ACCT Ch 3 Smart Book
In its 1st year of operation, City Perk paid Salaries Expense of $1.1 million. On December 31, it recorded an entry for additional Salaries Expense of $100,000 that will be paid at the beginning of the 2nd year. How much will Salaries Expense for the 1st year ended equal?
$1.2 million Reason: Salaries Expense equals $1.2 million which includes the $1.1 million paid and the $100,000 million owed to its employees.
Quartz Instruments had Retained Earnings of $145,000 at December 31, 2020. Net Income for 2021 was $90,000, and Dividends for 2021 were $30,000. What amount of Retained Earnings should be reported at December 31, 2021?
$205,000 Reason: $145,000 + $90,000 - $30,000 = $205,000
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 ______.
$3,000
In May, Many Happy Returns, Inc. provided $1,400 of services of which $1,000 was collected and had expenses of $800 of which $700 was paid. Its net income equals ______.
$600 using accrual accounting versus $300 using cash basis Reason: Accrual accounting net income equals $600 (=$1,400 revenues - $800 expenses incurred). Cash basis net income equals $300 (=$1,000 cash collected - $700 cash paid).
Total Revenues equals $80,000 and Net Income equals $20,000, then Total Expenses equals $_____
60,000
Which statement is false?
A trial balance is the same as a balance sheet. (false) True answers: A trial balance can be taken at any point in time. A trial balance can verify the equality of debits and credits. A trial balance lists all the accounts with their current balances.
When a company makes a payment for amounts owed from prior purchases, it will record a debit to ______ and a credit to ______.
Accounts Payable; Cash
When AppGame Company delivers pizza to customers on account and bills its customer accounts, it should record a debit to ______ and a credit to ______.
Accounts Receivable; Sales Revenue
Which ratio change provides good news about a company?
An increase in the net profit margin ratio
What type of an account is Accounts Receivable?
Asset
Which of the following is another way to express the expanded accounting equation?
Assets - Liabilities = Common Stock + Retained Earnings
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
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.
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
Match the description with each of the accounts that may be debited when Service Revenue is credited.
Cash= Collections occur in the same period as the services Accounts Receivable=The service is performed prior to the collections Deferred Revenue= Collections occur in advance of the performance of the service
Stockholders' equity consists of ______, which is the amount contributed, and ______, which is generated from profitable operations (i.e., from revenues being greater than expenses).
Common Stock; Retained Earnings
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 (bc they were owed and payed at the same month of sept)
If Revenues is credited, then the possible debits are ______. (Select all that apply.)
Deferred Revenue Accounts Receivable Cash
When Revenue is credited, the possible three debits are _________
Deferred Revenue Accounts Receivable Cash
Morris Lest, Inc. received and paid a $500 electric bill in June for electricity used in May. In which month should Morris Lest record the expense in accordance with Generally Accepted Accounting Principles?
May Reason: The expense recognition (matching) principle requires expenses be recorded in the period incurred, regardless of whether the expense has been paid. Since the electrical services related to May, the expense should be recorded in May, not in June when it is paid. Even if the bill has not yet been received, management must use historical information to estimate the amount of the expense.
Which of the following is correct?
Measurement of net income involves estimations. False answers: Net income equals the amount of cash generated by the business during the reporting period. Net income represents the change in the market value of the company's stock during the period.
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.
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. Reason: 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.
If a company incorrectly records a payment as an asset instead of an expense, how will this error affect net income in the current period?
Net income will be too high. Reason: Net income will be too high because the expenses are too low given expenses should have been increased instead of an asset.
ABC Company paid $6,000 cash for insurance in June that provides coverage for 6 months, from July through December. How much expense should be recognized in June to be in accordance with generally accepted accounting principles?
No expense should be recognized in June. Reason: Prepaid Insurance, an asset of $6,000, should be recorded because no insurance services were provided in June.
In June, customers paid $3,900 for services they received in May. How much revenue should be recognized in June under accrual accounting?
No revenues are recognized in June. Reason: In May when the services were performed is when the company records the revenue. The entry includes a debit to Accounts Receivable and a credit to Revenue. In June when the cash is received, the entry includes a debit to Cash and a credit to Accounts Receivable. Revenue is recorded in the period the seller provides the good or service regardless of when the cash is collected.
On October 31, Pizza Company sold pumpkin spice pizzas for Halloween parties on account. The customers have 30 days to pay for the pizzas. In which month should Pizza Company record the revenue under accrual accounting?
Oct Reason: Revenue is recognized when the goods are delivered which is October.
Which of the following financial statement line items is not an expense?
Prepaid Rent Reason: Prepaid Rent is an asset because it has future economic benefit for the business.
is the quantity sold times the price charged from selling goods or services to customers. (Enter one word per blank.)
Revenue
Which of the following line items appear on an income statement? (Select all that apply.)
Revenues Wages Expense
The journal entry to record the purchase of supplies on account is debit ______.
Supplies and credit Accounts Payable
True or false: A company generates Retained Earnings by operating profitably.
True Reason: Retained Earnings is the accumulated earnings the company has not distributed to stockholders.
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.
Under which of the following circumstances would cash basis accounting report lower revenue than accrual basis accounting in a company's 1st year of business?
When it makes sales on account
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 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.
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
After increases and decreases in an account are recorded, the amount remaining in the account is its ending ______
balance
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 basis
Revenue is recognized when ______. (Check all that apply.)
cash is collected from customers, if using cash basis accounting services are provided even if cash has not yet been collected, if using accrual basis accounting
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
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
The entry to record cash collected from customers in advance includes a ______. (Select all that apply.)
credit to Deferred Revenue debit to 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
Utilities Expense is ______.
debited when the service is received
Expenses are increased with ______.
debits because they decrease stockholders' equity
The totals on a trial balance reveal whether the total _____ equal the total _______. (Enter one word per blank.)
debits; credits
Assets, on the balance sheet, provide future benefits for a company, while _______ , on the income statement, are used-up benefits. (Enter one word per blank.)
expenses
If the Accounts Receivable ending balance is greater than its beginning balance, then its debits were ______ than its credits during the period.
greater
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
In accrual basis accounting, revenue is recorded when the seller ______.
performs the work promised to the customer and thus is entitled to receive compensation
The net profit margin ratio is calculated by dividing net income by ______.
revenue
If a company debits Cash and credits Sales Revenue, it is recording the ______.
sale of goods to a customer for cash
The key factor in determining whether revenue should be recognized is whether the ______.
seller has provided the goods or services to the customer
Accounts Receivable arises when a company ______.
sells on credit and is an asset
Revenues are recognized when ______, even when the cash is collected in a different accounting period than the obligation to the customer has been performed.
services are performed goods are delivered
Net income appears on the ______. (Select all that apply.)
statement of retained earnings income statement
Performing services on account will increase ______. (Check all that apply.)
total assets stockholders' equity Reason: Performing services on account will increase Accounts Receivable, an asset, and Revenue, which is an element of stockholders' equity.