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Which of the following statements about the income statement of a company that was formed 10 years ago is correct?


A) Reports a Net Loss for the year if expenses are more than revenues.
B) Reports the financial effects of activities that have occurred since the company's inception.
C) Reports the amount of the increase in stockholders' equity this year as a result of the company's operations.
D) Reports Net Income,which is an account in the ledger.

E) None of the above
F) All of the above

Correct Answer

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Cobalt Co.'s income statement shows Service Revenue of $64,000,Salaries and Wages Expense of $40,000 and net income of $1,600.The other expenses on Cobalt's income statement must equal:


A) $22,400.
B) $24,000.
C) $105,600.
D) $25,600.

E) A) and B)
F) None of the above

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Which of the following accounts does not have a normal credit balance?


A) Deferred Revenue
B) Prepaid Rent
C) Accounts Payable
D) Service Revenue

E) B) and C)
F) A) and B)

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The period of time between buying assets to be sold to customers and collecting cash from customers is the operating cycle.

A) True
B) False

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During September,the Bug-B-Gone Company buys and pays for a six-month supply of pesticides in order to receive a bulk discount.The company uses accrual basis accounting.The cost of the pesticides is recorded:


A) immediately as an expense.
B) as a liability,which will later be reduced as the pesticides are used.
C) partially as an expense and partially as a liability.
D) as an asset,which will later be reduced as the pesticides are used.

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

Correct Answer

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The net profit margin:


A) measures how much profit from each dollar of revenue.
B) means improved performance if it decreases.
C) means weaker performance if it increases.
D) measures the percentage of assets financed by debt.

E) None of the above
F) B) and C)

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The following transactions occurred during July: 1.Received $1,600 cash for services performed during July. 2.Received $10,000 cash from the issuance of common stock to owners. 3.Received $800 from a customer as payment for services performed during June. 4.Billed $7,000 to customers for services performed on account in July. 5.Borrowed $5,000 from the bank and signed a promissory note. 6.Received $2,000 from a customer for services to be performed during August. Which of the following statements about the recording of these transactions is correct?


A) Transaction #1 would include a debit to Service Revenue.
B) Transaction #3 would include a debit to Accounts Receivable.
C) Transaction #4 would include a debit to Accounts Receivable.
D) Transaction #6 would include a debit to Deferred Revenue.

E) All of the above
F) B) and C)

Correct Answer

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A company's revenue recognition policy:


A) affects the income statement but not the balance sheet.
B) defines when its revenue should be collected.
C) is usually described in the notes to a company's financial statements.
D) states that revenues should not be recorded until payments are received from customers.

E) All of the above
F) B) and C)

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GAAP does not allow cash basis accounting to be used in external financial reports.

A) True
B) False

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When a company makes a payment for amounts owed from prior purchases,it will record a debit to ________ and a credit to ________.


A) Accounts Payable;Cash
B) an expense;Cash
C) Accounts Payable;Retained Earnings
D) Cash;an expense

E) A) and B)
F) All of the above

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The ________ takes stock of what exists at a point in time whereas the ________ depicts a flow of what happened over a period of time.


A) income statement;balance sheet
B) balance sheet;income statement
C) statement of cash flows;balance sheet
D) statement of retained earnings;income statement

E) B) and D)
F) None of the above

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The following account balances are taken from the December 31,2018,financial statements of ABZ Advertising Company.The company uses accrual basis accounting.  Advertising Revenue 46,482 Cash 41,516 Accounts Receivable 7,296 Interest Expense 2,299 Accounts Payable 5,000 Operating Expenses 37,460 Deferred Revenue 1,178 Equipment 18,048 Income Tax Expense 2,326\begin{array}{lr}\text { Advertising Revenue } & 46,482 \\\text { Cash } & 41,516 \\\text { Accounts Receivable } & 7,296 \\\text { Interest Expense } & 2,299 \\\text { Accounts Payable } & 5,000 \\\text { Operating Expenses } & 37,460 \\\text { Deferred Revenue } & 1,178 \\\text { Equipment } & 18,048 \\\text { Income Tax Expense } & 2,326\end{array} The following activities occurred in 2019: 1.Performed advertising services on account,$55,000. 2.Received cash payments on account,$10,400. 3.Received deposits from customers for advertising services to be performed in 2020,$2,500. 4.Made payments to suppliers on account,$5,000. 5.Incurred $45,000 of operating expenses;$39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year. Which of the following is the journal entry that will be used to record activity #3?


A) Debit Cash and credit Deferred Revenue for $2,500.
B) Debit Deferred Revenue and credit Advertising Revenue for $2,500.
C) Debit Cash and credit Accounts Receivable for $2,500.
D) Debit Deferred Revenue and credit Receivable for $2,500.

E) All of the above
F) A) and B)

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Swift Company paid $18,650 in advance for six months of rent.What journal entry will Swift prepare to record this transaction?


A) Debit Cash and credit Deferred Rent for $18,650.
B) Debit Prepaid Rent and credit Cash for $18,650.
C) Debit Cash and credit Prepaid Rent for $18,650.
D) Debit Rent Expense and credit Cash for $18,650.

E) None of the above
F) C) and D)

Correct Answer

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


A) Revenues when cash is received;expenses when cash is paid.
B) Revenues when cash is received;expenses when the expense is incurred.
C) Revenues when the performance obligation is satisfied;expenses when the expense is incurred.
D) Revenues when the performance obligation is satisfied;expenses when cash is paid.

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

Correct Answer

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The following account balances are taken from the December 31,2018,financial statements of ABZ Advertising Company.The company uses accrual basis accounting.  Advertising Revenue 46,482 Cash 41,516 Accounts Receivable 7,296 Interest Expense 2,299 Accounts Payable 5,000 Operating Expenses 37,460 Deferred Revenue 1,178 Equipment 18,048 Income Tax Expense 2,326\begin{array}{lr}\text { Advertising Revenue } & 46,482 \\\text { Cash } & 41,516 \\\text { Accounts Receivable } & 7,296 \\\text { Interest Expense } & 2,299 \\\text { Accounts Payable } & 5,000 \\\text { Operating Expenses } & 37,460 \\\text { Deferred Revenue } & 1,178 \\\text { Equipment } & 18,048 \\\text { Income Tax Expense } & 2,326\end{array} The following activities occurred in 2019: 1.Performed advertising services on account,$55,000. 2.Received cash payments on account,$10,400. 3.Received deposits from customers for advertising services to be performed in 2020,$2,500. 4.Made payments to suppliers on account,$5,000. 5.Incurred $45,000 of operating expenses;$39,000 was paid in cash and $6,000 was on account and unpaid as of the end of the year. Which of the following is the journal entry that will be used to record activity #4?


A) Debit Operating Expense and credit Cash for $5,000.
B) Debit Accounts Payable and credit Cash for $5,000.
C) Debit Accounts Payable and credit Operating Expense for $5,000.
D) Debit Cash and credit Accounts Payable for $5,000.

E) All of the above
F) None of the above

Correct Answer

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Dividing up the continuing life of a company into shorter periods is called the time period assumption.

A) True
B) False

Correct Answer

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In September,a customer signed a contract to have his house painted and paid for the job in October.The painting company bought the paint in August on account and paid for it in September.The painting company painted the house in November.Assuming accrual basis accounting is used,the painting company should record the:


A) revenues in November and the expenses in September.
B) revenues and the expenses in September.
C) revenues and the expenses in November.
D) revenues in September and the expenses in August.

E) All of the above
F) A) and D)

Correct Answer

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When accrual basis accounting is used,net income equals the amount of cash generated by the business.

A) True
B) False

Correct Answer

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The entry recorded by a law firm when it provides a service it previously recorded as Deferred Revenue includes a:


A) credit to Service Revenue.
B) debit to Cash.
C) credit to Accounts Receivable.
D) credit to Deferred Revenue.
E) credit to Cash.

F) A) and B)
G) A) and C)

Correct Answer

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Which of the following is always true?


A) Net income is the amount of cash generated by a business.
B) Net income represents the change in the company's value during the period.
C) The measurement of income involves only counting.
D) Net income results when revenues exceed expenses.

E) A) and B)
F) All of the above

Correct Answer

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