Finance Chapter 4 Income Measurement And Accrual Accounting Because Its Objective Nature Historical Cost

Chapter 4: Income Measurement and Accrual Accounting

True / False

1. Recognition is the process of formally recording or incorporating an item into the financial statements.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Remembering

2. When initially recording the cost of land purchased, most companies use the current value.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Remembering

3. The process of recording an item in the financial statements is called measurement.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Remembering

4. The amount of cash that could be received by selling an asset currently is called historical cost.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Remembering

5. Under the accrual method, expenses are recognized when revenue is earned.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

6. When a company recognizes the portion of supplies used during a year, the effect is to decrease net income.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

7. All financial statements are prepared using the accrual basis of accounting.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

8. Most companies use the cash basis of accounting.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

9. Revenue is always earned continuously over time.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Remembering

10. An asset is always involved when revenue is recognized.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Remembering

11. The recognition of revenue may result from the settlement of a liability rather than from the acquisition of an asset.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Remembering

12. Expired costs are called assets.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Remembering

13. Three months before year-end, Billings Company signed a $100,000, 12%, 6-month note. Principal and interest will

be paid at maturity. No interest should be accrued at year-end because the company has no obligation to pay the interest

until the note matures.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Applying

14. Matching can occur directly (like cost of goods sold), indirectly (like plant assets), or immediately when no future

benefits from the cost are expected.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Remembering

15. A cost can be an asset or expense depending on whether the future economic benefits have expired or not.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Remembering

16. One effect of recognizing depreciation is to decrease net income.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

17. A company that forgets to recognize depreciation for the year overstates its income and assets.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

18. An entry that includes the Cash account is probably an adjustment.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

19. Every company prepares only four adjustments—one for each of the four types of adjustments.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

20. When cash is paid before an expense is incurred, an accrual is necessary.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

21. The amount of interest accrued is added to the note payable account and reported in the liabilities section of the

balance sheet.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

22. Accumulated depreciation is increased when depreciation is recognized.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

23. Adjustments are recorded for all transactions involving outside entities.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

24. When revenue is earned before the receipt of cash, an adjustment that increases a receivable and decreases a liability

account is recorded.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

25. Every adjustment involves at least one income statement and one balance sheet account.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

26. When an expense is incurred prior to the payment of cash for that expense, an adjustment that increases an expense

account and decreases an asset is prepared.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

27. The balance in the account, Rent Collected in Advance, is reported as an asset on the balance sheet of the landlord.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Remembering

28. While most companies make adjustments and prepare statements monthly, many companies complete the accounting

cycle only once per year.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

KEYWORDS:

Bloom’s: Remembering

29. Accountants often prepare work sheets at the end of an accounting period in place of financial statements.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

KEYWORDS:

Bloom’s: Remembering

30. Financial statements should be prepared before any adjustments are made.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

KEYWORDS:

Bloom’s: Remembering

31. Interim financial statements are prepared annually.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

KEYWORDS:

Bloom’s: Remembering

32. Adjusting entries are recorded at the end of each accounting period so that net income is accurately reflected in the

financial statements for the period.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-06 – LO: 04-06

KEYWORDS:

Bloom’s: Remembering

33. Income summary does not appear on the income statement.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-07 – LO: 04-07

KEYWORDS:

Bloom’s: Remembering

34. Balance sheet accounts are called real accounts.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-07 – LO: 04-07

KEYWORDS:

Bloom’s: Remembering

35. Expense accounts are debited in the closing process.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-07 – LO: 04-07

KEYWORDS:

Bloom’s: Remembering

36. Closing entries serve two important purposes: (1) to return the balances in all temporary or nominal accounts to zero

to start the next accounting period and (2) to transfer the net income (or net loss) and the dividends of the period to the

Retained Earnings account.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-07 – LO: 04-07

KEYWORDS:

Bloom’s: Remembering

37. There is one single format for a work sheet.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-08 – LO: 04-08

KEYWORDS:

Bloom’s: Remembering

38. According to the text, the income statement is in fact a subset of the balance sheet, because information from the

income statement columns flows into the balance sheet columns.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-08 – LO: 04-08

KEYWORDS:

Bloom’s: Remembering

39. The unit of measure in Japan is the U.S. dollar.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Remembering

40. The accounting profession is currently experimenting with financial statements adjusted for the changing value of the

dollar since inflation is increasing.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Remembering

41. Because of its objective nature, historical cost is the attribute used to measure many of the assets recognized on the

balance sheet.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Remembering

42. The income statement tells the reader about the actual cash inflows during a period of time.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

43. The statement of cash flows reflects the revenues actually earned by the business, regardless of whether cash has been

collected.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

44. The justification for the accrual basis of accounting lies in the needs of financial statement users for periodic

information on the financial position and the profitability of the entity.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Remembering

45. The revenue recognition principle involves two factors: paid and incurred.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Remembering

46. The revenue recognition principle does not pertain to long-term contracts, franchises, commodities, and installment

sales.

a.

True

b.

False

ANSWER:

False

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Remembering

47. Conceptually, anytime a cost is incurred, an asset is acquired.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Remembering

48. Costs incurred for purchases of merchandise result in an asset, Merchandise Inventory, and are eventually matched

with revenue at the time the product is sold.

a.

True

b.

False

ANSWER:

True

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Remembering

Multiple Choice

49. Measurement of the economic effects on an entity involves each of the following except

a.

Quantification of effects

b.

Identification of the attribute to be measured

c.

Selection of an appropriate unit of measure

d.

Recording the economic effects in the financial statements

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Understanding

50. The selection of historical cost over current value as the attribute to be measured for assets is an example of the trade-

off of

a.

Reliability over relevance

b.

Costs over benefit

c.

Comparability over consistency

d.

Understandability over verifiability

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Understanding

51. An accountant describes the effects of an economic event on an entity by recording the transaction and reporting the

amount on the financial statements. What is this called?

a.

Measurement

b.

Recognition

c.

Disclosure

d.

Matching

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Understanding

52. Which of the following is the attribute used to measure many assets that are recognized on a balance sheet, because it

is more objective and verifiable?

a.

Market value

b.

Historical cost

c.

Liquidation value

d.

Current replacement cost

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Understanding

53. Why is the use of the U.S. dollar as a unit of measure for financial statement data in the U.S. widely accepted?

a.

U.S. dollar remains stable over a long period of time.

b.

U.S. dollar is universally recognized as a reliable financial measure.

c.

U.S. dollar is the medium of monetary exchange in the U.S.

d.

U.S. dollar is required for financial statement presentation by the FASB and SEC.

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Understanding

54. Which one of the following statements is true?

a.

Recognition is concerned with the dollar amount of each economic effect that should be reported in the

financial statements.

b.

Measurement is concerned with how economic effects should be quantified.

c.

The stability concept is concerned with identification of the specific entity for which economic effects are to

be recognized and measured.

d.

The monetary unit assumption is concerned with the valuation of economic effects in terms of current

purchasing power.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-01 – LO: 04-01

KEYWORDS:

Bloom’s: Understanding

55. Sally’s Choice sells season memberships for $200 each. During January of 2016, 60 season memberships were sold.

As of March 31, 2016, only $3,000 of season membership fees had been collected from customers. The season runs for 4

months starting May 15, 2016. Which one of the following is an amount reported on the financial statements for the

period ending March 31, 2016?

a.

Unearned membership revenue of $3,000

b.

Unearned membership revenue of $9,000

c.

Accounts receivable of $3,000

d.

Membership revenue of $9,000

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Applying

56. Dom’s Motor Mart sold merchandise to a customer for $3,000 on credit on March 10. The customer paid Fox Auto the

amount due on March 31. Under the accrual basis of accounting, which of the following statements is true?

a.

Fox Auto will recognize the revenue on March 31.

b.

The March 10th transaction increases revenue, but has no effect on assets because cash has not been received.

c.

Revenue is recognized after the cost of the merchandise sold has been paid by Fox Auto.

d.

The March 31st transaction has no effect on total assets under the accrual basis.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Applying

57. Alexander City Consultants started business on January 1, 2016, and immediately purchased $1,000 of supplies to use

in the business. At the end of the month, 25 percent of the supplies remains unpaid and 20% are still on hand. What

amounts should appear on the financial statements for January, 2016?

Income Statement Statement of Cash Flows

a.

($ 1,000)

b.

($ 1,000)

($ 750)

c.

($ 800)

($ 25)

d.

($ 800)

($ 750)

ANSWER:

d

RATIONALE:

$1,000 (Immediate Purchase) – $200 (or 20% of $1,000) = $800 $1,000 (Immediate

Purchase) – $250 (or 25% of $1,000) = $750

DIFFICULTY:

Hard

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Analyzing

58. During December, Horn Inc. purchased $800 of supplies for use in its business. At the end of December, 20% of the

supplies were still on hand, but only 75% had been paid. What amounts will appear on the company’s balance sheet on

December 31?

Supplies on Hand Accounts Payable

a.

$800

$600

b.

$160

$200

c.

$640

$200

d.

$160

$800

ANSWER:

b

RATIONALE:

$800 (December purchase) × 20% = $160 $800 (December purchase) × (100% – 75% or

25%) = $200

DIFFICULTY:

Hard

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Analyzing

59. Camp Consulting Services started business on January 1, 2016. Camp performed services for customers totaling

$100,000 of which 40% remain uncollected at the end of December. Under the accrual basis, what amounts would appear

on Camp Consulting’s financial statements for 2016?

Income Statement Statement of Cash Flows

a.

$100,000

$ 60,000

b.

$100,000

c.

$ 60,000

d.

$ 60,000

$100,000

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Analyzing

60. Hensley Painting Company painted four houses in June at $500 each. At the end of June, three homeowners had paid

Hensley cash for the jobs. Under the accrual basis, what amounts will be reported on the income statement and the

statement of cash flows for June?

Income Statement Statement of Cash Flows

a.

$2,000

b.

$2,000

$1,500

c.

$1,500

d.

$ 500

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Analyzing

61. Holten Farm sells new tractors and pays each salesperson a commission of $1,000 for each tractor sold. During the

month of August, a salesperson, Fred, sold 3 new tractors. Jacob pays Jason on the 10th day of the month following the

sale. Fred operates on the cash basis; the tractor dealer operates on the accrual basis. Which of the following statements is

true?

a.

Fred will recognize commission revenue earned in the amount of $3,000 in August.

b.

Jacob will recognize commission expense in the amount of $3,000 in August.

c.

Fred will recognize commission expense in the amount of $3,000 in September.

d.

Fred will recognize revenue in the same month that the tractor dealer recognizes expense.

ANSWER:

b

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Applying

62. A pool cleaning service signs a contract with a new customer on May 1. The pool is vacuumed and “shocked” for the

customer on June 1, and the bill for the services is paid on July 1. Under the accrual basis, the business should recognize

revenue on:

a.

December 31

b.

July 1

c.

June 1

d.

May 1

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Applying

63. When are revenues and expenses recognized in the same accounting period that cash receipts and payments occur?

a.

Under the cash basis of accounting

b.

Under the accrual basis of accounting

c.

Under the adjusting method of accounting

d.

Under both the cash and accrual bases of accounting

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Understanding

64. On January 1, 2016, ABC, Inc. purchased a copier for $9,000 cash and decided to depreciate it over 5 years. What

amounts associated with the copier will appear on ABC’s financial statements for the year ending December 31, 2016?

Income Statement Statement of Cash Flows

a.

($1,800)

($9,000)

b.

($1,800)

$ 0

c.

($9,000)

$ 0

d.

None of these choices.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Analyzing

65. Which of the following concepts is important to accrual accounting?

a.

Time period, because accrual accounting divides earnings into time periods

b.

Monetary unit, because inflation is a big factor in the environment

c.

Cash basis, because if cash is not received, revenue is not accrued

d.

Entity concept, because personal transactions must be separated from business transactions

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Understanding

66. Which of the following statements does not present financial information based on the accrual basis of accounting?

a.

Balance Sheet

b.

Income Statement

c.

Statement of Retained Earnings

d.

Statement of Cash Flows

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-02 – LO: 04-02

KEYWORDS:

Bloom’s: Understanding

67. Harvest Catering is a local catering service. Conceptually, when should Harvest recognize revenue from its catering

service?

a.

At the date the customer places the order

b.

At the date the meals are served

c.

At the date the invoice is mailed to the customer

d.

At the date the customer’s payment is received

ANSWER:

b

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Understanding

68. When is revenue from the sale of merchandise normally recognized?

a.

On the date the sale is made.

b.

When the customer pays for the merchandise.

c.

Either on the date on which the sale occurs, or the date on which the customer pays

d.

When the merchandise is sold, if sold for cash, or when payment is received, if sold on credit

ANSWER:

a

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Understanding

69. Sun Corp. sells merchandise to customers. Sun should normally recognize

a.

Cash revenue only and the related expenses in the same accounting period as earned whether payment is

received or not

b.

Revenue when the cash is collected and the expenses when Mendes pays its creditor for the merchandise

c.

Revenue and expenses after all payments are collected

d.

Cash and credit revenue and the related expenses in the same accounting period as earned whether payment is

received or not

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Understanding

70. As a general rule, revenue is recognized at the point of sale. Which one of the following situations illustrates this rule?

a.

Products are sold to customers on credit with payment due in 30 days.

b.

Employees are paid wages the week after the wages are earned.

c.

Products are purchased for resale purposes.

d.

Interest is collected from amounts loaned to employees.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Understanding

71. What does the phrase, “Revenue is recognized at the point of sale” mean?

a.

Revenue is recorded in the accounting records when the goods are received from a supplier, and reported on

the income statement when sold to the customer.

b.

Revenue is recorded in the accounting records and reported on the income statement when the cash is received

from the customer.

c.

Revenue is recorded in the accounting records when the goods are sold to a customer, and reported on the

income statement when the cash payment is received from the customer.

d.

Revenue is recorded in the accounting records and reported on the income statement when goods are sold and

delivered to a customer.

ANSWER:

d

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Understanding

72. On October 31, Michael Corporation signed a one-year contract to provide services to Love Company for $80,000.

Love will pay for the services on November 1. Using the accrual basis of accounting, when should Michael Corporation

recognize revenue?

a.

November 1 of the current year when the cash is received from Harris

b.

On October 31 of the next year when all services have been provided

c.

Throughout the year as the revenue is earned

d.

At December 31 of the current year, and October 31 of the next year

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-03 – LO: 04-03

KEYWORDS:

Bloom’s: Understanding

73. Expenses originate from

a.

using an asset or recognizing liabilities.

b.

incurring liabilities or providing services to customers.

c.

collecting cash from customers.

d.

paying off liabilities.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Understanding

74. Which one of the following is not a recognized method of recognizing assets as expenses in a particular accounting

period?

a.

Customers’ account balances in accounts receivable are assigned to expense in the period in which each

customer pays.

b.

Prepaid insurance is assigned to expense as the insurance expires.

c.

A building is depreciated and its cost is assigned to the current and future accounting periods in which the

building is expected to be used.

d.

Merchandise inventory is assigned to cost of goods sold in the period the goods are sold.

ANSWER:

a

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Understanding

75. Expenses can be matched against revenue

a.

if the earnings process is not complete.

b.

when cash is collected from the sale of products.

c.

through allocation to the accounting periods in which the benefits are recognized.

d.

when payment is made for costs related to revenue.

ANSWER:

c

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

KEYWORDS:

Bloom’s: Understanding

76. Remaz Corp. purchased equipment at a cost of $220,000 in January, 2015. As of January 1, 2016, depreciation of

$160,000 had been recorded on this asset. Depreciation expense for 2014 is $50,000. After the adjustments are recorded

and posted at December 31, 2016, what are the balances for the Equipment and Accumulated Depreciation?

Equipment Accumulated Depreciation

a.

$220,000

$210,000

b.

$220,000

$ 0

c.

$160,000

$ 50,000

d.

$120,000

$210,000

ANSWER:

a

RATIONALE:

$160,000 (Accumulated Depreciation at Jan. 1, 2016) + $40,000 (Depreciation Expense for

2016) = $210,000 (Accumulated Depreciation at Dec. 31, 2016)

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Analyzing

77. Grove Corp. purchased equipment at a cost of $260,000 in January, 2012. As of January 1, 2016, depreciation of

$88,000 had been recorded on this asset. Depreciation expense for 2016 is $22,000. After the adjustments are recorded

and posted at December 31, 2016. What are the balances for the Depreciation Expense and Accumulated Depreciation?

Depreciation Expense Accumulated Depreciation

a.

$ 22,000

$110,000

b.

$ 22,000

$ 88,000

c.

$110,000

d.

$110,000

$ 88,000

ANSWER:

a

RATIONALE:

$88,000 (Accumulated Depreciation at Jan. 1, 2016) + $22,000 (Depreciation Expense for

2016) = $110,000 (Accumulated Depreciation at Dec. 31, 2016)

DIFFICULTY:

Moderate

LEARNING OBJECTIVES:

FACC.PONO.13.04-04 – LO: 04-04

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Analyzing

78. Which of the following statements is true concerning assets?

a.

Assets represent future economic sacrifices.

b.

Assets are expired costs.

c.

Assets become expenses at the time they are paid in cash.

d.

Assets become expenses when their economic benefits expire.

ANSWER:

d

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Understanding

79. Which one of the following is an example of a deferred revenue?

a.

Sales are made to customers on credit.

b.

Interest has been earned by a bank deposit, but it has not been recorded.

c.

Cash is received prior to providing the services to customers.

d.

Cash sales are made to customers.

ANSWER:

c

DIFFICULTY:

Easy

LEARNING OBJECTIVES:

FACC.PONO.13.04-05 – LO: 04-05

KEYWORDS:

Bloom’s: Understanding