Deck 3: Operating Decisions and the Income Statement

Question 1

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

Answer 1

True
Explanation: Earnings per share is a ratio widely used in evaluating a company's operating performance. This ratio is required to be reported on the income statement or in the notes to the financial statements.

Question 2

Under accrual accounting,interest expense would be recognized on the income statement when the interest has accrued with the passage of time even though cash has not been paid.

Answer 2

True
Explanation: In accrual accounting expenses are recognized when they are incurred.

Question 3

The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer regardless of the timing of the cash collection from customers.

Answer 3

True
Explanation: Under the accrual accounting basis the revenue principle states that revenues are recognized when earned, which usually occurs at the time goods or services are delivered.

Question 4

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.

Question 5

Investment income is reported on the income statement as operating revenues and therefore increases operating income.

Question 6

The matching principle requires expenses to be recorded on the income statement when incurred in generating revenues.

Question 7

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

Question 8

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

Question 9

Using cash to purchase office supplies which will be consumed later results in an increase in expenses and a decrease in assets as of the time of purchase.

Question 10

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

Question 11

Revenue is recognized at the time that cash is collected from a customer for services to be provided in the future.

Question 12

The time period assumption implies that the life of a business entity can be reported in time periods such as quarters and years.

Question 13

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

Question 14

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

Question 15

A gain resulting from the sale of plant and equipment does not create operating income on the income statement.

Question 16

Under accrual accounting,revenues are recognized when earned and expenses are recognized when incurred.

Question 17

Unearned revenues are reported as liabilities on the balance sheet.

Question 18

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

Question 19

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

Question 20

Salary expense is recognized on the income statement when the salaries are paid rather than when the employee provides the services.

Question 21

The total asset turnover ratio measures sales dollars generated per dollar of assets and is a measure of efficient management of assets.

Question 22

Which of the following describes the reporting of interest expense on the income statement?

A)It is reported as an operating expense.
B)It is a component of operating income.
C)It is deducted from operating income.
D)It is added to operating income.

Question 23

Which of the following statements is correct?

A)Dividend income is a component of operating income.
B)Operating income is decreased by the loss from the sale of plant assets.
C)A gain on the sale of a stock investment doesn't increase operating income.
D)Income before taxes doesn't change when a gain results from the sale of plant assets.

Question 24

Which of the following best describes the time period assumption?

A)It assumes we value a business as of the end of every month.
B)It is the cutoff point for asset and liability recognition.
C)It implies that financial statements are prepared at the end of a business entity's operating cycle.
D)It assumes we divide the long life of a business into a series of shorter time periods for accounting and reporting purposes.

Question 25

Purchasing a six-month insurance policy results in a debit to insurance expense and a credit to cash as of the date of purchase.

Question 26

Which of the following is not reported as an operating expense on the income statement?

A)Salaries expense
B)Rent expense
C)Interest expense
D)Advertising expense

Question 27

Which of the following businesses would most likely not report cost of goods sold on their income statement?

A)A law firm
B)An automobile dealership
C)A pizza restaurant
D)A computer chip manufacturer

Question 28

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

Question 29

The income statement needs to be prepared prior to preparation of the balance sheet.

Question 30

Which of the following statements is false?

A)The income statement covers a period of time.
B)A loss on the sale of plant and equipment is considered a peripheral activity and is not reported on the income statement.
C)Rent expense is a component of operating income.
D)Interest expense isn't a component of operating income.

Question 31

Which of the following best describes the operating cycle?

A)It is the length of the manufacturing process.
B)It is the time that elapses from the purchase of inventory on account to the sale of inventory on account.
C)It is the time that elapses from the completion of the manufacturing process to the cash collection from sale of the manufactured goods.
D)It is the time that elapses from the cash payment to suppliers to collection of cash from customers.

Question 32

Which of the following would lengthen the operating cycle?

A)Faster collection of accounts receivables.
B)Selling inventory in a shorter period of time.
C)Increasing the number of customers who paid cash.
D)Relaxing credit terms and allowing customers more time to pay.

Question 33

The statement of stockholders' equity links the income statement to the balance sheet.

Question 34

Revenue accounts have credit balances because they result in increases in stockholders' equity.

Question 35

Recording revenues on the income statement which 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.

Question 36

The total asset turnover ratio is computed by dividing sales revenue by average total assets.

Question 37

The statement of cash flows is prepared last and is the only financial statement which shows the cash inflows and outflows from transactions.

Question 38

The primary difference between revenues and gains is

A)gains are increases in net assets from peripheral activities while revenues are increases from ongoing activities.
B)revenues increase operating income and gains have no impact on net income.
C)revenues cause increases in net assets as a result of peripheral activities and gains cause increases through ongoing activities.
D)gains result in an increase in operating income whereas revenues do not impact operating income.

Question 39

When the board of directors declares a cash dividend either retained earnings or the dividends account can be debited.

Question 40

Which of the following costs is most likely to be the largest expense reported on the income statement of a merchandiser such as Wal-Mart?

A)Salaries expense
B)Cost of goods sold
C)Advertising expense
D)Income tax expense

Question 41

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

A)The sale of plant and equipment at a gain.
B)Collection of cash from a customer for services to be provided at a later date.
C)Providing a service to a customer on account.
D)The receipt of cash dividends from an investment.

Question 42

Lantz Company has provided the following information:
Cash sales totaled $255,000.
Credit sales totaled $479,000.
Cash collections from customers for services yet to be provided totaled $88,000.
A $22,000 loss from the sale of plant and equipment occurred.
Interest income was $7,700.
Interest expense was $19,900.
Cost of goods sold was $336,000.
Rent expense was $36,000.
Salaries expense was $49,000.
Other operating expenses totaled $79,000.
How much was Lantz's income before income taxes?

A)$553,800
B)$465,800
C)$487,800
D)$531,800

Question 43

Which of the following statements is false?

A)A liability is created when cash is received prior to delivery of the goods or services.
B)Revenue is recognized at the time of delivery of the goods or services if cash is received.
C)Revenue isn't recognized at the time of delivery of goods and services if cash is received after delivery of the goods and services.
D)Collecting cash after delivery of a good or service does not create revenue on the income statement as of the date of collection.

Question 44

Which of the following does not correctly describe the cash basis of accounting?

A)It is not accepted for external reporting purposes.
B)Revenues are recognized when cash is collected from customers.
C)Expenses are recognized when they are paid for.
D)Cash payments for long-term assets are recognized as an expense at the time of payment.

Question 45

Which of the following journal entries is prepared when a customer pays cash prior to delivery of the goods or services?

A) Cash
$\quad$ Revenues
B) Cash
$\quad$ Unearned revenues
C) Unearned revenues
$\quad$$\quad$ Cash
D) Cash
$\quad$ Accounts receivable

Question 46

Smith Corporation has provided the following information:
Cash sales totaled $125,000.
Credit sales totaled $279,000.
Cash collections from customers for services yet to be provided totaled $38,000.
An $11,000 gain from the sale of plant and equipment occurred.
Interest income totaled $7,700.
How much were Smith's operating revenues?

A)$404,000
B)$411,700
C)$442,000
D)$460,700

Question 47

Which of the following statements does not properly describe the accrual basis of accounting?

A)Expenses are recognized when incurred regardless of the timing of cash flows.
B)Revenues are recognized when incurred regardless of the timing of cash flows.
C)Generally accepted accounting principles require use of the accrual basis.
D)It should not be used when providing financial statements to external decision makers.

Question 48

A landlord collected $5,000 cash from a tenant for December 2011's rent but the tenant's rent for December is $8,000.Which of the following is true with respect to the landlord's financial statements?

A)$8,000 would be reported on the statement of cash flows.
B)$8,000 would appear on the balance sheet as rent receivable.
C)$8,000 would appear on the income statement as rent revenue earned.
D)$5,000 would appear on the balance sheet as prepaid rent.

Question 49

Which of the following best describes operating revenues?

A)They are increases in net assets as a result of peripheral transactions.
B)They are decreases in net assets as a result of ongoing operations.
C)They are increases in net assets as a result of ongoing operations.
D)They are decreases in net assets as a result of peripheral transactions.

Question 50

Which of the following best describes the matching principle?

A)It requires expenses to be recorded when they are paid for.
B)It requires expenses to be recorded when incurred to generate revenues.
C)It requires expenses to be recorded consistent with the cash basis of accounting.
D)It does not allow expenses to be recorded if they are incurred prior to being paid for.

Question 51

Which of the following statements is false?

A)An expense is a cost incurred to generate revenues.
B)Expenses are reported on the income statement as they are incurred.
C)Revenues are reported on the income statement as they are earned.
D)Revenues result in an increase in net assets, net income, and contributed capital.

Question 52

The following information has been provided by Hable Company:
Advertising expense $9,900;
Interest expense $3,700;
Rent expense $12,000;
Loss on sale of plant and equipment $5,700;
Cost of goods sold $21,300;
Depreciation expense $7,100.
How much were Hable's operating expenses?

A)$50,300
B)$54,000
C)$59,700
D)$43,200

Question 53

During 2010,Sigma Company earned service revenues amounting to $700,000,of which $630,000 was collected in cash; the balance will be collected in January 2011.What amount should the 2010 income statement report for service revenues?

A)$630,000
B)$700,000
C)$70,000
D)$570,000

Question 54

Which of the following expenses has no impact on operating income?

A)Income tax expense
B)Cost of goods sold
C)Depreciation expense
D)Rent expense

Question 55

Which of the following journal entries is prepared when a customer pays cash subsequent to delivery of goods or services?

A) Cash
$\quad$ Revenues
B) Cash
$\quad$ Unearned revenues
C) Unearned revenues
$\quad$$\quad$ Cash
D) Cash
$\quad$ Accounts receivable

Question 56

Which of the following is not criteria pertaining to the revenue principle?

A)The goods or services have been delivered.
B)The selling price is fixed or determinable.
C)Collection is reasonably assured.
D)The cash payment has been received.

Question 57

Which of the following correctly describes the impact of collecting cash from customers for services to be provided in the future?

A)Assets and stockholders' equity increase.
B)Assets and revenues increase.
C)Assets and liabilities increase.
D)Assets and operating income increase.

Question 58

Yelena Company received cash from a customer in advance of providing the service to the customer.Which of the following does not accurately describe the impact on the financial statements when Yelena later provides the service?

A)Liabilities are decreased.
B)Operating income increases.
C)Retained earnings increases.
D)Assets are increased.

Question 59

Colby Corporation has provided the following information:
Operating revenues were $199,700.
Operating expenses were $111,000.
Interest expense was $9,200.
Gain from sale of plant and equipment was $3,300.
Dividend payments to Colby's stockholders were $7,700.
Income tax expense was $36,000.
How much was Colby's net income?

A)$39,100
B)$48,300
C)$52,700
D)$46,800

Question 60

Lantz Company has provided the following information:
Cash sales totaled $255,000.
Credit sales totaled $479,000.
Cash collections from customers for services yet to be provided totaled $88,000.
A $22,000 loss from the sale of plant and equipment occurred.
Interest income was $7,700.
Interest expense was $19,900.
Cost of goods sold was $336,000.
Rent expense was $36,000.
Salaries expense was $49,000.
Other operating expenses totaled $79,000.
How much was Lantz's operating income?

A)$221,800
B)$322,000
C)$199,800
D)$234,000

Question 61

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

A)The customer has paid for the goods or services.
B)Delivery of goods or performance of service has occurred or is scheduled to occur.
C)The price is fixed or determinable.
D)The customer has signed a contract.

Question 62

A company purchased supplies for cash which will be consumed during future months.Which of the following correctly describes the impact of the supplies purchase on the financial statements?

A)Total assets will remain unchanged.
B)Total assets will decrease.
C)Operating expenses will increase.
D)Operating income will decrease.

Question 63

Boone's Cleaning Service performed cleaning services during December,2010,but had not collected any cash from its customers as of December 31,2010.What impact did performing these services have on the accounting equation?

A)The service increased assets and increased liabilities.
B)The service increased assets and increased stockholders' equity.
C)The service increased assets and decreased stockholders' equity.
D)The service decreased liabilities and decreased stockholders' equity.

Question 64

A company purchased supplies for cash which will be consumed during future months.Which of the following does not correctly describe the impact on the financial statements when the supplies are used during future months?

A)Total assets will remain unchanged.
B)Total assets will decrease.
C)Operating expenses will increase.
D)Operating income will decrease.

Question 65

Which of the following statements is correct?

A)Expense accounts result in decreases in net income and stockholders' equity and therefore have credit balances.
B)Revenue accounts result in increases in net income and stockholders' equity and therefore have debit balances.
C)Loss accounts result in decreases in net income and stockholders' equity and therefore have debit balances.
D)Gain accounts result in increases in net income and stockholders' equity and therefore have debit balances.

Question 66

A company receives a $50,000 cash deposit from a customer on October 15 but will not deliver the goods until November 20.Which of the following statements is true?

A)Cash will be reported on the statement of cash flows for the month of November.
B)Revenue will be recorded and reported on the income statement for October.
C)A liability will be reported on the balance sheet at the end of October.
D)A prepaid asset will be reported on the balance sheet at the end of October.

Question 67

McNeil Company owed its employees for services performed and recorded a liability for the wages owed the employees.Which of the following correctly describes the impact on the financial statements when the employee wages are subsequently paid?

A)Operating expenses are increased.
B)Retained earnings decreases.
C)Operating income does not change.
D)Total assets remain the same.

Question 68

During 2010,Sensa Corporation incurred operating expenses amounting to $100,000 of which $75,000 was paid in cash; the balance will be paid during 2011.Which of the following is correct for the 2010 year-end balance sheet?

A)Stockholders' equity decreases $75,000 and assets decrease $75,000.
B)Assets decrease $100,000 and stockholders' equity decreases $100,000.
C)Assets decrease $100,000, liabilities increase $25,000, and stockholders' equity decreases $100,000.
D)Stockholders' equity decreases $100,000, assets decrease $75,000, and liabilities increase $25,000.

Question 69

A company purchased $20,000 of inventory during February and will pay for it during March.Which of the following statements is false assuming the inventory was sold during March?

A)The company's accounts payable will include the $20,000 on the February month-end balance sheet.
B)The statement of cash flows will report an operating cash outflow of $20,000 during March.
C)The income statement will report cost of goods sold of $20,000 during February.
D)The company's inventory will include the $20,000 on the February month-end balance sheet.

Question 70

Which of the following correctly applies the revenue recognition principle?

A)Recording revenue in December 2009 for units manufactured but not yet sold to customers.
B)Recording cash received in advance from customers as revenue when the product is not yet shipped.
C)Not recording interest earned in 2009 until the cash is received in 2010.
D)Recording revenue in December 2009 for units sold but not yet paid for in full.

Question 71

Which of the following journal entries is correct when a company has incurred interest expense but has not yet paid the interest?

A) Interest expense
$\quad$$\quad$ Operating income
B) Interest expense
$\quad$$\quad$ Interest payable
C) Interest payable
$\quad$$\quad$ Interest expense
D) Retained earnings
$\quad$$\quad$ Interest expense

Question 72

Which of the following is correct when land costing $20,000 is sold for $29,000? The land was a component of plant and equipment on the balance sheet.

A)Revenues are debited for $29,000.
B)Cost of goods sold is credited for $20,000.
C)Gain on sale of land is credited for $9,000.
D)Operating income increases $29,000.

Question 73

Which of the following journal entries correctly records the receipt of a utility bill which will be paid for in later weeks?

A) Utilities payable
$\quad$$\quad$ Utilities expense
B) Utilities expense
$\quad$$\quad$ Utilities payable
C) Utilities expense
$\quad$$\quad$ Retained earnings
D) Retained earnings
$\quad$$\quad$ Utilities payable

Question 74

Which of the following statements is false?

A)Expense accounts have a debit balance.
B)Revenue accounts have a credit balance.
C)Gain accounts have a credit balance.
D)Loss accounts have a credit balance.

Question 75

Which of the following accounts normally have a debit balance?

A)Prepaid expenses, wages payable, and dividends.
B)Cash, utilities expense, and accounts receivable.
C)Retained earnings, cost of goods sold, and wages expense.
D)Utilities expense, prepaid expenses, and wages payable.

Question 76

Which of the following journal entries correctly records a transaction where services were provided to a customer on account?

A) Cash
$\quad$ Revenues
B) Unearned revenue
$\quad$ Revenues
C) Accounts receivable
$\quad$$\quad$ Revenues
D) Revenues
$\quad$ Unearned revenues

Question 77

Which of the following liability accounts is likely to be satisfied without a future cash payment?

A)Wages payable
B)Unearned subscriptions revenue
C)Accounts payable
D)Taxes payable

Question 78

Which of the following accounts normally have a credit balance?

A)Unearned revenues; Prepaid rent; Revenues.
B)Revenues; Expenses; Contributed capital.
C)Revenues; Inventory; Unearned revenue.
D)Notes payable; Retained earnings; Revenues.

Question 79

Which of the following is not a proper application of the revenue principle?

A)Recording the sale of merchandise on credit as sales revenue.
B)Recording rent received in advance as unearned rent revenue.
C)Recording interest revenue when cash is collected rather than when earned.
D)Reducing the unearned service revenue account for service revenue performed at the end of the accounting period.

Question 80

Which of the following is an example of revenue or expense to be recognized in the current period's income statement?

A)Cash received from a client before the service is provided.
B)Inventory being held by a retail store.
C)Wages owed to employees who worked during the period.
D)Cash collected from an accounts receivable.