Chapter 4
1. Revenues measure the inflow of net assets from operating activities.
2. Expenses measure the outflow of net assets consumed in the process of generating revenues.
3. Cost is the economic sacrifice made to acquire goods or services.
4. Current accounting practice takes the viewpoint of shareholders by reporting the amount of net income
available to shareholders after subtracting from revenues all expenses incurred in generating the revenue by
claimants (for example, employees, lenders, governments) other than shareholders.
5. Gains/Losses arise from relatively infrequent transactions, and there can be no assurance that they will recur
in any future period.
6. Common terminology, but not definitions in U.S. GAAP and IFRS, often refers to the difference between
sales and cost of sales as gross margin, gross profit, or gross income.
7. The statement of cash flows begin with revenues; for this reason, analysts often refer to revenue growth as
“top–line” growth.
8. Most firms display the components of cost of sales.
9. Both U.S. GAAP and IFRS require the disclosure, in the notes to the financial statements, of selected
information about business segments.
10. The income statement typically provides information about the operating results of business segments.
11. Items classified as operating expenses reflect management’s judgment that the item is a cost of the core
business.
12. All transactions that increase net assets affect income.
13. Expenses provide future benefits, and assets measure the consumption of those benefits.
14. Expenditures on advertising and research must be recognized as expense in the period of expenditure,
regardless of the firm’s expectation of future benefits.
15. A natural business year ends when most activities in an operating cycle have been substantially concluded.
16. Under the accrual method, the timing of revenue recognition is influenced by when the services or product
are provided.
17. Which of the following are true?
18. Which of the following is/are true?
19. When assets and income from operations that a firm has decided to discontinue (and dispose of or abandon),
separating the two income components allows users to form better predictions of
20. What criteria must sales transactions meet in order for the seller to recognize revenues before collecting
cash?
21. The matching convention assigns _____ to the related _____.
22. _____ are part of the ongoing central operations of the firm, so they are relatively persistent and
sustainable.
23. _____ arise from relatively infrequent transactions, and there can be no assurance that they will recur in any
future period.
24. The _____ uses only sales revenues and net income and an analyst nearly always can calculate, regardless
of format and display differences in income statement presentations.
25. Which of the following is/are false?
26. The income statement is not also called the statement of
27. _____ present an ordered list, grouped by broad categories of revenues and expenses. They begin with
revenues followed by a list of expenses.
28. Common terminology, but not definitions in U.S. GAAP and IFRS, often refers to the difference between
sales and cost of sales as gross
29. Which of the following is/are true?
30. Subtraction of total operating expenses from sales yields:
31. Other (nonoperating) items follow operating expenses or the subtotal for operating profit. Most firms
reporting under U.S. GAAP separately report financing costs, such as
32. A firms decision to sell its headquarters building at a gain
33. Subtracting nonoperating expenses from operating income yields:
34. U.S. GAAP and IFRS require separate income statement display of income from continuing operations and
_____earnings that will not continue because the firm either sold, or made a decision to sell, a portion of its
business). Such a requirement aids users of the income statement in predicting future earnings.
35. Research shows that the largest category of restated financial statements in the U.S. relates to
36. Revenue recognition is among the most complex issues in financial reporting. Currently, U.S. GAAP
contains over _____ pieces of authoritative guidance for recognizing revenues.
37. Revenue recognition is among the most complex issues in financial reporting. The quantity and complexity
of the authoritative guidance for recognizing revenues result from
38. A firm sells its headquarters building at a gain. This means that at the time of sale
39. As a general principle, under the accrual basis of accounting, the firm recognizes revenue when the
transaction meets which of the following conditions?
40. Which of the following is/are true?
41. When customers return goods for cash refunds or, if the customer has not yet paid, for cancellation of the
customer’s obligation to pay, the firm records a sales
42. Sales discounts and allowances include:
43. The _____ convention, links the timing of some expenses with revenue recognition.
44. The firm recognizes an expense when the following condition(s) hold(s).
45. Which of the following is not a period expense?
46. A seller of goods can easily associate (or match) the consumption of the benefits of the asset sold with
revenues from its sale. At the time of sale and revenue recognition, the seller
47. Which of the following is false regarding a merchandising firm?
48. Which of the following is/are not true regarding a merchandising firm?
49. Which of the following is not true regarding a manufacturing firm?
50. A manufacturing firm has manufacturing costs which become product costs. These manufacturing costs do
not include:
51. Manufacturing overhead includes:
52. For manufacturing firms, the balance sheet reports the costs of incomplete items as
53. For manufacturing firms, the cost of completed products remains on the balance sheet as __________ assets
until the firm sells the products; upon sale, the cost of the assets becomes a cost of goods sold expense.
54. Which of the following is/are not examples of a period expense?
55. Which of the following is/are not a period expense?
56. If the firm measures an asset at acquisition cost on the balance sheet, it measures expenses based on the
_____ of the asset consumed..
57. The sum of net income and other comprehensive income is:
58. Both U.S. GAAP and IFRS require firms to report the cumulative effect of other comprehensive income in a
balance sheet account called Accumulated
59. Both U.S. GAAP and IFRS require the presentation of an income statement and the presentation of the
items of Other Comprehensive Income. U.S. GAAP permits the following reporting format(s) except for:.
60. While no general principle describes the nature of items excluded from net income and included in Other
Comprehensive Income, they tend to arise from remeasurements of assets and liabilities (often, remeasurements
at fair value) and not from transactions. For example, IFRS permits but does not require firms to revalue certain
noncurrent assets upward to reflect increases in fair value in excess of acquisition cost. Under IFRS, such a
revaluation remeasurement increases assets (because the firm now records an existing asset on the balance sheet
at a larger number) and increases Other Comprehensive Income. These increases are accumulated in a(n) _____
account, Revaluation Surplus.
61. A common-size income statement expresses each expense and net income as a percentage of
62. Which of the following is not true?
63. Which of the following is true?
64. Under the accrual method, the timing of revenue recognition is influenced by
65. The accrual basis of accounting is often contrasted with the cash basis of accounting. Which of the
following is true of the cash basis of accounting?
66. A common-sized income statement permits
67. A common-size income statementpermits an analysis of changes or differences in the relations between
revenues, expenses, and net income and identifies relations that the analyst should explore further, such as
68. A common-sized income statement permits
69. Which financial statement reports operating performance for a specific period of time?
70. A natural business year
71. What is the best definition of an accounting period?
72. Which of the following concepts best characterizes the accrual basis of accounting?.
73. The intermingling of performance of one period with that of preceding or succeeding periods is
characteristic of which basis of accounting?
Cash basis Accrual basis
74. Under accrual accounting, revenue is recognized when
75. The accrual basis of accounting is often contrasted with the cash basis of accounting. Which of the
following is true of the cash basis of accounting?
76. Over sufficiently long time periods, the amount of net income equals
77. The net income for a period and the financial position at the end of the period are
78. Which equation is correct?
79. Revenue and expense accounts
80. Recognition of revenue usually occurs when
81. Dividends
82. At the end of the third year of operation, GreenWash Corporation has total assets equal to $100,000,
liabilities totaling $90,000, and contributed capital of $30,000. What is the balance in retained earnings?.
83. Shareholders of Forest Glen Corporation have received $35,000 in dividends in the current year. At year end
the corporation has total assets of $500,000, total liabilities equal to $300,000, and contributed capital totaling
$100,000. If retained earnings at the beginning of the year was $80,000, what was Forest Glen’s net income for
the current year?
84. Which of the following is an example of a contra account?
85. Prepaid assets are valued on the balance sheet at
86. The result of closing entries is that balances in all temporary accounts
87. Which of the following are not an example of adjusting entries?
88. Ames Corp. purchased new equipment during the year but neglected to record depreciation. What is the
effect of this omission on each of the named accounts?
Accumulated Retained Depreciation
Depreciation Earnings Expense
89. Julia Corporation purchased an insurance policy for three years beginning January 1, Year 2, and recorded
the $6,000 premium in the Prepaid Insurance account. What adjusting entry is required to reflect the proper
balances, in the insurance-related accounts at year-end, on December 31, Year 2?
90. The income statement provides information for assessing the operating profitability of a firm. One tool used
for analysis is the common-size income statement that expresses
91. Peter Company signed a new $36,000 three-year lease beginning October 1, Year 1, for a storage facility for
holding merchandise inventory. On October 1, Year 1, Peter Company recorded the first year’s payment of
$12,000 in the Prepaid Rent account. There was no balance in the Prepaid Rent account prior to this entry. Peter
Company records adjustments only at the calendar year end. At December 31, Year 1, the adjusting entry
needed to accurately reflect the correct balances in the Prepaid Rent and Rent Expense accounts would be to
debit:
92. The sales manager of Sebastian Company failed to record a valid sale on account of merchandise that had
been shipped to a customer prior to the end of the current year, however the merchandise had been properly
excluded from inventory at the end of the current year. As a result of this error, Sebastian Company’s
93. Electra Company purchased $100,000 worth of office supplies on January 1. Electra expects to use 60
percent of the supplies in the first year and the remainder in the second year. After adjusting entries (and before
closing entries), how much should Electra show in its Supplies Expense account?.
94. Bethesda Manufacturing Corp. purchased a new lathe machine for its baseball bat manufacturing plant on
January 1. The machine cost $12,000 and is expected to be used in production for 4 years at which time its
estimated salvage value will be $2,000. The yearly straight-line depreciation for this asset would be
95. On April 1, Year 1, Marshall Bookstore bought an insurance policy costing $48,000 that would insure the
retail building for two years against fire loss. What asset account and what amount are recorded on the balance
sheet at December 31, Year 1?
96. On November 1, Year 1, Deadbeat Collections Agency accepted a $100,000, 3-month note from a customer.
The note earns 24% interest per year. What is the amount of interest receivable recorded by August Collections
Agency at December 31, Year 1? (Assume no other entries to record interest have been made.)
97. Many firms provide similar types of airline services with similar types of assets. They each received
unqualified opinions from their independent auditors. Yet, Flash Airlines appears to apply its accounting
principles more aggressively in income-enhancing ways relative to its competitors. The choices for Flash
Airlines in applying generally accepted accounting principles under the accrual basis of accounting include:
98. Solve for the unknown item for each of the following independent situations.
CASE A
CASE B
CASE C
Total assets
A
400
600
Contributed capital
100
150
C
Total revenues
400
300
400
Total liabilities
600
B
250
Beginning retained earnings
(50)
100
100
Total expenses
250
350
200
Dividends
0
50
0
99. Collette and Cohen incorporate as CC Designs, Inc. on January 1, Year 1. CC Designs creates custom wall
finishes and sells painting products. The following transactions occur during January.
Cohen contributes cash of $75,000 and receives 15,000 shares of $1 par value stock.
Collette contributes $35,000 cash, office furniture with a value of $5,000, and computer equipment
with a value of $10,000 and receives 15,000 shares of $1 par value stock. The furniture and
equipment is expected to last 5 years and has no salvage value.
On January 2, $10,000 of painting products were purchased. CC paid $8,000 cash with the remaining
amount on account.
During January, painting products are sold for $8,000 cash. The cost of the products is $2,000.
Additional painting products with a value of $5,000 are sold, with a cost of $1,500, but the cash is not
collected as of January 31st. It is expected that the $5,000 will be collected in full by February 15th.
Cohen is paid a salary of $2,000.
CC paid $1,200 for January and February rent.