Chapter Three Multiple Choice Questions

If a company incorrectly records a payment as an asset, rather than as an expense, how will this error affect net income in the current period? a. Net income will be too high. b. Net income will be too low. c. Net income will not be affected by this error. d. It's a mystery; nobody really knows.

a. Net income will be too high.

Which of the following is correct? a. The income statement measures the amount of revenue earned during the current period. b. The income statement measures the change in value of a company. c. The income statement measures the true values of revenues and expenses without using estimates. d. The income statement measures the amount of cash generated by the business.

a. The income statement measures the amount of revenue earned during the current period.

Which of the following items is not a specific account in a company's accounting records? a. Accounts Receivable b. Net Income c. Sales Revenue d. Unearned Revenue

b. Net Income

Which of the following accounts normally has a debit balance? a. Unearned Revenue b. Rent Expense c. Retained Earnings d. Sales Revenue

b. Rent Expense

When should companies that sell gift cards to customers report revenue? a. When the gift card is issued and cash is received. b. When the gift card is used by the customer. c. At the end of the year in which the gift card is issued. d. None of the above.

b. When the gift card is used by the customer.

Which account is least likely to be debited when revenue is recorded? a. Accounts Payable b. Accounts Receivable c. Cash d. Unearned Revenue

a. Accounts Payable

Moore Co. had a beginning balance in accounts receivable of $12,000. During the year, it had credit sales of $150,000. Moore received payments on account of $140,000. At the end of the year, accounts receivable has a: a. Debit balance of $22,000. b. Credit balance of $22,000. c. Debit balance of $2,000. d. Credit balance of $2,000.

a. Debit balance of $22,000.

Webby Corporation reported the following amounts on its income statement: service revenues, $32,500; utilities expense, $300; net income, $1,600; and income tax expense, $900. If the only other amount reported on the income statement was for selling expenses, what amount would it be? a. $2,200 b. $29,700 c. $30,000 d. $30,900

b. $29,700

The prepayment of rent for the next three months (not including this month): a. Reduces total assets. b. Has no effect to total assets. c. Increases expenses. d. Decreases stockholders' equity.

b. Has no effect to total assets.

Which of the following is the entry to be recorded by a law firm when it receives a payment from a new client that will be earned when services are provided in the future? a. Debit Accounts Receivable; credit Service Revenue. b. Debit Unearned Revenue; credit Service Revenue. c. Debit Cash; credit Unearned Revenue. d. Debit Unearned Revenue; credit Cash.

c. Debit Cash; credit Unearned Revenue.

On September 30, ABC Co. received a bill for $1,000 for running a newspaper ad in September. The bill will be paid in October. Which of the following statements is correct for September? a. Liabilities are decreased by $1,000. b. Assets are increased by $1,000. c. Expenses are increased by $1,000. d. Revenues are decreased by $1,000.

c. Expenses are increased by $1,000.

Homerdale Corp. received an order from a customer on November 10. It manufactured the ordered items on November 15, shipped the goods on November 17, and received payment on December 2. Under the accrual basis of accounting, it recorded revenue on: a. November 10 b. November 15 c. November 17 d. December 2

c. November 17

When expenses exceed revenues in a given period, a. Stockholders' equity will not be impacted. b. Stockholders' equity will be increased. c. Stockholders' equity will be decreased. d. One cannot determine the impact on stockholders' equity without information about the specific revenues and expenses.

c. Stockholders' equity will be decreased.

Which of the following items is reported on the income statement as an expense? a. This month's cash sales b. The purchase of supplies c. This month's utility bill d. The purchase of land

c. This month's utility bill

Which of the following would appear in the credit column on the unadjusted trial balance? a. Advertising Expense b. Cash c. Unearned Revenue d. Prepaid Rent

c. Unearned Revenue

When should a company report the cost of an insurance policy as an expense? a. When the company first signs the policy. b. When the company pays for the policy. c. When the company receives the benefits from the policy over its period of coverage. d. When the company receives payments from the insurance company for its insurance claims.

c. When the company receives the benefits from the policy over its period of coverage.

CJ Inc. provides tax services on April 14th. They receive payment for their services on April 29. Which of the following is an appropriate journal entry for April 14th? a. No journal entry is made until payment is received. b. Debit Unearned Revenue and credit Tax Preparation Revenue. c. Debit Cash and credit Tax Revenue. d. Debit Accounts Receivable and credit Tax Preparation Revenue.

d. Debit Accounts Receivable and credit Tax Preparation Revenue.

Which of the following situations results in unearned revenue? a. Collected $100 from a customer who purchased goods a month ago. b. Received an order from a customer who will purchase and pay for goods in two weeks. c. Sold goods for $100 today with payment due from the customer in 30 days. d. Received $100 cash from a customer for an order of goods to be shipped next month.

d. Received $100 cash from a customer for an order of goods to be shipped next month.

Which of the following will result in an increase in revenue? a. Borrowing $10,000 from a bank. b. Stockholders investing $10,000 in a company. c. Selling concert tickets for $10,000 four months before the performance. d. Selling $10,000 of groceries.

d. Selling $10,000 of groceries.

The expense recognition principle ("matching") controls a. Where on the income statement expenses should be presented. b. When revenues are recognized on the income statement. c. The ordering of current assets and current liabilities on the balance sheet. d. When costs are recognized as expenses on the income statement.

d. When costs are recognized as expenses on the income statement.