Financial Accounting Global Edition Robert Libby Patricia Libby 8th Edition- Test Bank
To Purchase this Complete Test Bank with Answers Click the link Below
If face any problem or
Further information contact us At tbzuiqe@gmail.com
Sample Test
Chapter 03
Operating Decisions and the Accounting System
True / False Questions
1. The
operating cycle is the time that elapses between a company’s cash payment to
suppliers for inventory purchases and the collection of cash from sale of
inventory to customers.
True False
2. A
retail store would likely have a shorter operating cycle than an automotive
manufacturer.
True False
3. The
time period assumption implies that the life of a business entity can be
reported in time periods such as quarters and years.
True False
4. An
example of operating revenue would be the revenue created by the sale of an
automobile by a car dealership.
True False
5. According
to the revenue realization principle, revenue is recognized at the time that
cash is collected from a customer for services to be provided in the future.
True False
6. Unearned
revenues are reported as liabilities on the balance sheet.
True False
7. Interest
expense is reported on the income statement as an operating expense.
True False
8. Earnings
per share must be either reported on the income statement or disclosed in the
notes to the financial statements.
True False
9. Investment
income is reported as operating revenue and therefore increases operating
income.
True False
10.
Expenses are the result of decreases in assets or increases in
liabilities incurred in order to generate revenues.
True False
11.
According to the matching principle, salary expense is
recognized on the income statement when the salaries are paid rather than when
the employee provides the work.
True False
12.
A gain resulting from the sale of plant and equipment is not
reported as operating income on the income statement.
True False
13.
Under accrual accounting, rent expense for February, 2015 would
be recognized on the income statement in February, 2015 even though it had been
paid for in January.
True False
14.
Under accrual basis accounting, revenues are recognized when
earned and expenses are recognized when incurred.
True False
15.
Application of generally accepted accounting principles requires
that the accrual basis of accounting be used for reporting revenues and
expenses on the income statement.
True False
16.
The matching principle requires expenses to be recorded on the
income statement when incurred in generating revenues.
True False
17.
The revenue realization principle recognizes revenue when the
goods or services are provided, regardless of the timing of the cash collection
from customers.
True False
18.
Selling inventory to a customer on account results in an
increase in both assets and revenues.
True False
19.
Cash received prior to the providing of the goods or service
results in an increase in both assets and liabilities.
True False
20.
Using cash to purchase office supplies, which will be consumed
later, results in an increase in expenses and a decrease in assets at the time
of purchase.
True False
21.
Revenue accounts have credit balances because they increase
stockholders’ equity.
True False
22.
Expense accounts have debit balances because they decrease net
income, retained earnings, and stockholders’ equity.
True False
23.
Purchasing a six-month insurance policy results in a debit to
insurance expense and a credit to cash at the date of purchase.
True False
24.
Reporting revenues on the income statement that were previously
reported as unearned revenues on the balance sheet results in a decrease in
liabilities and an increase in net income, retained earnings, and stockholders’
equity.
True False
25.
When the board of directors declares a cash dividend, the retained
earnings account is debited.
True False
26.
The trial balance needs to be prepared prior to preparation of
the income statement.
True False
27.
Due to the relationship of financial statements, the statement
of retained earnings links the income statement to the balance sheet.
True False
28.
An income statement with each line divided by net sales and
shown as a percentage is called a common statement.
True False
29.
Collections from customers are cash flows from operating
activities.
True False
30.
Cash paid to suppliers for inventory is an investing activity.
True False
31.
The net profit margin ratio is calculated by dividing net sales
by net income.
True False
32.
The net profit margin ratio is a measure of how much profit was
created per sales dollar.
True False
Multiple Choice Questions
33.
Which of the following best describes the operating cycle?
1. It is
the length of the manufacturing process.
1. It is
the time that elapses from the purchase of inventory on account to the sale of
inventory on account.
1. It is
the time that elapses from the completion of the manufacturing process to the
cash collection from sale of the manufactured goods.
1. It is
the time that elapses from the cash payment to suppliers to collection of cash
from customers.
34.
Which of the following would lengthen the operating cycle?
1. Faster
collection of accounts receivables.
1. Selling
inventory in a shorter period of time.
1. Increasing
the number of customers who paid cash.
1. Relaxing
credit terms and allowing customers more time to pay.
35.
The primary difference between revenues and gains is:
1. Gains
are increases in net assets from peripheral activities while revenues are
increases from ongoing activities.
1. Revenues
increase operating income and gains have no impact on net income.
1. Revenues
cause increases in net assets as a result of peripheral activities and gains
cause increases through ongoing activities.
1. Gains
result in an increase in operating income whereas revenues do not impact
operating income.
36.
Which of the following best describes the time period
assumption?
1. It
assumes we value a business as of the end of every month.
1. It is
the cutoff point for asset and liability recognition.
1. It
implies that financial statements are prepared at the end of a business
entity’s operating cycle.
1. It
assumes we divide the long life of a business into a series of shorter time
periods for accounting and reporting purposes.
37.
Which of the following costs is most likely to be the largest
expense reported on the income statement of a merchandiser such as Wal-Mart
stores?
1. Utilities
expense.
1. Cost
of goods sold.
1. Advertising
expense.
1. Income
tax expense.
38.
Which of the following businesses would most likely not report
cost of goods sold on their income statement?
1. A law
firm.
1. An
automobile dealership.
1. A
pizza restaurant.
1. A
computer chip manufacturer.
39.
Which of the following describes the reporting of interest
expense on the income statement?
1. It is
reported as an operating expense.
1. It is
a component of operating income.
1. It is
deducted from operating income.
1. It is
added to operating income.
40.
Which of the following statements is false?
1. The
income statement covers a period of time.
1. A
loss on the sale of plant and equipment is considered a peripheral activity and
is not reported on the income statement.
1. Rent
expense is a component of operating income.
1. Interest
expense is not a component of operating income.
41.
Which of the following is not reported as an operating expense
on the income statement?
1. Salaries
expense.
1. Rent
expense.
1. Interest
expense.
1. Cost
of goods sold.
42.
Which of the following statements is correct?
1. Dividend
income is a component of operating income.
1. Operating
income is decreased by the loss from the sale of plant assets.
1. A
gain on the sale of a stock investment does not increase operating income.
1. Income
before taxes does not change when a gain results from the sale of plant assets.
43.
Which of the following best describes operating revenues?
1. They
are increases in assets or increases in liabilities as a result of peripheral transactions.
1. They
are decreases in assets or decreases in liabilities as a result of ongoing
operations.
1. They
are increases in assets or decreases in liabilities as a result of ongoing
operations.
1. They
are decreases in assets or increases in liabilities as a result of peripheral
transactions.
44.
Which of the following transactions will result in an increase
in operating income as of the date of the transaction?
1. The
sale of plant and equipment at a gain.
1. Collection
of cash from a customer for services to be provided at a later date.
1. Providing
a service to a customer on account.
1. The
receipt of cash dividends from an investment.
45.
Which of the following expenses does not affect operating
income?
1. Income
tax expense.
1. Cost
of goods sold.
1. Depreciation
expense.
1. Rent
expense.
46.
Which of the following statements is false?
1. An
expense is a cost incurred to generate revenues.
1. Selling
assets at a gain does not result in earning revenue.
1. Revenues
are reported on the income statement as they are earned.
1. Revenues
result in an increase in net income and additional paid-in capital.
47.
The following information has been provided by Hable Company:
Advertising expense $9,900;
Interest expense $3,700;
Rent expense $12,000;
Loss on sale of property and equipment $5,700;
Cost of goods sold $21,300;
Depreciation expense $7,100;
Prepaid insurance expense $1,000.
How much were Hable’s operating expenses?
300.
$50,300.
1. $54,000.
700.
$59,700.
200.
$43,200.
48.
Smith Corporation has provided the following information:
Cash sales totaled $125,000.
Credit sales totaled $279,000.
Cash collections from customers for services yet to be provided
totaled $38,000.
An $11,000 gain from the sale of property and equipment
occurred.
Interest income totaled $7,700.
How much were Smith’s operating revenues?
1. $404,000.
700.
$411,700.
1. $442,000.
700.
$460,700.
49.
Lantz Company has provided the following information:
Cash sales totaled $255,000.
Credit sales totaled $479,000.
Cash collections from customers for services yet to be provided
totaled $88,000.
A $22,000 loss from the sale of property and equipment occurred.
Interest income was $7,700.
Interest expense was $19,900.
Cost of goods sold was $336,000.
Rent expense was $36,000.
Salaries expense was $49,000.
Other operating expenses totaled $79,000.
Unearned revenue was $4,000.
How much was Lantz’s operating income?
800.
$221,800.
1. $322,000.
800.
$199,800.
1. $234,000.
50.
Lantz Company has provided the following information:
Cash sales totaled $255,000.
Credit sales totaled $479,000.
Cash collections from customers for services yet to be provided
totaled $88,000.
A $22,000 loss from the sale of property and equipment occurred.
Interest income was $7,700.
Interest expense was $19,900.
Cost of goods sold was $336,000.
Rent expense was $36,000.
Salaries expense was $49,000.
Other operating expenses totaled $79,000.
Unearned revenue was $4,000.
How much was Lantz’s income before income taxes?
800.
$553,800.
800.
$465,800.
800.
$199,800.
800.
$531,800.
51.
Which of the following correctly describes the impact of
collecting cash from customers for services to be provided in the future?
1. Assets
and stockholders’ equity increase.
1. Assets
and revenues increase.
1. Assets
and liabilities increase.
1. Assets
and operating income increase.
52.
Colby Corporation has provided the following information:
Operating revenues were $199,700.
Operating expenses were $111,000.
Interest expense was $9,200.
Gain from sale of plant and equipment was $3,300.
Dividend payments to Colby’s stockholders were $7,700.
Income tax expense was $36,000.
Prepaid rent expense was $5,000.
How much was Colby’s net income?
100.
$39,100.
300.
$48,300.
700.
$52,700.
800.
$46,800.
53.
Which of the following does not correctly describe the cash
basis of accounting?
1. It is
not accepted for external reporting purposes.
1. Revenues
are recognized when cash is collected from customers.
1. Expenses
are recognized when they are paid for.
1. Cash
payments for long-term assets are recognized as an expense at the time of
payment.
54.
A landlord collected $5,000 cash from a tenant for December
2015’s rent but the tenant’s rent for December is $8,000. Which of the
following is true with respect to the landlord’s financial statements?
1. $8,000
would be reported on the statement of cash flows.
1. $8,000
would appear on the balance sheet as rent receivable.
1. $8,000
would appear on the income statement as rent revenue earned.
1. $5,000
would appear on the balance sheet as prepaid rent.
55.
Which of the following is not a criterion pertaining to the
revenue realization principle?
1. The
goods or services have been delivered.
1. The
selling price is fixed or determinable.
1. Collection
is reasonably assured.
1. The
cash payment has been received.
56.
Which of the following statements does not properly describe the
accrual basis of accounting?
1. Expenses
are recognized when incurred regardless of the timing of cash flows.
1. Revenues
are recognized when earned regardless of the timing of cash flows.
1. Generally
accepted accounting principles require use of the accrual basis.
1. It
should not be used when providing financial statements to external decision
makers.
57.
Which of the following statements is false?
1. A
liability is created when cash is received prior to delivery of the goods or
services.
1. Revenue
is recognized at the time of delivery of the goods or services if cash is
received.
1. Revenue
is not recognized at the time of delivery of goods and services if cash is
received after delivery of the goods and services.
1. Collecting
cash after delivery of a good or service does not create revenue on the income statement
at the date of collection.
58.
Which of the following journal entries is prepared when cash is
received from a customer prior to delivery of the goods or services?
1. Option
A
1. Option
B
1. Option
C
1. Option
D
59.
Which of the following journal entries is prepared by an auto
repair shop when a customer will pay cash subsequent to delivery of goods or
services?
1. Option
A
1. Option
B
1. Option
C
1. Option
D
60.
Yelena Company received cash from a customer in advance of providing
the service to the customer. Which of the following does not accurately
describe the impact on the financial statements when Yelena later provides the
service?
1. Liabilities
are decreased.
1. Operating
income increases.
1. Retained
earnings increases.
1. Assets
are increased.
61.
Which of the following best describes the expense matching
principle?
1. It
requires expenses to be recorded when they are paid for.
1. It
requires expenses to be recorded when incurred to generate revenues.
1. It
requires expenses to be recorded consistent with the cash basis of accounting.
1. It
does not allow expenses to be recorded if they are incurred prior to being
paid.
62.
During 2014, Sigma Company earned service revenues amounting to $700,000,
of which $630,000 was collected in cash; the balance will be collected in
January, 2015. Also in 2014 there were collections of cash prior to the
delivery of goods/services totaling $10,000. What amount should the 2014 income
statement report for service revenues?
1. $630,000.
1. $700,000.
1. $70,000.
1. $570,000.
63.
A company purchased supplies for cash, which will be consumed
during future months. Which of the following correctly describes the impact of
the supplies purchase on the financial statements?
1. Total
assets will remain unchanged.
1. Total
assets will decrease.
1. Operating
expenses will increase.
1. Operating
income will decrease.
64.
A company purchased supplies for cash, which will be consumed
during future months. Which of the following does not correctly describe the
impact on the financial statements when the supplies are used during future
months?
1. Total
assets will remain unchanged.
1. Total
assets will decrease.
1. Operating
expenses will increase.
1. Operating
income will decrease.
65.
The revenue realization principle requires four conditions to be
met. Which of the following is one of the four conditions?
1. The customer
has paid for the goods or services.
1. Delivery
of goods or performance of service has occurred or is scheduled to occur.
1. The
price is fixed or determinable.
1. The
customer has signed a contract.
66.
Which of the following journal entries is correct when a company
has incurred an expense for work performed but has not yet paid for theses
salaries to employees?
1. Option
A
1. Option
B
1. Option
C
1. Option
D
67.
McNeil Company owed its employees for services performed and
recorded a liability for the wages owed the employees. Which of the following
correctly describes the impact on the financial statements when the employee
wages are subsequently paid?
1. Operating
expenses are increased.
1. Retained
earnings decreases.
1. Operating
income does not change.
1. Total
assets remain the same.
68.
Which of the following journal entries correctly records the
receipt of a utility bill, which will be paid for in later weeks?
1. Option
A
1. Option
B
1. Option
C
1. Option
D
69.
Which of the following is not a proper application of the
revenue realization principle?
1. Recording
the sale of merchandise on credit as sales revenue.
1. Recording
rent received in advance as unearned rent revenue.
1. Recording
interest revenue when cash is collected rather than when earned.
1. Reducing
the unearned service revenue account for service revenue performed at the end
of the accounting period.
70.
Which of the following is an example of revenue or expense to be
recognized in the current period’s income statement?
1. Cash
received from a client before the service is provided.
1. Inventory
purchased for sale to customers.
1. Wages
owed to employees who worked during the period.
1. Cash
collected from an account receivable.
71.
Which of the following liability accounts is likely to be
satisfied without a future cash payment?
1. Wages
payable.
1. Unearned
subscriptions revenue.
1. Accounts
payable.
1. Taxes
payable.
72.
A company receives a $50,000 cash deposit from a customer on
October 15 but will not deliver the goods until November 20. Which of the
following statements is true?
1. Cash
will be reported on the statement of cash flows for the month of November.
1. Revenue
will be recorded and reported on the income statement for October.
1. A
liability will be reported on the balance sheet at the end of October.
1. A
prepaid asset will be reported on the balance sheet at the end of October.
73.
A company purchased $20,000 of inventory during February and
will pay for it during March. Which of the following statements is false,
assuming the inventory was sold during March?
1. The
company’s accounts payable will include the $20,000 on the February month-end
balance sheet.
1. The
statement of cash flows will report an operating cash outflow of $20,000 during
March.
1. The
income statement will report cost of goods sold of $20,000 during February.
1. The
company’s inventory will include the $20,000 on the February month-end balance
sheet.
74.
Which of the following correctly applies the revenue realization
principle?
1. Recording
revenue in December 2014 for products manufactured but not yet delivered to
customers.
1. Recording
cash received in advance from customers as revenue when the product is not yet
shipped.
2015.
Not recording dividend revenue in 2014 until the cash is
received in 2015.
1. Recording
revenue in December 2014 for products sold but not yet paid for in full.
75.
Which of the following accounts normally have a credit balance?
1. Unearned
revenues; Prepaid rent; Revenues.
1. Revenues;
Expenses; Retained earnings.
1. Revenues;
Cash; Unearned revenue.
1. Accounts
payable; Retained earnings; Revenues.
76.
During 2014, Sensa Corporation incurred operating expenses
amounting to $100,000 of which $75,000 was paid in cash; the balance will be
paid during 2015. Which of the following is correct for the 2014 year-end
balance sheet?
1. Stockholders’
equity decreases $75,000 and assets decrease $75,000.
1. Assets
decrease $100,000 and stockholders’ equity decreases $100,000.
1. Assets
decrease $100,000, liabilities increase $25,000, and stockholders’ equity
decreases $100,000.
1. Stockholders’
equity decreases $100,000, assets decrease $75,000, and liabilities increase
$25,000.
77.
Which of the following accounts normally have a debit balance?
1. Prepaid
expenses, Wages payable, Dividends.
1. Cash,
Utilities expense, Accounts receivable.
1. Retained
earnings, Cost of goods sold, Wages expense.
1. Utilities
expense, Prepaid expenses, Wages payable.
78.
Which of the following statements is false?
1. Expense
accounts have a debit balance.
1. Revenue
accounts have a credit balance.
1. Gain
accounts have a credit balance.
1. Loss
accounts have a credit balance.
79.
Which of the following statements is correct?
1. Expense
accounts result in decreases in net income and stockholders’ equity and
therefore have credit balances.
1. Revenue
accounts result in increases in net income and stockholders’ equity and
therefore have debit balances.
1. Loss
accounts result in decreases in net income and stockholders’ equity and
therefore have debit balances.
1. Gain
accounts result in increases in net income and stockholders’ equity and
therefore have debit balances.
80.
Which of the following journal entries correctly records a
transaction where services were provided to a customer on account?
1. Option
A
1. Option
B
1. Option
C
1. Option
D
81.
Which of the following is correct when land costing $20,000 is
sold for $29,000? The land was a component of property and equipment on the
balance sheet.
1. Revenues
are debited for $29,000.
1. Cost
of goods sold is credited for $20,000.
1. Gain
on sale of land is credited for $9,000.
1. Operating
income increases $29,000.
82.
Boone’s Cleaning Service performed cleaning services during
December 2014, but had not collected any cash from its customers as of December
31, 2014. What impact did performing these services have on the accounting
equation?
1. The
service increased assets and increased liabilities.
1. The service
increased assets and increased stockholders’ equity.
1. The
service increased assets and decreased stockholders’ equity.
1. The
service decreased liabilities and decreased stockholders’ equity.
83.
On December 31, 2014, Avery Corporation paid $10,000 for next
year’s insurance policy. This transaction should be recorded as follows by
Avery:
1. Option
A
1. Option
B
1. Option
C
1. Option
D
84.
Mama June Pizza Company sold land costing $39,000 for $51,000
cash. Which of the following statements concerning the land sale is correct?
1. The
land account was credited for $51,000.
1. The
revenue account was debited for $51,000.
1. Operating
income increased $12,000.
1. Income
before income taxes increased $12,000.
85.
Which of the following statements is false when Mama June Pizza
Company paid $47,000 cash on accounts owed to suppliers?
1. The
cash account was credited for $47,000.
1. Accounts
payable was debited for $47,000.
1. Supplies
expense was increased by $47,000.
1. Operating
income was not changed by the payment to the suppliers.
86.
Which of the following journal entries is correct assuming that
Mama June Pizza Company received cash for interest earned on investments?
1. Option
A
1. Option
B
1. Option
C
1. Option
D
87.
Mama June Pizza Company determined that dough, sauce, cheese and
other ingredients costing $8,700 were used to make pizzas during July. Which of
the following statements is false with respect to the use of the ingredients?
700.
Cost of goods sold was debited for $8,700.
700.
Operating expenses increased $8,700.
700.
Operating income decreased $8,700.
700.
Supplies was debited for $8,700.
88.
Zeppelin Company received cash during January for services to be
provided in February. Which of the following statements does not accurately
describe the impact on the financial statements when Zeppelin provides the
services during February?
1. Unearned
revenues decreased and were debited.
1. Revenues
increased and were credited.
1. Stockholders’
equity will increase.
1. Total
assets will increase.
89.
Which of the following describes the transaction resulting in a
journal entry with a debit to Salaries payable and a credit to Cash?
1. Salaries
expense has been incurred but is unpaid.
1. Cash
was used to pay for salaries that were previously recorded as an expense.
1. Cash
was used to pay for salaries that were not previously recorded as an expense.
1. Cash
was used to prepay employee wages.
90.
Which of the following statements is correct?
1. Recording
revenues results in an increase in assets or a decrease in liabilities.
1. Recording
revenues results in an increase in assets or a decrease in stockholders’
equity.
1. Recording
expenses results in a decrease in assets or a decrease in liabilities.
1. Recording
expenses results in an increase in assets or an increase in liabilities.
91.
Which of the following statements is false?
1. The
unearned revenue account has a credit balance.
1. The
revenue account has a credit balance.
1. An
expense account has a debit balance.
1. A
prepaid expense account has a credit balance.
92.
Which of the following accounts does not have a debit balance?
1. Prepaid
expenses.
1. Insurance
expense.
1. Unearned
revenue.
1. Investments.
93.
Which of the following accounts does not have a credit balance?
1. Gain
on sale of land.
1. Investment
income.
1. Unearned
revenue.
1. Rent
expense.
94.
Which of the following transactions would not be reported as
cash flow from operating activities on a cash flow statement?
1. Cash
collected from customers.
1. Cash
paid to suppliers.
1. Cash
paid for employee wages.
1. Cash
paid for dividends to the company’s stockholders.
95.
Which of the following transactions would be reported as cash
flow from operating activities on a cash flow statement?
1. Cash
paid to purchase equipment.
1. Cash
paid to acquire land.
1. Cash
paid for dividends to the company’s stockholders.
1. Cash
paid for wages.
96.
Garret Company has provided the following selected information
for the year ended December 31, 2014:
Cash collected from customers was $783,000.
Cash received from stockholders in exchange for common stock
totaled $91,000.
Cash paid to suppliers was $361,000.
Cash paid to employees was $204,000.
Cash to stockholders for dividends was $33,000.
Cash received from sale of a building was $250,000.
Cash paid for rent was $39,000.
Cash received for interest and dividends was $7,000.
Cash paid for income taxes was $55,000.
Based on the selected information provided, how much was
Garret’s cash flow from operating activities?
1. $131,000.
1. $98,000.
1. $381,000.
1. $222,000.
97.
Which of the following transactions will not decrease the net
profit margin ratio?
1. Accruing
interest expense at year-end.
1. The
recording of depreciation expense.
1. Using
cash to pay for previously accrued salaries.
1. Accruing
utilities expense at year-end.
98.
Which of the following statements regarding the net profit
margin ratio is false?
1. The
numerator is net income.
1. The
denominator is net sales or operating revenues.
1. It
measures how much of every sales dollar is gross profit.
1. Financial
analysts expect well-run businesses to maintain or improve their profit margin
over time.
Essay Questions
99.
What is the operating cycle? Describe a business entity with an
operating cycle of less than six months and a business with an operating cycle
of more than one year.
100.
Describe the difference between operating revenues and gains
from the sale of plant and equipment while providing examples of each.
101.
Describe the difference between operating expenses and losses
from the sale of plant and equipment while providing examples of each.
102.
Describe the difference(s) with respect to the cash basis of
accounting and the accrual basis of accounting.
Comments
Post a Comment