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1 Copyright © 2014 Pearson Education, Inc.Introduction to Financial Accounting, 11e (Horngren) Chapter 2 Measuring Income to Assess Performance
Learning Objective 2.1 Questions
1) The operating cycle begins with
- the acquisition of goods.
- the receipt of cash from customers.
- the payment for goods.
- the initial investment by owners.
- the sales to customers.
Answer: A
Diff: 1
Objective: L.O. 2-1
2) Net income is
- the difference between revenues and dividends
- the difference between revenues and retained earnings.
- the difference between cash and dividends.
- the difference between revenues and total assets.
- the difference between revenues and expenses.
Answer: E
Diff: 1
Objective: L.O. 2-1
3) Revenues are
- increases in liabilities resulting from delivering goods or services to customers.
- decreases in net assets resulting from delivering goods or services to customers.
- increases in net assets resulting from delivering goods or services to customers.
- decreases in retained earnings resulting from delivering goods or services to customers.
- another term for assets.
Answer: C
Diff: 2
Objective: L.O. 2-1
4) For which company would it seem sensible to use a fiscal year ending on June 30?
- A landscaping company
- A retail store that sells lawn mowers and lawn equipment
- A swimming pool retailer
- A snowboard retailer
- A hardware store
Answer: D
Diff: 2
Objective: L.O. 2-1
Introduction to Financial Accounting 11th Edition Horngren Test Bank Visit TestBankDeal.com to get complete for all chapters
2 Copyright © 2014 Pearson Education, Inc.5) Kronic Enterprises sold inventory costing $500 for $900 on account. If Kronic Enterprises operates under the accrual basis, what net effect will this transaction have on the owners' equity side of the balance sheet?
- None, since the customer to whom the inventory was sold has not yet paid
- None, since sales and/or cost of goods sold are income statement accounts
- Decrease owners' equity by $1,400
- Increase owners' equity by $400
- Increase owners' equity by $1,400
Answer: D
Diff: 3
Objective: L.O. 2-1
6) An accountant records a transaction when cash is paid or received under which basis of accounting?
- Cash
- Accrual
- Deferral
- Prepaid
- Cost recovery
Answer: A
Diff: 1
Objective: L.O. 2-1
7) Which of the following circumstances would result in a decrease in income under the accrual basis but would not result in a decrease in income under the cash basis?
- Purchase of inventory on account
- Payment of 2 months' rent in advance
- The expiration of prepaid rent
- The return of defective inventory purchased on account, where full credit was given
- The payment of the current period's utility bill
Answer: C
Diff: 3
Objective: L.O. 2-1
8) Hilac Plumbing records revenue as cash is received. Which method of income measurement is Hilac Plumbing using?
- The accrual basis
- The cash basis
- The recognition basis
- The revenue basis
- The realization basis
Answer: B
Diff: 2
Objective: L.O. 2-1
3 Copyright © 2014 Pearson Education, Inc.9) Which of the following circumstances would result in an increase in income under the cash basis and an increase in income under the accrual basis?
- The return of defective inventory purchased on account, where full credit was given
- Cash collection from a credit customer
- The cash sale of inventory at a sales price in excess of cost
- The expiration of prepaid rent
- The sale of inventory on account, at a sales price in excess of cost
Answer: C
Diff: 3
Objective: L.O. 2-1
10) Which of the following circumstances would result in a decrease in income under both the accrual and cash basis?
- The payment of last period's rent
- The payment of this period's rent
- The payment of next period's rent
- The cash purchase of land
- The purchase of equipment on account
Answer: B
Diff: 2
Objective: L.O. 2-1
11) An operating loss occurs when
- revenues exceed expenses.
- expenses exceed revenues.
- assets exceed liabilities.
- liabilities exceed assets.
- liabilities exceed owners equity.
Answer: B
Diff: 1
Objective: L.O. 2-1
12) Expenses are
- increases in net assets as a result of consuming resources in the process of providing services to a
- decreases in net assets as a result of consuming resources in the process of providing services to a
- increases in liabilities resulting from purchasing assets.
- increases in retained earnings resulting from operations.
- increases in equity resulting from operations.
customer.
customer.
Answer: B
Diff: 2
Objective: L.O. 2-1
13) The operating cycle is the time it takes for a company to buy goods.
Answer: FALSE
Diff: 1
Objective: L.O. 2-1
4 Copyright © 2014 Pearson Education, Inc.14) Because of the difficulty of measuring income, there is no reason to compare income levels between different companies.
Answer: FALSE
Diff: 1
Objective: L.O. 2-1
15) The additional owners' equity generated by net income or net profits is used to increase retained earnings.
Answer: TRUE
Diff: 1
Objective: L.O. 2-1
16) Because net income is the excess of revenues over liabilities, retained earnings increases by the amount of net income reported during the period less any dividends.
Answer: FALSE
Diff: 1
Objective: L.O. 2-1
17) According to accounting rules, fiscal years are required to be established over calendar years.
Answer: FALSE
Diff: 1
Objective: L.O. 2-1
18) An interim period is a time span that is less than a year and is established for accounting purposes.
Answer: TRUE
Diff: 1
Objective: L.O. 2-1
19) For revenue to be earned under the cash basis of accounting, the cash from the customer must be received.
Answer: TRUE
Diff: 1
Objective: L.O. 2-1
20) Cash for services performed in 20X8 is received in 20X9. Using the accrual basis of accounting, the revenue would appear on the 20X9 income statement.
Answer: FALSE
Diff: 2
Objective: L.O. 2-1
21) Revenue is recorded when accounts receivable are collected under the cash basis of accounting.
Answer: TRUE
Diff: 1
Objective: L.O. 2-1
22) Under the cash method, revenue is recorded when cash is collected.
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