Chapter 03 Operating Decisions and the Accounting System Answer Key
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.
2.
A retail store would likely have a shorter operating cycle than an automobile manufacturer.
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 revenue would be the revenue created by the sale of an automobile
by a car dealership.
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.
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.
9.
Interest revenue is reported as operating revenue and therefore increases operating income.
10.
Expenses are the result of decreases in assets or increases in liabilities incurred in order to
generate revenues.
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.
12.
A gain resulting from the sale of buildings and equipment is not reported as operating income
on the income statement.
13.
Under accrual accounting, rent expense for February, 2016 would be recognized on the
income statement in February, 2016 even though it had been paid for in January of 2016.
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.
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 expense recognition principle requires expenses to be recorded on the income statement
in the same period they are incurred in generating revenues.
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.
18.
Selling inventory to a customer on account results in an increase in both assets and
revenues.
19.
Cash received prior to the providing of the goods 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 at the time of purchase.
21.
Revenue accounts have credit balances because they increase stockholders’ equity.
22.
Expense accounts have debit balances because they decrease 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 at the date of purchase.
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.
25.
When the board of directors declares a cash dividend, the retained earnings account is
debited.
26.
The trial balance needs to be prepared prior to preparation of the income statement.
27.
Dividends declared decrease net income.
28.
An income statement with each line divided by net sales and shown as a percentage is called
a common statement.
29.
Collections from customers are cash flows from operating activities.
30.
Cash paid to suppliers for inventory is an investing activity.
31.
The net profit margin ratio is calculated by dividing net sales by net income.
32.
The net profit margin ratio is a measure of how much profit was created per sales dollar.
Multiple Choice Questions
33.
Which of the following best describes the operating cycle?
34.
Which of the following would lengthen the operating cycle?
35.
The primary difference between revenues and gains is:
36.
Which of the following best describes the time period assumption?
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?
38.
Which of the following businesses would most likely not report cost of goods sold on their
income statement?
39.
Which of the following describes the reporting of interest expense on the income statement?
40.
Which of the following statements is false?