Financial Accounting Robert Libby 10th Edition- Test Bank

 

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Sample Test

Financial Accounting, 10e (Libby)

Chapter 3  Operating Decisions and the Accounting System

 

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.

 

Answer:  TRUE

Explanation:  The operating cycle is the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers.

Difficulty: 2 Medium

Topic:  Operating cycle and time period

Learning Objective:  03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

2) A retail store would likely have a shorter operating cycle than an automobile manufacturer.

 

Answer:  TRUE

Explanation:  The operating cycle is the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers. The length of time for completion of the operating cycle depends on the nature of the business. Companies with lower-priced products that sell quickly and in high volume generally have shorter operating cycles than companies with low volume of sales and higher-priced items.

Difficulty: 1 Easy

Topic:  Operating cycle and time period

Learning Objective:  03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

3) The time period assumption implies that the life of a business entity can be reported in time periods such as quarters and years.

 

Answer:  TRUE

Explanation:  A company’s operating cycle repeats itself continuously. The time period assumption indicates that the long life of a company can be reported in shorter time periods.

Difficulty: 1 Easy

Topic:  Operating cycle and time period

Learning Objective:  03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

4) An example of operating revenue would be the revenue created by the sale of an automobile by a car dealership.

 

Answer:  TRUE

Explanation:  Operating revenue results from an entity’s sale of goods or services.

Difficulty: 1 Easy

Topic:  Operating revenue-Description

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

5) According to the revenue recognition principle, revenue is recognized at the time that cash is collected from a customer for services to be provided in the future.

 

Answer:  FALSE

Explanation:  Revenue is recognized when the company transfers promised goods or services to its customer in the amounts it expects to receive.

Difficulty: 1 Easy

Topic:  Recognition of revenue

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue realization and expense matching principles to measure income.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

6) Unearned revenues are reported as liabilities on the balance sheet.

 

Answer:  TRUE

Explanation:  Unearned revenues are payments provided to a company before the promised goods or services are transferred to customers. Unearned revenues are liabilities reported on the balance sheet.

Difficulty: 1 Easy

Topic:  Basis of accounting-Accrual vs Cash basis

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue realization and expense matching principles to measure income.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

7) Interest expense is reported on the income statement as an operating expense.

 

Answer:  FALSE

Explanation:  Interest expense results from the cost of borrowing money and incurring interest expense is not the central operation of most businesses. Thus, interest expense is not classified as an operating expense.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement; Operating expenses-Description

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

8) Earnings per share must be either reported on the income statement or disclosed in the notes to the financial statements.

 

Answer:  TRUE

Explanation:  Earnings per share is a ratio widely used in evaluating a company’s operating performance. This ratio is required to be reported on the income statement or in the notes to the financial statements.

Difficulty: 1 Easy

Topic:  Elements on the Income Statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

9) Interest revenue is reported as operating revenue and therefore increases operating income.

 

Answer:  FALSE

Explanation:  Interest revenue is a result of investing activities. Investing activities are not considered part of central operations; therefore any revenue generated is not part of operating revenue.

Difficulty: 1 Easy

Topic:  Elements on the Income Statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

10) Expenses are the result of decreases in assets or increases in liabilities incurred in order to generate revenues.

 

Answer:  TRUE

Explanation:  Expenses are defined as decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues during the period.

Difficulty: 1 Easy

Topic:  Elements on the Income Statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

11) According to the expense recognition principle, wages expense is recognized on the income statement when the wages are paid rather than when the employee provides the work.

 

Answer:  FALSE

Explanation:  Expenses are recognized when incurred. The expense for wages is recognized when the employee provides the services.

Difficulty: 2 Medium

Topic:  Recognition of expenses

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue realization and expense matching principles to measure income.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

12) A gain resulting from the sale of buildings and equipment is not reported as operating income on the income statement.

 

Answer:  FALSE

Explanation:  Gains resulting from the sale of operating assets are included in the operating income section of the income statement.

Difficulty: 2 Medium

Topic:  Losses and gains

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

13) Under accrual accounting, rent expense for February 2019 would be recognized on the income statement in February 2019 even though it had been paid for in January of 2019.

 

Answer:  TRUE

Explanation:  In accrual accounting, expenses are recognized in the same period in which they are incurred to generate revenue.

Difficulty: 2 Medium

Topic:  Basis of accounting-Accrual vs Cash basis

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue realization and expense matching principles to measure income.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

14) Under accrual basis accounting, revenues are recognized when goods or services are transferred to customers, and expenses are recognized when incurred to generate that revenue.

 

Answer:  TRUE

Explanation:  In accrual basis accounting, revenues are recognized when the company transfers promised goods or services to customers, and expenses are recognized in the same period that costs are incurred to generate that revenue.

Difficulty: 1 Easy

Topic:  Basis of accounting-Accrual vs Cash basis

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue realization and expense matching principles to measure income.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

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.

 

Answer:  TRUE

Explanation:  Financial statements issued under cash basis accounting are not very useful to external users. Therefore, GAAP requires accrual basis accounting for financial reporting purposes.

Difficulty: 1 Easy

Topic:  Basis of accounting-Accrual vs Cash basis

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue realization and expense matching principles to measure income.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

16) The expense recognition principle requires expenses to be recorded on the income statement in the same period they are incurred in generating revenues.

 

Answer:  TRUE

Explanation:  The expense recognition principle requires that expenses incurred to generate revenues be recognized in the same period as the revenues they help generate.

Difficulty: 1 Easy

Topic:  Recognition of expenses

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue realization and expense matching principles to measure income.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

17) The revenue recognition principle recognizes revenue when the goods or services are transferred to customers, regardless of the timing of the cash collection from customers.

 

Answer:  TRUE

Explanation:  Under the accrual basis of accounting, the revenue recognition principle states that revenues are recognized when goods or services are transferred to customers.

Difficulty: 1 Easy

Topic:  Recognition of revenue

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue realization and expense matching principles to measure income.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

18) Selling inventory to a customer on account results in an increase in an asset and an increase in revenues.

 

Answer:  TRUE

Explanation:  Inventory sold on account increases accounts receivable, an asset, and also sales revenue.

Difficulty: 2 Medium

Topic:  Basis of accounting-Accrual vs Cash basis; Transaction analysis-Effect on equation

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue and expense recognition principles to measure income.; 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

19) Cash received prior to the providing of the goods or services results in an increase in both assets and liabilities.

 

Answer:  TRUE

Explanation:  Collecting cash increases assets (debit), and if collection occurs before services are provided, the liability “unearned revenue” increases (credit).

Difficulty: 2 Medium

Topic:  Basis of accounting-Accrual vs Cash basis; Transaction analysis-Effect on equation

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue and expense recognition principles to measure income.; 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

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.

 

Answer:  FALSE

Explanation:  Total assets remain unchanged from this transaction and no expense is recorded. The supplies are to be used later. Thus, the asset account of cash decreases by the same amount that the asset account of supplies increases. An expense is recorded as the supplies are consumed.

Difficulty: 2 Medium

Topic:  Basis of accounting-Accrual vs Cash basis; Transaction analysis-Effect on equation

Learning Objective:  03-03 Explain the accrual basis of accounting and apply the revenue and expense recognition principles to measure income.; 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

21) Revenue accounts have credit balances because they increase stockholders’ equity.

 

Answer:  TRUE

Explanation:  Revenues increase stockholders’ equity through the account Retained Earnings and therefore have credit balances.

Difficulty: 1 Easy

Topic:  Transaction analysis-Effect on equation

Learning Objective:  03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

22) Expense accounts have debit balances because they decrease net income, retained earnings, and stockholders’ equity.

 

Answer:  TRUE

Explanation:  Expenses decrease net income, thus decreasing retained earnings and stockholders’ equity. Therefore, they have debit balances.

Difficulty: 2 Medium

Topic:  Transaction analysis-Effect on equation

Learning Objective:  03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

23) Purchasing a six-month insurance policy results in a debit to insurance expense and a credit to cash at the date of purchase.

 

Answer:  FALSE

Explanation:  At the date of purchase a six-month insurance policy does not result in a debit to insurance expense, but instead results in a debit to prepaid insurance, which is an asset account. There is also a credit to cash at the date of purchase.

Difficulty: 2 Medium

Topic:  Transaction analysis-Journal entries

Learning Objective:  03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Understand

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

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.

 

Answer:  TRUE

Explanation:  Recording revenues increases net income, which flows through the financial statements to increase retained earnings and stockholders’ equity. When unearned revenue is earned, the liability account decreases.

Difficulty: 3 Hard

Topic:  Transaction analysis-Effect on equation

Learning Objective:  03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

25) When the board of directors declares a cash dividend, the retained earnings account is debited.

 

Answer:  TRUE

Explanation:  The account that is debited when a cash dividend is declared is retained earnings.

Difficulty: 1 Easy

Topic:  Transaction analysis-Journal entries

Learning Objective:  03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

26) The trial balance needs to be prepared prior to preparation of the income statement.

 

Answer:  TRUE

Explanation:  The trial balance lists all accounts and proves that debits equal credits. Then the financial statements can be prepared.

Difficulty: 1 Easy

Topic:  Preparing a classified income statement

Learning Objective:  03-05 Prepare a classified income statement.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

27) Dividends declared decrease net income.

 

Answer:  FALSE

Explanation:  Dividends do not affect net income. Dividends declared are debited to the account Retained Earnings as a distribution to stockholders from all past revenues and expenses.

Difficulty: 2 Medium

Topic:  Transaction analysis-Effect on equation

Learning Objective:  03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

28) An income statement that is categorized into operating and peripheral activities is called a consolidated income statement.

 

Answer:  FALSE

Explanation:  An income statement that is categorized into operating and peripheral activities is called a classified income statement.

Difficulty: 2 Medium

Topic:  Ratio analysis-Net profit margin

Learning Objective:  03-05 Prepare a classified income statement.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

29) Collections from customers are cash flows from operating activities.

 

Answer:  TRUE

Explanation:  Cash flows from operating activities arise from cash receipts received from customers and cash payments made to suppliers, as well as other ongoing expenses.

Difficulty: 1 Easy

Topic:  Operating-Investing-Financing-Cash flow

Learning Objective:  03-07 Identify operating transactions and demonstrate how they affect cash flows.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

30) Cash paid to suppliers for inventory is an investing activity.

 

Answer:  FALSE

Explanation:  Cash flows from operating activities arise from cash receipts received from customers and cash payments made to suppliers for merchandise that will be sold, as well as for other ongoing expenses. Cash payments for investments, and property and equipment are investing activities.

Difficulty: 2 Medium

Topic:  Operating-Investing-Financing-Cash flow

Learning Objective:  03-07 Identify operating transactions and demonstrate how they affect cash flows.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

31) The net profit margin ratio is calculated by dividing net sales by net income.

 

Answer:  FALSE

Explanation:  Net Profit Margin = Net Income ÷ Net Sales.

Difficulty: 1 Easy

Topic:  Ratio analysis-Net profit margin

Learning Objective:  03-06 Compute and interpret the net profit margin ratio.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

32) The net profit margin ratio is a measure of how much profit was created per sales dollar.

 

Answer:  TRUE

Explanation:  In general, the net profit margin measures how much of every sales dollar generated during the period is profit.

Difficulty: 1 Easy

Topic:  Ratio analysis-Net profit margin

Learning Objective:  03-06 Compute and interpret the net profit margin ratio.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

33) Which of the following best describes the operating cycle?

1.   A) It is the length of the manufacturing process.

2.   B) It is the time that elapses from the purchase of inventory on account to the sale of inventory on account.

3.   C) It is the time that elapses from the completion of the manufacturing process to the cash collection from sale of the manufactured goods.

4.   D) It is the time that elapses from the cash payment to suppliers to collection of cash from customers.

 

Answer:  D

Explanation:  The operating cycle can be described as cash-to-cash. It is the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers.

Difficulty: 2 Medium

Topic:  Operating cycle and time period

Learning Objective:  03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

34) Which of the following would lengthen the operating cycle?

1.   A) Faster collection of accounts receivables.

2.   B) Selling inventory in a shorter period of time.

3.   C) Increasing the number of customers who pay cash

4.   D) Relaxing credit terms and allowing customers more time to pay.

 

Answer:  D

Explanation:  The operating cycle can be described as cash-to-cash. Allowing customers more time to pay increases the time it takes to collect cash and finish the operating cycle.

Difficulty: 2 Medium

Topic:  Operating cycle and time period

Learning Objective:  03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

35) The primary difference between revenues and gains is:

1.   A) Gains are increases in net assets from periodically selling assets (other than inventory), while revenues are increases from major or central ongoing operations of a business.

2.   B) Revenues increase operating income and gains have no impact on net income.

3.   C) Revenues cause increases in net assets as a result of infrequent activities and gains cause increases through ongoing activities.

4.   D) Gains result in an increase in operating income whereas revenues do not impact operating income.

 

Answer:  A

Explanation:  Revenues are defined as increases in assets or settlements of liabilities from ongoing operations. Revenues can also be generated regularly from investments as dividends and interest. Gains are a result of an increase in assets or decrease in liabilities from selling operating assets, other than inventory, such as plant and equipment, and also from selling investment assets.

Difficulty: 2 Medium

Topic:  Operating revenue-Description; Elements on the Income Statement; Losses and gains

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

36) Which of the following best describes the time period assumption?

1.   A) It assumes we value a business as of the end of every month.

2.   B) It is the cutoff point for asset and liability recognition.

3.   C) It implies that financial statements are prepared at the end of a business entity’s operating cycle.

4.   D) It assumes we divide the long life of a business into a series of shorter time periods for accounting and reporting purposes.

 

Answer:  D

Explanation:  The time period assumption indicates that the long life of a company can be reported in shorter time periods such as months, quarters, and years.

Difficulty: 2 Medium

Topic:  Operating cycle and time period

Learning Objective:  03-01 Describe a typical business operating cycle and explain the necessity for the time period assumption.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

37) Which of the following costs is most likely to be the largest expense reported on the income statement of a merchandiser, such as Walmart Stores, Inc.?

1.   A) Utilities expense.

2.   B) Cost of goods sold.

3.   C) Advertising expense.

4.   D) Income tax expense.

 

Answer:  B

Explanation:  In companies with a merchandising focus, cost of goods sold is usually the most significant expense on the income statement.

Difficulty: 1 Easy

Topic:  Elements on the Income Statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

38) Which of the following businesses would most likely not report cost of goods sold on its income statement?

1.   A) A law firm.

2.   B) An automobile dealership.

3.   C) A pizza restaurant.

4.   D) A computer chip manufacturer.

 

Answer:  A

Explanation:  In purely service-oriented companies where no products are produced or sold, the cost of using employees to generate revenue is usually the largest expense. This is recorded as wages expense.

Difficulty: 1 Easy

Topic:  Elements on the Income Statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

39) Which of the following describes the reporting of interest expense on the income statement?

1.   A) It is reported as an operating expense.

2.   B) It is a component of operating income.

3.   C) It is deducted from operating income.

4.   D) It is added to operating income.

 

Answer:  C

Explanation:  Interest expense is a cost resulting from financing activities, not operating activities, and thus results in a reduction after the operating income caption of the income statement.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement; Preparing a classified income statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-05 Prepare a classified income statement.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

40) Which of the following statements is false?

1.   A) The income statement covers a period of time.

2.   B) A loss on the sale of plant and equipment is considered a peripheral activity and is not reported on the income statement.

3.   C) Rent expense is a component of operating income.

4.   D) Interest expense is not a component of operating income.

 

Answer:  B

Explanation:  Gains or losses on the sale of assets, both those used in operations and those from sale of investments, are reported on the income statement.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

41) Which of the following is not reported as an operating expense on the income statement?

1.   A) Wages expense.

2.   B) Rent expense.

3.   C) Interest expense.

4.   D) Cost of goods sold.

 

Answer:  C

Explanation:  Interest expense is the result of borrowing money and not part of day-to-day operations when making and/or selling products and/or services. Therefore, interest expense is not listed as an operating expense.

Difficulty: 1 Easy

Topic:  Operating expenses-Description; Preparing a classified income statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-05 Prepare a classified income statement.

Bloom’s:  Remember

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

42) Which of the following statements is correct?

1.   A) Dividend revenue is a component of Income from Operations.

2.   B) Income from Operations is decreased by a loss from the sale of plant assets.

3.   C) A gain on the sale of a stock investment increases Income from Operations.

4.   D) Income before taxes occurs before Other Items on the income statement.

 

Answer:  B

Explanation:  When assets other than investments are sold or disposed for less than the undepreciated cost, losses result; these losses are reported in the operating expenses section of the income statement, which results in Income from Operations.

Difficulty: 3 Hard

Topic:  Elements on the Income Statement; Losses and gains

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

43) Trend Decorations Company provides decorating services for store displays. Trend sold equipment that it had been using to create decorations. Of the following choices, which will Trend report on its income statement when it sells the equipment?

1.   A) Operating revenue: Sales revenue

2.   B) Operating expenses: Loss on disposal of equipment

3.   C) Other items: Loss on sale of equipment

4.   D) General and administrative expenses: Sale of decorating equipment

 

Answer:  B

Explanation:  When assets other than investments are sold, gains or losses will result. Losses from the disposal of assets other than investments are reported in the Operating expenses section of the income statement. Assets used to create revenue are assets other than investments and the sale of these assets are not considered as sales revenue.

Difficulty: 2 Medium

Topic:  Losses and gains

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

 

 

44) Which of the following best describes operating revenues?

1.   A) They are increases in assets or increases in liabilities as a result of peripheral transactions.

2.   B) They are decreases in assets or decreases in liabilities as a result of central ongoing operations.

3.   C) They are increases in assets or decreases in liabilities as a result of central ongoing operations.

4.   D) They are decreases in assets or increases in liabilities as a result of peripheral transactions.

 

Answer:  C

Explanation:  Operating revenues are increases in assets (cash or accounts receivable) or settlements of liabilities (unearned revenues) from central ongoing operations.

Difficulty: 3 Hard

Topic:  Operating revenue-Description

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Analyze

AACSB:  Analytical Thinking

Accessibility:  Keyboard Navigation

 

45) Which of the following transactions will result in an increase in operating income as of the date of the transaction?

1.   A) The sale of investments at a gain.

2.   B) Collection of cash from a customer for services to be provided at a later date.

3.   C) Providing a service to a customer on account.

4.   D) The receipt of cash dividends from an investment.

 

Answer:  C

Explanation:  Operating income is increased by operating revenue. Operating revenues result from the sale of goods or services to a customer, even if it is on account and will not be collected until a later date.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

46) Which of the following expenses does not affect the reporting of operating income?

1.   A) Income tax expense.

2.   B) Cost of goods sold.

3.   C) Depreciation expense.

4.   D) Rent expense.

 

Answer:  A

Explanation:  Income tax expense is not classified as an operating expense and is deducted after the calculation of operating income on the income statement.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement; Preparing a classified income statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-05 Prepare a classified income statement.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

47) Which of the following statements is false?

1.   A) An expense is a cost incurred to generate revenues.

2.   B) Selling assets at a gain does not result in earning revenue.

3.   C) Revenues are reported on the income statement as they are earned.

4.   D) Revenues result in an increase in net income and additional paid-in capital.

 

Answer:  D

Explanation:  Revenues result in an increase in net income and retained earnings. Revenues have no impact on additional paid-in capital.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement; Transaction analysis-Effect on equation

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-04 Apply transaction analysis to examine and record the effects of operating activities on the financial statements.

Bloom’s:  Understand

AACSB:  Reflective Thinking

Accessibility:  Keyboard Navigation

 

 

 

48) The following information has been provided by Hable Company:

 

• Advertising expense $9,900
• Interest expense $3,700
• Rent expense for store $12,000
• Loss on sale of property and equipment $5,700
• Cost of goods sold $21,300
• Depreciation expense $7,100
• Prepaid insurance $1,000

 

How much were Hable’s total expenses in calculating operating income?

300.             A) $50,300.

301.             B) $54,000.

302.             C) $56,000.

303.             D) $43,200.

 

Answer:  C

Explanation:  Operating expenses = $56,000 = $9,900 + $12,000 + $5,700 + $21,300 + $7,100.

Prepaid insurance is an asset. Interest expense is included in Other items.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement; Preparing a classified income statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-05 Prepare a classified income statement.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

 

49) The following information has been provided by Hable Company:

 

• Advertising expense $9,900
• Interest expense $3,700
• Rent expense for store $12,000
• Loss on sale of property and equipment $5,700
• Cost of goods sold $21,300
• Depreciation expense $7,100
• Prepaid insurance $1,000

 

What is the amount included in the Other Items section of Hable’s income statement?

300.             A) $19,300.

301.             B) $9,400.

302.             C) $3,700.

303.             D) $13,800.

 

Answer:  C

Explanation:  Other items = Interest expense = $3,700.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement; Preparing a classified income statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-05 Prepare a classified income statement.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

 

50) 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 of these items was included in operating income?

1.   A) $415,000.

2.   B) $411,700.

3.   C) $442,000.

4.   D) $460,700.

 

Answer:  A

Explanation:  Operating revenues = $415,000 = $125,000 + $279,000 + $11,000.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement; Preparing a classified income statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-05 Prepare a classified income statement.

Bloom’s:  Understand

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

 

51) 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.
• Supplies expense was $336,000.
• Rent expense for the store was $36,000.
• Wages expense was $49,000.
• Other operating expenses totaled $79,000.
• Unearned revenue was $4,000.

 

What is the amount of Lantz’s operating revenues?

1.   A) $734,000.

2.   B) $822,000.

3.   C) $826,000.

4.   D) $833,700.

 

Answer:  A

Explanation:  Operating revenues = $734,000 = $255,000 + $479,000.

Difficulty: 2 Medium

Topic:  Operating revenue-Description; Preparing a classified income statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-05 Prepare a classified income statement.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

 

52) 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.
• Supplies expense was $336,000.
• Rent expense for the store was $36,000.
• Wages expense was $49,000.
• Other operating expenses totaled $79,000.
• Unearned revenue was $4,000.

 

What is the amount of Lantz’s total operating expenses?

1.   A) $421,000.

2.   B) $500,000.

3.   C) $522,000.

4.   D) $541,900.

 

Answer:  C

Explanation:  Operating expenses = $522,000 = $336,000 + $36,000 + $49,000 + $79,000 + $22,000.

Difficulty: 2 Medium

Topic:  Operating expenses-Description; Preparing a classified income statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-05 Prepare a classified income statement.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation

 

 

 

53) 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.
• Supplies expense was $336,000.
• Rent expense for the store was $36,000.
• Wages expense was $49,000.
• Other operating expenses totaled $79,000.
• Unearned revenue was $4,000.

 

What is the amount of Lantz’s income from operations (operating income)?

800.             A) $221,800.

801.             B) $212,000.

802.             C) $199,800.

803.             D) $234,000.

 

Answer:  B

Explanation:  Operating revenues = $734,000 = $255,000 + $479,000.

Operating expenses = $522,000 = $336,000 + $36,000 + $49,000 + $79,000 + $22,000.

Operating income = $212,000 = $734,000 – $522,000.

Difficulty: 2 Medium

Topic:  Elements on the Income Statement; Preparing a classified income statement

Learning Objective:  03-02 Explain how business activities affect the elements of the income statement.; 03-05 Prepare a classified income statement.

Bloom’s:  Apply

AACSB:  Knowledge Application

Accessibility:  Keyboard Navigation