ACCT chap 3

If a company collected $1,000 from its customers in advance and then fulfilled $800 of its obligation and incurred expenses of $700 of which it paid $300, using accrual basis accounting, it would report net income equal to ____.

$100

True or false: In accordance with generally accepted accounting principles, the timing of cash receipts dictates when revenues are recognized.

False -- Reason: The key factor is whether the seller has provided the goods or services to the customer, not whether the cash has been received.

Which of the following is not one of the five steps to apply when determining revenue?

Recognize revenue when each performance obligation is satisfied Reason: This is the 5th step. Revenue is recorded when the seller has satisfied the performance obligation of delivering goods and/or services, regardless of whether cash has been received.

Accounts Receivable is credited when recording the ______.

collection from sales made on account

Which of the following accounts will be found on the balance sheet?

Prepaid Advertising Accounts Payable Deferred Revenue Accounts Receivable

Expenses are increased with ______.

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

Which of the following is not a revenue account that appears on the income statement?

deferred revenue

_____are the costs of operating a business that are incurred to generate revenues in the period covered by the income statement.

expenses

True or false: All of the accounts listed on an Unadjusted Trial Balance are also listed on the Balance Sheet. True false question.

false-- Only the assets, liabilities, Common Stock and Retained Earnings accounts are reported on the balance sheet. Revenues and expenses are reported on the income statement.

True or false: In accordance with generally accepted accounting principles, the timing of cash receipts dictates when revenues are recognized.

false-- Reason: The key factor is whether the seller has provided the goods or services to the customer, not whether the cash has been received.

Revenues are recognized when ______, even when the cash is collected in a different accounting period than the obligation to the customer has been performed.

goods are delivered services are performed

When a company collects cash in advance from customers it records a liability called

unearned revenue

After posting all entries to the ledger, the Accounts Payable T-account will show which of the following? (Check all that apply.)

beginning balance on the top of the credit side payments made on the debit side ending balance on the bottom of the credit side purchases on account on the credit side

The operating cycle is the period from ______.

buying goods and services through to collecting cash from customers

If a company records a debit to Cash and a credit to Deferred Revenue, it must be recording the ______.

collection of cash from customers in advance of the revenue being generated Reason: The entry to record amounts of revenue generated that were collected from customers in advance includes a debit to Deferred Revenue (+L) and a credit to Revenue (+R,+SE).

Bank 'n' Roll, Inc. pays its employees once a month and records the expense at the time of payment. On May 31, Bank 'n' Roll, Inc. paid its employees $10,000 for work performed in May. The entry to record the payment includes a ______ for $10,000. (Check all that apply.)

credit to Cash debit to Wages Expense

Under the expanded accounting equation, assets equal liabilities plus common stock and ____ earnings

retained

Supplies are expensed ______.

when used

In May, Sea the World Cruises, Inc. collected $1,000 cash from a customer for services to be performed in June. Which of the following is true assuming accrual accounting?

$1,000 of revenue should be recorded in June.

Which of the following is another way to express the expanded accounting equation?

Assets - Liabilities = Common Stock + Retained Earnings

When Pizza Company sells three $100 gift cards at the beginning of the month, it should record a debit to ______ and credit to ______ for $300.

Cash; Deferred Revenue Reason: Revenue is not recorded until the gift cards are used by the customers. The purchasing of the gift card represents amounts owed to the customers for future purchases and is recorded as Deferred Revenue. Cash has increased and is recorded with a debit. Deferred Revenue, a liability, has increased and is recorded with a credit.

Which are 3 common misconceptions users of an income statement may have? (Select all that apply.)

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

After increases and decreases in an account are recorded, the amount remaining in the account is its ending ____

balance

The ______ takes stock of what exists at a point in time. The ______ depicts a flow of what happened during a period of time.

balance sheet; income statement

In accrual basis accounting, revenue is recorded when the seller ______.

performs the work promised to the customer and thus is entitled to receive compensation

Monster Music Company provided music lessons to customers for $10,000, receiving $6,000 in cash and the rest on account. What is Monster Music Company's revenue under the accrual basis of accounting?

10,000 -- $10,000 of revenue was recognized because the services were provided.

Accruix, Inc. uses accrual basis accounting. Its balance sheets reported Accounts Receivable of $5,000 at the end of its first year of business. Its income statement reported Sales Revenue of $100,000 for its first year. What would Accruix's revenues have been if it had used cash basis accounting?

95,000--Reason: Cash collected equals $95,000 which is the $100,000 Sales Revenue minus $5,000 of Accounts Receivables (i.e., the sales not yet collected).

what does a trial balance do?

A trial balance lists all the accounts with their current unadjusted balances and indicates whether the total debits equals total credits for all of the accounts.

______ basis accounting is the only acceptable method for external reporting of net income.

Accrual

Which of the following statements are true?

Amounts in the balance sheet will continue to have financial impact beyond the current accounting period. The income statement reports the results of activities for an accounting period of time.

On June 30, Cyclepath, Inc. pays $600 for supplies that will be used in July. Which of the following statements are true? (Select all that apply.)

In June, Supplies is debited and Cash is credited. In July, Supplies Expense is debited and Supplies is credited. Reason: Supplies Expense is not recorded until July, when the supplies are used.

On May 25, Dew Drop Inn purchased $500 of supplies on account. In June, $300 of supplies was used and $400 was paid to the supplier. Which of the following are true statements? (Check all that apply.)

In May, the assets, Supplies, is increased by $500. In June, Supplies Expense of $300 is recorded.

In its 1st year of operation, Jetway Airlines paid Salaries Expense of $40 million. On December 31, it recorded an entry for additional Salaries Expense of $2 million that will be paid at the beginning of the 2nd year. What should Jetway report in the income statement and balance sheet for its first year ended December 31?

Income statement: Salaries Expense $42 million; Balance sheet: Salaries Payable $2 million

True or false: Operating activities are the primary sources of revenue and expenses involved in running a business.

True: Reason: Unlike investing and financing activities, which occur infrequently and typically produce long-lasting effects, operating activities such as buying and selling products or paying and receiving cash occur regularly.

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.)

Wok 'n' Roll should report net income of $10,000 for external reporting purposes. Wok 'n' Roll should use accrual basis accounting for external reporting purposes to conform with GAAP and IFRS.

Receiving cash from a customer to pay for a previously recorded accounts receivable will ______.

have no effect on stockholders' equity have no effect on total assets have no effect on liabilities

If a company debits Prepaid Advertising and credits Cash, then it must _____.

have paid in advance of the advertising being run

______ 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

Which of the following financial statements cover a period of time rather than report amounts at a specific point in time? (Check all that apply.)

income statement statement of cash flows

Increases to stockholders' equity are recorded on the _____ side of the T-Account

right

If a company records a debit to Accounts Receivable and a credit to Revenue, it must be recording the ______.

sale of goods on account

If a company debits Cash and credits Sales Revenue, it is recording the ______.

sale of goods to a customer for cash

Accounts Receivable arises when a company ______.

sells on credit and is an asset

Revenue is recognized when ______.

services are provided even if cash has not yet been collected, if using accrual basis accounting cash is collected from customers, if using cash basis accounting

Performing services on account will increase ______.

stockholders' equity total assets

Which ratio change provides good news about a company?

An increase in the net profit margin ratio

The journal entry that records the collection of cash from a customer for payment on account for a sale that was recorded previously includes a debit to ______.

Cash and credit to Accounts Receivable

Under which of the following circumstances would cash basis accounting report higher expenses than accrual basis accounting in the current accounting period?

Cash is paid in advance of services being provided -- Cash basis would report lower expenses since the expense was not paid. Accrual basis would report the expense in the current period when the service is performed.

When Pizza Company delivers pizza to customers for $100 cash, it should record a $100 debit to ______ and a $100 credit to ______.

Cash; Sales Revenue

Which activities are part of the operating cycle?

Collecting cash from customers Buying goods and services Paying cash to suppliers

A service company receives a check from a customer as partial payment of his account balance. This transaction does not involve the sale of additional services. How should the entry be recorded?

Debit Cash and credit Accounts Receivable

When a company records the payment to its employees for the work performed during the accounting, it records the following.

Debit Salaries and Wages Expense Credit Cash

During the month of September, AppGame Company wrote checks to employees totaling $8,100 for wages earned in September and not previously expensed. Which of the following is the correct entry?

Debit Wages Expense and credit Cash for $8,100

In January, Pizza Company bought pizza ingredients on account for $100, with payment due to the supplier in March. The pizza ingredients were used for pizzas made in January. In which month should Pizza Company record the cost of the pizza ingredients as an expense?

January -- Reason: The pizza ingredients are expensed in the month the ingredients are used (January), not in the month when the payment is made. January

Novel Tea Company paid $1,000 in June for utilities used in May. The expense recognition principle requires the utility expense to be recorded in ______.

May Reason: Expenses are recorded in the period the services are used and help to generate revenue, regardless of when the cash is paid.

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

Net income will be too high -- Net income will be too high because the credit should have been to Deferred Revenue, a liability, and not to Sales Revenue which makes net income too high.

Revenue on the income statement for the year ended December 31, 2020 equals the ______.

amount recognized by selling goods or services to customers during 2020

in which order, from top to bottom, is the order of the unadjusted trial balance?

assets liabilities common stock retained earnings revenues expenses

The journal entry a law firm records when it provides legal services for a client who will pay in a later period includes a ______. (Check all that apply.)

credit to Service Revenue debit to Accounts Receivable

If Sales Revenue is credited, then which of the following would be the corresponding debit?

cash

Reporting revenues only when cash is received and expenses only when cash is paid is called the _____ basis of accounting

cash

The correct journal entry to record a transaction that involves paying cash for an expense incurred in the same period is ______.

debit an expense and credit cash

The entry to record the sale of services for cash includes a ______.

debit to Cash credit to Service Revenue

Net income appears on the ______. (Select all that apply.)

income statement statement of retained earnings

During the year, a company had $100,000 in revenues, $40,000 in expenses, and paid $3,000 in dividends. The net of these items cause retained earnings to ______.

increase by $57,000 Reason: Revenues increase, while expenses and dividends decrease retained earnings.

If the purchase of supplies on account is not recorded then ______.

liabilities will be understated

Identifying the performance obligation is an important step in determining whether to recognize revenue especially when the contract involves ______.

multiple obligations Reason: When a contract has multiple obligations, it is important to identify each separately and then determine the price for each obligation and record the revenue only when the specific obligation has been satisfied.

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.

operating

The period from buying goods and services through to collecting cash is known as the ___ cycle.

operating

A company paid for 6 months of insurance coverage on September 1. The insurance is recorded as an expense ______.

over the 6 months covered by the insurance contract Reason: The insurance is expensed over the periods the company benefits from the coverage, which is over 6 months. When the insurance is paid for in advance, Prepaid Insurance (+A) is debited and Cash (-A) is credited. An asset is recorded because it has future benefit and has not yet been used. As the company benefits from the coverage over time, it expenses the asset by debiting Insurance Expense (+E,-SE) and crediting Prepaid Insurance (-A).

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. (Add only one word per blank.)

revenue

The net profit margin ratio is calculated by dividing net income by ______.

revenue