferred Revenue is reported on the balance sheet as a liability.

Question 8

It is possible for a company to be profitable,yet not have enough cash to pay its bills.

Question 9

A net profit margin of 18.2% means that the company used 81.8 cents of each sales dollar to cover costs and expenses.

Question 10

Under the five-step revenue recognition model,a contract can be written,verbal,or implied.

Question 11

The period of time between buying assets to be sold to customers and collecting cash from customers is the operating cycle.

Question 12

Expenses are the costs of operating a business that are paid for in the period covered by the income statement.

Question 13

Which of the following is an operating activity?

A)Billing customers for services rendered but not yet paid for
B)Paying off a loan to the bank
C)Purchasing equipment for cash
D)Receiving cash investments from owners

Question 14

If a company decides to record an expenditure made this period as an expense,when it should have been recorded as an asset,net income will be overstated in the current period as a result.

Question 15

When accrual basis accounting is used,net income equals the amount of cash generated by the business.

Question 16

A company does not need to record the receipt of a bill for utilities used during this year if the company will not pay the bill until next year.

Question 17

When revenues exceed expenses in a period,stockholders' equity will increase.

Question 18

A performance obligation is any agreement between a seller and a customer that creates legal rights and obligations.

Question 19

In the fifth step of the revenue recognition model,"when" refers to "over a period of time" (e.g. ,monthly)whereas "as" refers to "a point in time" (e.g. ,at delivery).

Question 20

Net income is based on estimates.

Question 21

Which of the following will result in an increase in revenue?

A)Borrowing $10,000 from a bank
B)Stockholders investing $10,000 in a company
C)Selling concert tickets for $10,000 four months before the performance
D)Selling $10,000 of groceries to customers

Question 22

Which activity is not part of the operating cycle?

A)Repaying a bank loan used to purchase manufacturing equipment
B)Purchasing goods from suppliers for resale to customers
C)Paying employees for hours worked
D)Collecting cash from sales on account made last month

Question 23

The financial statement that reports revenues and expenses is the:

A)statement of retained earnings.
B)income statement.
C)balance sheet.
D)statement of cash flows.

Question 24

The primary source of revenues and expenses comes from:

A)financing activities.
B)investing activities.
C)operating activities.
D)other activities.

Question 25

Which of the following represents an account rather than a subtotal?

A)Net Income
B)Total Revenues
C)Total Expenses
D)Service Revenue

Question 26

Which of the following September transactions would impact the September income statement?

A)Collecting cash related to an account receivable
B)Providing services to new customers
C)Purchasing supplies
D)Issuing stock to new shareholders

Question 27

Which of the following line items appear on an income statement?

A)Inventory
B)Revenues
C)Accounts Receivable
D)Salaries and Wages Payable

Question 28

During the year,Sand,Inc.had $120,000 in revenues,$48,000 in expenses,and paid $3,600 in dividends.Net income equals:

A)$75,600.
B)$68,400.
C)$120,000.
D)$72,000.

Question 29

Which of the following is an operating activity?

A)Repaying a bank loan
B)Paying a dividend to owners
C)Purchasing a new building
D)Purchasing goods to be offered for sale

Question 30

Which of the following items is reported on the income statement as an expense?

A)This month's cash sales
B)The purchase of supplies
C)This month's utility bill
D)The purchase of land

Question 31

Income Tax Expense appears on the ________,while Income Tax Payable is a(n):

A)income statement;liability on the balance sheet.
B)balance sheet;liability on the income statement.
C)income statement;expense on the income statement.
D)balance sheet;expense on the balance sheet.

Question 32

A net loss results when:

A)assets are greater than liabilities.
B)revenues are less than expenses.
C)revenues are greater than expenses.
D)cash paid is less than cash received.

Question 33

Which of the following line items appear on an income statement?

A)Accounts Payable
B)Equipment
C)Utilities Expense
D)Retained Earnings

Question 34

Dividing the long life of a company into shorter periods such as months,quarters,or years for reporting purposes is called the:

A)time period assumption.
B)expense recognition principle ("matching").
C)revenue recognition principle.
D)separation principle.

Question 35

The ________ takes stock of what exists at a point in time whereas the ________ depicts a flow of what happened over a period of time.

A)income statement;balance sheet
B)balance sheet;income statement
C)statement of cash flows;balance sheet
D)statement of retained earnings;income statement

Question 36

Cobalt Co.'s income statement shows Service Revenue of $64,000,Salaries and Wages Expense of $40,000 and net income of $1,600.The other expenses on Cobalt's income statement must equal:

A)$22,400.
B)$24,000.
C)$105,600.
D)$25,600.

Question 37

Which of the following items is not a specific account in a company's chart of accounts?

A)Income Tax Expense
B)Sales Revenue
C)Deferred Revenue
D)Net Income

Question 38

If a company incorrectly records cash received for services to be provided in the future with a debit to Cash and credit to Sales Revenue,how will this error affect net income for the current period?

A)Net income will be too high.
B)Net income will be too low.
C)Net income will not be affected by this error.
D)Net income will be too high in the following period.

Question 39

If a company incorrectly records a payment as an asset instead of an expense,how will this error affect net income in the current period?

A)Net income will be too high.
B)Net income will be too low.
C)Net income will not be affected by this error in the current period,but will be too low in a later period.
D)Net income will never be affected by this error because assets are reported on the balance sheet.

Question 40

Which of the following statements about the income statement and income statement accounts is correct?

A)The income statement reports the financial position of a company at a point in time.
B)Income statement accounts are permanent accounts,while balance sheet accounts are temporary accounts.
C)Income statement accounts are temporary accounts,while balance sheet accounts are permanent accounts.
D)The income statement reports the cash received and paid during the period.

Question 41

The fact that any problems a seller has in collecting amounts due from customers is accounted for separately is implied in the language of:

A)step 3 "entitled to."
B)step 5 "when (or as)each performance obligation is satisfied."
C)step 1 "it can be written,verbal,or merely implied."
D)step 2 "transferring control of goods or services to a customer."

Question 42

The Rainbow House Painting Company has been contracted to paint a house for $3,600.One-half of that amount will be paid up front;the rest will be paid upon satisfactory completion.Rainbow should recognize the revenue when:

A)the performance obligation is identified.
B)the first payment is received.
C)the contract is identified.
D)the performance obligation is satisfied.

Question 43

Which of the following identifies,in the correct order,steps in the five-step model for reporting revenue?

A)Determine the transaction price;identify the seller's performance obligation(s);identify the contract.
B)Allocate the transaction price to the performance obligation(s);determine the transaction price;recognize revenue when (or as)each performance obligation is satisfied.
C)Identify the contract;determine the transaction price;identify the seller's performance obligation(s).
D)Identify the seller's performance obligation(s);determine the transaction price;recognize revenue when (or as)each performance obligation is satisfied.

Question 44

During September,By the Book Co.collected $1,800 cash from a customer for services to be provided during November.Which of the following statements about this transaction is correct?

A)$1,800 of revenue should be recorded in September.
B)$900 of revenue should be recorded in September and $900 in November.
C)$1,800 of revenue should be recorded in November.
D)No revenue should be recorded for these events because they relate only to the balance sheet.

Question 45

During February,Blake Building Co.billed a customer $4,500 for services performed during February.During March,Blake collected the $4,500.Which of the following statements about this transaction is correct?

A)$4,500 of revenue should be recorded in February.
B)$2,250 of revenue should be recorded in February and $2,250 in March.
C)$4,500 of revenue should be recorded in March.
D)No revenue should be recorded for these events because they relate only to the balance sheet.

Question 46

If more than one performance obligation exists,the total contract price:

A)is split by referring to the stand-alone price of each part sold separately.
B)is recognized as revenue once one of the performance obligations is satisfied.
C)is recognized as Deferred Revenue and later recognized as Revenue when the performance obligations are satisfied.
D)is allocated by contract,first to written contracts,then to verbal contracts,and finally to implied contracts.

Question 47

The Fastbank Motorcycle Service Company wins a $10 million bid to provide the repair services for a recall on a popular brand of motorcycles.No money is exchanged.The repair services are expected to be performed early next year.Which of the steps of the five-step model for revenue recognition is not yet complete?

A)Determine the transaction price.
B)Identify the seller's performance obligation(s).
C)Identify the contract.
D)Recognize revenue when (or as)each performance obligation is satisfied.

Question 48

During June,the Grass Is Greener Company mows 100 lawns a week;the company bills customers and full payment is due by July 15.The company uses the accrual basis of accounting.How will these events affect the company's financial statements?

A)In June,an asset and a liability account will both increase.
B)In June,an asset and a revenue account will both increase.
C)In July,an asset account will increase and a liability account will decrease.
D)In July,a liability account will decrease and a revenue account will increase.

Question 49

Which of the following statements about the income statement of a company that was formed 10 years ago is correct?

A)Reports a Net Loss for the year if expenses are more than revenues.
B)Reports the financial effects of activities that have occurred since the company's inception.
C)Reports the amount of the increase in stockholders' equity this year as a result of the company's operations.
D)Reports Net Income,which is an account in the ledger.

Question 50

Which of the following statements about cash basis accounting and accrual basis accounting is correct?

A)Net income is always larger under accrual basis accounting than cash basis accounting.
B)GAAP does not require the use of accrual basis accounting for external reporting.
C)Accrual basis accounting and cash basis accounting will always produce the same amount of net income.
D)Accrual basis accounting provides a better measure of operating performance than cash basis accounting.

Question 51

When cash is received in advance of a performance obligation being satisfied,a(n)________ called ________ is recorded.

A)liability;Deferred Revenue
B)asset;Deferred Revenue
C)liability;Accounts Receivable
D)asset;Accounts Receivable

Question 52

Reporting revenues when they are earned and expenses when they are incurred is called ________ basis accounting.

A)accrual
B)cash
C)expense recognition
D)cost

Question 53

Which of the following would not be reported on the income statement?

A)Utilities expense in the amount of a bill received for utilities used during the current period but unpaid as of the end of the period.
B)Rent expense in the amount of rent paid during the period for use of a storage facility in the current period.
C)Revenue for services provided to customers who promise to pay in the next period.
D)Cost of land purchased with cash for future use.

Question 54

Which of the following statements about accrual basis accounting is correct?

A)If a company uses accrual basis accounting,the company should not record revenue until payments are actually received.
B)If a company uses accrual basis accounting,the company should record expenses in the same period as the revenues they generate.
C)IFRS does not allow accrual basis accounting for external reporting of income.
D)The items reported on the income statement continue to have an impact beyond the current period,whereas the items reported on the balance sheet impact just the current period.

Question 55

Revenues are recognized when:

A)a contract is identified.
B)a seller's performance obligations are identified.
C)a seller's performance obligations are satisfied.
D)a transaction price has been determined and allocated.

Question 56

If an apartment leasing company receives the rent for January 2018 from a tenant in December 2017,this will be reported by the leasing company as:

A)revenue in 2017.
B)an expense in 2017.
C)a liability in 2017.
D)stockholders' equity in 2017.

Question 57

In its first year of business,Declan Industries earned $175,000 of revenues of which $140,000 was collected.It also incurred $157,500 in expenses for which $140,000 was paid.Which of the following statements are correct?

A)Declan should use cash basis accounting for external reporting purposes as required under GAAP and IFRS.
B)Declan should report net income of $17,500 for external reporting purposes.
C)Declan should report $0 net income for external reporting purposes.
D)Declan should report net income of $35,000 for external reporting purposes.

Question 58

During 2018,a company provided services for cash of $33,600 and services on credit of $24,000.The company collected accounts receivable of $12,800 and incurred operating expenses of $36,320,$22,400 of which were paid during the year.The amount of net income (loss)for the year is:

A)$21,280.
B)$2,720.
C)$36,320.
D)$10,080.

Question 59

Which of the following situations results in deferred revenue?

A)Collected $100 from a customer who purchased goods a month ago.
B)Received an order from a customer who will purchase and pay for goods in two weeks.
C)Sold goods for $100 today with payment due from the customer in 30 days.
D)Received $100 cash from a customer for an order of goods to be shipped next month.

Question 60

A company's revenue recognition policy:

A)affects the income statement but not the balance sheet.
B)defines when its revenue should be collected.
C)is usually described in the notes to a company's financial statements.
D)states that revenues should not be recorded until payments are received from customers.

Question 61

Under the accrual basis of accounting,the ________ recognition ("matching")principle requires that expenses be recognized in the same period as the related revenues.

A)expense
B)revenue
C)cost
D)separate

Question 62

During April,Ballarat,Inc.earned $1,680,of which $1,200 was collected,and had expenses of $960,of which $840 was paid.Its net income equals:

A)$720 using accrual accounting versus $360 using cash basis.
B)$360 using accrual accounting versus $720 using cash basis.
C)$840 using accrual accounting versus $240 using cash basis.
D)$240 using accrual accounting versus $840 using bash basis.

Question 63

Deferred Revenue is a(n):

A)expense.
B)asset.
C)revenue.
D)liability.

Question 64

In accordance with the expense recognition principle,expenses are recorded in the period when the:

A)related revenues are recorded.
B)cash is paid.
C)related assets are recorded.
D)contract and performance obligations are identified.

Question 65

Murphy,Inc.paid $9,600 cash for insurance in June that provides coverage for six months,from July through December.How much expense should be recognized in June to be in accordance with generally accepted accounting principles?

A)No expense should be recognized in June.
B)$9,600
C)$1,600 ($9,600 × 1/6 for the month of June)
D)$4,800

Question 66

In November,Ellie Company bought supplies on account for $480,with payment due to the supplier in 90 days.The supplies were used for products made and delivered in November.In which month should Ellie Company record the cost of the supplies as an expense?

A)One-third should be expensed in each month from November through the January payment date.
B)January.
C)November.
D)December

Question 67

Which of the following statements about cash basis accounting and accrual basis accounting is correct?

A)Using the accrual basis of accounting,if payment is received before delivery of goods or a service,revenue is recorded at the time the payment is received.
B)Using the accrual basis of accounting,if payment is received after delivery of goods or a service,an asset is recorded at the time the good or service was delivered.
C)Using the cash basis of accounting,if payment is received before delivery of goods or a service,net income is affected when goods or services are delivered.
D)Using the cash basis,if payment is received after delivery of goods or a service,deferred revenue is recorded.

Question 68

What type of account is Accounts Receivable?

A)Asset
B)Liability
C)Expense
D)Revenue

Question 69

Supplies are expensed when:

A)purchased.
B)paid for.
C)used.
D)purchased on account.

Question 70

When employees work for a company in June but are not paid until July,the June financial statements will include ________ on the:

A)Salaries and Wages Payable;balance sheet
B)Prepaid Salaries and Wages;income statement
C)Salaries and Wages Payable;income statement
D)Prepaid Salaries and Wages;balance sheet

Question 71

During May,2018,Sugar Inc.performs consulting services.The client does not pay Sugar until June,2018.

A)Using the accrual basis of accounting,the revenue is reported in June 2018.
B)Using the cash basis of accounting,the revenue is reported in May 2018.
C)Using the accrual basis of accounting,the revenue is reported in May 2018.
D)Using the accrual basis of accounting,the revenue is reported when Sugar's expenses are paid.

Question 72

Which of the following will have no effect on total assets?

A)Billing a customer for work performed during the current month
B)Receiving cash from a customer to pay for a previously recorded account receivable
C)Receiving cash from a customer for work to be performed next month
D)Receiving cash from a customer for work performed today

Question 73

Which of the following statements about cash basis accounting and accrual basis accounting is correct?

A)If payment is received at the same time a service is provided,it does not matter whether cash basis accounting or accrual basis accounting is used;both would record the transaction with the same journal entry.
B)The cash basis of accounting works best when a lengthy delay exists between the timing of cash flows and the underlying business activities to which they relate.
C)If a company receives a bill for rent for the period and decides to delay payment,the rent will not be recorded as an expense if accrual basis accounting is used.
D)If the cash basis of accounting is used,the Deferred Revenue account is increased when a company receives a deposit in advance of services to be performed by the company.

Question 74

The expense recognition principle ("matching")dictates:

A)where on the income statement expenses should be presented.
B)when revenues are recognized on the income statement.
C)the ordering of current assets and current liabilities on the balance sheet.
D)when costs are recognized as expenses on the income statement.

Question 75

Time Warner is a publishing and communications company,specializing in magazines,cable television operations,television program development,and other telecommunication services.Its financial statements show $37,666 in an account called Deferred Revenue,which represents amounts that customers have paid in advance of receiving magazines,cable television,and internet services.What type of account is this and on what statement is it reported?

A)Asset;Balance Sheet
B)Liability;Balance Sheet
C)Revenue;Balance Sheet
D)Revenue;Income Statement

Question 76

Fireside,Inc.uses accrual basis accounting.Its balance sheets reported Accounts Receivable of $12,000 at the end of its first year and $18,000 at the end of its second year.Its income statement reported Sales Revenue of $120,000 in its second year.What would Fireside's revenues have been if it had used cash basis accounting?

A)$120,000
B)$114,000
C)$126,000
D)$12,000

Question 77

A business purchased supplies for cash.The business will decrease its Cash account and:

A)increase its Supplies account.
B)decrease its Supplies account.
C)increase its Supplies Payable account.
D)decrease stockholder's equity by recording Supplies Expense for the amount of the payment.

Question 78

The entry to record the payment of accounts payable:

A)decreases assets.
B)increases expenses.
C)increases liabilities.
D)increases stockholder's equity.

Question 79

In its first year of operations,Jetway Airlines incurred and paid Salaries Expense of $40 million.On December 31,it accrued an additional Salaries Expense of $2 million.What should Jetway report in the income statement and balance sheet for its first year ended December 31?

A)Income statement: Salaries and Wages Expense $42 million;Balance sheet: Salaries and Wages Payable $2 million
B)Income statement: Salaries and Wages Expense $40 million;Balance sheet: Salaries and Wages Payable $2 million
C)Income statement: Salaries and Wages Expense $40 million;Balance sheet: Salaries and Wages Payable $0
D)Income statement: Salaries and Wages Payable $2 million;Balance sheet: Salaries and Wages Expense $42 million

Question 80

If the cash is received before the related goods or services are delivered,which of the following will be recorded?

A)Deferred Revenue,a liability.
B)Accounts Receivable,an asset.
C)Pre-earned Revenue,which increases Retained Earnings.
D)Service Revenue,which increases Retained Earnings.