Deck 3: The Income Statement

Question 1

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

A)A liability is recorded in October; in November the liability is reduced and revenue is recorded.
B)Revenue is recorded in October and expenses are recorded in November.
C)An asset is recorded in October; in November,the asset is reduced and revenue is recorded.
D)Revenue and expenses are recorded in October.

Answer 1

A liability is recorded in October; in November the liability is reduced and revenue is recorded.

Question 2

An account that measures interest earned on investments might include which of the following terms in its title?

A)Gain.
B)Loss.
C)Revenue.
D)Expense.

Answer 2

Revenue.

Question 3

During November 2010,Asler,Inc.,performs consulting services.The client does not pay Asler until January 2011.

A)Using the accrual basis of accounting,the revenue is reported in January 2011
B)Using the cash basis of accounting,the revenue is reported in November 2010.
C)Using the accrual basis of accounting,the revenue is reported in November 2010.
D)Using the accrual basis of accounting,the revenue is reported when Asler's expenses are paid.

Answer 3

Using the accrual basis of accounting,the revenue is reported in November 2010.

Question 4

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

A)The income statement shows the effects of the transactions in June.
B)The income statement shows the effects of the transactions in July.
C)The balance sheet shows no effect from the transactions in June.
D)The transactions have no effect on the balance sheet.

Question 5

Guessco reported the following amounts on its income statement: total revenues,$31,500; interest expense,$300; net income,$1,600; income tax expense,$900; and operating income,$2,800.What was the amount of Guessco's income before income tax expense?

A)$1,300.
B)$2,500.
C)$29,000.
D)$29,900.

Question 6

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

A)Advertising Expense.
B)Sales Revenues.
C)Cost of Goods Sold.
D)Operating Income.

Question 7

During June,the Grass is Greener Company mows 100 lawns a week; the company was paid in advance during May by those customers.The company uses the accrual basis of accounting.How will these events affect the company's financial statements?

A)The income statement shows the effects of the transactions in May.
B)The income statement shows the effects of the transactions in June.
C)The balance sheet shows no effect from the transactions in May.
D)The transactions have no effect on the balance sheet.

Question 8

When cash is paid before the expense is incurred to generate revenue,costs are stated as:

A)Prepaid (asset).
B)Payable (liability).
C)Receivable (asset).
D)Stockholders's equity.

Question 9

Your company bought a 30-second advertisement that aired during the Stanley Cup finals at a cost of $1.2 million.It is legally obligated to pay for the ad but has not yet done so.How does the purchase and use of the ad time affect your company's balance sheet?

A)It increases both assets and liabilities by $1.2 million.
B)It increases assets and decreases Shareholders' equity by $1.2 million each.
C)It does not affect the balance sheet.
D)It increases liabilities and decreases Shareholders' equity by $1.2 million each.

Question 10

Which of the following is an example of a non-operating expense?

A)Interest expense.
B)Rent expense.
C)Advertising expense.
D)Salaries and Wages Expense.

Question 11

During April,the Grass is Greener Company buys and pays for a six-month supply of fertilizer in order to receive a bulk discount.The cost of fertilizer is recorded:

A)immediately as an expense.
B)as a liability,which will later be reduced as the fertilizer used.
C)partially as an expense and partially as a liability.
D)as an asset,which will later be reduced as the fertilizer is used.

Question 12

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)Unearned Revenue.
D)Net Income.

Question 13

Operating income refers to:

A)operating revenue minus operating expenses.
B)revenue generated by day-to-day business activities.
C)gains minus losses.
D)the net income of the company during the relevant time period.

Question 14

A toy manufacturer sells land for $180,000 that it bought four years ago for $320,000.This transaction,when recorded,would be:

A)an operating expense.
B)operating revenue.
C)a loss.
D)non-operating revenue.

Question 15

Which of the following is not an expense and would not show on income statement?

A)Paying for supplies.
B)Paying a dividend.
C)Paying for electricity used by production equipment.
D)Paying wages for production workers.

Question 16

Costs are said to have been "capitalized" when:

A)they are financed by the company.
B)they are recorded as assets.
C)the company calculates the worth of the asset based on the revenue generated.
D)none of the above.

Question 17

The Fastbank Motorcycle Company (FMC)receives a $10 million order from dealers wanting to buy its most popular model on credit.No money changes hands.Due to excess demand,FMC cannot supply the motorcycles until next quarter.How will these events affect the balance sheet?

A)Accounts Receivable will increase by $10 million this quarter and Inventories will decrease next quarter.
B)Both Accounts Receivable and Accounts Payable will increase by $10 million this quarter.
C)Both Accounts Receivable and Shareholders' Equity will increase by $10 million this quarter.
D)These events will not impact the balance sheet this quarter.

Question 18

An account that measures the amount of income taxes incurred might include which of the following terms in its title?

A)Gain.
B)Loss.
C)Revenue.
D)Expense.

Question 19

Rogers Communications is a communications company,specializing in cable television operation,television program development,and other telecommunication services.Its financial statements show $37,666 in an account called "Unearned Subscriber Revenue," which represents amounts that customers have paid in advance of receiving cable television and internet services.What type of account is this and on what statement is it reported?

A)Option A
B)Option B
C)Option C
D)Option D

Question 20

Pet Sitters,Inc.,sold $27,000 of pet-care services that cost $19,000 to provide.The company also incurred $6,000 in income tax and interest expenses.Net income was:

A)$41,000.
B)$19,000.
C)$8,000.
D)$2,000.

Question 21

Which of the following is true?

A)Credits increase both assets and liabilities.
B)Credits increase expenses and decrease liabilities.
C)Credits increase revenues and decrease expenses.
D)Credits decrease both assets and liabilities.

Question 22

Which of the following is most likely be reported as an accrued liability?

A)Supplies.
B)Wages.
C)Prepaid Rent.
D)Property and Equipment.

Question 23

Sparkling Pools provides $1,000 of pool maintenance services during July and collects payment in August.The company performs $1,600 of pool maintenance services during July that were paid for in June.The company accepts an order to perform $500 of pool maintenance services in August and will be paid in the same month.Revenue should be credited for:

A)$1,600 in June,$1,000 in July,and $500 in August.
B)$1,600 in June,$0 in July,and $1,500 in August.
C)$0 in June,$1,600 in July,and $1,500 in August.
D)$0 in June,$2,600 in July,and $500 in August.

Question 24

WestJet Corporation issued a $1,000 gift certificate.What journal entry will WestJet Corporation record?

A)Debit Cash,credit Sales Revenue.
B)Debit Cash,credit Unearned Revenue.
C)Debit Unearned Revenues,credit Cash.
D)Debit Accounts Receivable,credit Cash.

Question 25

A customer purchased $1,500 of services on credit two months ago and has just paid the bill.The receipt of the payment from the customer is recorded as a

A)debit to Cash and a credit to Accounts Receivable.
B)debit to Cash and a credit to Inventory.
C)debit to Expenses and a credit to Revenue.
D)debit to Accounts Receivable and a credit to Retained Earnings.

Question 26

Cansing Company collected $5,000 from a customer on account.What journal entry will Cansing record?

A)Debit Cash,credit Accounts Receivable.
B)Debit Cash,credit Revenue.
C)Debit Accounts Receivable,credit Revenue.
D)Debit Accounts Receivable,credit Cash.

Question 27

If a company provides a service and receives payment at the same time:

A)only one journal entry is needed.
B)Cash will be debited.
C)a revenue account will be increased with a credit.
D)all of the above.

Question 28

When a customer buys services on account,it should be recorded as:

A)a debit to Cash and a credit to Accounts Receivable.
B)a credit to Revenue and a debit to Accounts Receivable.
C)a credit to Unearned Revenue and a debit to Inventory.
D)a debit to Cash and a credit to Accounts Payable.

Question 29

Galvan Corporation (GC)capitalized a $20,000 automobile.Which of the following is true?

A)GC recorded a liability for $20,000.
B)GC recorded an asset for $20,000.
C)GC recorded an expense for $20,000.
D)GC recorded Contributed Capital for $20,000.

Question 30

During March,the Long Life Consulting Company provides $23,000 in consulting services of which $12,000 is immediately paid for and $11,000 is on account.

A)Cash increases $12,000,revenue increases $11,000,and Shareholders' equity increases $23,000.
B)Cash increases $12,000,Accounts Receivable increases $11,000,and revenues increase $23,000.
C)Accounts Receivable increases $11,000,liabilities decrease $12,000,and Shareholders' equity decreases $1,000.
D)Revenues increase $12,000,liabilities decrease $12,000,and Shareholders' equity is unchanged.

Question 31

Which of the following would eventually cause a reduction in retained earnings?

A)Interest earned on investment.
B)A decrease in unearned revenue.
C)An increase in prepaid utilities.
D)A loss on disposal of land.

Question 32

Customers paid $8,000 on their accounts.Which accounts are affected by this transaction?

A)Revenue and Retained Earnings increase $8,000.
B)Cash and Revenue increase $8,000.Liabilities and Expense increase $8,000.
C)Cash increases $8,000 and Accounts Receivable decreases $8,000.Revenue and Retained Earnings are unchanged.
D)Revenue and Retained Earnings decrease $8,000.

Question 33

Expenses

A)represent the costs that arise when a company sacrifices its resources during the accounting period.
B)are reported in the period in which they are incurred to generate revenue.
C)reduce Shareholders' equity.
D)all of the above.

Question 34

Your company orders and receives goods in January,pays for them in February,sells them in March and is paid by customers in April.Using the accrual basis of accounting:

A)expenses are recorded in February and revenues are recorded in April.
B)expenses are recorded in February and revenues are recorded in March.
C)expenses and revenues are recorded in March.
D)expenses are recorded in January and revenues are recorded in April.

Question 35

In October,your company prepays rent of $7,000 for November and December.Which of the following describes the effects of this transaction in October?

A)Assets decrease $7,000 and liabilities decrease $7,000.
B)Assets increase $7,000 and Shareholders' equity increases $7,000.
C)There is no change to total assets,liabilities or Shareholders' equity.
D)Liabilities decrease $7,000 and Shareholders' equity increases $7,000.

Question 36

Which of the following is a true statement?

A)Revenue accounts are a subset of assets,and expense accounts are a subset of liabilities.
B)Both revenue accounts and expense accounts are subsets of contributed capital.
C)Both revenue accounts and expense accounts are subsets of retained earnings.
D)Revenue accounts are a subset of cash,and expense accounts are a subset of accounts payable.

Question 37

Your company received payment last month for a service that you provided this month.How will the business activity of the current month affect the basic accounting equation?

A)Assets will not change; liabilities (Unearned Revenue)will decrease; and Shareholders' equity (Service Revenue)will increase.
B)Assets (Cash)will increase,liabilities (Unearned Revenue)will increase,and Shareholders' equity will not change.
C)Assets (Cash)will increase,liabilities will not change,and Shareholders' equity (Service Revenue)will increase.
D)Assets (Prepaid Expenses)will decrease,liabilities will not change,and Shareholders' equity (Service Revenue)will increase.

Question 38

Company A receives $10,000 in advance this month for work to be performed next month.This month,the company should:

A)Debit Inventory $10,000 and credit Sales Revenue $10,000.
B)Debit Cash $10,000 and credit Unearned Revenue $10,000.
C)Debit Inventory $10,000 and credit Accounts Payable $10,000.
D)Debit Accounts Payable $10,000 and credit Cash $10,000.

Question 39

When should a company recognize revenue?

A)When delivery has occurred or services have been provided (rendered).
B)When the price is fixed or determinable.
C)When there is persuasive evidence of an arrangement for customer payment and collection is reasonably assured.
D)All of the above are necessary to recognize revenue.

Question 40

If a company is paid in full for services provided this month,how will the basic accounting equation be affected?

A)Liabilities will decrease.
B)Shareholders' equity will increase as revenue is recorded.
C)Liabilities will increase.
D)Shareholders' equity will increase as gains are recorded.

Question 41

A customer orders a heavy duty machinery from Yukon Inc in October.Yukon manufactures it in November and ships it along with their bill in December and receives payment in January.If Yukon is to recognize revenue in January,they are following:

A)Credit basis accounting
B)Accrual-basis accounting
C)Cash basis accounting
D)Debit basis accounting

Question 42

Which of the following statements is true?

A)Expenses are listed before revenues on the income statement.
B)Operating income is listed before net income on the income statement.
C)The income statement demonstrates the effect of net income on the balance sheet.
D)Net income is listed before net operating income on the income statement.

Question 43

Which of the following statements is true?

A)When operating income is positive,revenue is greater than expenses.
B)When net income is negative,retained earnings decrease,all other things being equal.
C)When net income is positive,Shareholders' equity increases,all other things being equal.
D)All of the above.

Question 44

During the three months of this quarter,Asbar,Inc.,has generated service revenues of $16,500,$21,000,and $43,800,respectively.The cost of providing the services is $3,600,$6,000,and $9,400,respectively.In addition,salaries and wages for the quarter total $17,900 while general administrative expenses total $14,300.The company also earned interest revenue of $6,900 and incurred income taxes of $7,400.Net income for the quarter is:

A)$15,800.
B)$30,100
C)$29,600.
D)$22,700.

Question 45

Sparkling Pools received a bill for $1,200 for running newspaper ads during the last two weeks of July; the bill will be paid on August 1.Advertising expense should be:

A)credited for $1,200 in July.
B)credited for $1,200 in August.
C)debited for $1,200 in July.
D)debited for $1,200 in August.

Question 46

All other accounts remaining the same,an increase in revenue will always:

A)increase Shareholders' equity.
B)increase assets.
C)decrease Shareholders' equity.
D)decrease assets.

Question 47

In January,the Huntington Beach Resort (HBR)accepts your reservation and receives your $2,000 payment for a week of sun and fun in California during spring break in March.The $2,000 would be recorded by HBR during January as a debit to:

A)Cash and a credit to Unearned Revenue.
B)Accounts Payable and a credit to Service Revenue.
C)Cash and a credit to Service Revenue.
D)Service Revenue and a credit to Cash.

Question 48

The unadjusted trial balance:

A)is a preliminary financial statement for external users.
B)generally lists account names in alphabetical order.
C)is created to determine that total debits equal total credits.
D)demonstrates that the accounting process is error free.

Question 49

This month,Grass is Greener Lawn Service pays cash for $4,000 of grass fertilizer to be used two months from now.What journal entry will Grass is Greener record this month?

A)Debit cash for $4,000 and credit supplies expense for $4,000.
B)Debit supplies expense for $4,000 and credit accounts payable for $4,000.
C)Debit supplies for $4,000 and credit cash for $4,000.
D)Debit retained earnings for $4,000 and credit accounts payable for $4,000.

Question 50

Trudy's Café paid its employees $50,000 in September for work done that month.What journal entry will Trudy's record in September,assuming Trudy's did not owe any amounts to employees at the end of August?

A)Debit Cash,credit Wages Revenue.
B)Debit Cash,credit Wages Payable.
C)Debit Wages Revenue,credit Cash.
D)Debit Wages Expense,credit Cash.

Question 51

Austin Insurance (AI)earned $10,000 revenue for services provided.Which of the following is correct?

A)AI would credit Accounts Receivable,regardless of the timing of cash receipts.
B)AI would credit Accounts Receivable,but only if cash has not been received.
C)AI would credit Revenue,regardless of the timing of cash receipts.
D)AI would credit Revenue,but only if cash has been received.

Question 52

Which of the following groups of accounts contains only those accounts that normally have credit balances?

A)Accounts Payable; Retained Earnings; Service Revenue.
B)Equipment; Cash; Contributed Capital.
C)Notes Payable; Wages Payable; Rent Expense.
D)Accounts Receivable; Accounts Payable; Unearned Revenue.

Question 53

The unadjusted trial balance:

A)does not yet include income tax expense.
B)might balance even if there is a mistake.
C)does not yet include end-of-the-accounting period adjustments.
D)all of the above.

Question 54

On the 15^th of the month,a company receives $8,000 in payments from customers.$1,000 is for services performed on that day and the remaining is payment for services performed in the previous month.The $8,000 cash receipt would be recorded as a:

A)debit of $7,000 to Accounts Receivable,debit of $1,000 to Service Revenue,and a credit of $8,000 to Cash.
B)debit of $8,000 to Cash,a credit of $7,000 to Accounts Receivable,and a credit of $1,000 to Service Revenue.
C)debit of $7,000 to Accounts Receivable,a debit of $1,000 to Unearned Revenue,and a credit of $8,000 to Cash.
D)debit of $8,000 to Cash,debit of $1,000 to Service Revenue,and a credit of $7,000 to Accounts Receivable.

Question 55

Which account is least likely to be credited when an expense is recorded?

A)Cash.
B)Accounts Payable.
C)Prepaid Expenses.
D)Accounts Receivable.

Question 56

Which of the following journal entries would decrease Shareholders' equity?

A)Debiting Prepaid Utilities and crediting Cash.
B)Debiting Unearned Revenue and crediting Revenue.
C)Debiting Inventory and crediting Accounts Payable.
D)None of the above.

Question 57

In January,a company pays for advertising space in the local paper for ads to be run during the months of January,February,and March at $1,500 a month.The payment would be recorded in January as a:

A)debit of $4,500 to Cash,a credit of $1,500 to Advertising Expense,and a credit of $3,000 to Prepaid Advertising.
B)debit of $4,500 to Accounts Payable and a credit of $4,500 to Cash.
C)debit of $4,500 to Accounts Payable and a credit of $4,500 to Shareholders' Equity.
D)debit of $1,500 to Advertising Expense,a debit of $3,000 to Prepaid Advertising,and a credit of $4,500 to Cash.

Question 58

Which of the following is an example of an error that would not cause the trial balance to be out of balance?

A)A journal entry was posted as a debit to Cash for $525 and credited to Accounts Receivable for $552.
B)A journal entry was posted as a debit to Cash and a credit to Sales Revenue when the company received a customer payment on account.
C)A journal entry was posted as a debit to Wages Expense and a debit to Wages Payable.
D)All of the above errors would cause the trial balance to be out of balance.

Question 59

This month,a company performed $517,000 of services and incurred total expenses of $438,000.If 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 $517,000,expenses to increase $438,000,and retained earnings to decrease $79,000.
B)cash increase $517,000,expenses to increase $438,000,and retained earnings to increase $79,000.
C)revenues to increase $517,000,expenses to increase $438,000,and cash to increase $79,000.
D)revenues to increase $79,000,expenses to increase $438,000,and cash to increase $517,000.

Question 60

On the last day of the current month,a company paid $12,000 to its suppliers,of which $2,000 was for supplies received on the last day of the current month and $10,000 was for supplies received during the previous month.The $12,000 payment would be recorded as a:

A)$10,000 debit to Supplies,a $2,000 debit to Accounts Payable,and a $12,000 credit to Cash.
B)$12,000 debit to Supplies and a $12,000 credit to Cash.
C)$12,000 debit to Supplies Expense and a $12,000 credit to Cash.
D)$2,000 debit to Supplies,a $10,000 debit to Accounts Payable,and a $12,000 credit to Cash.

Question 61

Creative Ads Inc.,provides $5 million of advertising development services on account to a large,existing customer who has previously purchased similar amounts of services and has always paid on time.Creative Ads Inc.,then decides to credit $5 million to revenue.This decision:

A)violates the condition that risks and rewards be passed or the earnings process be substantially complete.
B)violates the condition that measurability be reasonably certain.
C)violates the condition that collectability be reasonably assured.
D)does not violate any of the above conditions of the revenue principle.

Question 62

Cash basis accounting measures financial performance very well when a business sells its customers on account.
BT: Knowledge

Question 63

The main purpose of preparing a trial balance is to ensure that:

A)The total of recorded debits and total of recorded credits are equal.
B)The company is making a profit.
C)The total of revenue is equal to expenses.
D)The total of recorded debits in revenue accounts are equal to total of recorded credits

Question 64

The matching principle requires:

A)that expenses should be recognized on periodic basis.
B)that expenses should be split between Cost of Goods Sold (sometimes called Cost of Sales)and Selling Expenses.
C)that current assets and current liabilities are stated in a certain order on the balance sheet.
D)that costs are recognized as expenses in the same period as the revenues they generate.

Question 65

The Rainbow House Painting Company has been contracted to strip,repair,prime,and paint a house for $3,600 to be paid in instalments as phases of the work are completed.The company has not started painting and has only received one payment.The company decides to record $3,600 as revenue.This decision violates the:

A)fourth condition of the revenue principle which states that regulatory approval be acquired.
B)second condition of the revenue principle,that measurability is reasonably certain.
C)third condition of the revenue principle that collectability is reasonably assured.
D)first condition of the revenue principle,that risks and rewards have passed or the earnings process is substantially complete.

Question 66

Net income of a company is the same as the amount of cash flow generated by the business during the period.
BT: Comprehension

Question 67

In September,a customer signed a contract to have his house painted and paid for the job in October.The painting company bought the paint in August on account and paid for it in September.The painting company painted the house in November.According to the revenue and matching principles,the painting company should record:

A)the revenues in November and the expenses in September.
B)the revenues and the expenses in September.
C)the revenues and the expenses in November.
D)the revenues in September and the expenses in August.

Question 68

If expenses grow faster than revenues compare to the previous period,the net income will increase.
BT: Comprehension

Question 69

Costs that benefit future periods are reported as assets.
BT: Knowledge

Question 70

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 71

Picasso Art School's operating activities for the month of February are summarized in the following transactions: 1.Provided $1,500 of instructional lessons.
2)Received $2,100 cash from students-of which $1,200 is for lessons provided in February,and $900 is for lessons provided in January.
3)Paid January's rental bill of $300.Received February's bill of $450 but did not pay.
Determine Picasso Art School's Net Income for February using the cash basis of accounting?

A)$950
B)$1,800
C)$900
D)$750

Question 72

Revenues come solely from selling a company's goods or services.
BT: Knowledge

Question 73

If payment is received at the same time a service is produced and sold,there is no difference between how cash and accrual accounting record the transaction.
BT: Comprehension

Question 74

When Cash is paid after the cost is incurred to generate revenue,costs are stated as:

A)Liability
B)Asset
C)Revenue
D)Stockholders' equity

Question 75

Accrual basis of accounting is the only acceptable method for external reporting of financial statements under both ASPE and IFRS.
BT: Knowledge

Question 76

One of the ways companies can mislead investors is by inappropriately capitalizing costs.When is it appropriate to capitalize costs?

A)When the work has already been performed.
B)When future economic benefits are associated with the cost.
C)When the good or service being purchased by the company has been received and used.
D)When the good or service being purchased by the company has not yet been paid.

Question 77

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 decided to record the July expenses of rent,utilities and salaries in August,when it pays for them.One or both of these decisions:

A)violate the matching principle.
B)violate principles of accrual accounting.
C)violate the revenue principle.
D)violate the accounting equation.

Question 78

Picasso Art School's operating activities for the month of February are summarized in the following transactions: 1.Provided $1,500 of instructional lessons.
2)Received $2,100 cash from students-of which $1,200 is for lessons provided in February,and $900 is for lessons provided in January.
3)Paid January's rental bill of $300.Received February's bill of $450 but did not pay.
Determine Picasso Art School's Net Income for February using the accrual basis of accounting?

A)$1,050
B)$1,800
C)$900
D)$750

Question 79

Which of the following is not a condition for reporting revenues?

A)The goods or services have been delivered.
B)The customer has already paid for the good or service.
C)The price is fixed or determinable.
D)Collection is reasonably assured.

Question 80

What entry would be made in account receivable when a company has billed its client $230,000 during the financial year and client have sent in payments totalling $87,908.The business uses cash-based accounting?

A)230,000
B)87,908
C)0
D)142,092.