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Exam 3: Operating Decisions and the Accounting System

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Question 61

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Which of the following accounts does not have a credit balance?

A) Gain on sale of land.
B) Investment income.
C) Unearned revenue.
D) Rent expense.

E) C) and D)
F) B) and C)

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Question 62

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The net profit margin ratio is a measure of how much profit was created per sales dollar.

A) True
B) False

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Question 63

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Describe the difference(s) with respect to the cash basis of accounting and the accrual basis of accounting.

Selling inventory to a customer on account results in an increase in both assets and revenues.

Expense accounts have debit balances because they decrease net income, retained earnings, and stockholders' equity.

Application of generally accepted accounting principles requires that the accrual basis of accounting be used for reporting revenues and expenses on the income statement.

The following income statement was reported for Bauer Inc. for the first year of operations ending December 31, 2014 reported (in thousands of dollars): $\begin{array}{|l|r|r|}\hline \text { Sales revenue } & & \$ 24,500 \\\hline \text { Expenses: } & & \\\hline \text { Cost of Sales } & \$ 12,100 & \\\hline \text { Salaries and Wages } & 5,300 & \\\hline \text { Rent } & 900 & \\\hline \text { Utilities } & 500 & \\\hline \text { Miscellaneous } & \underline{600} & \\\hline \text { Total Expenses } & & \underline{19.400} \\\hline \text { Income before taxes } & & 5.100 \\\hline \text { Income tax expense } & & \underline{1.785} \\\hline \text { Net income } & & \$ 3.315 \\\hline\end{array}$ Requirement: A. Calculate net profit margin. B. Calculate earnings per share if there are 200,000 weighted average shares of common stock outstanding.

Which of the following statements is false?

Which of the following transactions will result in an increase in operating income as of the date of the transaction?

World Services Inc. has provided the following information pertaining to the month ended October 31, 2014: $\begin{array} { | l | r | l | l | r | } \hline \text { Sales revenue } & \$ 100,000 & & \text { Supplies expense } & \$ 1,500 \\\hline \text { Interest expense } & 6,900 & & \text { Rent expense } & 4,000 \\\hline \text { Cost of goods sold } & 60,000 & & \text { Salaries expense } & 9,500 \\\hline \text { Dividends paid } & 5,000 & & \text { Utilities expense } & 1,100 \\\hline \text { Advertising expense } & 4,500 & & \text { Loss on sale of land } & 3,200 \\\hline \text { Dividends declared } & 7,100 & & \text { Income tax expense } & 3,800 \\\hline \text { Unearned revenues } & 6,100 & & & \\\hline\end{array}$ Prepare an income statement through operating income for the month ended October 31, 2014.

Boone's Cleaning Service performed cleaning services during December 2014, but had not collected any cash from its customers as of December 31, 2014. What impact did performing these services have on the accounting equation?

Reporting revenues on the income statement that were previously reported as unearned revenues on the balance sheet results in a decrease in liabilities and an increase in net income, retained earnings, and stockholders' equity.

Which of the following correctly applies the revenue realization principle?

The revenue realization principle requires four conditions to be met. Which of the following is one of the four conditions?