Intermediate Accounting Quiz 6

A cost may be recorded as an expense or as an asset purchase. This statement is True False

True A cost is incurred when a company pays cash or incurs a liability as a result of its operating or investing activities. For example, a company may pay cash or increase its salaries payable to compensate its employees who have completed work for the company. In this case, the company would recognize an expense because it has already used the labor provided by the employees. In other words, there is no future benefit associated with the cost because the benefit was obtained in the past when the work was done. Alternatively, a company could pay cash to purchase supplies that it plans to use in the future. Under this circumstance, a benefit will occur in the future when the supplies are used in the process of producing revenue. As a result, the company would record the cost as the purchase of an asset. In summary, when a company incurs a cost that has no future benefit it recognizes an expense. When a company incurs a cost that has a future benefit is records the purchase of an asset. Note carefully, that in accounting terms, a cost and an expense do not mean the same thing.

Which of the following shows how the event "collected cash for services to be rendered in the future" affects a company's financial statements? A. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. + + NA NA NA NA +OA B. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. + NA + NA NA NA +OA C. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. + + NA NA NA NA NA D. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. + + NA NA + − +OA

A Collecting cash for services to be rendered in the future is an asset source transaction. The asset account (cash) increases and the liability account (unearned revenue) increases. Since the revenue recognition is deferred (delayed), there is no effect on the income statement. A cash inflow from operating activities is shown on the statement of cash flows.

On May 1 of Year 1 Matthew Company paid $2,400 cash for an insurance policy that would protect the company for one year. The company's fiscal closing date is December 31. Based on this information, the amount of insurance expense and the cash flow from operating activities shown on the Year 1 financial statements would be A. Insurance Expense Cash flow $1,600 ($2,400) B. Insurance Expense Cash flow $2,400 ($1,600) C. Insurance Expense Cash flow $1,600 $800 D. Insurance Expense Cash flow $1,600 ($800)

A Cost per month = $2,400 total ÷ 12 months = $200 per month As of December 31, Year 1: Amount used = $200 per month x 8 months = $1,600 insurance expense Future benefit = $200 per month x 4 months = $800 prepaid insurance Since all of the cash was paid in Year 1, the total $2,400 cash outflow would be shown on the Year 1 statement of cash flows. Zero would be shown in Year 2.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of depreciation expense recognized on the Year 2 income statement is A. $10,000 B. $20,000 C. $12,000 D. $24,000

A Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost - $8,000 Salvage) ÷ 4 Year life = $10,000 Straight-line depreciation recognizes the same amount of expense for each year of useful life. In this case, $10,000 will be recognized in Year 1, Year 2, Year 3, and Year 4. The depreciation expense account is a temporary account that is closed at the end of each accounting period. Therefore, the depreciation expense account for the truck has a zero balance at the beginning of each accounting period and a before closing balance that is equal to one year's depreciation ($10,000) at the end of each accounting period.

Baltimore Company paid $3,600 cash for the right to use office space during the coming year. Which of the following shows how this event would affect Baltimore's ledger accounts? A. Assets = Liabilities + Stockholders' Equity Cash + Prepaid Rent = (3,600) 3,600 B. Assets = Liabilities + Stockholders' Equity Prepaid Rent = Accounts Payable 3,600 3,600 C. Assets = Liabilities + Stockholders' Equity Prepaid Rent = Retained Earnings 3,600 3,600 D. Assets = Liabilities + Stockholders' Equity Prepaid Rent = Retained Earnings (3,600) (3,600)

A Paying cash to purchase the right to use office space in the future is an asset exchange event. One asset account (cash) decreases and another asset account (prepaid rent increases). The recognition of rent expense is deferred until a future date when the office space is used in the process of generating revenue.

On December 31, Year 1 Adam Company incurred $3,000 of accrued salary expense. The Year 2 recognition of the cash payment for these expenses A. decreases the amount of liabilities shown on the Year 2 balance sheet. B. increases the amount of salary expense recognized in Year 2. C. decreases the amount of salary expense recognized in Year 2. D. increases the amount of liabilities shown on the Year 2 balance sheet.

A Recognizing accrued salary expense in Year 1 caused liabilities (salaries payable) to increase. In Year 2 when cash is paid to settle the obligation, assets (cash) and liabilities (salaries payable) decrease. The expense recognition occurs in Year 1. Paying off the liability in Year 2 does not affect the recognition of salary expense.

The following items were drawn from a company's accounting records: Accounts receivable Accounts payable Cash paid to purchase land Supplies Supplies expense Cash collected for service to be provided in the future Unearned revenue Prepaid rent Earned Revenue Accrued salaries expense Common stock Dividends Cash paid for prepaid rent Retained earnings Which accounts would appear on the balance sheet? A. 1, 2, 4, 7, 8, 11, and 14 B. 1, 2, 4, 7, 8, 10, and 11 C. 1, 2, 3, 7, 8, 9, and 11 D. 1, 2, 4, 7, 9, 11, and 12

A The balance sheet shows a company's assets, liabilities and stockholders' equity. Items 1, 4, and 8 are asset accounts; items 2 and 7 are liability accounts; and items 11 and 14 are stockholders' equity accounts.

A deferral A. exists when a company pays cash after recognizing the associated expense. B. exists when a company pays cash before recognizing the associated expense. C. exists when a company pays cash at the time the associated expense is recognized.

B Companies uses deferrals to recognize expenses in the period they are incurred regardless of when cash is paid. For example, a company could pay $1,200 for the right to use office space in the future. In this case the company would defer the expense recognition by recording the cost (cash payment) in an asset account. Then the expense would be recognized later in the period in which the office space is used to generate revenue. In summary a deferral occurs when a company pays cash before recognizing the associated expense.

On June 1 of Year 1 Doe Company paid $1,800 cash for an insurance policy that would protect the company for one year. The company's fiscal closing date is December 31. Based on this information alone, the amount of prepaid insurance and insurance expense shown on the Year 2 financial statements would be A. Prepaid Insurance Insurance Expense $1,050 $750 B. Prepaid Insurance Insurance Expense zero $750 C. Prepaid Insurance Insurance Expense $750 $1,050 D. Prepaid Insurance Insurance Expense zero $1,800

B Cost per month = $1,800 total ÷ 12 months = $150 per month As of December 31, Year 1: Amount used = $150 per month x 7 months = $1,050 insurance expense Future benefit = $150 per month x 5 months = $750 prepaid insurance As of December 31, Year 2: Amount used = $150 per month x 5 months = $750 insurance expense Since all of the insurance is used by the end of Year 2, there would be a zero balance in the prepaid insurance account at the end of Year 2.

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of accumulated depreciation shown on the Year 2 balance sheet is A. $10,000 B. $20,000 C. $12,000 D. $24,000

B Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost - $8,000 Salvage) ÷ 4 Year life = $10,000 The accumulated depreciation account is a permanent contra asset account. As its name implies, the balance accumulates each year. In this case the after closing (ending) balance in the accumulated depreciation account will be $10,000 in Year 1, $20,000 in Year 2, $30,000 in Year 3, and $40,000 in Year 4.

A deferral A. exists when a company receives cash after recognizing the associated revenue. B. exists when a company receives cash before recognizing the associated revenue. C. exists when a company receives cash at the time the associated revenue is recognized.

B Note that revenues as well as expenses can be deferred. A deferral occurs whenever a company receives or pays cash but defers (delays) the recognition of the related revenue or expense. Recall that revenue cannot be recognized before the work has been done. This is true even if the company has already received the cash for the work that will be done in the future. In this case the company would receive the cash but defer the recognition of revenue until it has completed the work.

Which of the following shows how paying cash for an insurance policy that protects the company for some future time period affects a company's financial statements? A. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA + − −OA B. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA NA NA −OA C. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − NA − NA NA NA −OA D. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA NA NA −IA

B Paying cash for insurance that will be used in the future is an asset exchange transaction. One asset account (cash) decreases and another asset account (prepaid insurance) increases. The amount of total assets is not affected (NA). The income statement is not affected. The cash outflow is shown in the operating activities section of the statement of cash flows

Which of the following statements is false? A. Prepaid insurance indicates that a company has already paid cash for insurance coverage that protects the company for some future time period. B. Prepaid insurance is shown on the income statement. C. Prepaid insurance is a deferred expense. D. Prepaid insurance represents a future economic benefit.

B Prepaid insurance is an asset account that appears on the balance sheet not the income statement.

On August 1 of Year 1 Accounting Associates collected $1,200 cash for consulting services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of unearned revenue appearing on the December 31, Year 2 balance sheet would be A. $1,200 B. zero C. $700 D. $500

B Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 5 months = $500 service revenue Future obligation = $100 per month x 7 months = $700 unearned revenue As of December 31, Year 2: Amount earned = $100 per month x 7 months = $700 service revenue All of the revenue has been earned by the end of Year 2 so the amount of unearned revenue is zero on December 31, Year 2.

On October 1 of Year 1 Wilburn Company paid cash for an insurance policy that would provide protection for a one year term. Which of the following shows how the required adjusting entry on December 31, Year 1 will affect Wilburn's financial statements? A. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − NA − NA NA NA −OA B. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − NA − NA + − NA C. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA + − −OA D. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA NA NA NA

B The adjusting entry is an asset use transaction. The asset account (prepaid insurance) decreases reflecting the use of insurance coverage. The expense recognition decreases the amount of net income and ultimately stockholders' equity (retained earnings). The cash flow occurred at the time the insurance was purchased. There is no cashflow effect at the time the expense is recognized on December 31.

Delta Company started Year 2 with a $1,700 balance in its Cash account, a $700 balance in its Supplies account and a $2,400 balance in its Common Stock account. During Year 2 the company experienced the following events. Paid $1,600 cash to purchase supplies. Physical count revealed $400 of supplies on hand at the end of Year 2. Based on this information, which of the following show how the year end adjusting entry required to recognize supplies expense would affect Delta's account balances? A. Assets = Liabilities + Stockholders' Equity Cash + Supplies = (1,600) 1,600 B. Assets = Liabilities + Stockholders' Equity Supplies = Retained Earnings (1,900) (1,900) C. Assets = Liabilities + Stockholders' Equity Supplies = Accounts Payable 1,900 1,900 D. Assets = Liabilities + Stockholders' Equity Supplies = Retained Earnings (1,600) (1,600)

B The amount of supplies available for use is $2,300 ($700 beginning balance in the Supplies account plus the $1,600 amount of supplies purchased). Given that there was $400 of supplies on hand at the end of the accounting period, $1,900 ($2,300 available - $400 ending balance) of supplies must have been used during the period. The amount of supplies used would be recorded as an expense. The expense recognition would cause assets (supplies) to decrease by $1,900, supplies expense to increase by $1,900 and equity (retained earnings) to decrease by $1,900.

AAA Consulting Services collected $6,000 cash for services to be provided in the future. Which of the following shows how recognizing the cash receipt will affect the company's ledger accounts? A. Assets = Liabilities + Stockholders' Equity = Unearned Revenue + Retained Earnings 6,000 (6,000) B. Assets = Liabilities + Stockholders' Equity Cash = Retained Earnings 6,000 6,000 C. Assets = Liabilities + Stockholders' Equity Cash = Unearned Revenue 6,000 6,000 D. Assets = Liabilities + Stockholders' Equity = Unearned Revenue + Retained Earnings (6,000) 6,000

C Collecting cash for services to be provided in the future is an asset source transaction. The asset account (cash) and the liability account (unearned revenue) increase. The retained earnings is not affected because the revenue recognition is deferred.

Which of the following shows how adjusting the accounts to recognize supplies expense will affect a company's financial statements? A. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − NA − NA + − −OA B. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − NA − NA + − +OA C. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − NA − NA + − NA D. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − − NA NA + − NA

C Recognizing supplies expense at the end of the accounting period is an asset use transaction. The asset account (cash) decreases, supplies expense increases, net income decreases, and stockholders' equity (retained earnings) decreases. There is no effect on cash flow. The effect on cash flow occurs at the time the company pays for the supplies not when the supplies are expensed.

On October 1 of Year 1 Zeta Company collected $1,200 cash for services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of revenue appearing on the Year 1 income statement would be A. $900 B. $1,200 C. $300 D. $800

C Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 3 months = $300 service revenue Future obligation = $100 per month x 9 months = $900 unearned revenue

On August 1 of Year 1 Accounting Associates (AA) collected $1,200 cash for consulting services to be provided for one year beginning immediately. Based on this information, which of the following show how the required adjustment on December 31, Year 1 would affect AA's ledger accounts? A. Assets = Liabilities + Stockholders' Equity = Unearned Revenue + Retained Earnings (700) 700 B. Assets = Liabilities + Stockholders' Equity Unearned Revenue + Retained Earnings 700 (700) C. Assets = Liabilities + Stockholders' Equity = Unearned Revenue + Retained Earnings (500) 500 D. Assets = Liabilities + Stockholders' Equity = Unearned Revenue + Retained Earnings 500 (500)

C Revenue earned per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount earned = $100 per month x 5 months = $500 service revenue Recognizing deferred revenue is a claims exchange transaction. The liability account (unearned revenue) decreases. The revenue recognition increases net income which ultimately increases retained earnings.

Knoll Company started Year 2 with a $500 balance in its Cash account, a $500 balance in its Supplies account and a $1,000 balance in its common stock account. During Year 2 the company experienced the following events. Paid $400 cash to purchase supplies Physical count revealed $100 of supplies on hand at the end of Year 2 Based on this information the amount of supplies expense reported on the Year 2 income statement is A. $900. B. $400. C. $800. D. $100.

C Since the Company started the accounting period with $500 of supplies and then purchased an additional $400 of supplies during the accounting period, there was a total amount of $900 ($500 + $400) of supplies that were available to be used during the accounting period. Since there were only $100 of supplies on hand at the end of the accounting period then $800 ($900 - $100) had to be used. Assets, in this case supplies, used in the process of producing revenue are called expenses.

On November 1 of Year 1 Falloch, Inc. paid $2,400 cash for a contract allowing the company to use office space for one year. The company's fiscal closing date is December 31. Based on this information, the amount of cash flow from operating activities appearing on the Year 1 statement of cash flows would be A. ($1,200). B. ($2,000). C. ($2,400). D. ($400).

C The cash outflow is not affected by how much of the office space has or has not been used. Since $2,400 cash was paid in Year 1, there would be a $2,400 cash outflow from operating activities shown on the Year 1 statement of cash flows. There would be zero cash flow shown on the Year 2 statement of cash flows.

Which of the following shows how the adjusting entry to recognize services provided to a client who paid for the services prior to the work being performed A. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. + NA + + NA + NA B. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA − + + NA + +OA C. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA − + + NA + NA D. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − − NA + NA + NA

C When a company collects cash for services before they are provided, the company recognizes an obligation to provide the services in the future (unearned revenue). When the company settles its obligation by providing services, the liability account (unearned revenue) decreases and the revenue account increases. This is a claims exchange transaction. The increase in revenue causes net income to increase. The increase in net income causes stockholders' equity (retained earnings) to increase. There is no effect on cash flow because the cash flow was previously recognized at the time the cash was collected from the client.

Which of the following statements is true? A. To determine the book value of a long-term asset, the balance in the accumulated depreciation account must be subtracted from cost of the asset. B. Accumulated depreciation is a contra asset account. C. The amount of depreciation expense recognized each year is added to the beginning balance of accumulated depreciation account to determine the ending balance of the account. D. All of the statements are true.

D

Lawyers Inc. accepted a $12,000 retainer for which the company agreed to provide services in the future. Recognizing this event would A. defer the recognition of revenue. B. cause the company's assets to increase. C. cause the company's liabilities to increase. D. All of the answers are correct.

D Collecting cash for services to be provided in the future is an asset source transaction. The asset account (cash) and the liability account (unearned revenue) increase. The unearned revenue account shows the lawyer's obligation to perform services in the future. Revenue recognition is deferred until the services are actually performed.

On October 1 of Year 1 Lesikar Company paid $1,200 cash for an insurance policy that would provide protection for a one year term. Which of the following shows how the required adjustment on December 31, Year 1 will affect Lesikar's ledger accounts? A. Assets = Liabilities + Stockholders' Equity Prepaid Insurance = Accounts Payable 3,600 3,600 B. Assets = Liabilities + Stockholders' Equity Cash + Prepaid Insurance = (1,200) 1,200 C. Assets = Liabilities + Stockholders' Equity Prepaid Insurance = Retained Earnings 1,200 (1,200) D. Assets = Liabilities + Stockholders' Equity Prepaid Insurance = Retained Earnings (300) (300)

D Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount used = $100 per month x 3 months = $300 insurance expense The expense recognition causes the asset (Prepaid Insurance) to decreases. Further the expense recognition causes net income to decrease which ultimately causes retained earnings to decrease.

On August 1 of Year 1 Presco Enterprises paid $1,200 cash for an insurance policy that would provide protection for a one year term. The company's fiscal closing date is December 31. Based on this information, the amount of insurance expense appearing on the Year 1 income statement would be A. $1,200 B. $900 C. $700 D. $500

D Cost per month = $1,200 total ÷ 12 months = $100 per month As of December 31, Year 1: Amount used = $100 per month x 5 months = $500 insurance expense Future benefit = $100 per month x 7 months = $700 prepaid insurance

On January 1, Year 1, Marino Moving Company paid $48,000 cash to purchase a truck. The truck was expected to have a four-year useful life and an $8,000 salvage value. If Marino uses the straight-line method, the amount of book value shown on the Year 2 balance sheet is A. $30,000 B. $38,000 C. $20,000 D. $28,000

D Depreciation expense per year = (Cost of the asset - Salvage value) ÷ Useful life Depreciation expense per year = ($48,000 Cost - $8,000 Salvage) ÷ 4 Year life = $10,000 The book value is the amount of the cost of the asset minus the accumulated depreciation. At the end of Year 2, the book value is $28,000 ($48,000 Cost - $20,000 Accumulated depreciation).

Bookmyer Company experienced a business event that affected its financial statements as indicated below. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA NA NA −OA Which of the following events could have caused these effects? A. Paid cash to reduce supplies payable B. Recognized supplies expense C. Purchased supplies on account D. Paid cash to purchase supplies

D Paying cash to purchase supplies is an asset exchange transaction. One asset (cash) decreases and another asset (supplies) increases. Total assets is not affected. The income statement is not affected at the time supplies are purchased. Instead, the income statement will be affected at the time the amount of supplies used is determined at the end of the accounting period. Since cash was paid to purchase the supplies, there will be a cash outflow from operating activities shown on the statement of cash flows.

Which of the following shows how paying cash to purchase supplies will affect a company's financial statements? A. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − NA − NA + − NA B. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. − NA − NA NA NA −OA C. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA NA NA NA D. Balance Sheet Income Statement Statement of Cash Flows Assets = Liab. + Equity Rev. − Exp. = Net Inc. NA NA NA NA NA NA −OA

D Paying cash to purchase supplies is an asset exchange transaction. One asset (cash) decreases and another asset (supplies) increases. Total assets is not affected. The income statement is not affected at the time supplies are purchased. Instead, the income statement will be affected at the time the amount of supplies used is determined at the end of the accounting period. Since cash was paid to purchase the supplies, there will be a cash outflow from operating activities shown on the statement of cash flows.

When a company purchases supplies on account A. expenses increase. B. total assets decrease. C. cash flow from investing activities decreases. D. liabilities increase.

D Purchasing on account means that the buyer does not pay cash at the time of purchase. Instead the buyer incurs an obligation (accounts payable) to pay cash in the future. When supplies are purchased on account assets (supplies) and liabilities (accounts payable) increase. The cash flow associated with the purchase of supplies is an operating activity not an investing activity.

On June 1 of Year 1 Zoe Company collected $1,800 cash for medical services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information the amount of unearned revenue and service revenue shown on the Year 1 financial statements would be A. Unearned Revenue Service Revenue zero 1,800 B. Unearned Revenue Service Revenue 1,800 zero C. Unearned Revenue Service Revenue $1,050 $750 D. Unearned Revenue Service Revenue $750 $1,050

D Revenue earned per month = $1,800 total ÷ 12 months = $150 per month As of December 31, Year 1: Amount earned = $150 per month x 7 months = $1,050 service revenue Future obligation = $150 per month x 5 months = $750 unearned revenue

On May 1 of Year 1 Matthew Company collected $2,400 cash for services to be provided for one year beginning immediately. The company's fiscal closing date is December 31. Based on this information, the amount of service revenue and the cash flow from operating activities shown on the Year 1 financial statements would be A. Service Revenue Cash flow $2,400 $800 B. Service Revenue Cash flow $1,600 $800 C. Service Revenue Cash flow $2,400 $1,600 D. Service Revenue Cash flow $1,600 $2,400

D Revenue earned per month = $2,400 total ÷ 12 months = $200 per month As of December 31, Year 1: Amount earned = $200 per month x 8 months = $1,600 service revenue All of the cash was collected in Year 1, the cash inflow from operating activities on the December 31, Year 1 statement of cash flows would be $2,400.

The following items were drawn from a company's accounting records: Accounts receivable Accounts payable Cash paid to purchase land Supplies Supplies expense Cash collected for service to be provided in the future Unearned revenue Prepaid rent Earned Revenue Accrued salaries expense Common stock Dividends Cash paid for prepaid rent Retained earnings Which of the items listed above appear on the income statement? A. 5, 7, 9, and 10 B. 5, 8, and 10 C. 5, 9, 10, and 11 D. 5, 9, and 10

D The income statement shows a company's revenues and expenses. Item 9 is a revenue account. Note that item 7 is a liability account even though its name has the word revenue in it. Items 5 and 10 are expense accounts.