(Occasionally an expenditure results in a decrease in an asset other than
cash. When an old automobile is traded in for a new automobile, part of
the expenditure is the decrease in the asset Automobiles.)
*1
- POST - {b}{a,6,45}Cash{n}
CASH - OK - Yes, it may decrease Cash.
C - OK - Yes, it may decrease Cash.
- HINT - Of the four choices, only Cash is an asset.
*2
- POST - {b}{a,10,28}liability{n}
LIABILITY - OK - Yes! It may increase a liability.
B - OK - Yes! It may increase a liability.
REVENUE - NO - Accounts Payable is a liability, not revenue.
A - NO - Accounts Payable is a liability, not revenue.
CASH - NO - No, it will DECREASE Cash, not increase it.
C - NO - No, it will DECREASE Cash, not increase it.
ACCOUNTS PAYABLE - NO - Well, that is one example of a liability.
D - NO - Well, that is one example of a liability.
@
6.6
Mogul Shop had {u}expenditures{n} of $3,000 in August for the purchase of
goods for inventory. If $500 of these goods were sold in August, there was
an {b}expense{n} of $500 in August. The remaining $2,500 of goods are still in
inventory at the end of August; they therefore are an {b}asset{n}. Thus the
expenditures of the period are either {1,8} of the period
(A) expenses (B) assets
or {2,8} at the end of the period.
(A) expenses (B) assets
*1
- POST - {b}{a,12,13}expenses
EXPENSES - OK - Yes, and an example is the $500 of inventory sold in August.
A - OK - Yes, and an example is the $500 of inventory sold in August.
ASSETS - QUIT - Well, "expenses" is a better fit here.
B - QUIT - Well, "expenses" is a better fit here.
*2
- POST - {b}{a,16,29}assets
ASSETS - OK - {a,21,1}Yes, and here the example is the $2,500 of goods still in inventory, {a,22,1}although there was an expenditure for them in August.
B - OK - {a,21,1}Yes, and here the example is the $2,500 of goods still in inventory, {a,22,1}although there was an expenditure for them in August.
EXPENSES - QUIT - {a,21,1}A better choice here is assets, but just remember that expenditures may be {a,22,1}{u}either{n} expenses or assets. {n}
A - QUIT - {a,21,1}A better choice here is assets, but just remember that expenditures may be {a,22,1}{u}either{n} expenses or assets. {n}
@
6.7
Mogul Shop sold the remaining $2,500 of goods in September.
In September it had an {1,11} of $2,500, but it did not have
(A) expense (B) expenditure
any {2,11} for these goods in September.
(A) expense (B) expenditure
*1
- POST - {b}{a,6,13}expense
EXPENSE - OK - That's right, because inventory was reduced by $2,500 in September.
A - OK - That's right, because inventory was reduced by $2,500 in September.
EXPENDITURE - QUIT - No, when an asset is consumed, this is an EXPENSE!
B - QUIT - No, when an asset is consumed, this is an EXPENSE!
*2
- POST - {b}{a,10,29}{r}
EXPENDITURE - OK - Right -- it did not acquire the goods in Sept. so there was no expenditure.
B - OK - Right -- it did not acquire the goods in Sept. so there was no expenditure.
EXPENSE - QUIT - {a,21,1}No, it did not have an EXPENDITURE in September because the goods were not {a,22,1}acquired in September.
A - QUIT - {a,21,1}No, it did not have an EXPENDITURE in September because the goods were not {a,22,1}acquired in September.
@
6.8
In August Mogul Shop paid an employee $200 cash for services
rendered in August. It had an {u}expense{n} and an {u}expenditure{n} of $200 for
labor services in August.
@
6.9
When all or part of an asset is used up or consumed in the
operations of a business, an expense is incurred. Thus an asset
gives rise to an {1,11} when it is acquired,
(A) expense (B) expenditure
and to an {2,11} when it is consumed.
(A) expense (B) expenditure
*1
- POST - {b}{a,8,29}{r}
EXPENDITURE - OK - Yes.
B - OK - Yes.
EXPENSE - QUIT - No, an expense is incurred when the asset is used up.
A - QUIT - No, an expense is incurred when the asset is used up.
*2
- POST - {b}{a,12,13}expense
EXPENSE - OK - Good.
A - OK - Good.
EXPENDITURE - QUIT - No, when an asset is CONSUMED there is an EXPENSE.
B - QUIT - No, when an asset is CONSUMED there is an EXPENSE.
@
6.10
When an asset is purchased, there is an {1,-11}. {s}
{d}
When an asset is consumed, there is an {2,-11}.
*1
EXPENDITURE - OK - That's right.
EXPENSE - NO - No, when the asset is acquired there's an expenditure.
*2
EXPENSE - OK - Yes.
EXPENDITURE - NO - No, when an asset is used up there is an expense.
@
6.11{s}
For example, suppose the Irwin Company purchased a supply of fuel
oil in 19x1, paying $10,000 cash. No fuel oil was consumed in 19x1. In 19x2,
$8,000 of fuel oil was consumed, and in 19x3, $2,000 was consumed. There was
an expenditure in {1,4} [when?] and an expense in {2,4} and {3,4}.
{s}
$10,000 ─┼─ ▓▓▓▓▓▓ ░░░░░░ FUEL OIL
│ ▓▓▓▓▓▓ ░░░░░░
─┼─ ▓▓▓▓▓▓ ░░░░░░ ▓▓▓▓▓▓ = Asset
│ ▓▓▓▓▓▓ ░░░░░░
─┼─ ▓▓▓▓▓▓ ░░░░░░ ░░░░░░ = Expense
│ ▓▓▓▓▓▓ ░░░░░░
─┼─ ▓▓▓▓▓▓ ░░░░░░
│ ▓▓▓▓▓▓ ░░░░░░
2,000 ─┼─ ▓▓▓▓▓▓ ▓▓▓▓▓▓ ░░░░░░
│ ▓▓▓▓▓▓ ▓▓▓▓▓▓ ░░░░░░
0 ─┴───────────────────────────────
19x1 19x2 19x3
*1
19X1 - OK - Right.
19X2 - QUIT - Irwin purchased the fuel in 19x1, so that's when the expenditure was incurred.
19X3 - QUIT - Irwin purchased the fuel in 19x1, so that's when the expenditure was incurred.
*2
19X2 - OK - Correct.
19X3 - QUIT - Okay -- but let's start with 19x2.
19X1 - NO - No expenses then.
- HINT - Expenses were $8,000 in 19x2 and $2,000 in 19x3.
*3
19X3 - OK - Right.
19X2 - QUIT - 19x3 belongs here.
19X1 - NO - No expenses then.
- HINT - Expenses were $8,000 in 19x2 and $2,000 in 19x3.
@
6.12
Between the time of their purchase and the time of their consumption,
the resources of a business are assets. Thus, when fuel oil is purchased,
there is an expenditure. The fuel oil is an {u}asset{n} until consumed. When
consumed, it becomes an {u}expense{n}.
@
6.13
Irwin Company purchased a two-year supply of fuel oil in 19x1, paying
$10,000. None of it was consumed in 19x1, $8,000 was consumed during 19x2, and
$2,000 in 19x3. The balance sheet item for the asset Fuel Oil Inventory will
show the following amounts: {s}
{d}
As of December 31, 19x1 ......... ${1,-6} {s}
{d}
As of December 31, 19x2 ......... ${2,-6} {s}
{d}
As of December 31, 19x3 ......... ${3,-6}
{s}
Choose from (A) 8,000, (B) 10,000, (C) 2,000, or (D) 0.
*1
10,000 - OK - Yes.
10000 - OK - Yes.
B - OK - Yes.
- HINT - On Dec. 31, 19x1, Fuel Oil Inventory showed $10,000.
*2
2,000 - OK - Yes.
2,000 - OK - Yes.
2000 - OK - Yes.
C - OK - Yes.
- HINT - On Dec. 31, 19x2, Fuel Oil Inventory showed $2,000.
*3
0 - OK - Yes.
0 - OK - Yes.
D - OK - Yes.
- HINT - On Dec 31, 19x3, Fuel Oil Inventory showed zero.
@
6.14
Irwin Company purchased a two-year supply of fuel oil in 19x1, paying
$10,000. None of it was consumed in 19x1, $8,000 was consumed during 19x2, and
$2,000 in 19x3. The item Fuel Oil Expense on the income statements will be
as follows: {s}
{d}
For the year 19x1 ......... ${1,-6} {s}
{d}
For the year 19x2 ......... ${2,-6} {s}
{d}
For the year 19x3 ......... ${3,-6}
{s}
Choose from (A) 8,000, (B) 10,000, (C) 2,000, or (D) 0.
*1
0 - OK - Yes.
0 - OK - Yes.
D - OK - Yes.
- HINT - For 19x1, Fuel Oil Expense was zero.
*2
8,000 - OK - Yes.
8,000 - OK - Yes.
8000 - OK - Yes.
A - OK - Yes.
- HINT - For 19x2, Fuel Oil Expense was $8,000.
*3
2,000 - OK - Yes.
2,000 - OK - Yes.
2000 - OK - Yes.
C - OK - Yes.
- HINT - For 19x3, Fuel Oil Expense was $2,000.
@
6.15
Over the life of a business, most expenditures {u}will{n} become expenses,
but in a single accounting period, there is no necessary correspondence
between expenditures and expenses.
@
6.16 Unexpired and Expired Costs
Another way of explaining the nature of expenses is to point out
that all expenditures result in costs. When inventory and other assets are
acquired, they are recorded at their {1,4}. Expenses are the {2,4}
of the resources used or consumed in the accounting period.
*1
COST - OK - Right.
- HINT - According to the cost concept, they are recorded at cost.
*2
COST - OK - Correct.
@
6.17
Expenditures result in costs. Costs that are used up or consumed in
In January 19x2 Eastman Company paid $5,000 to its landlord for the
December 19x1 rent. The journal entry in January would be: {s}
{d}
Dr. {1,55}
Cr. {2,59} {s}
{d}
Choose from (A) Cash 5,000
(B) Accrued rent 5,000
*1
ACCRUED RENT .................................... 5,000 - OK - Yes.
ACCRUED RENT 5,000 - OK - Yes.
B - OK - Yes.
CASH 5,000 - QUIT - No, the CREDIT is to Cash here.
A - QUIT - No, the CREDIT is to Cash here.
*2
CASH ........................................ 5,000 - OK - Good.
CASH 5,000 - OK - Good.
A - OK - Good.
ACCRUED RENT 5,000 - QUIT - No, that was the debit. A credit to Cash removes the liability Accrued Rent.
B - QUIT - No, that was the debit. A credit to Cash removes the liability Accrued Rent.
@
6.44
Earlier we saw that if rent is paid {u}prior{n} to the period in which the
expense was incurred, the amount is first debited to Prepaid Rent, which is
a(n) {1,9} account. As the previous screen indicates, if rent is paid
(A) asset (B) liability
{u}after{n} the period in which the expense is incurred, there is an entry to
Accrued Rent, which is a(n) {2,9} account.
(A) asset (B) liability
*1
- POST - {b}{a,8,13}asset
ASSET - OK - Yes.
A - OK - Yes.
LIABILITY - QUIT - Prepaid Rent is a resource on hand, so it's an ASSET account.
B - QUIT - Prepaid Rent is a resource on hand, so it's an ASSET account.
*2
- POST - {b}{a,14,29}{r}
LIABILITY - OK - That is right.
B - OK - That is right.
ASSET - QUIT - Accrued Rent implies an obligation to pay -- it's a liability account.
A - QUIT - Accrued Rent implies an obligation to pay -- it's a liability account.
@
6.45
Prepaid expenses are turned into expenses by a debit to the {1,7}
(A) asset (B) expense
account and a credit to the {2,7} account.
(A) asset (B) expense {s}
{d}
Accrued liabilities are discharged by a debit to {3,19}
(C) Cash (D) Accrued Liabilities
and a credit to {4,19}.
(C) Cash (D) Accrued Liabilities
*1
- POST - {b}{a,4,29}{r}
EXPENSE - OK - Yes, you debit the expense account and credit the prepaid expense account.
B - OK - Yes, you debit the expense account and credit the prepaid expense account.
ASSET - QUIT - {a,21,1}No, if Eastman Company paid its December rent in November,there would be a {a,22,1}debit to Prepaid Rent, an asset account. To turn it into an expense, you debit{a,23,1}the expense account and credit Prepaid Rent.
A - QUIT - {a,21,1}No, if Eastman Company paid its December rent in November,there would be a{a,22,1}debit to Prepaid Rent, an asset account. To turn it into an expense, you debit{a,23,1}the expense account and credit Prepaid Rent.
*2
- POST - {b}{a,8,13}asset
ASSET - OK - Sure -- if you debit the expense, you credit an asset account.
A - OK - Sure -- if you debit the expense, you credit an asset account.
EXPENSE - QUIT - No, you have debited an expense account and need to credit an asset account.
B - QUIT - No, you have debited an expense account and need to credit an asset account.
*3
- POST - {b}{a,13,29}{r}
ACCRUED LIABILITIES - OK - That's right.
D - OK - That's right.
CASH - QUIT - No, to discharge an accrued liability, you debit the accrued liability.
C - QUIT - No, to discharge an accrued liability, you debit the accrued liability.
*4
- POST - {b}{a,17,13}Cash
CASH - OK - Yes.
C - OK - Yes.
ACCRUED LIABILITIES - QUIT - The DEBIT was to accrued liabilities, the credit here is to Cash.
D - QUIT - The DEBIT was to accrued liabilities, the credit here is to Cash.
@
6.46
Of course, many items of expense are paid for in cash during the
accounting period. Salaries of $90,000 earned in 19x1 and paid for in cash
in 19x1 would be recorded in the following entry. {s}
{d}
Dr. {1,55}
Cr. {2,59}
Choose from (A) Cash 90,000
(B) Salary expense 90,000
*1
SALARY EXPENSE ................................. 90,000 - OK - Correct.
SALARY EXPENSE 90,000 - OK - Correct.
B - OK - Correct.
CASH - QUIT - No, the debit is to Salary Expense.
A - QUIT - No, the debit is to Salary Expense.
*2
CASH ............................................... 90,000 - OK - Correct.
CASH 90,000 - OK - Correct.
A - OK - Correct.
SALARY EXPENSE - QUIT - No, the credit is to Cash.
B - QUIT - No, the credit is to Cash.
@
6.47 Losses
Assets such as prepaid expenses provide benefits to future periods,
and they become expenses in these periods. Suppose Bryan Company owned an
uninsured machine that was destroyed by fire in 19x1. The machine
{1,8} benefit future periods. The asset amount carried for the machine
(A) will (B) will not
expired in 19x1, and this amount is thereby recorded as an E{2,7}
in 19x1.
*1
- POST - {b}{a,10,29}{r}
WILL NOT - OK - You are right.
B - OK - You are right.
WILL - QUIT - If the machine was destroyed, it's unlikely to benefit future periods.
A - QUIT - If the machine was destroyed, it's unlikely to benefit future periods.
*2
XPENSE - OK - Right.
EXPENSE - OK - Right.
- HINT - It is an unexpired cost and therefore an EXPENSE.
@
6.48
Thus, even though an asset does not provide benefits to a period,
it is an expense of that period if its cost has expired for any reason.
Such expenses are called {b}losses{n}. A loss is recorded as an expense
{1,-1}
(A) in the period in which the loss occurs.
(B) over the periods that the asset was supposed to benefit.
*1
- POST - {b}{a,10,13}{r}
A - OK - Yes, that's correct.
B - QUIT - {a,21,1}No, since its cost has expired in the period in which the loss occurs, it is {a,22,1}recorded in that period.
@
6.49
A loss is recorded as an expense if it is {b}reasonably possible{n}, even
though it is not certain. Thus, if a customer sues Bryan Company in 19x1, and
if it seems reasonably possible that Bryan Company will lose the law suit,
the estimated loss is recorded as an expense {1,28}
(A) in 19x1. (B) when the law suit is settled.
This is in accordance with the concept that requires expenses to be recognized
when they are reasonably possible, which is the {b}conservatism{n} concept.
*1
- POST - {b}{a,10,13}in 19x1.
IN 19X1. - OK - Yes, because the loss is reasonably possible in 19x1.
IN 19X1 - OK - Yes, because the loss is reasonably possible in 19x1.
A - OK - Yes, because the loss is reasonably possible in 19x1.
WHEN THE LAW SUIT IS SETTLED - QUIT - No, in 19x1.
B - QUIT - No, in 19x1.
@
6.50 Summary of Matching Concept
As a summary of the matching concept, we shall repeat the various
types of transactions that are expenses in the year 19x1. First, there
are the costs of the goods or services that are sold in 19x1 and whose
R{1,6}S are recognized in 19x1.
*1
EVENUE - OK - Correct.
REVENU - OK - Correct.
- HINT - Goods and services create revenues when they are sold.
@
6.51
Expenses of 19x1 are also those expenditures made in prior periods
that are associated with activities in 19x1. On the balance sheet at the
beginning of 19x1, these items were reported as A{1,4}S, such as Prepaid
Expenses.
*1
SSET - OK - That's right, assets.
ASSE - OK - That's right, assets.
- HINT - These are ASSETS.
@
6.52
Expenses of 19x1 are also amounts applicable to 19x1 that will not
be paid for until some future time. On the balance sheet at the end of 19x1,
these amounts are reported as {1,11}.
(A) assets (B) liabilities
*1
- POST - {b}{a,8,29}{r}
LIABILITIES - OK - Yes, since they are owed in the future.
B - OK - Yes, since they are owed in the future.
ASSETS - QUIT - No, they are not resources on hand in 19x1, but are liabilities.
A - QUIT - No, they are not resources on hand in 19x1, but are liabilities.
@
6.53
Expenses obviously include amounts applicable to 19x1 and paid for
in 19x1. These amounts {1,6} appear on a balance sheet as of the end
(A) do (B) do not
of a period.
*1
- POST - {b}{a,6,25}{r}
DO NOT - OK - That's right -- they are neither assets nor equities.
B - OK - That's right -- they are neither assets nor equities.
DO - QUIT - No, they do not, because they are neither assets nor equities.
A - QUIT - No, they do not, because they are neither assets nor equities.
@
6.54
Finally, expenses include losses occurring in 19x1. These may be
either a reasonably possible decrease in a(n) {1,9}, or a reasonably
(A) liability (B) asset
possible increase in a(n) {2,9}.
(A) liability (B) asset
*1
- POST - {b}{a,6,31}{r}
ASSET - OK - Yes.
B - OK - Yes.
LIABILITY - QUIT - No, a loss is an INCREASE in a liability.
A - QUIT - No, a loss is an INCREASE in a liability.
*2
- POST - {b}{a,10,13}liability
LIABILITY - OK - Right -- a loss may be an increase in a liability.
A - OK - Right -- a loss may be an increase in a liability.
ASSET - QUIT - No, a loss is a DECREASE in an asset.
B - QUIT - No, a loss is a DECREASE in an asset.
@
6.55
The balance sheet at the {b}beginning{n} of a period reports assets obtained
as a result of {1,12} made in earlier periods. Part of these assets
will expire and therefore are {2,12} of the current period. The
remainder will be carried forward to future periods and will be reported as
{3,12} on the balance sheet at the end of the current period. {s}
{d}For each blank space above, choose from among the following:
(A) assets
(B) expenditures
(C) expenses
(D) liabilities
*1
EXPENDITURES - OK - Yes, that is correct.
B - OK - Yes, that is correct.
ASSETS - NO - No, assets are resources on hand.
A - NO - No, assets are resources on hand.
EXPENSES - NO - No, assets are obtained through earlier expenditures.
C - NO - No, assets are obtained through earlier expenditures.
LIABILITIES - NO - No, assets are obtained through earlier expenditures.
D - NO - No, assets are obtained through earlier expenditures.
*2
EXPENSES - OK - Right!
C - OK - Right!
ASSETS - NO - No, they are no longer assets.
A - NO - No, they are no longer assets.
EXPENDITURES - NO - No, the expenditures were in an earlier period.
B - NO - No, the expenditures were in an earlier period.
LIABILITIES - NO - Expired assets are EXPENSES of the period.
D - NO - Expired assets are EXPENSES of the period.
*3
ASSETS - OK - That's right -- they will STILL be assets.
A - OK - That's right -- they will STILL be assets.
EXPENDITURES - NO - No, they'll be assets.
B - NO - No, they'll be assets.
EXPENSES - NO - No, only those assets that expired become expenses.
C - NO - No, only those assets that expired become expenses.
LIABILITIES - NO - No, they were assets before and remain assets.
D - NO - No, they were assets before and remain assets.
@
6.56 An Example of Matching
Homes, Inc., is a company that buys and sells houses. Exhibit 8 in
your booklet describes some of its transactions during May, June, and July.
These events relate to the sale of two houses, House A and House B. {s}
{d}
We shall measure the income for Homes, Inc., for the month of June.
@
6.57
Delivery of the deed to a house constitutes delivery of the ownership
of the house. Exhibit 8 says that for House A this happened in {1,6}
[what month?]; therefore, revenue from the sale of House A is recognized in
{2,6} [what month?].
*1
JUNE - OK - June is correct.
- HINT - The deed was delivered in June.
*2
JUNE - OK - Yes.
- HINT - The revenue is also recognized in June.
@
6.58{s}
The amount of revenue for House A is measured by two transactions.
List these below and find the revenue for House A. {d}
{b} Date Transaction Amount
May 2 {1,-21 } ${2,-6 } {s}
{d}
June 5 {3,-21 } ${4,-6 }
{l,10 }
Revenue from House A ${5,-6 }
{s}
Fill out the list using the following choices:
(A) Final Payment (D) 72,000
(B) Commission (E) 8,000
(C) Down Payment (F) 80,000
*1
DOWN PAYMENT - OK - Yes.
DOWN PAYMENT - OK - Yes.
C - OK - Yes.
FINAL PAYMENT - NO - The final payment is not until June 5.
A - NO - The final payment is not until June 5.
COMMISSION - NO - No, a commission is an expense, not revenue.
B - NO - No, a commission is an expense, not revenue.
*2
8,000 - OK - Yes.
8,000 - OK - Yes.
8000 - OK - Yes.
E - OK - Yes.
- HINT - The down payment on May 2 was $8,000.
*3
FINAL PAYMENT - OK - Right!
FINAL PAYMENT - OK - Right!
A - OK - Right!
COMMISSION - NO - No, the commission is an expense, not revenue.
B - NO - No, the commission is an expense, not revenue.
DOWN PAYMENT - NO - No, the down payment was already made.
C - NO - No, the down payment was already made.
*4
72,000 - OK - Yes, $72,000 was the final payment.
72000 - OK - Yes, $72,000 was the final payment.
D - OK - Yes, $72,000 was the final payment.
8,000 - NO - No, that was the down payment.
8000 - NO - No, that was the down payment.
E - NO - No, that was the down payment.
80,000 - NO - No, that's the Total amount.
80000 - NO - No, that's the Total amount.
F - NO - No, that's the Total amount.
*5
80,000 - OK - Good.
80000 - OK - Good.
F - OK - Good.
- HINT - The sum of $8,000 and $72,000 is $80,000.
@
6.59
Now consider the costs that are associated with this total revenue
of $80,000 in June. One of these costs was the cost of House A, which was
${1,-6}.
*1
70,000 - OK - Right.
70000 - OK - Right.
- HINT - Look again at the June 5 transaction in Exhibit 8.
@
6.60
Two of the cash payments related to the sale of House A. What were
the amounts of these cash decreases? {s}
{d}
{b} Date Transaction Amount
May 15 Commission ${1,-6} {s}
{d}
July 2 Commission ${2,-6}
*1
400 - OK - Yes, $400 -- 5% of cash received.
400 - OK - Yes, $400 -- 5% of cash received.
- HINT - The cash decrease on May 15 was a commission payment of $400.
*2
- POST - {a,20,1}{c, ,78}{a,21,1}{c, ,78}
3,600 - OK - Yes, so the total commission for the salesperson who sold House A was $4,000.
3,600 - OK - Yes, so the total commission for the salesperson who sold House A was $4,000.
3600 - OK - Yes, so the total commission for the salesperson who sold House A was $4,000.
- HINT - {a,21,1}The additional commission paid on July 2 was $3,600, for a total of $4,000 {a,22,1}to the salesperson who sold House A. {d}
@
6.61
The {b}matching{n} concept requires that the costs associated with
the revenues of a period be recognized as expenses of that period. Therefore,
the two commissions associated with House A, totalling $4,000, should be
recognized as expenses in {1,6} [what month?], even though they were
not paid in that month.
*1
JUNE - OK - Good.
- HINT - No, June -- because the deed was delivered in June and therefore revenue{a,22,1}was recognized in June.
@
6.62
In accordance with the realization concept, the $12,000 down
payment received on House B in June {1,7} revenue in June.
(A) was not (B) was
It will be revenue in {2,6} [what month?]. Because Homes, Inc.,
has an obligation to deliver the house, the $12,000 is a(n)
{3,9} on the balance sheet at the end of June.
(C) liability (D) asset
*1
- POST - {b}{a,6,13}was not
WAS NOT - OK - Yes, that's right.
A - OK - Yes, that's right.
WAS - QUIT - No, revenue will be recognized when the deed is delivered.
B - QUIT - No, revenue will be recognized when the deed is delivered.
*2
JULY - OK - Right, because the deed will be delivered in July.
- HINT - It will be revenue in July, when the deed is delivered.
*3
- POST - {b}{a,14,13}liability
LIABILITY - OK - Good.
C - OK - Good.
ASSET - QUIT - No, the $12,000 is not a resource for Homes, Inc., it is a liability.
D - QUIT - No, the $12,000 is not a resource for Homes, Inc., it is a liability.
@
6.63
The matching concept says that general costs of operations during
any period are expenses of that period. Thus the $2,000 general costs of
operations in June are expenses in {1,6} [what month?].
*1
JUNE - OK - You're right.
- HINT - {a,21,1}Since the costs were in June, the expenses are recorded in June too.
@
6.64{s}
Information from the last six screens is summarized below. Complete
the income statement for Homes, Inc., for the month of June, applying the
{b}Realization concept:{n} Revenue is recognized when goods are {1,9,3 }
or when services are {2,9,3}.
*1
DELIVERED - OK - Correct.
*2
PERFORMED - OK - That's right.
DELIVERED - OK - Okay.
@
6.75
{b}Matching concept:{n} Costs that are associated with revenues or activities
of a period are {1,8,3} of the period.
*1
EXPENSES - OK - Correct.
@
6.76 The Income Statement
There is no standard format for an income statement. The lower
portion of Exhibit 9 shows one common format. The first item on this income
statement is sales revenue, which is the amount of goods {1,9,3}
(A) performed (B) delivered
or services {2,9,3} during the period.
(A) performed (B) delivered
*1
- POST - {b}{a,8,31}{r}
DELIVERED - OK - Yes.
B - OK - Yes.
PERFORMED - QUIT - No, it is "amount of goods delivered."
A - QUIT - No, it is "amount of goods delivered."
*2
- POST - {b}{a,12,13}performed
PERFORMED - OK - Right.
A - OK - Right.
DELIVERED - QUIT - A better choice is PERFORMED.
B - QUIT - A better choice is PERFORMED.
@
6.77
The item on the second line is labelled cost of sales. It reports
the cost of the goods or services whose revenue is reported on the first line.
This is an example of the {1,11,3} concept.
(A) cost
(B) realization
(C) matching
*1
- POST - {b}{a,12,13}{r}
MATCHING - OK - Yes. The cost of goods or services are matched with associated revenue.
C - OK - Yes. The cost of goods or services are matched with associated revenue.
COST - NO - No, the cost concept focuses on the cost of ASSETS.
A - NO - No, the cost concept focuses on the cost of ASSETS.
REALIZATION - NO - No, the second line is an example of matching costs with associated revenues.
B - NO - No, the second line is an example of matching costs with associated revenues.
@
6.78
The difference between sales and cost of sales is called
{1,12,3 } [two words] in Exhibit 9. Write an equation (i.e., in the
form X = Y - Z) using the following terms:
(A) cost of sales (B) sales (C) gross margin
{s}
{2,13,3} = {3,13,3} - {4,13,3}
*1
GROSS MARGIN - OK - Correct.
C - OK - Correct.
- HINT - The difference is called the gross margin.
*2
GROSS MARGIN - OK - Yes.
C - OK - Yes.
- HINT - No, it's gross margin.
*3
SALES - OK - Yes.
B - OK - Yes.
- HINT - No, it's sales.
*4
COST OF SALES - OK - Yes.
A - OK - Yes.
- HINT - No, it's cost of sales.
@
6.79
Exhibit 9 shows that operating expenses are subtracted from
gross margin, leaving {1,21,6}.
*1
INCOME BEFORE TAXES - OK - Correct.
@
6.80
In accordance with the {1,11} concept, these expenses include
(A) materiality (B) matching (C) realization
costs related to the current period and costs that do not benefit future
periods.
*1
- POST - {b}{a,4,32}matching
MATCHING - OK - Correct.
B - OK - That's right.
MATERIALITY - NO - No, the matching concept associates expenses and costs of a period.
A - NO - No, the matching concept associates expenses and costs of a period.
REALIZATION - NO - No, the matching concept associates expenses and costs of a period.
C - NO - No, the matching concept associates expenses and costs of a period.
@
6.81
The next item on Exhibit 9, {1,26,4} [four words],
is shown separately because it is an especially important expense.
*1
PROVISION FOR INCOME TAXES - OK - Correct.
@
6.82
The final item on an income statement is called {1,14}
(or {b}net loss{n}, if expenses were larger than revenues).
(A) total equities
(B) total assets
(C) net income
*1
- POST - {b}{a,10,13}{r}
NET INCOME - OK - {a,21,1}Yes, net income is the result of calculations on the income statement. It {a,22,1}is then included in "retained earnings" on the balance sheet. {n}
C - OK - {a,21,1}Yes, net income is the result of calculations on the income statement. It {a,22,1}is then included in "retained earnings" on the balance sheet. {n}
- HINT - {a,21,1}Total equities and total assets are part of the balance sheet, not the income {a,22,1}statement. The final item on the income statement is NET INCOME (or net loss).
@
6.83
If the entity had a large, unusual, and nonrecurring loss or gain,
the amount would be shown separately just above net income and labelled
{b}Extraordinary loss or gain. {s}
{d}
Loss from destruction caused by an earthquake is an example of an
{1,13,2} loss, and a profit from the sale of part of the business
is an example of an {2,13,2} gain.
*1
EXTRAORDINARY - OK - Right.
*2
EXTRAORDINARY - OK - Yes.
@
6.84
To arrive at net income, dividends {1,7} subtracted from
(A) are (B) are not
revenues. Therefore dividends {2,7} an expense. Dividends are
(A) are (B) are not
a distribution of earnings to shareholders.
*1
- POST - {b}{a,4,24}{r}
ARE NOT - OK - Yes.
B - OK - Yes.
ARE - QUIT - {a,21,1}No, look again at the Exhibit 7 income statement. You will see that dividends {a,22,1}are subtracted from the sum of retained earnings and net income, NOT revenues.
A - QUIT - {a,21,1}No, look again at the Exhibit 7 income statement. You will see that dividends {a,22,1}are subtracted from the sum of retained earnings and net income, NOT revenues.
*2
- POST - {b}{a,8,24}{r}
ARE NOT - OK - Right.
B - OK - Right.
ARE - QUIT - No, they ARE NOT an expense, since they are not subtracted from revenue.
A - QUIT - No, they ARE NOT an expense, since they are not subtracted from revenue.
@
6.85
Revenues are defined as {1,9,3} in the owners' equity
(A) increases (B) decreases
item on the balance sheet. Expenses are {2,9,3} in owners' equity.
(A) increases (B) decreases
Income is the {3,18} revenues and expenses.
(C) sum of (D) difference between
*1
- POST - {b}{a,4,13}increases
INCREASES - OK - Yes.
A - OK - Yes.
DECREASES - QUIT - {a,21,1}No, revenues are increases in owners' equity (even though there might be {a,22,1}a net loss after expenses).
B - QUIT - {a,21,1}No, revenues are increases in owners' equity (even though there might be {a,22,1}a net loss after expenses).
*2
- POST - {a,21,1}{c, ,78}{a,22,1}{c, ,78}
- POST - {b}{a,8,29}{r}
DECREASES - OK - That's right.
B - OK - That's right.
INCREASES - QUIT - No, expenses would be decreases in owners' equity.
A - QUIT - No, expenses would be decreases in owners' equity.
*3
- POST - {b}{a,12,29}{r}
DIFFERENCE BETWEEN - OK - Good.
D - OK - Good.
SUM OF - QUIT - No, expenses are subtracted from revenues -- what's left is income.
C - QUIT - No, expenses are subtracted from revenues -- what's left is income.
@
6.86
Because income is always supposed to be the {u}difference{n} between sales
revenue and expenses, a term such as "sales income" {1,6} a misleading
(A) is (B) is not
term. However, it is sometimes used.
*1
- POST - {b}{a,6,13}is
IS - OK - Yes.
A - OK - Yes.
IS NOT - QUIT - It does mislead -- the simple term "income" is better.
B - QUIT - It does mislead -- the simple term "income" is better.
@
6.87 A Package of Accounting Reports
An income statement is a summary of certain changes in
the {1,14} section of the balance sheet that have taken
(A) assets (B) owners' equity
place during a(n) {2,17}.
(C) accounting period (D) year (E) quarter
*1
- POST - {b}{a,6,29}{r}
OWNERS' EQUITY - OK - Right.
B - OK - Right.
ASSETS - QUIT - No, income affects owners' equity, which is not found under assets.
A - QUIT - No, income affects owners' equity, which is not found under assets.
*2
- POST - {b}{a,10,13}accounting period
ACCOUNTING PERIOD - OK - Yes, the income statement summarizes activities for a period of time.
C - OK - Yes, the income statement summarizes activities for a period of time.
YEAR - NO - Maybe, but an income statement can cover any length of time.
D - NO - Maybe, but an income statement can cover any length of time.
QUARTER - NO - Maybe, but an income statement can cover any length of time.
E - NO - Maybe, but an income statement can cover any length of time.
@
6.88
In other words, a(n) {1,16} reports changes in owners'
(A) balance sheet (B) income statement
equity that have taken place between one {2,16} and the next.
(A) balance sheet (B) income statement
*1
- POST - {b}{a,4,35}{r}
INCOME STATEMENT - OK - OK.
B - OK - OK.
BALANCE SHEET - QUIT - No, a balance sheet reports a moment in time, not changes over a period.
A - QUIT - No, a balance sheet reports a moment in time, not changes over a period.
*2
- POST - {b}{a,8,13}balance sheet
BALANCE SHEET - OK - Yes, that's right.
A - OK - Yes, that's right.
INCOME STATEMENT - QUIT - No, the income statement reports changes between two balance sheets.
B - QUIT - No, the income statement reports changes between two balance sheets.
@
6.89
Thus a convenient accounting "report package" consists of
a(n) {1,16 } at the {u}start{n} of the accounting period, a(n)
{2,16 } {u}for{n} the period, and a(n) {3,16 }
at the {u}close{n} of the period. {s}
{d}
For each space above, choose from among:
(A) balance sheet (B) income statement
*1
BALANCE SHEET - OK - Good.
A - OK - Good.
INCOME STATEMENT - QUIT - Remember that a balance sheet reports status at a moment in time.
B - QUIT - Remember that a balance sheet reports status at a moment in time.
*2
INCOME STATEMENT - OK - Correct.
B - OK - Correct.
BALANCE SHEET - QUIT - No, it is an income statement which reports changes over a period of time.
A - QUIT - No, it is an income statement which reports changes over a period of time.
*3
BALANCE SHEET - OK - Right!
A - OK - Right!
INCOME STATEMENT - QUIT - No, a new balance sheet will report the most recent status.
B - QUIT - No, a new balance sheet will report the most recent status.
@
6.90
In a corporation, the owners' equity is usually represented by
at least two items on the balance sheet: (1) the amount assigned to the
outstanding stock when it was originally issued, and (2) the increase
or decrease in owners' equity that has resulted from the operations of
the business. As indicated in Exhibit 9, the first of these items is
titled Common Stock; the second is titled {1,17,3}.
*1
RETAINED EARNINGS - OK - Yes, good.
- HINT - Notice that Retained earnings changes with net income,less dividends.
@
6.91
Thus the income reported on the income statement relates to the item
Retained earnings reported on the balance sheet.
@
6.92
Exhibit 9 shows a financial report package consisting of an income
statement and two balance sheets. Exhibit 9 shows that the retained earnings
on December 31, 19x1, was ${1,-9}.
*1
7,385,000 - OK - Good -- you remembered to include the thousands.
7385000 - OK - Good -- you remembered to include the thousands.
7,385 - QUIT - The thousands were omitted in the report but you should include them here.
7385 - QUIT - The thousands were omitted in the report but you should include them here.
- HINT - {a,21,1}On the earlier balance sheet in Exhibit 9, retained earnings is $7,385,000. {a,23,1}
@
6.93
During 19x2 profitable operations resulted in net income of
${1,-9}, which increased retained earnings by this amount. {s}
{d}
Retained earnings was decreased by $4,390,000, which was distributed to
the shareholders in the form of {2,9}.
*1
6,122,000 - OK - That's right.
6122000 - OK - That's right.
6,122 - QUIT - Okay, but remember to include the thousands.
6122 - QUIT - Okay, but remember to include the thousands.
- HINT - The net income for the year was $6,122,000.
*2
DIVIDENDS - OK - Dividends is correct.
- HINT - DIVIDENDS are a distribution of earnings to shareholders.
@
6.94
As a result, the total Retained Earnings on December 31, 19x2,
was ${1,-9}.
*1
9,117,000 - OK - Correct.
9117000 - OK - Correct.
9,117 - QUIT - Close enough -- remember the extra 000.
9117 - QUIT - Close enough -- remember the extra 000.
7,385,000 - NO - No, that was for 19x1.
7385000 - NO - No, that was for 19x1.
7,385 - NO - No, that was for 19x1.
7385 - NO - No, that was for 19x1.
- HINT - {a,21,1}The total Retained Earnings on the ending balance sheet was $9,117,000. {a,23,1}
@
6.95
Remember that dividends are {1,36,6}.
(A) an expense (B) a distribution of earnings to owners
Dividends are {u}not{n} {2,36,6}.
(A) an expense (B) a distribution of earnings to owners
*1
- POST - {b}{a,4,31}{r}
A DISTRIBUTION OF EARNINGS TO OWNERS - OK - That's right.
B - OK - That's right.
AN EXPENSE - QUIT - No, dividends are a distribution of earnings to owners.
A - QUIT - No, dividends are a distribution of earnings to owners.
*2
- POST - {b}{a,8,13}an expense
AN EXPENSE - OK - Yes.
A - OK - Yes.
B - QUIT - Dividends are NOT an expense.
@
6.96 Income Statement Percentages
In an analysis of a business's performance, {b}percentages{n} of certain
income statement items are usually calculated. {b}Sales revenue{n} is taken as
100 percent. One percentage is the gross margin percentage, which is found
by dividing gross margin by sales revenue.
@
6.97
Calculate the gross margin percentage for Garsden Corporation in 19x2.
(Refer to the financial report package in Exhibit 9.)
{s}
{d} ${1,-6}
{l,13 } = {l,9 } = {3,-2} percent
${2,-6}
{a,8,9}Gross margin {a,10,9}Sales revenue
*1
23,251 - OK - Okay.
23251 - OK - Okay.
- HINT - The gross margin from Exhibit 9 is $23,251 (000 omitted).
*2
75,478 - OK - Right -- now calculate the percentage to the nearest percent.
75478 - OK - Right -- now calculate the percentage to the nearest percent.
- HINT - Sales revenue is $75,478.
*3
31 - OK - Fine.
30 - OK - Fine.
32 - OK - Fine.
33 - OK - Fine.
- HINT - The division yields .308 or about 31%.
@
6.98
An even more important percentage is the {b}net income percentage{n}.
Calculate it for Garsden Corporation.
{s}
{d} ${1,-6}
{l,13 } = {l,9 } = {3,-1} percent
${2,-6}
{a,8,10}Net income {a,10,9}Sales revenue
*1
6,122 - OK - Good.
6,122 - OK - Good.
6122 - OK - Good.
- HINT - The net income in Exhibit 7 was $6,122 (000 omitted).
*2
75,478 - OK - That's right.
75478 - OK - That's right.
- HINT - Sales revenue is $75,478, same as before.
*3
8 - OK - Yes, the net income percentage is 8%.
- HINT - Division yields .0811, or about 8%.
@
6.99
The net income for many American corporations is roughly 5% to 10%
of sales revenue, but there is a wide variation from company to company.
@
Key Points to Remember {s}
- Expenditures are made when goods or services are acquired. If these goods
or services are used up during the period, they are expenses of the period.
If not used up, they are assets at the end of the period. These assets will
become expenses in future periods as they are used up.
- Some expenditures result in obligations. These are liabilities. An example
is accrued salaries.
- Expenses are expired costs. Assets are unexpired costs.
- Matching concept: Costs associated with the revenues of a period are
expenses of the period.
- Expenses of a period are (1) cost of the goods sold or services performed
during the period, (2) other expenditures that benefit operations of the
period, and (3) losses, that is, other assets whose benefits expired during
the period, or liabilities that were created during the period.
<continued>
@
Key Points to Remember{s}
- The income statement summarizes revenues and expenses of the period. Its
"bottom line", net income, shows the increase in owners' equity resulting
from activities during the period.
- Dividends are a distribution of earnings to shareholders, not an expense.
- Retained earnings at the beginning of the period + net income - dividends
= retained earnings at the end of the period.
- Percentages are calculated for various income statement items, particularly
gross margin and net income, using sales revenue as 100 percent.
<continued>
@
You have now completed Part 6 of this program. If you have understood
the material in this part, you should now take Post Test 6. If you feel you
would like to review the material before taking the post test, please do so.
The post test will serve both to test your comprehension and to review the
highlights of Part 6. After taking the post test, you may find that you are
unsure about certain points the test raises. You should review these points
