Chapter 03 – Operating Decisions and the Income Statement
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.
2. A retail store would likely have a shorter operating cycle than an automotive manufacturer.
Chapter 03 – Operating Decisions and the Income Statement
3. The time period assumption implies that the life of a business entity can be reported in time
periods such as quarters and years.
4. An example of operating revenues would be the revenue created by the sale of an
automobile by a car dealership.
5. Revenue is recognized at the time that cash is collected from a customer for services to be
provided in the future.
Chapter 03 – Operating Decisions and the Income Statement
6. Unearned revenues are reported as liabilities on the balance sheet.
7. Interest expense is reported on the income statement as an operating expense.
8. Earnings per share must be either reported on the income statement or disclosed in the
notes to the financial statements.
Chapter 03 – Operating Decisions and the Income Statement
9. Investment income is reported on the income statement as operating revenues and therefore
increases operating income.
10. Expenses are decreases in assets or increases in liabilities incurred in order to generate
revenues.
11. Salary expense is recognized on the income statement when the salaries are paid rather
than when the employee provides the services.
Chapter 03 – Operating Decisions and the Income Statement
12. A gain resulting from the sale of plant and equipment does not create operating income on
the income statement.
13. Under accrual accounting, interest expense would be recognized on the income statement
when the interest has accrued with the passage of time even though cash has not been paid.
14. Under accrual accounting, revenues are recognized when earned and expenses are
recognized when incurred.
Chapter 03 – Operating Decisions and the Income Statement
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.
16. The matching principle requires expenses to be recorded on the income statement when
incurred in generating revenues.
17. The revenue principle recognizes revenue from the sale of goods when ownership passes
from the seller to the buyer regardless of the timing of the cash collection from customers.
Chapter 03 – Operating Decisions and the Income Statement
18. Selling inventory to a customer on account results in an increase in both assets and
revenues.
19. Cash collected prior to the providing of the good or service results in an increase in both
assets and liabilities.
20. Using cash to purchase office supplies which will be consumed later results in an increase
in expenses and a decrease in assets as of the time of purchase.
Chapter 03 – Operating Decisions and the Income Statement
21. Revenue accounts have credit balances because they result in increases in stockholders’
equity.
22. Expense accounts have debit balances because they result in decreases in net income,
retained earnings and stockholders’ equity.
23. Purchasing a six-month insurance policy results in a debit to insurance expense and a
credit to cash as of the date of purchase.
Chapter 03 – Operating Decisions and the Income Statement
24. Recording revenues on the income statement which 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.
25. When the board of directors declares a cash dividend either retained earnings or the
dividends account can be debited.
26. The income statement needs to be prepared prior to preparation of the balance sheet.
Chapter 03 – Operating Decisions and the Income Statement
27. The statement of stockholders’ equity links the income statement to the balance sheet.
28. The statement of cash flows is prepared last and is the only financial statement which
shows the cash inflows and outflows from transactions.
29. The total asset turnover ratio is computed by dividing sales revenue by average total
assets.
Chapter 03 – Operating Decisions and the Income Statement
30. The total asset turnover ratio measures sales dollars generated per dollar of assets and is a
measure of efficient management of assets.
31. Which of the following best describes the operating cycle?
Chapter 03 – Operating Decisions and the Income Statement
32. Which of the following would lengthen the operating cycle?
33. The primary difference between revenues and gains is
Chapter 03 – Operating Decisions and the Income Statement
34. Which of the following best describes the time period assumption?
35. 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?
Chapter 03 – Operating Decisions and the Income Statement
36. Which of the following businesses would most likely not report cost of goods sold on
their income statement?
37. Which of the following describes the reporting of interest expense on the income
statement?
Chapter 03 – Operating Decisions and the Income Statement
38. Which of the following statements is false?
39. Which of the following is not reported as an operating expense on the income statement?
Chapter 03 – Operating Decisions and the Income Statement
40. Which of the following statements is correct?
41. Which of the following best describes operating revenues?
Chapter 03 – Operating Decisions and the Income Statement
42. Which of the following transactions will result in an increase in operating income as of the
date of the transaction?
43. Which of the following expenses has no impact on operating income?
Chapter 03 – Operating Decisions and the Income Statement
44. Which of the following statements is false?
45. 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 plant and equipment $5,700;
Cost of goods sold $21,300;
Depreciation expense $7,100.
How much were Hable’s operating expenses?
Chapter 03 – Operating Decisions and the Income Statement
46. 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 plant and equipment occurred.
• Interest income totaled $7,700.
How much were Smith’s operating revenues?
Chapter 03 – Operating Decisions and the Income Statement
47. 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 plant 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.
How much was Lantz’s operating income?