ACC 120 Chapter 3

In June, Cellars, Inc. collected $1,000 from a customer in advance. In July, Cellars completed the first half of the job. In August, Cellars completed the work. If Cellars uses the cash basis of accounting, it will record revenues of ______. Multiple choice question. $500 in July and $500 in August as the services are performed $1,000 in June when the cash is collected $1,000 in August once the job is complete

$1,000 in June when the cash is collected Reason: Under cash basis, the revenue is recorded in the period the cash is collected. Under accrual accounting, the revenue is recorded in the period the goods or services are provided to the customer regardless of when the cash is collected.

Which statement is false? Multiple choice question. A trial balance can verify the equality of debits and credits. A trial balance can be taken at any point in time. A trial balance is the same as a balance sheet. A trial balance lists all the accounts with their current balances.

A trial balance is the same as a balance sheet.

Which ratio change provides good news about a company? Multiple choice question. An increase in the net profit margin ratio An increase in debt-to-equity ratio A decrease in assets-to-equity ratio A decrease in the net profit margin ratio

An increase in the net profit margin ratio

Which of the following is another way to express the expanded accounting equation? Multiple choice question. Assets + Liabilities = Common Stock + Retained Earnings Assets = Liabilities - Common Stock + Retained Earnings Assets - Liabilities = Common Stock + Retained Earnings

Assets - Liabilities = Common Stock + Retained Earnings Reason: Assets equal liabilities plus (not minus) stockholders' equity.

When Revenue is credited, the possible three debits are , Accounts , and/or Revenue. (Enter only one word per blank.)

Blank 1: Cash Blank 2: Receivable Blank 3: Deferred or Unearned

If Revenues is credited, then the possible debits are ______. (Select all that apply.) Multiple select question. Deferred Revenue Prepaid Rent Accounts Receivable Cash Accounts Payable

Deferred Revenue Accounts Receivable Cash

The ___ ____ is the financial statement that summarizes the financial impact of operating activities and reports the amount of profit earned during the accounting period. (Enter only one word per blank.)

Income Statement

The financial statement that reports revenues and expenses is the ______. Multiple choice question. statement of cash flows statement of retained earnings balance sheet income statement

Income Statement

Which of the following is correct? Multiple choice question. Net income represents the change in the market value of the company's stock during the period. Net income equals the amount of cash generated by the business during the reporting period. Measurement of net income involves estimations.

Measurement of net income involves estimations.

Which are 3 common misconceptions users of an income statement may have? (Select all that apply.) Multiple select question. Net Income does not report all changes of value that occurred during the accounting period. Net Income includes estimates. Net Income does not include estimates. Net Income reports all changes of value that occurred during the accounting period. Net Income does not equal Cash. Net Income equals Cash.

Net Income does not include estimates. Net Income reports all changes of value that occurred during the accounting period. Net Income equals Cash.

Collecting cash from customers for services provided is a(n) ______ activity. Multiple choice question. financing operating investing

Operating

On May 1, Cut Above, Inc. collected $3,000 in advance from customers to mow their lawns in June. Under cash basis accounting, revenues in May will equal ______. Multiple choice question. $1,500 $0 $3,000

Reason: This is the correct answer for accrual, not cash, basis accounting. This question asks for revenue under cash basis, not accrual basis accounting. $3,000

In its first year of business, Wok 'n' Roll, Inc. it provided $100,000 of goods to its customers of which $80,000 was collected. It also incurred $90,000 in expenses for which $80,000 was paid. Which of the following statements are correct? (Check all that apply.) Multiple select question. Wok 'n' Roll should report net income of $20,000 for external reporting purposes. Wok 'n' Roll should use accrual basis accounting for external reporting purposes to conform with GAAP and IFRS. Wok 'n' Roll should report net income of $10,000 for external reporting purposes. Wok 'n' Roll should report $0 net income for external reporting purposes.

Wok 'n' Roll should use accrual basis accounting for external reporting purposes to conform with GAAP and IFRS. Wok 'n' Roll should report net income of $10,000 for external reporting purposes. Reason: Net income should be $10,000 (revenues of $100,000 minus expenses of $90,000). GAAP and IFRS require companies to use accrual basis, not cash basis. Reason: Wok 'n' Roll should report net income of $10,000 (revenues of $100,000 minus expenses of $90,000) for external reporting purposes

Reporting revenues when the goods or services are provided and expenses when they are incurred is called basis accounting. (Enter one word per blank.)

accrual

Retained Earnings represents ______. (Check all that apply.) Multiple select question. amounts earned (revenues minus expenses) that have been kept by the company amounts given to the company by its stockholders in exchange for stock net income generated by the company through profitable operations that has not been distributed to its stockholders

amounts earned (revenues minus expenses) that have been kept by the company net income generated by the company through profitable operations that has not been distributed to its stockholders

If Sales Revenue is credited, then which of the following would be the corresponding debit? Multiple choice question. Accounts Payable Retained Earnings Inventory Cash

cash

Reporting revenues only when cash is received and expenses only when cash is paid is called the basis of accounting. (Enter one word per blank.)

cash

Revenues increase net income and retained earnings, so revenues are recorded with a , just like all increases in stockholders' equity. (Enter one word per blank.)

credit

Revenues are increased with ______. Multiple choice question. debits because they decrease stockholders' equity credits because they decrease stockholders' equity debits because they increase stockholders' equity credits because they increase stockholders' equity

credits because they increase stockholders' equity Reason: Credits (right) increase stockholders' equity (which is on the right side of the accounting equation). Since revenues increase stockholders' equity, revenues are recorded with credits thereby causing an increase to stockholders' equity.

The totals on a trial balance reveal whether the total ____equal the total______ . (Enter one word per blank.)

debits credits

The trial balance is an internal report used to determine whether total debits ____total credits. (Enter only one word per blank.)

equal

Revenues are recognized when ______, even when the cash is collected in a different accounting period than the obligation to the customer has been performed. Multiple select question. cash is collected goods are delivered bills are paid customers prepay for goods/services services are performed

goods are delivered services are performed

Investing activities are concerned with acquiring long-term assets; financing activities provide the money needed to operate the business and to provide the capital for investing activities; and _______activities are involved with providing goods and services to the customer. (Enter only one word per blank.)

operating

Under the expanded accounting equation, assets equal liabilities plus common stock and earnings. (Enter one word per blank.)

retained

Revenues and expenses are subcategories of ______. Multiple choice question. assets common stock liabilities assets and liabilities, respectively retained earnings

retained earnings

In accrual accounting, according to the _____ recognition principle, revenues should be recognized when the seller performs the work promised, not necessarily when cash is received.

revenue

The net profit margin ratio is calculated by dividing net income by ______. Multiple choice question. total assets revenue average total assets total liabilities

revenue

If a company debits Cash and credits Sales Revenue, it is recording the ______. Multiple choice question. sale of goods to a customer for cash sale of goods to a customer on account collection of cash from customers in advance for goods to be delivered later collection of cash for goods that were sold on account

sale of goods to a customer for cash