Question 1

Which of the following best describes the Revenue Recognition Principle under accrual accounting?

Accepted Answer

Revenues are recognized when goods or services are provided to customers, in the amount the seller expects to be entitled to receive.

Question 2

A company sells $5,000 of goods on account in September and receives payment in October. Under accrual basis accounting, when is the revenue recognized?

Accepted Answer

In September, when the goods are delivered.

Question 3

Which journal entry correctly records the payment of $1,200 cash for three months of rent in advance under accrual accounting?

Accepted Answer

Prepaid Rent (+A) 1,200; Cash (-A) 1,200

Question 4

Which of the following is a limitation of the income statement?

Accepted Answer

It may not reflect all economic events affecting the company during the period.

Question 5

A business incurs $800 in advertising costs in September but will pay the bill in October. Under accrual accounting, how is this transaction recorded in September?

Accepted Answer

Advertising Expense (+E, -SE) 800; Accounts Payable (+L) 800

Question 6

Which equation correctly represents net income on the income statement?

Accepted Answer

$Net\ Income = Revenues - Expenses$

Question 7

A company receives $500 cash for services to be performed next month. What is the correct journal entry under accrual accounting?

Accepted Answer

Cash (+A) 500; Deferred Revenue (+L) 500

Question 8

Which of the following transactions would NOT be recognized as revenue in July under accrual accounting?

Accepted Answer

Receiving payment in July for services to be performed in August.

Question 9

A company pays $2,000 cash for June’s electricity bill in July and receives July’s bill for $2,500, which will be paid in August. What is the total utilities expense recognized in July under accrual accounting?

Accepted Answer

$2,500$

Question 10

Which of the following best describes the matching principle?

Accepted Answer

Expenses are recognized in the same period as the revenues they help generate.

Question 11

If a company performs cleaning services worth $2,800 on account, what is the correct journal entry?

Accepted Answer

Accounts Receivable (+A) 2,800; Service Revenue (+R, +SE) 2,800

Question 12

Which of the following is TRUE about cash basis accounting?

Accepted Answer

It records revenues when cash is received and expenses when cash is paid.

Question 13

A company pays $1,500 cash to a plumber for repairs in July. Under accrual accounting, how is this transaction recorded?

Accepted Answer

Repairs and Maintenance Expense (+E, -SE) 1,500; Cash (-A) 1,500

Question 14

Which of the following is NOT an operating activity?

Accepted Answer

Buying equipment for long-term use.

Question 15

A company issues $25,000 of common stock for cash. What is the correct journal entry?

Accepted Answer

Cash (+A) 25,000; Common Stock (+SE) 25,000

Question 16

Which of the following best describes the five-step model for revenue recognition?

Accepted Answer

Identify the contract, identify performance obligations, determine transaction price, allocate price, recognize revenue when obligations are satisfied.

Question 17

A company pays $600 for utilities in September via automatic bank payment. What is the correct journal entry?

Accepted Answer

Utilities Expense (+E, -SE) 600; Cash (-A) 600

Question 18

If a company receives $1,000 from a customer who previously owed money, what is the correct journal entry?

Accepted Answer

Cash (+A) 1,000; Accounts Receivable (-A) 1,000

Question 19

A company incurs $600 in utilities costs this month and will pay them next month. What is the correct journal entry?

Accepted Answer

Utilities Expense (+E, -SE) 600; Accounts Payable (+L) 600

Chapter 3: The Income Statement – Financial Accounting Study Notes

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