Deck 3: Operating Decisions and the Accounting System

Question 1

Financial analysts look to the income statement to determine which of the following?

A)whether the company has generated income from operations
B)if the company has invested too much cash in its inventory
C)whether the company has generated sufficient cash to pay its bills
D)if the company is collecting its receivables on time

Answer 1

A

Question 2

In applying the revenue principle to a given transaction,the most important moment or period in time is when which of the following happens?

A)related cash inflows occur.
B)related expenses are incurred.
C)sales transaction is completed (i.e.,ownership passes)or services are rendered.
D)the service contract is signed regarding service to be performed.

Answer 2

C

Question 3

Which of the following is not considered an asset?

A)Equipment
B)Dividends
C)Trade receivables
D)Inventory

Answer 3

B

Question 4

At the end of December,the owner of an apartment complex realized that the December rent had not been collected from one of the tenants.December 31 was the end of the accounting year; therefore,the owner made the appropriate adjusting entry at that time.When the December rent was collected in January of the following year,the entry made by the apartment owner should include which of the following?

A)debit to Rent receivable.
B)credit to Rent receivable.
C)debit to Rent revenue collected in advance.
D)credit to Rent revenue.

Question 5

Revenue is always recognized when which of the following occurs?

A)expenses are paid.
B)cash is collected.
C)it is earned.
D)the end of the period arrives.

Question 6

The matching principle states that expenses should be matched with revenues because

A)efforts should be matched with accomplishments.
B)dividends should be matched with shareholder investments.
C)cash payments should be matched with cash receipts.
D)assets should be matched with liabilities.

Question 7

Accrued expenses which must be recorded in adjusting entries represent which of the following?

A)expenses incurred but not yet paid.
B)expenses incurred but not recorded or paid.
C)expenses paid in advance.
D)expenses paid in advance and not recorded.

Question 8

Which of the following expenses is usually listed last on the income statement?

A)Advertising expense
B)Cost of sales
C)General administrative expenses
D)Income tax expense

Question 9

The periodicity assumption is the basis for which of the following?

A)dividing the activities of a business into a series of time periods for accounting and reporting purposes.
B)the cut-off of revenue recognition only.
C)keeping the company's transactions separate from the owners' transactions.
D)the cut-off of expense recognition only.

Question 10

Which of the following businesses would most likely have the shortest operating cycle?

A)A retail chain such as Walmart
B)A jewellery manufacturer such as Mappins
C)A grocery chain such as Loblaws
D)A pizza franchise such as Pizza Pizza

Question 11

Which principle holds that all of the expenses incurred in earning revenue should be identified with the revenue recognized and reported for the same period?

A)revenue principle.
B)matching principle.
C)timing principle.
D)liability principle.

Question 12

Which of the following costs is most likely to be the largest expense item on the income statement of a merchandising chain such as Walmart?

A)Wage,salary and benefits expense
B)Advertising
C)Cost of Sales
D)Income tax expense

Question 13

Calculate the effective tax rate for a company that reports an income tax expense of $3.0 million,profit of $7.5 million,and income before taxes of $10.5 million.

A)28.5%
B)35%
C)40%
D)It cannot be computed with the above information

Question 14

The operating cycle of a business is best defined as which of the following?

A)the period of time for which we prepare our financial statements
B)the length of time over which our plant and equipment assets are expected to be used by the company in generating revenues
C)the time it takes for a company to purchase and pay for goods or services from suppliers,sell those goods or services to customers and collect cash from the customers
D)one year

Question 15

Why is the cash basis of accounting not appropriate for use by publicly traded corporations?

A)the OSC (Ontario Securities Commission)does not allow its use
B)no assets or liabilities other than cash would ever appear on the statement of financial position,giving a distorted picture of financial position
C)the profit reported could not be distorted if a large customer paid for goods in advance or we postponed paying for goods or services until the next accounting period
D)the cash basis is not permitted for tax purposes

Question 16

During 20B,New Company earned service revenues amounting to $200,000,of which $120,000 were collected in cash; the balance will be collected in January 20C.The 20B income statement of the company should report which of the following amounts for service revenues?

A)$80,000.
B)$120,000.
C)$200,000.
D)$320,000.

Question 17

Which of the following is not an example of the application of the revenue principle?

A)Recording the sale of merchandise on credit in sales revenue.
B)Recording rent received in advance as rent revenue.
C)Recording accrued interest revenue on a loan made to another party.
D)Recording the sale of merchandise for cash in sales revenue.

Question 18

Which of the following activities will most likely result in a reported loss on the income statement?

A)The sale of inventory to customers
B)The sale of old equipment
C)The wages and benefits paid to employees
D)Interest expense

Question 19

Under the accrual basis of accounting

A)cash must be received before revenue is recognized.
B)profit is calculated by matching cash outflows against cash inflows.
C)the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared.
D)events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received.

Question 20

If total revenues are the same as total expenses,then a company has which of the following?

A)a loss.
B)a profit.
C)neither a profit nor a loss.
D)negative profit.

Question 21

When a corporation pays a dividend,the

A)expense account will be increased with a debit.
B)dividends account will be increased with a credit.
C)retained earnings account will be directly increased with a debit.
D)dividends account will be increased with a debit.

Question 22

Which of the following is not normally a condition that must be met for revenue to be recognized (recorded)under the revenue principle?

A)The earnings process is complete or nearly complete.
B)The promise to perform an exchange in the future has been made.
C)Collection of receivables from credit sales is reasonably assured.
D)The amount of revenue can be measured reliably.

Question 23

Which of the following activities does not violate the revenue recognition principle?

A)Recording revenue in December 2011 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 2011 until the cash is received in 2012
D)Recording cash received in advance from customers as a liability when the product is not yet shipped

Question 24

With respect to shareholders' equity,indicate which one of the following statements is correct.

A)Revenues are recorded as credits to the revenue accounts and expenses are recorded as debits to the expense accounts.
B)Revenues are recorded as debits to the revenue accounts and expenses are recorded as credits to the expense accounts.
C)Contributions (investments)by owners are recorded as debits to the share capital accounts.
D)Withdrawals by owners are recorded as credits to the share capital accounts.

Question 25

The statement of changes in equity is dependent on the results of

A)the statement of financial position.
B)the income statement.
C)a company's share capital.
D)the statement of cash flows.

Question 26

Hill's Copy Service performed photocopy services during December,20A,but had not collected any cash (or other assets)from its customers by the end of the accounting period,December 31,20A.What effect did performing these services have on the fundamental accounting model?

A)Increased assets and increased liabilities.
B)Increased assets and increased shareholders' equity.
C)Increased assets and decreased shareholders' equity.
D)Decreased liabilities and decreased shareholders' equity.

Question 27

On January 1,20B,Grover Inc.,started the year with a $22,000 credit balance in its retained earnings account.During 20B,the company earned profit of $40,000 and declared and paid dividends of $10,000.Also,the company received cash of $15,000 as an additional investment by its owners.Therefore,the balance in retained earnings on December 31,20B,would be which of the following?

A)$42,000.
B)$52,000.
C)$57,000.
D)$67,000.

Question 28

On December 31,20A,Ted Corporation paid $2,000 for next year's insurance coverage.How should this transaction be recorded by Ted Corporation?

A)Choice A
B)Choice B
C)Choice C
D)Choice D

Question 29

If Global Company paid $500 for the telephone bill,this would do which of the following?

A)decrease assets.
B)increase assets.
C)decrease expenses.
D)increase liabilities.

Question 30

Which of the following items has no effect on retained earnings?

A)dividends
B)revenue
C)hiring a new employee
D)expense

Question 31

If Golden Corporation declared a dividend to its shareholders which has not been paid,this would

A)increase liabilities.
B)increase shareholders' equity.
C)decrease liabilities.
D)increase assets.

Question 32

A company receives a $25,000 cash deposit from a customer on March 15 but will not deliver the goods until April 20.Which of the following statements is false?

A)Cash will be reported on the statement of cash flows for the month of March.
B)Revenue will be recorded and reported on the income statement for April.
C)A liability will be reported on the statement of financial position at the end of March.
D)Revenue will be recorded and reported on the income statement for March.

Question 33

During the accounting period,Luxor Company had the following data: Sales of products:
Expenses:
This is the first year of business.
What were the sales revenue and expenses?

A)Choice A
B)Choice B
C)Choice C
D)Choice D

Question 34

During 20B,Blue Corporation incurred operating expenses amounting to $100,000,of which $75,000 were paid in cash; the balance will be paid in January 20C.Transaction analysis of operating expenses for 20B,should reflect which of the following?

A)decrease shareholders' equity,$75,000; decrease assets,$75,000.
B)decrease assets,$100,000; decrease shareholders' equity,$100,000.
C)decrease assets,$100,000; increase liabilities,$25,000; decrease shareholders' equity,$100,000.
D)decrease shareholders' equity,$100,000; decrease assets,$75,000; increase liabilities,$25,000.

Question 35

What would be the effect on December's income statement of a utility bill received on December 27,2011 but which will not be paid until January 10,2012?

A)No expense will be recognized until the bill is paid in January
B)We would cause an increase in profit by recording the expense in December
C)Recording the expense in December when it is incurred will increase expenses
D)Profit will be decreased when we pay the bill in January

Question 36

Which group of accounts contains only those that normally have a debit balance?

A)Trade receivables; Accumulated depreciation; Fees earned.
B)Bond investment; Cash; Share capital.
C)Cash; Inventory; Prepaid insurance.
D)Notes receivable; Wages payable; Operating expenses.

Question 37

During 20B,Melon Company incurred operating expenses amounting to $250,000,of which $120,000 were paid in cash; the balance will be paid in January 20C.On the 20B income statement of the company,what amount should be reported for operating expenses?

A)$120,000.
B)$130,000.
C)$250,000.
D)$370,000.

Question 38

Which of the following liability accounts is likely to be satisfied with other than payment of cash?

A)Wages payable
B)Deferred subscriptions revenue
C)Accounts Payable
D)Income taxes payable

Question 39

Tony's Tune-Up Shop Ltd.follows the revenue recognition principle.Tony services a car on May 31.The customer picks up the vehicle on June 1 and mails the payment to Tony on June 5.Tony receives the cheque in the mail on June 6.When should Tony show that the revenue was earned?

A)May 31
B)June 5
C)June 1
D)June 6

Question 40

Which of the following phases of the accounting information processing cycle is performed at the end of the accounting period?

A)Adjusting entries.
B)Peer reviews.
C)Liquidation.
D)Transaction entries.

Question 41

The income statement provides investors with information about a company's investing activities.

Question 42

Golden Company had these transactions during the accounting period: Sold merchandise for $600; its cost was $400.
Collected $400 from a trade receivable.The account was established in the previous year.
Used office supplies of $50.
Golden's profit for the period would be which of the following?

A)$50.
B)$150.
C)$600.
D)$900.

Question 43

The profit of a business is computed by subtracting revenues from expenses.

Question 44

When a growing company finds it needs to buy more inventory before cash has been collected from customers,they often use short term credit such as trade or notes payable to finance the inventory purchases.

Question 45

The division of business activities into a series of equal periods for accounting purposes is known as the periodicity assumption.

Question 46

The operating cycle is the time it takes for a company to purchase goods,pay for the goods,sell them to customers,and collect the cash from the customers.

Question 47

Asset turnover measures

A)how often a company replaces its assets.
B)how efficiently a company uses its assets to generate sales.
C)the portion of the assets that have been financed by creditors.
D)the overall rate of return on assets.

Question 48

A Taco Bell restaurant would most likely have a longer operating cycle than Walmart.

Question 49

Operating cash inflows and outflows are primarily connected to which of the following?

A)acquisitions and sale of long lived assets
B)the sale of goods and services to customers and costs incurred to operate the business
C)issuance of shares,bank borrowings and repayments,and dividend payments
D)purchase and sale of long-term investments

Question 50

Operating revenues result from the sale of goods or services.

Question 51

A company reports sales revenue of $120 million this year and $110 million last year.Their total assets in the current year are $80 million and last year's total assets were $75 million.What is the current year's asset turnover ratio?

A)1.46
B)1.50
C)1.55
D)1.61

Question 52

If Pizza Pizza reports an asset turnover ratio of 2.34 for 2011 and their competitor Pizza Hut reports 3.79 for their 2011 ratio,it means which of the following?

A)Pizza Pizza is better able to pay their current obligations with their current assets.
B)Pizza Pizza has been more effective in managing the use and level of its assets.
C)Pizza Pizza has been less effective in managing the use and level of its assets.
D)Pizza Pizza is less able to pay off their current obligations with their current assets.

Question 53

The operating cycle is of a similar duration for most companies.

Question 54

Cash receipts from interest are classified as

A)financing activities.
B)investing activities.
C)operating activities.
D)either financing or investing activities.

Question 55

For a merchandising company,the largest operating cash outflow would result from which of the following?

A)payments to suppliers from whom we have purchased inventory on credit
B)payment of wages and benefits to employees
C)payment of taxes to the various government entities
D)payment of interest on notes payable

Question 56

According to the periodicity assumption,to measure and report financial information periodically,we assume the long life of the company can be cut into shorter periods.

Question 57

The category that is generally considered to be the best measure of a company's ability to continue as a going concern is

A)cash flows from investing activities.
B)cash flows from operating activities.
C)cash flows from financing activities.
D)usually different from year to year.

Question 58

Revenues are decreases in assets or settlements of liabilities from ongoing operations.

Question 59

Losses are decreases in assets or increases in liabilities from peripheral activities.

Question 60

Income tax expense will appear on the statement of financial position.

Question 61

Expenses are recognized when an exchange takes place of productive assets,the earnings process is complete or nearly complete,and collection is likely.

Question 62

Cost of sales is usually the largest expense for manufacturing or merchandising companies.

Question 63

Transactions where cash is received before being earned often result in adjusting entries at the end of the period to record profit in the proper period.

Question 64

A gain causes an increase in income as a result of normal operating activities.

Question 65

A company that ships product to its customers in January 20B but records them as revenue in December 20A has not violated the revenue principle because they were manufactured and ready for sale before the accounting year end.

Question 66

Shareholders' equity is increased by investments of the owners and is decreased by profit.

Question 67

Deferred in the case of revenues means collected in advance of being earned and accrued in the case of revenues means not yet collected.

Question 68

The matching process recognizes liabilities when incurred in earning revenue.

Question 69

We record insurance as an expense when we pay for a three year policy.

Question 70

Cash basis accounting is often adequate for very small businesses such as a small retail store or a doctor's office.

Question 71

Revenue collected in advance of being earned represents a liability until it is earned.

Question 72

Expenses incurred,but not yet paid,create a receivable (i.e.,an asset)until payment occurs.

Question 73

The sale of merchandise on credit and the collection from the customer ten days later constitutes one transaction for accounting purposes.

Question 74

Using the accrual basis of accounting,a company recognizes expenses when they are paid.

Question 75

Accrual basis accounting recognizes revenues when cash is received from the customer.

Question 76

The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer.In the sale of services,revenue is recognized when the services are completed.

Question 77

Accrual basis accounting records revenues when earned and expenses when incurred,regardless of when the related cash is received or paid.

Question 78

Accrued in the case of expenses means paid in advance,and deferred in the case of expenses means not yet paid.

Question 79

Revenue recognition most commonly occurs at the point of delivery of goods or services to the customer.

Question 80

The revenue principle recognizes revenues when the earnings process is complete or nearly complete,an exchange has taken place,and collection is probable.