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Exam 3: The Income Statement

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Question 1

True/False

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Net income for the accounting period will increase retained earnings account.

A) True
B) False

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Question 2

Multiple Choice

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Expenses

A) represent the costs that arise when a company sacrifices its resources during the accounting period.
B) are reported in the period in which they are incurred to generate revenue.
C) reduce Shareholders' equity.
D) all of the choices.

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

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D

Question 3

Multiple Choice

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Creative Ads Inc.,provides $5 million of advertising development services on account to a large,existing customer who has previously purchased similar amounts of services and has always paid on time.Creative Ads Inc.,then decides to credit $5 million to revenue.This decision:

What entry would be made in account receivable when a company has billed its client $230,000 during the financial year and client have sent in payments totalling $87,908.The business uses cash-based accounting?

Accrual basis of accounting is the only acceptable method for external reporting of financial statements under both ASPE and IFRS.

A customer purchased $1,500 of services on credit two months ago and has just paid the bill.The receipt of the payment from the customer is recorded as a

The total credits recorded in revenue accounts must equal the total debits recorded in expense accounts.

The net profit margin for Jewelers Inc.is 40%.They brought in $15,000 of revenues during the year.What are expenses?

An increase in net income does not affect Shareholders' equity.

Revenues come solely from selling a company's goods or services.

Deferred Revenue is an alternative name for the Shareholders' equity account typically known as Retained Earnings.

An account that measures interest earned on investments might include which of the following terms in its title?

The following is a series of accounts for the Sprinkler Blowout Company,listed alphabetically and numbered for identification.Following the accounts is a series of transactions.For each transaction,indicate the account(s)that should be debited and credited by entering the appropriate account number(s)to the right of each transaction.If no journal entry is needed,write none after the transaction. $\begin{array} { | l | l | l | l | } \hline\text { Acct.\# } & \text { Accuunt Title } & \text { Acct.\# } & \text { Accuunt Title } \\\hline 1 & \text { Accounts payable } & 9 & \text { Land } \\\hline 2 & \text { Accounts receivable } & 10 & \text { Note payable } \\\hline 3 & \text { Advertising expense } & 11 & \text { Prepaid insurance } \\\hline 4 & \text { Building } & 12 & \text { Service reverue } \\\hline 5 & \text { Cash } & 13 & \text { Supplies } \\\hline 6 & \text { Contributed capital } & 14 & \text { Supplies expense } \\\hline 7 & \text { Income taxes payable } & 15 & \text { Wages expense } \\\hline 8 & \text { Irsurance expense } & 16 & \text { Wages payable } \\\hline\end{array}$ $\begin{array} { | l | l | l | } \hline \text { Tranfactions } & \text { Debit } & \text { Credit } \\\hline \text { A .Performed service for customers this month for cash. } & & \\\hline \text { B. Purchared on credit but did not use supplies this month. } & & \\\hline \text { C. Purchased a building, paying part cash and sigring a note for the } & & \\\hline \text { Pest. } & & \\\hline \text { D. Paid insurance preriiun for coverage begirning next month. } & & \\\hline \text { E. Booked blowouts to be done next monthr, didn't collect cash. } & & \\\hline\end{array}$

Businesses adhere to roughly the same steps in the operating cycle,regardless of what industry they are in.

Show journal entries for each of the following January activities,and post results to the relevant T-accounts. A.Provided $26,000 of services.$17,000 was received in cash and $9,000 was provided on credit. B.Used $423 of supplies. C.Provided $3,500 of services paid for in previous months. D.Bought $15,000 of new equipment signing a promissory note. E.Paid $689 on account for December's utilities. F.Paid workers $8,300 for work done in January.

If a company is paid in full for services provided this month,how will the basic accounting equation be affected?

An account that measures the amount of income taxes incurred might include which of the following terms in its title?

Which account is least likely to be credited when an expense is recorded?

A debit to prepaid rent of $1,000 was incorrectly reported as a debit to rent expense.Will the unadjusted trial balance still balance? If not,will debits be greater than credits or credits greater than debits? What is the resulting impact on net profit margin?

GAAP (Generally Accepted Accounting Principles)requires the use of accrual basis of accounting for external financial reporting purposes.