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Exam 3: Reporting Operating Results on the Income Statement

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Question 1

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Which of the following is an operating activity?

A) Repaying a bank loan
B) Paying a dividend to owners
C) Purchasing a new building
D) Purchasing goods to be offered for sale

E) C) and D)
F) B) and D)

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D

Question 2

Multiple Choice

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A company received a bill of $3,500 for utilities used in the current month.The journal entry to record this event:

A) will include a debit to Accounts Receivable for $3,500.
B) will include a credit to Accounts Payable for $3,500.
C) will include a credit to Utilities Expense.
D) is not required; no journal entry should be prepared until the utilities bill is paid.

E) B) and D)
F) B) and C)

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Question 3

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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?

Which of the following would eventually cause Retained Earnings to decrease?

A company reported sales revenue,all of which arose from credit sales,of $40,000 on the income statement.Balance sheet information includes the following: How much cash was collected from customers during the year?

If a company receives payment when it provides a service:

If a company decides to record an expenditure made this period as an expense,when it should have been recorded as an asset,net income will be overstated in the current period as a result.

When cash is paid before the related expense is incurred,an asset is reported on the balance sheet.

Which of the following expressions correctly describes when revenues and expenses are recognized under accrual basis accounting?

Which of the following statements about revenues and expenses is correct?

Revenues are recognized when __________,even when cash is collected in a different accounting period than the revenue is earned.

Net income is based on estimates.

If revenues are not growing faster than expenses,then net income will decrease.

The following transactions occurred during July: 1.Received $800 cash for services performed during July. 2.Received $5,000 cash from the issuance of common stock to owners. 3.Received $400 from a customer as payment for services performed during June. 4.Billed $3,500 to customers for services performed on account in July. 5.Borrowed $2,500 from the bank and signed a promissory note. 6.Received $1,000 from a customer for services to be performed during August. -Use the information above to answer the following question.Which of the following statements about the recording of these transactions is correct?

Melody's Piano School operations for the month of May were limited to the following transactions: -Provided $400 of piano lessons to students who paid in cash. -Provided $100 of piano lessons on account. -Collected $300 from students who took piano lessons during April. -Paid April's piano rental bill of $100. -Received May's piano rental bill of $150 and set it aside for payment in June. -Use the information above to answer the following question.Assuming that the company uses cash basis accounting,what is net income for May?

Which of the following would not be considered an operating activity?

Match the term and the explanation.There are more definitions than terms. TERM 1._____ Cash Basis 2._____ Net Profit Margin 3._____ Unadjusted Trial Balance 4._____ Prepaid Expense 5._____ Unearned Revenue 6._____ Revenue Recognition Principle 7._____ Expense Recognition Principle DEFINITION A.Reported when a company sells goods or services in the ordinary course of business for more than it costs to produce. B.Reporting expenses and revenue according to the time the underlying activities occur. C.A list of account balances when the accounts do not yet include all revenues and expenses. D.The concept that expenses should be reported at the same time as the related revenue. E.The principle that changes in assets must be matched by changes in liabilities and equity. F.Also known as net assets,this is the value of assets minus liabilities. G.An indication that a company has already paid a cost not yet incurred. H.A company's policy on when to report revenue in the financial statements. I.Reporting expenses and revenues according to the time the money is paid or received. J.A liability account indicating customers have already paid for services not yet rendered. K.A ratio that indicates the percent of each revenue dollar that is left over after covering costs and expenses.

The following activities took place during the month of November at a corporation that operates a shoe repair shop. 1.Salaries and wages in the amount of $33,000 are paid to employees. 2.On the last day of November,the company acquires equipment on account of $55,000. 3.Payment of $375 made on account to a consulting firm for services received from that firm during October. 4.Payment of $12,000 made at the beginning of November for six months of rent; the period covered by the payment begins in November. 5.Utility bills in the amount of $125 arrive in the mail; the bills will not be paid until December. Required: Indicate what accounts would be used to record the initial transaction arising from each activity.

During March,the Long Life Consulting Company provides $23,000 in consulting services for a customer.The customer paid $12,000; the other $11,000 was on account.Which of the following statements about these transactions is correct?

Expenses include all of the following except: