MAB1033 Phillips Chapter 3 Income statement

Which of the following would not be considered an operating activity?

• Pay employees for work completed

• Purchase supplies on account

• Purchase equipment for cash

• Sell goods to customers

Answer explanation

Paying employees, purchasing supplies, and selling goods to customers are all operating activities. The purchase of equipment is an investing activity.

Which of the following is an operating activity?

• Billing customers for services rendered but not yet paid for

• Paying off a loan to the bank

• Purchasing equipment for cash

• Receiving cash investments from owners

Answer explanation

Paying off loans, purchasing equipment for cash, and receiving cash investments from owners are investing or financing activities. Billing customers for services rendered is an operating activity.

The primary source of revenues and expenses comes from:

• financing activities.

• investing activities.

• operating activities.

• other activities.

Answer explanation

Operating activities are the day-to-day functions involved in running a business. Operating activities include buying goods and services from suppliers, paying employees, and selling goods and services to customers and collecting cash from them.

Which of the following will result in an increase in revenue?

• Borrowing $10,000 from a bank

• Stockholders investing $10,000 in a company

• Selling concert tickets for $10,000 four months before the performance

• Selling $10,000 of groceries to customers

Answer explanation

Revenues are increases in a company's resources created by providing goods or services to customers during the accounting period. Therefore, selling $10,000 of groceries results in an increase in revenue. When a company borrows money or stockholders invest in the company, the company is not providing goods or services so no revenue is recorded. The "sales" of concert tickets for a performance four months in advance is not revenue, but a liability since services (the concert) will be provided in the future.

Which of the following items is reported on the income statement as an expense?

• This month's cash sales

• The purchase of supplies

• This month's utility bill

• The purchase of land

Answer explanation

An expense is recorded in the same period as the revenues to which it relates or, if it cannot be directly associated with revenues, it is recorded in the period that the underlying business activity occurs. Payment of this month's utility bill would be shown on the income statement as an expense since the underlying business activity occurred during this time. Cash sales are reported as revenues. Purchases of land or supplies would be reported on the balance sheet as increases in assets.

Which of the following September transactions would impact the September income statement?

• Collecting cash related to an account receivable

• Providing services to new customers

• Purchasing supplies

• Issuing stock to new shareholders

Answer explanation

Providing services in the current period is reflected in the income statement, which captures activity for the current period.

Which of the following represents an account rather than a subtotal? 

• Net Income

• Total Revenues

• Total Expenses

• Service Revenue

Answer explanation

Total Revenues, Total Expenses and Net Income are subtotals reported on the income statement. Service Revenue is an account representing amounts a business charges its customers.

Which of the following items is not a specific account in a company's chart of accounts?

• Income Tax Expense

• Sales Revenue

• Deferred Revenue

• Net Income

Answer explanation

Net income is not an account; it is the final amount shown on the income statement when revenues are greater than expenses.

Which of the following line items appear on an income statement?

• Inventory

• Revenues

• Accounts Receivable

• Salaries and Wages Payable

Answer explanation

Revenues appear on the income statement. The other accounts listed appear on the balance sheet, which reports assets, liabilities, and stockholders equity.

If a company incorrectly records cash received for services to be provided in the future with a debit to Cash and credit to Sales Revenue, how will this error affect net income for the current period?

• Net income will be too high.

• Net income will be too low.

• Net income will not be affected by this error.

• Net income will be too high in the following period.

Answer explanation

This transaction includes an obligation to provide services in the future. This obligation is a liability called Deferred Revenue. Service Revenue will be reported later, when the services are provided. Because the company recorded the revenue now instead of later, it overstated its revenues and, as a result, overstated its net income.