Libby Chapter 3 - Online Assignment PDF

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Chapter 03 Operating Decisions and the Statement of Earnings

True / False Questions 1. The operating cycle is the time it takes for a company to purchase goods, pay for the goods, sell them to customers, and collect the cash from the customers. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

2. According to the periodicity assumption, to measure and report financial information periodically, we assume the long life of the company can be cut into shorter periods. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

3. The operating cycle is of a similar duration for most companies. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

4. The division of business activities into a series of equal periods for accounting purposes is known as the periodicity assumption. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

5. The statement of earnings provides investors with information about a company's investing activities. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-02 The Operating Cycle

6. A Taco Bell restaurant would most likely have a longer operating cycle than Walmart. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

7. When a growing company finds it needs to buy more inventory before cash has been collected from customers, they often use short term credit such as trade or notes payable to finance the inventory purchases. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-01 Describe a typical business operating cycle and explain the necessity for the periodicity assumption. Topic: 03-02 The Operating Cycle

8. Revenues are decreases in assets or settlements of liabilities from ongoing operations. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-03 Classified Statement of Earnings

9. The profit of a business is computed by subtracting revenues from expenses. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-03 Classified Statement of Earnings

10. Losses are decreases in assets or increases in liabilities from peripheral activities. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-03 Classified Statement of Earnings

11. Income tax expense will appear on the statement of financial position. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-03 Classified Statement of Earnings

12. Operating revenues result from the sale of goods or services. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-02 Explain how transactions arising from operating activities affect the elements of the statement of earnings. Topic: 03-03 Classified Statement of Earnings

13. A gain on sale of land causes an increase in income as a result of operating activities. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-05 Prepare a classified statement of earnings and explain the difference between net earnings and cash flow operations. Topic: 03-03 Classified Statement of Earnings

14. Investors are most interested in income from operations as it best predicts future company performance. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-05 Prepare a classified statement of earnings and explain the difference between net earnings and cash flow operations. Topic: 03-03 Classified Statement of Earnings

15. Cost of goods sold is usually the largest expense for manufacturing or merchandising companies. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-05 Prepare a classified statement of earnings and explain the difference between net earnings and cash flow operations. Topic: 03-03 Classified Statement of Earnings

16. Accrual basis accounting records revenues when earned and expenses when incurred, regardless of when the related cash is received or paid. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

17. The concept of accruals largely forms the basis for the accounting profession. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

18. The cash flow of a transaction can occur before, at the same time as, or after the transaction itself. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

19. Prepaid expenses will eventually be expensed as they are used by the business. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

20. Unearned revenue is an asset. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

21. Using the accrual basis of accounting, a company recognizes expenses when they are paid. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

22. The revenue principle recognizes revenues when the earnings process is complete or nearly complete, an exchange has taken place, and collection is probable. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

23. Cash basis accounting is often adequate for very small businesses such as a small retail store or a doctor's office. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

24. Accrual basis accounting recognizes revenues when cash is received from the customer. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

25. Expenses incurred, but not yet paid, create a receivable (i.e., an asset) until payment occurs. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

26. Accrued in the case of expenses means paid in advance, and deferred in the case of expenses means not yet paid. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

27. Deferred revenues refer to monies collected in advance of being earned and accrued revenues means earned but not yet collected. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-12 Accrual Accounting

28. Expenses are recognized when an exchange takes place of productive assets, the earnings process is complete or nearly complete, and collection is likely. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

29. The matching process recognizes liabilities when incurred in earning revenue. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-14 The Matching Process

30. Transactions where cash is received before being earned often result in adjusting entries at the end of the period to record profit in the proper period. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-16 Transaction Analysis Rules

31. The revenue principle recognizes revenue from the sale of goods when ownership passes from the seller to the buyer. In the sale of services, revenue is recognized when the services are rendered. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

32. The sale of merchandise on credit and the collection from the customer ten days later constitutes one transaction for accounting purposes. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

33. Revenue recognition most commonly occurs at the point of delivery of goods or services to the customer. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

34. A company that ships product to its customers in January 20X2 but records them as revenue in December 20X1 has not violated the revenue principle because they were manufactured and ready for sale before the accounting year end. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Hard Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-13 The Revenue Recognition Principle

35. We record insurance as an expense when we pay for a three-year policy. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-03 Explain the accrual basis of accounting and apply the revenue recognition principle and the matching process to measure net earnings. Topic: 03-14 The Matching Process

36. Under the double-entry system, revenues must always equal expenses. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

37. Under the double-entry system, the sum of all debits must equal the sum of all credits for each and every transaction. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

38. An expense account is a subdivision of the retained earnings account and decreases shareholder's equity. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

39. If a revenue account is credited, the revenue account is increased. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

40. Debit and credit can be interpreted to mean "bad" and "good," respectively. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

41. A credit means that an account has been increased. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

42. An increase in an asset is recorded by a debit. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

43. A decrease in a liability account is recorded by a debit. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

44. The double-entry accounting system records the dual effect of each transaction. TRUE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

45. The normal balance of the Dividend account is a debit. TRUE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

46. The normal balance of an asset is a credit. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

47. The normal balance of all accounts is a debit. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Easy Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

48. Revenue accounts normally have debit balances because they represent assets received while expense accounts normally have credit balances because they represent assets used. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Hard Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

49. The double-entry system of accounting refers to the placement of a double line at the end of a column of figures. FALSE

Accessibility: Keyboard Navigation Blooms: Remember Difficulty: Medium Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

50. Collection of a customer's account has an impact on total assets. FALSE

Accessibility: Keyboard Navigation Blooms: Understand Difficulty: Easy Learning Objective: 03-04 Apply transaction analysis to recognize, classify and record the effects of transactions arising from operating activities on the financial statements. Topic: 03-16 Transaction Analysis Rules

51. The statement of earnings reports profit or loss at a point in time. FALSE

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