Financial Accounting: A Business Process Approach, 3e (Reimers)

Chapter 2 Qualities of Accounting Information

Learning Objective 2-1

1) Net income equals ________.

A) the gross profit on a sale
B) operating income minus cost of goods sold
C) the increase in cash for the period
D) revenue minus expenses
Answer:

2) Gross profit equals ________.

A) sales minus cost of goods sold
B) operating income minus cost of goods sold
C) the increase in cash for the period
D) revenue minus expenses
Answer:

3) Busy Beaver had revenues of $2,000, cost of goods sold of $780, advertising expense of $100, and interest expense
of $25. Net income was ________.
A) $1,095
B) $1,120
C) $1,195
D) $1,220
Answer:

2.1-4) Busy Beaver had revenues of $2,000, cost of goods sold of $780, advertising expense of $100, and interest
expense of $25. Gross profit was ________.
A) $1,095
B) $1,120
C) $1,195
D) $1,220
Answer:

2.1-5) Generally accepted accounting principles (GAAP) ________.

A) are a set of rules that a U.S. company must follow when preparing its financial statements
B) are accounting rules determined by the IRS
C) are accounting rules required by the U.S. government for all businesses to follow
D) are issued by the International Accounting Standards Board
Answer:

2.1-6) The set of rules that a U.S. company must follow when preparing its financial statements is called ________.
A) AICPA
B) FASB
C) GAAP
D) SOX
Answer:

2.1-7) The set of rules that a U.S. company must follow when preparing its financial statements is called ________.

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A) generally accepted accounting principles
B) internal revenue code
C) internal control procedures
D) internally accepted accounting principles
Answer:

2.1-8) Which of the following statements is TRUE?

A) The IASB is the current standards setting body for the U.S. accounting profession.
B) The FASB determines U.S. generally accepted accounting principles.
C) Applying IFRS will require much less judgment and interpretation than following U.S. GAAP.
D) The IRS determines generally accepted accounting principles.
Answer:

2.1-9) U.S. generally accepted accounting principles (GAAP) are determined by the ________.
A) IFRS
B) IASB
C) FASB
D) U.S. Congress
Answer:

2.1-10) It requires more judgment to use ________ than to use ________.

A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
Answer:

2.1-11) ________ have more detailed rules than ________.

A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
Answer:

2.1-12) ________ are more concept-based than ________.

A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
Answer:

2.1-13) ________ is more rule-based than ________.

A) IFRS; U.S. GAAP
B) U.S. GAAP; IFRS
C) This is a trick question, since U.S. GAAP and IFRS are the same.
D) IGAAP; U.S. GAAP
Answer:

2.1-14) The SEC has ________.

A) ordered all U.S. companies to begin using IFRS immediately

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B) ruled that U.S. companies may never use IFRS for financial reporting
C) established a time table for the convergence of U.S. GAAP and IFRS
D) established an International Accounting Standards Board to create international accounting rules
Answer:

2.1-15) The IRS developed GAAP, or generally accepted accounting principles, for the accounting profession.
Answer:

2.1-16) The FASB, or Financial Accounting Standards Board, is currently the standards-setting body for rules that
U.S. publicly-held companies must use in preparing financial statements.
Answer:

2.1-17) GAAP, or generally accepted accounting principles, are the rules for preparing financial statements followed
by the accounting profession in the United States.
Answer:

2.1-18) Revenue minus expenses equals net income.

Answer:

2.1-19) Revenue minus expenses equals gross profit.

Answer:

2.1-20) The Financial Accounting Standards Board sets international financial reporting standards (IFRS).
Answer:

2.1-21) IFRS and U.S. GAAP are the same in all respects.
Answer:

2.1-22) IFRS have fewer detailed rules than U.S. GAAP.

Answer:
2.1-23) What is profit?
Answer:

2.1-24) What is the purpose of generally accepted accounting principles (GAAP)?

Answer:

2.1-25) What are IFRS? How do they compare and contrast with U.S. GAAP?
Answer:

1) A financial statement provides information that ________.

A) is specific to a business enterprise
B) is industry-wide information
C) is economy-wide information
D) includes the owner's personal financial records

2.2-2) Characteristics of useful information include ________.

A) rationality and reliability
B) comparability and consistency
C) materiality and conservatism
D) comprehensive and complete

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2.2-3) Relevant information ________.
A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period

2.2-4) Comparable information ________.

A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period

2.2-5) Reliable information ________.

A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period

2.2-6) Consistent information ________.

A) needs to be current so it can be used to make decisions
B) can be verified as accurate and truthful
C) allows users to make comparisons across financial statements
D) is presented the same way period after period

2.2-7) Assets are recorded at their original cost to the company at the time of purchase. This is the ________
principle.
A) historical-cost
B) full-disclosure
C) matching
D) revenue recognition

2.2-8) Expenses are reported on the income statement when the related revenue is recognized. This is the ________
principle.
A) historical-cost
B) full-disclosure
C) matching
D) revenue recognition
2.2-9) Ace Electronics bought a new factory for $5,000,000. The factory was originally offered for sale for
$5,200,000, but Ace successfully negotiated a lower price. Acme, Inc. was also trying to buy the factory and offered
to pay $4,900,000. Ace should record the factory on its books at ________.
A) $5,200,000
B) $5,000,000
C) $4,500,000
D) $4,900,000

2.2-10) For June, Team Shirts had a beginning balance in its Retained earnings account of $500. Net income for the
month was $875. Team Shirts paid dividends of $200. The ending balance in Retained earnings was ________.
A) $675
B) $1,575

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C) $1,175
D) $1,375

2.2-11) Accounts receivable represents ________.

A) amounts owed by the company to suppliers
B) amounts owed to the company by customers
C) revenue
D) shareholders' equity

2.2-12) Accounts payable represents ________.

A) amounts owed by the company to suppliers
B) amounts owed to the company by customers
C) expenses
D) shareholders' equity

2.2-13) The monetary-unit assumption refers to ________.

A) measuring financial statement items at their cost at the time of the transaction
B) an assumption that a company will continue to be in business in the future
C) the use of monetary units, such as dollars, to measure the value of financial statement amounts
D) the way revenues and expenses are recognized

2.2-14) The historical-cost principle refers to ________.

A) measuring financial statement items at their cost at the time of the transaction
B) an assumption that a company will continue to be in business in the future
C) using monetary units, such as dollars, to measure the value of financial statement amounts
D) the way revenues and expenses are recognized

2.2-15) The going-concern assumption refers to ________.

A) measuring the financial statement items at their cost at the time of the transaction
B) an assumption is made that a company will continue to be in business in the future
C) the use of monetary units, such as dollars, to measure the value of financial statement amounts
D) the way revenues and expenses are recognized

2.2-16) The accounting rule which requires that only the business transactions of Team Shirts be shown on the
balance sheet is the ________.
A) separate-entity assumption
B) going-concern assumption
C) monetary-unit assumption
D) historical-cost principle

2.2-17) The accounting rule which assumes that Team Shirts is continuing in business for an indefinite period of time
is the ________.
A) separate-entity assumption
B) going-concern assumption
C) monetary-unit assumption
D) historical-cost principle

2.2-18) Which of the following is an example of using the materiality concept?

A) recording significant purchases as assets even though technically they are considered expenses
B) recording insignificant purchases as expenses even though technically they are considered assets

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C) not recording insignificant purchases at all
D) recording insignificant liabilities as assets

2.2-19) All of Team Shirts' financial statements are presented in U.S. dollars. The accounting rule that applies is the
________.
A) separate-entity assumption
B) going-concern assumption
C) monetary-unit assumption
D) historical-cost principle

2.2-20) The revenue reported on the Team Shirts' income statement has been earned during the accounting period.
The accounting rule that applies is the ________.
A) going-concern assumption
B) historical-cost principle
C) revenue-recognition principle
D) matching principle

2.2-21) Supplies expense on the Team Shirts' income statement represents only supplies that were used to earn
revenue during the accounting period. The accounting rule that applies is the ________.
A) going-concern assumption
B) historical-cost principle
C) revenue-recognition principle
D) matching principle

2.2-22) On December 31, 2012, Twisted Pretzel was told by an appraiser that its land, which cost $100,000, was
worth $120,000. How should Twisted Pretzel show this information on its financial statements prepared under U.S.
GAAP?
A) Report a gain of $20,000 on its income statement.
B) Report land at $100,000 on its income statement.
C) Report land at $120,000 on its income statement.
D) Continue showing the land at its cost of $100,000.

2.2-23) On December 31, 2012, Twisted Pretzel was told by an appraiser that its land, which cost $100,000, was
worth $120,000. Under IFRS, Twisted Pretzel would be allowed to: show the land on its financial statements as
________.
A) an expense of $100,000 on the income statement
B) an expense of $120,000 on the balance sheet
C) an asset of $120,000 on the income statement
D) an asset of $120,000 on the balance sheet

2.2-24) For information to be useful, it must be relevant and reliable.

2.2-25) The owner of a sole proprietorship should not include personal financial records as part of the financial
records and statements of the business.
2.2-26) The separate-entity concept means that a company and its owners should keep separate records.

2.2-27) Two characteristics of useful information are comparability and consistency.

2.2-28) Comparability means that companies should use the same accounting rules from period to period.

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2.2-29) Reliable information can be verified.

2.2-30) If a company spends $25 on copy paper, the amount is not material compared with the total office supplies
budget of $250,000.

2.2-31) Information that is relevant is both timely and useful in predicting the future.

2.2-32) State the most applicable accounting rule for each of the following situations. An accounting rule can be a
principle, assumption, constraint, or information characteristic.

1. All purchases and expenses are recorded at the amount paid.

2. South Seas records items imported from Tahiti in U.S. dollars.
3. The owner intends to run South Seas for an indefinite period of time.
4. Jem's Jewelers sold a $5,000 diamond engagement ring on account and recorded it as a sale.
5. Inventory purchased last month and sold this month was deducted as a cost on this month's income statement.

2.2-33) State the most applicable accounting rule for each of the following situations. Each rule can be used more
than once. An accounting rule can be a principle, assumption, constraint, or information characteristic.

1. Maids-R-Us recorded using supplies in the same period the supplies were used instead of expensing them in the
period when they were purchased.
2. Clean Sweep cleaned an office building in October and was paid in November. Revenue was reported in October.
3. Team Shirts sends a set of financial statements prepared in accordance with GAAP to First Bank every month.
4. Mary Ellis, owner of Clean Sweep, has a bank account for her business separate from her personal bank account.
5. Jem's Jewelers purchased a three-month insurance policy on its diamond inventory. The cost of the policy was
recorded as an asset. Later one-third of the asset was expensed each month over the three-month policy.

2.2-34) State the most applicable accounting rule for each of the following situations. An accounting rule can be a
principle, assumption, constraint, or information characteristic.

1. A $15 wastebasket was expensed when purchased even though it will be used for more than one year.
2. The owner of the business paid for private school tuition and did not list the amount on the books of his business.
3. Team Shirts prepares financial statements in the same manner each year.
4. South Sea's financial statements are prepared within the first week after the close of each accounting period.
5. An external auditor found receipts documenting the purchase of a computerized information system for Team
Shirts.

2.2-35) Busy Beaver, Inc. purchased land ten years ago for $30,000. At December 31, 2012, similar land has been
appraised at $50,000. Answer the following questions:

1. At what amount should land be reported on the balance sheet under U.S. GAAP?
2. Which basis is more reliable, historical cost, $30,000, or fair market value, $50,000?
3. Which basis is more relevant, historical cost, $30,000, or fair market value, $50,000?
4. How might the land be reported using IFRS?

2.2-36) Explain the objectives of financial reporting.

2.2-37) Discuss the qualities of accounting information.

Answer: Usefulness is the most important characteristic of accounting information. Useful information is relevant to
the decision maker. In other words, it makes a difference in making decisions. Information must be reliable. This

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means that it must be verifiable or based on some sort of documentation. The information must be accurate and
truthful. Useful information must be comparable across different companies. Therefore, accountants and companies
follow GAAP reporting rules. When all companies follow the same reporting rules, then information can be
compared among companies and industries. Useful information should be consistent. This means that accountants
and companies have to follow the same reporting rules across time.

2.2-38) Match each of the following terms with the appropriate definition. Each term should be used only once.

a. Generally Accepted Accounting Principles (GAAP)

b. Financial Accounting Standards Board (FASB)
c. Separate-entity assumption
d. Time-period assumption
e. Usefulness
f. Relevant
g. Consistency
h. Materiality
i. Accounts payable
j. On account

_____ 1. Amounts that a company owes its vendors

_____ 2. The significance of an amount or item on the financial statements
_____ 3. The rules set by the SEC and FASB for preparing financial statements
_____ 4. The most important characteristic of accounting information and the objective of financial reporting
_____ 5. A qualitative characteristic of accounting information that requires that information be fresh and allows
users to evaluate a firm's past performance to predict where a firm is going
_____ 6. Term used to signify either buying or selling on credit
_____ 7. A qualitative characteristic of accounting information that requires that firms use the same accounting rules
from period to period
_____ 8. The current standards setting body for the U.S. accounting profession
_____ 9. The assumption that the life of the company can be separated into accounting periods of equal length
_____ 10. The requirement that a company and its owners keep separate financial records

2.2-39) From the list of concepts, principles, and assumptions, choose the letter which best matches each item below.
Use each term only once.

a. Accrual accounting g. Materiality

b. Consistency
c. Comparability
d. Going-concern assumption
e. Historical-cost principle
f. Matching principle
h. Monetary-unit assumption
i. Relevance
j. Reliability
k. Revenue-recognition principle
l. Separate-entity assumption

1. Items purchased for less than $25 are expensed even though they will last longer than a year.
2. Land is valued on the balance sheet at the amount paid for it even though it is worth more.
3. Revenues are recorded when the goods are delivered even if the cash was not collected.
4. Supplies are expensed in the period they are used to help generate revenue.
5. Cost of goods sold is presented in dollars, not units, on the income statement.
6. The same methods of measuring items on the financials should be used from period to period.
7. Assumes companies are going to stay in business indefinitely.
8. The owner's personal expenses should not be included in the company's records.
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 9. Accounting information is provided in a timely fashion so that the information is still useful.
10. Revenues are recorded when earned and expenses are recorded when incurred regardless of when
the related cash changes hands.
11. The items on the financial statements should be accurate and truthful.
12. Comparing financial statements of different companies is more meaningful when the statements
are prepared in accordance with GAAP.

2.2-40) Match the accounting principle or assumption that is most applicable to each of the following. Each term
should be used only once.

a. monetary-unit assumption
b. historical-cost principle
c. going-concern assumption
d. revenue-recognition principle
e. matching principle

_____ 1. Team Shirts reports assets valued at the original transaction price.
_____ 2. The expenses incurred by Team Shirts in March were subtracted from March revenues to calculate the profit
for March.
_____ 3. Team Shirts reports the amounts on its financial statements in dollars.
_____ 4. Team Shirts reports amounts earned even though cash has not yet been collected.
_____ 5. Tom has plans to run Team Shirts indefinitely.
2.3-1) Team Shirts purchased six months' worth of insurance for $900. The insurance would initially be recorded as
________.
A) an account receivable
B) an account payable
C) prepaid insurance
D) insurance expense

2.3-2) Team Shirts has $200 in its Prepaid insurance account on June 30. This amount is for insurance for July and
August. It represents a ________.
A) current asset
B) long-term asset
C) current liability
D) long-term liability

2.3-3) On May 31, Team Shirts pays a $600 dividend to its shareholders. The dividend ________.
A) increases assets by $600
B) reduces retained earnings by $600
C) is classified as dividend expense of $600
D) increases net income by $600

2.3-4) On July 1, Team Shirts paid $600 for three months' worth of advertising beginning on July 1. What is the
balance in the Prepaid advertising account at July 31?
A) $0
B) $200
C) $400
D) $600

2.3-5) On July 1, Team Shirts paid $600 for three months' worth of advertising beginning on July 1. What is the
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balance in the Prepaid advertising account at August 31?
A) $0
B) $200
C) $400
D) $600

2.3-6) On July 1, Team Shirts paid $600 for three months' worth of advertising beginning on July 1. What is
Advertising expense for the MONTH ended August 31?
A) $0
B) $200
C) $400
D) $600

2.3-7) Team Shirts sold $125 worth of T-shirts to a customer on credit. This transaction includes ________.
A) an account receivable
B) an account payable
C) a prepaid sale
D) T-shirt expense

2.3-8) On January 1, Team Shirts paid $600 for three months' worth of advertising beginning on February 1. What
should the balance be in the Prepaid advertising account on April 1?
A) $0
B) $100
C) $200
D) $300

2.3-9) Adjusting the books is done ________.

A) every time a sale is made
B) every time an asset is purchased
C) as expenses are used up
D) at the end of every accounting period

2.3-10) The first financial statement to be prepared at the end of each accounting period is the ________.
A) balance sheet
B) income statement
C) statement of changes in shareholders' equity
D) statement of cash flows

2.3-11) The economic resources of a company resulting from past transactions are called ________.
A) assets
B) revenues
C) retained earnings
D) contributed capital

2.3-12) Liabilities are ________.

A) amounts that the business owes
B) amounts that the business owns
C) Shareholder claims on the assets of the business
D) matched with revenues to calculate income

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2.3-13) Financial statements may be prepared ________.
A) weekly
B) monthly
C) quarterly
D) All of these are correct.

2.3-14) During its first year of business, Mega, Inc. earned revenues of $400,000, of which it collected only $310,000
in cash. Which of the following statements is CORRECT?
A) The income statement will show Cash collected from customers of $310,000.
B) The balance sheet will show Accounts receivable of $310,000.
C) The income statement will show Revenues of $310,000.
D) The income statement will show Revenues of $400,000.

2.3-15) The four basic financial statements are the ________.

A) income statement, balance sheet, statement of changes in shareholders' equity, and cash budget
B) income statement, balance sheet, cash budget, and statement of cash flows
C) income statement, balance sheet, statement of changes in shareholders' equity, and statement of cash flows
D) balance sheet, shareholders' equity, statement of cash flows, and cash budget

2.3-16) In June, Team Shirts collected $2,250 from customers, paid $600 for T-shirts, and paid $500 for rent. Net
cash from operations was ________.
A) $1,950
B) $1,650
C) $1,150
D) $2,250

2.3-17) Accounts receivable are classified as ________.

A) current assets
B) current liabilities
C) noncurrent assets
D) noncurrent liabilities

2.3-18) Accounts payable are classified as ________.

A) current assets
B) current liabilities
C) noncurrent assets
D) noncurrent liabilities

2.3-19) Equity ________.

A) represents shareholders' claims to the assets of a business
B) represents capital contributions to the business by lenders
C) represents capital owed by customers
D) is equal to assets plus liabilities

2.3-20) A classified balance sheet shows subtotals for ________.

A) revenues and expenses
B) current assets, long-term assets, current liabilities, long-term liabilities and shareholders' equity
C) operating activities, investing activities and financing activities
D) retained earnings, net income, and dividends

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2.3-21) Contributed capital is also called ________.
A) paid-in capital
B) retained earnings
C) investments
D) non-current liabilities

2.3-22) Cash is ________.

A) part of retained earnings
B) found on the income statement
C) equal to net income on the income statement
D) found on the balance sheet

2.3-23) Team Shirts purchased $2,000 worth of T-shirts from a company in Guatemala. Team Shirts recorded the
value of the transaction in U.S. dollars. Which accounting rule applies to this situation?
A) monetary-unit assumption
B) consistency
C) relevance
D) full-disclosure principle

2.3-24) The three basic elements of the balance sheet are ________.
A) operating activities, investing activities, and financing activities.
B) assets, liabilities, and shareholders' equity
C) revenues, expenses, and net income or loss
D) retained earnings, net income, and dividends

2.3-25) The three basic elements of the statement of cash flows are ________.
A) operating activities, investing activities, and financing activities
B) assets, liabilities, and shareholders' equity
C) revenues, expenses, and net income or loss
D) retained earnings, net income, and dividends

2.3-26) The three basic elements of the income statement are ________.
A) operating activities, investing activities, and financing activities
B) assets, liabilities, and shareholders' equity
C) revenues, expenses, and net income or loss
D) retained earnings, net income, and dividends

2.3-36) Match each of the accounts listed below with the appropriate balance sheet classification.

a. Assets
b. Liabilities
c. Shareholders' equity

_____ 1. Accounts receivable

_____ 2. Retained earnings
_____ 3. Accounts payable
_____ 4. Cash
_____ 5. Contributed capital
_____ 6. Notes payable

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_____ 7. Inventory
_____ 8. Common stock

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2.3-37) Indicate with an “X" whether each item is an asset, liability or shareholders' equity account. There is only
one correct answer for each.

Item: Asset Liability Shareholders' equity

Dividends
Accounts receivable
Contributed capital
Note payable
Wages expense
Wages payable
Prepaid insurance
Insurance expense
Accounts payable
Retained earnings

2.3-38) Identify the appropriate financial statement for each of the items listed below. Some items may be found on
more than one financial statement.

a. Balance sheet
b. Income statement
c. Statement of changes in shareholders' equity
d. Statement of cash flows

_____ 1. Cash paid for supplies

_____ 2. Net income
_____ 3. Sales revenue
_____ 4. Rent expense
_____ 5. Inventory
_____ 6. Retained earnings
_____ 7. Cash received from customers
_____ 8. Cash

2.3-39) Match each of the following terms with the appropriate definitions. Use each term only once.

a. prepaid insurance
b. accounts receivable
c. accounts payable
d. assets
e. current assets
f. liabilities
g. current liabilities
h. classified balance sheet
i. shareholders' equity
j. contributed capital
k. adjusting the books

_____ 1. Name for the owners' claims to the assets of the business which includes both contributed capital and
retained earnings
_____ 2. The economic resources of a company resulting from past transactions
_____ 3. Amounts customers owe a company for goods or services purchased on credit
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_____ 4. Obligations the company has incurred to obtain the assets it owns
_____ 5. Insurance a business has purchased, but not yet used
_____ 6. Assets the company plans to turn into cash or use to generate revenue in the next fiscal year
_____ 7. The amount the owners have put into their business
_____ 8. The process of making changes in the accounting records, at the end of an accounting period to make sure
that the amounts reflect the financial condition of a company as of that date
_____ 9. Financial statement which shows subtotals for current assets and current liabilities
_____ 10. Liabilities the company will pay off within the next fiscal year
_____ 11. Amounts the company owes its vendors

2.3-40) Indicate with an "X" the one financial statement where you would expect to find each line item:

IncomeStatement
Statementof Cash
Balance
FlowsSheet
1. Cash paid for insurance
2. Prepaid insurance
3. Insurance expense
4. Wages paid to employees
5. Wages payable
6. Wages expense
7. Accounts payable
8. Cost of goods sold
9. Inventory
10. Cash paid to vendors

2.3-41) Classify each of the items below according to the section of a firm's financial statements where it would be
reported. Some sections may be used more than once. Others may not be used at all.
a. Current asset c. Current liability f. Revenue
b. Long-term asset d. Long-term liability g. Expense
e. Shareholders' equity

_____ 1. Common stock _____ 6. Accounts payable

_____ 2. Notes payable (due in 2 years) _____ 7. Land
_____ 3. Prepaid insurance (2 months remaining) _____ 8. Inventory
_____ 4. Sales _____ 9. Service fees earned
_____ 5. Cost of goods sold _____10. Accounts receivable

2.3-42) Indicate with an "X" the one financial statement where you would expect to find each line item:

Statement
Income of Cash Balance
Statement Flows Sheet
1. Interest payable
2. Interest expense
3. Notes payable
4. Cash paid for interest
5. Rent payable
6. Prepaid rent
7. Rent expense
8. Cash paid for rent
9. Sales revenue
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10. Cash collected from customers
11. Accounts receivable
2.3-43) For each description, identify with an “X" whether the item is either an asset (A), liability (L) or shareholders'
equity (SE) account on the balance sheet or a revenue (R) or expense (E) on the income statement. There is only one
correct answer for each description.
Income
Balance Sheet Statement
Description: A L SE R E
1. Resources available for future use
2. Accounts payable
3. Amounts not yet collected from customers
4. Cost of goods sold
5. Prepaid insurance
6. Past profits kept by the company

2.4-1) Team Shirts purchased T-shirts in July. The T-shirts were sold to customers in August. Team Shirts received
the final cash payments in September. According to the revenue-recognition principle, when should revenue be
recorded?
A) July
B) August
C) September
D) both August and September

2.4-2) Team Shirts ordered T-shirts from its supplier in June. The T-shirts were delivered in July. Team Shirts paid
the bill in August and sold the T-shirts in September. When should Team Shirts recognize an expense using accrual
accounting?
A) June
B) September
C) August
D) July

2.4-3) Accrual accounting is an accounting system in which ________.

A) measurement of income is NOT based on cash receipts and cash disbursements
B) measurement of income is based on cash receipts and cash disbursements
C) all businesses prepare reports required by the FASB
D) there are no timing differences

2.4-4) Clean Sweep performed cleaning services and billed the customer for $900. This transaction includes
________.
A) revenue and an account payable
B) revenue and an account receivable
C) revenue and cash
D) revenue and retained earnings

2.4-5) During the year, Mega, Inc. had revenues of $400,000 of which $310,000 was collected from customers. It also
had expenses of $360,000 of which $280,000 was paid. The shareholders were paid $20,000 in dividends. Net
income for the year equals ________.
A) $10,000
B) $30,000
C) $40,000
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D) $20,000

2.4-6) Team Shirts ordered T-shirts from its supplier in June. The T-shirts were delivered in July. Team Shirts paid
the bill in August and sold the T-shirts in September. When should Team Shirts recognize an expense using cash-
basis accounting?
A) June
B) September
C) August
D) July

2.4-7) During May, Team Shirts spent $4,000 to buy 800 T-shirts and sold 300 of them for $15 each. Team Shirts
should recognize ________ as expense for May.
A) $4,500
B) $1,500
C) $3,750
D) $4,000

2.4-8) During May, Team Shirts spent $4,000 to buy 800 T-shirts. In May, Team Shirts sold 300 of them for $15
each. The rest were sold for cash of $12 each in June. Net income for May and June was ________.
A) $4,500 in May and $6,000 in June
B) $3,000 in May and $3,500 in June
C) $1,500 in May and $2,500 in June
D) $500 in May and $6,000 in June

2.4-9) An accrual transaction is one in which ________.

A) the action comes before the cash
B) cash comes before the action
C) a company postpones recognizing cash transactions
D) the exchange of cash coincides with the economic substance of a transaction

2.4-10) A deferral transaction is one in which ________.

A) the action comes before the cash
B) cash comes before the action
C) a company postpones recognizing cash transactions
D) the exchange of cash coincides with the economic substance of a transaction

2.4-11) An account receivable is ________.

A) an accrual
B) a deferral
C) a cash sale to a customer
D) cash collected from a customer

2.4-12) Prepaid insurance is ________.

A) an accrual
B) a deferral
C) insurance expense
D) a liability

2.4-13) An accrual transaction is one in which revenue is earned before cash is received.

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2.4-14) Cash-basis accounting is the preferred method of accounting according to the FASB.

2.4-15) On April 25, Team Shirts paid $1,000 for advertising for May and June. This transaction is a deferral.

2.4-16) Accrual accounting is an accounting system in which the measurement of income is based on cash receipts
and cash disbursements.

2.4-17) Financial statements should be prepared using accrual accounting.

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