A201 Smartbook ch 3
At the beginning of the period, chipotle $80 cash for rent, insurance, and advertising, all to be used in the future. What is the journal entry for this transaction?
-Prepaid expenses $80(Debit) -Cash $80(Credit)
What is the Expense Recognition Principle?
requires that costs incurred to generate revenues be recognized in the same period - a matching of costs with benefits
What ratio is used to determine how effective management is in generating profit on every dollar of sales?
Net profit Margin Ratio
T/F Expenses decrease net income and stockholders equity
TRUE
T/F When net income is positive, Retained Earnings increases; a net loss decreases Retained Earnings.
TRUE
During the first quarter, chipotle sold food and beverages to customers for $1228; $44 was sold to universities on account(To be paid by universities next quarter) the rest was received in cash in stores. What is the journal entry for this transaction?
- NOTE: To measure revenues and expenses in a quarter, these accounts begin with a $0 account balance; notice they are note listed on the trial balance because they have no balances yet. - Cash $1184(Debit) -Accounts receivables $44(Debit) -Sales Revenue $1228(Credit)
On December 1, ABC Apartment Company received $4,800 from a tenant for 3 months' rent in advance. The entry on December 1, includes a ______. (Check all that apply.) -$4,800 debit to Unearned Rent Revenue -$4,800 debit to Cash -$4,800 credit to Rent Revenue -$4,800 credit to Unearned Rent Revenue
-$4,800 debit to Cash -$4,800 credit to Unearned Rent Revenue
When a company makes a payment for amounts owed from prior purchases, it will record a debit to ______ and a credit to ______. -Expenses; Cash -Accounts Payable; Retained Earnings -Cash; an expense -Accounts Payable; Cash
-Accounts Payable; Cash Reason: When the items were originally purchased an asset was debited and a liability, Accounts Payable, was credited. When the company pays, the entry is a debit to Accounts Payable, and a credit to Cash.
Retained earnings is increased with ______. (Check all that apply.) -credits -when revenues exceed expenses -dividends declared -debits
-Credits -When revenues exceed expenses
Identify which line items are a result of peripheral transactions (i.e., those not central to on-going operations) and, thus, are listed below operating income on a multiple step income statement. (Check all that apply.) -Investment Income -Cost of Sales -Salaries Expense -Interest Expense
-Investment Income -Interest Income
Unearned Revenue is a(n) ______ and is _____ when cash is collected in advance of being earned.
-Liability -Credited
When a company pays cash in advance for rent that is to be used over the next 2 years, the company records a debit to ______ and a credit to ______. -Prepaid Rent; Cash -Rent Expense; Cash -Cash; Prepaid Rent -Prepaid Rent; Accounts Receivable
-Prepaid Rent; Cash
What are the balances of revenues and expenses accounts?
-Revenue accounts have credit balances -Expense accounts have Debit balances
In accrual basis accounting, when are revenues and expenses recognized?
-Revenues are recognized when they are earned -Expenses are recognized when they are incurred to generate revenues
Assume chipotle purchased food, beverage, and packing supplies costing $370, paying $290 dollars in cash and owing the rest on account. What is the journal entry for this transaction?
-Supplies 370(Debit) -Cash $290(Credit) -Accounts Payable $80(Credit)
Which of the following statements are true about supplies? (Check all that apply.) -Supplies Expense on the income statement reports the amount of supplies on hand. -Supplies are assets because they have not yet been used. -Supplies Expense is on the income statement and reports the amount of supplies used during the period. -Supplies are on the income statement and report the amount of supplies used during the period. -Supplies is on the balance sheet and reports the amount of supplies on hand.
-Supplies are assets because they have not yet been used. -Supplies Expense is on the income statement and reports the amount of supplies used during the period. -Supplies is on the balance sheet and reports the amount of supplies on hand.
When supplies, purchased previously, are used to generate revenues, ______. (Check all that apply.) -liabilities are decreased -liabilities are increased -supplies are expensed -cash is decreased -the asset, Supplies, is decreased
-Supplies are expensed -The asset, supplies, is decreased
A company paid $41 for management training expenses.What is the journal entry for this transaction?
-Training expenses $41(Debit) -Cash $41 (Credit)
Select all that apply On May 30, Blade for Blade, Inc. collected $10,000 from customers in advance. In June, it earned $2,000 of the amounts collected in advance. In June, ______. (Select all that apply.) -Accounts Receivable is decreased -Accounts Receivable is increased -Cash is increased -Unearned Revenue is decreased -Revenue is increased -Unearned Revenue is increased
-Unearned Revenue is decreased -Revenue is increased
Which of the following would appear only on accrual-based, and not on cash-based, financial statements? (Check all that apply.) -Sales on the income statement -Unearned revenue on the balance sheet -Accounts receivable on the balance sheet -Cash collected from customers on the statement of cash flows
-Unearned Revenue on the balance sheet
A company paid employees $177 for work this quarter and $83 for work last quarter. what is the journal entry for this transaction?
-Wages expense $177(Debit) -Wages Payable $83 (Debit) -Cash $260 (Credit)
In its first year of business, Wok 'n' Roll, Inc. earned $100,000 of revenues 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 $0 net income for external reporting purposes. -Wok 'n' Roll should report net income of $20,000 for external reporting purposes. -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.
-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.
Adjusting entries are required before financial statements are prepared to ensure that ______. (Select all that apply.) -all revenues earned during the period are recorded -all expense incurred during the period are recorded -the expenses include only the amounts paid during the period -revenues earned equals the cash collected from customers during the period
-all revenues earned during the period are recorded -all expense incurred during the period are recorded
Adjusting entries ______. (Check all that apply.) -are required in cash basis accounting only -are needed in order to measure the period's net income or loss -update the accounts to their proper balances
-are needed in order to measure the period's net income or loss -update the accounts to their proper balances
On February 28, AppGame Company paid for a one-year insurance policy that begins March 1. AppGame's entry to record this transaction includes a ______. (Check all that apply.) -credit to Cash -debit to Prepaid Insurance -debit to Insurance Expense -credit to Prepaid Insurance -debit to Cash
-credit to Cash -debit to Prepaid Insurance
On February 28, AppGame Company paid for a one-year insurance policy that begins March 1. AppGame's entry to record this transaction includes a ______. (Check all that apply.) Multiple select question. -credit to Prepaid Insurance -credit to Cash -debit to Prepaid Insurance -debit to Insurance Expense -debit to Cash
-credit to Cash -debit to Prepaid Insurance
On May 10, BC Company ordered $500 of supplies, promising to pay for them in June. The supplies were received and recorded on May 15. BC paid the $500 on June 1. The journal entry that BC makes on June 1 would include a ______. (Check all that apply.) -debit to Cash of $500 -credit to Accounts Payable of $500 -credit to Cash of $500 -debit to Supplies of $500 -debit to Accounts Payable of $500
-credit to Cash of $500 -debit to Accounts Payable of $500
Pizza Company sold pizzas on account. The journal entry to record the sales will include a ______. (Check all that apply.) -credit to Unearned Revenue -credit to Sales Revenue -debit to Sales Revenue -debit to Cash -debit to Accounts Payable -debit to Accounts Receivable
-credit to Sales Revenue -debit to Accounts Receivable
Pizza Company prepaid 3 months' store rent. The journal entry to record this transaction includes a ______. (Check all that apply.) -debit to Rent Expense -debit to Cash -debit to Prepaid Rent -credit to Prepaid Rent -credit to Rent Expense -credit to Cash
-debit to Prepaid Rent -credit to Cash
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 caused total stockholders' equity to ______. -increase by $57,000 -increase by $63,000 -decrease by $3,000 -increase by $60,000 -decrease by $60,000 -increase by $3,000
-increase by $57,000
Russell's Consulting Services provided $1,000 of services to the local college and immediately collected $700, but the college wants to pay the rest next month. Record this transaction in the accounting equation of Russell by ______. -decreasing Cash; and increasing both Accounts Receivable and Common Stock -increasing both Cash and Accounts Receivable; and decreasing Revenues -increasing both Cash and Accounts Receivable; and increasing Revenues -increasing Cash and Accounts Payable; and increasing Revenues
-increasing both Cash and Accounts Receivable; and increasing Revenues
Retained Earnings represents ______. (Check all that apply.) -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 -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
A classified income statement is categorized into ______. -earned and contributed capital -current and noncurrent items -operating and peripheral activities -operating, investing and financing activities
-operating and peripheral activities
In an effort to meet investors' expectations, managers may feel pressure to ______. (Select all that apply.) -overstate expenses -overstate net income -record cash collected in advance as revenue -overstate revenues -understate net income -record supplies purchased as an expense rather than an asset
-overstate net income -record cash collected in advance as revenue -overstate revenues
When reporting net income to users, accountants must determine _____. -the amount of cash received and paid -the length of the operating cycle -how much owners' investments changed -when the effects of operating activities and what amounts should be recorded
-when the effects of operating activities and what amounts should be recorded
Two types of issues arise in reporting periodic income to users, what are they?
1. Recognition Issue: When should the effects of operating activities be recognized and reported? 2. Measurement Issue: What amounts should be recognized and reported?
Monster Music Company provided music lessons to customers and earned $10,000, receiving $6,000 in cash and earning the rest on account. What is Monster Music Company's revenue under the accrual basis of accounting? -4000 -6000 -10000
10000
Monster Music Company provided music lessons for customers and earned $10,000, receiving $6,000 in cash and recording an accounts receivable for the remainder. What is Monster Music Company's revenue under the cash basis accounting? -10,000 -6,000 -4,000
6000
What happens when a customer pays for goods or services in advanced, for example, with a gift card? When is the revenue recorded for this transaction?
A liability, usually unearned revenue, is created - at this point no revenue is recorded - When the company provides the promised goods or services to the customer, then the revenue is recognized and the liability is eliminated.
What does a rising net profit margin indicate?
A rising net profit margin ratio signals more efficient management of sales and expenses
Pizza Aroma delivered $500 of pizzas to the local high school, but hasn't received payment yet. Pizza Aroma will report ______. -nothing, because payment hasn't been received yet -Accounts Payable of $500 -Accounts Receivable of $500 -Cash of $500, because the school will pay for the pizzas eventually
Accounts receivable $500
Cash basis accounting may be used by organizations that ______. are large publicly-traded corporations -collect cash from customers in advance -do not need to report to external users -are required to follow accrual accounting in accordance with Generally Accepted Accounting Principles
Do not report to external users
T/F As expenses increase(are debited), net income, retained earnings, and stockholders equity increase.
FALSE As expenses increase(are debited), net income, retained earnings, and stockholders equity DECREASE.
T/F Investors in the stock market base their decisions on their expectations of past earnings
FALSE Investors base their decisions on their expectations of FUTURE earnings
T/F Many local retailers, medical offices, and other small businesses use accrual-basis accounting, in which revenues are recorded when cash is received and expenses are recorded when cash is paid, regardless of when the revenues are earned or the expenses incurred.
FALSE Many local retailers, medical offices, and other small businesses use CASH BASIS accounting, in which revenues are recorded when cash is received and expenses are recorded when cash is paid, regardless of when the revenues are earned or the expenses incurred. - Many smaller businesses use cash basis, while the larger corporations use accrual basis accounting
T/F Revenues decrease net income and stockholders equity
FALSE Revenues INCREASE net income and stockholders equity
T/F Managers can make unethical accounting and reporting decisions based on greed by falsifying revenues and expenses. Falsifying information always fools people in the long and manager never get caught.
FALSE While falsifying often fools people in the short-term, it rarely works in the long-run and often leads to very bad consequences.
What are the 3 major types of business activities?
Financing, operating and investing
What is the last expense listed on the income statement before calculating net income?
Income tax expense
When do you recognize revenue when cash is received after the goods or services are delivered? For example, goods or services are provided on account or a select customer is delivered food and charged by chipotle at a later date.
Revenue is recorded at the point of delivery, not when cash is received. - Once cash is received, we increase cash and reduce the accounts receivable account
When do you recognize revenue if cash. is received before the goods or services are delivered? For example a gift card is sold in exchange for the promise to provide goods or services in the future.
Since nothing has been delivered at this point, no revenue is recorded. Instead, it creates a liability account (Unearned Revenue) representing the amount of food service owed to the customers. - Later when the customer redeems the gift card, and the company delivers the good or service, it earns and records the revenue earned and reduces the liability account.
T/F When revenues exceed expenses, the company reports net income, increasing Retained Earnings and stockholders' equity. However, when expenses exceed revenues, a net loss results that decreases Retained Earnings and thus stockholders' equity.
TRUE
T/F All profit-making corporations are required to compute income taxes to federal, state, and foreign governments.
TRUE
True or false: Income Tax Expense may also be called Provision for Income Taxes.
TRUE
T/F When a revenue or expense is recorded, either an asset or a liability will be affected as well
TRUE - Revenues increase stockholders' equity through the account Retained Earnings and therefore have credit balances (the positive side of Retained Earnings). Recording revenue requires either increasing an asset (such as Accounts Receivable when selling goods on account to customers) or decreasing a liability (such as Unearned Revenue that was recorded in the past when cash was received from customers before being earned). - Expenses decrease stockholders' equity through Retained Earnings. As expenses increase, they have the opposite effect on net income, which affects Retained Earnings. Therefore, they have debit balances (opposite of the positive credit side in Retained Earnings). That is, to increase an expense, you debit it, thereby decreasing net income and Retained Earnings. Recording an expense requires either decreasing an asset (such as Supplies when used) or increasing a liability (such as Wages Payable when money is owed to employees).
T/F GAAP requires accrual accounting for financial reporting
TRUE -Financial statements created under cash basis accounting normally postpone or accelerate recognition of revenues and expenses long before or after goods and services are produced and delivered (when cash is received or paid). - as a result, cash basis does not accurately reflect assets or liabilities for a specific time
What is the Net Profit Margin Ratio?
net income/net sales(or operating revenues)
The gain from the sale of investments are ______ on the income statement.
not included as operating income but are included in net income
What is the operating income equation?
operating revenues - operating expenses = Operating Income
What is retained earnings?
the Retained Earnings account is the accumulation of all past revenues and expenses minus any income distributed to stockholders as dividends (that is, earnings not retained in the business).
On the income statement, Income from Operations differs from Income before Income Taxes in that ______ are subtracted from Income from Operations to arrive at Income before Income Taxes. -interest and income tax expenses -operating results and all other one-time transactions -transactions that are non-operating or infrequently occurring
transactions that are non-operating or infrequently occurring
