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Exam 3: The Income Statement

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Question 51

Multiple Choice

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During June,the Grass is Greener Company mows 100 lawns a week; the company was paid in advance during May by those customers.The company uses the accrual basis of accounting.How will these events affect the company's financial statements?

A) The income statement shows the effects of the transactions in May.
B) The income statement shows the effects of the transactions in June.
C) The balance sheet shows no effect from the transactions in May.
D) The transactions have no effect on the balance sheet.

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

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Question 52

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Match the letter and the blank in each transaction description to complete the analysis.All letters will not be used and some letters may be used more than once.

Premises

Responses

A company is paid for a job completed last month.This is posted as a debit to ____ and a credit to ____.

deferred revenue

A company pays the original amount owed on a promissory note.This is posted as a debit to ____ and a credit to ____.

accrued liabilities

A company receives money for a job to be done next month.This is posted as a debit to ____ and a credit to ____.

accounts receivable

A restaurant buys and immediately uses ingredients.This is posted as a(n)____ to an expense and a(n)____ to cash.

expense

A company pays wages.This is posted as a(n)____ to cash and a(n)____ to wages expense.

credit

debit

revenue

notes payable

cash

supplies

Premises

A company is paid for a job completed last month.This is posted as a debit to ____ and a credit to ____.

A company pays the original amount owed on a promissory note.This is posted as a debit to ____ and a credit to ____.

A company receives money for a job to be done next month.This is posted as a debit to ____ and a credit to ____.

A restaurant buys and immediately uses ingredients.This is posted as a(n)____ to an expense and a(n)____ to cash.

A company pays wages.This is posted as a(n)____ to cash and a(n)____ to wages expense.

Responses

deferred revenue

accrued liabilities

accounts receivable

expense

credit

debit

revenue

notes payable

cash

supplies

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Correct Answer

Premises

Responses

deferred revenue

accrued liabilities

accounts receivable

expense

credit

debit

revenue

notes payable

cash

supplies

Premises

deferred revenue

accrued liabilities

accounts receivable

expense

credit

debit

revenue

notes payable

cash

supplies

Responses

Question 53

Multiple Choice

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Picasso Art School's operating activities for the month of February are summarized in the following transactions: 1.Provided $1,500 of instructional lessons. 2) Received $2,100 cash from students-of which $1,200 is for lessons provided in February,and $900 is for lessons provided in January. 3) Paid January's rental bill of $300.Received February's bill of $450 but did not pay. Determine Picasso Art School's Net Income for February using the cash basis of accounting?

The Fastbank Motorcycle Company (FMC) receives a $10 million order from dealers wanting to buy its most popular model on credit.No money changes hands.Due to excess demand,FMC cannot supply the motorcycles until next quarter.How will these events affect the balance sheet?

For each of the following,indicate the effect the given situation would have on net income in the current period. O overstate net income U understate net income N/A not applicable; no effect on net income _____ recording prepaid costs as current expenses. _____ recording an expense at more than the actual cost. _____ failing to record the receipt of a payment by a customer on account. _____ underestimating depreciation expense. _____ failing to record some supplies received. _____ recording deferred revenue as revenue. _____ recording an expense as revenue. _____ failing to record the company issuing additional shares of its own common stock. _____ overestimating payroll tax expense.

If number of debits equal number of credits in the unadjusted trial balance,you have made no errors in preparing and posting journal entries.

Deferred Revenue is a liability account.

Using the accrual basis of accounting,if payment is received before delivery of a good or service,a liability is recorded at the time the payment is received.

Your company receives advance payment in October for services that are provided during November.Which of the following is true?

During March,the Long Life Consulting Company provides $23,000 in consulting services of which $12,000 is immediately paid for and $11,000 is on account.

To ensure revenue reporting is consistent over time,a business adopts a revenue recognition policy that defines the time at which they report revenues from providing goods or services to customers.

The cash basis of accounting works best when a lengthy delay exists between the timing of cash flows and the underlying business activities to which they relate.

Guessco reported the following amounts on its income statement: total revenues,$31,500; interest expense,$300; net income,$1,600; income tax expense,$900; and operating income,$2,800.What was the amount of Guessco's income before income tax expense?

Your company received payment last month for a service that you provided this month.How will the business activity of the current month affect the basic accounting equation?

Across all revenue accounts,the total value of all debits must equal the total value of all credits.

Sparkling Pools received a bill for $1,200 for running newspaper ads during the last two weeks of July; the bill will be paid on August 1.Advertising expense should be:

Cash basis accounting

The time period assumption refers to the accounting convention of using a calendar year,as the fiscal period.

Operating activities are the primary source of revenues and expenses

Cash basis accounting measures financial performance very well when a business sells its customers on account.