Income Statement
Medium Practice Test
Introduction to Accounting
Income Statement
Medium Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Total owner’s equity increases when
a. services provided are valued at less than the cost of providing services
b. dividends are paid to shareholders
c. services provided are valued at more than the cost of providing services
d. interest expense is paid in a different period than it was incurred
Answer
2. The company received bills for services provided to them during this month totaling $11,800 and paid bills this month totaling $13,600. What will be reported as expense on the income statement for this month?
a. $13,600
b. $11,800
c. $25,400
d. $ 1,800
Answer
B. An expense is reported when the service is provided to the company. When the amount is paid does not matter. The amount paid could be related to prior months or future months. The amount provided to the company this month is expensed this month.
3. The company provided goods to customers totaling $34,800 and collected payments from customers this month in the amount of $39,200. What will be reported as revenues on the income statement this month?
a. $39,200
b. $34,800
c. $74,000
d. $ 4,400
Answer
B. Revenue is reported when the service or goods is provided to the customer. When the cash is received does not matter. The amounts received could be related to prior months or future months. The amount provided to customers this month is revenue this month.
4. Rent expense reported on the income statement represents
a. the service that was provided to the company
b. the service that was provided to the customer
c. the amount that was paid for rent
d. the amount that was collected for rent
Answer
5. Which of the following is NOT reported as revenue in the current period?
a. an order received from the customer is shipped in the current period
b. goods provided to customers in the prior period
c. services provided to customers in the current period
d. cash collected from customers for services provided this period
Answer
6. The company sold equipment that cost $100,000 for $82,000 in June. Cash in the amount of $82,000 was received in July. How will the sale of equipment be reported on the income statement?
a. A loss of $18,000 will be reported in June
b. A gain of $18,000 will be reported in June
c. A gain of $100,000 will be reported in July
d. A gain of $100,000 will be reported in June
Answer
A. The loss is reported in the period the sale occurred. The amount of the loss is the difference in cost and cash received. The company received less than the cost of the equipment which results in a loss. When cash is received does not matter to the income statement. The loss is reported in the period the sale occurs.
7. A company earns “income” during the period when
a. the value of goods provided to customers is less than the company’s cost to to provide the goods to customers
b. the value of goods provided to customers is more than the company’s cost to provide the goods to customers during the period
c. cash collected during the period is greater than cash paid during the period
d. cash collected during the period is greater than services provided to customers during the period.
Answer
8. The cost of interest on borrowed money is an expense because
a. an asset is used up
b. a service is provided to the customer
c. a service is provided to the company
d. the loan must be paid back to the bank
Answer
C. Interest is an expense because the bank has provided the service of letting the company use the money. A service provided to the company is an expense.
9. An asset that is reported on the balance sheet that is used to provide services to customers is
a. reported on the balance sheet as an asset and never expensed on the income statement
b. reported on the statement of owner’s equity as cash generated from customers
c. reported on the balance sheet as an asset and expensed on the income statement as the asset is used over time
d. expensed when the asset is paid for
Answer
C. As asset that has probable future benefit is reported on the balance sheet. As the probable future benefit is used up an expense is reported on the income statement and the asset is reduced by the same amount as the expense. An asset used is an expense.
10. A company started the year with $1,000 of supplies. During the year the company purchased $4,000 total supplies. At the end of the year the company has $1,200 of supplies on hand. The amount of supplies expense is
a. $4,000
b $3,800
c. $4,200
d. $2,200
Answer
B. The expense is equal to the amount of asset that is used up. Total supplies that could have been used was $5,000 ($1,000 beginning + $4,000 purchases) and the company finished the year with $1,200. The difference in what the company had and what is left is what is used up. $5,000 – $1,200 = $3,800
11. Prepare an income statement for Yoto, Inc. for the month of June. The company had the following transactions.
June 1: purchased $15,000 of items to be sold to the customer
June 3: paid $3,600 and rented a warehouse for a year; stored the items to be sold to customers beginning in June
June 7: paid $1,200 for insurance for six months beginning June 1
June 15: employees worked and the company owes them $3,200
June 21: sold goods to customers for $16,000. The goods provided to customers cost the company $7,500
June 25: paid $2,500 for advertising run in several trade magazines during the month of June
June 30 paid employees for work for the first part of the month; $3,200
Answer
First: Go through each transaction and answer the 3 questions related to the income statement. Use the answers to the question to determine what is reported on the June income statement.
1) Goods or service provided to customers? Revenue/Sales
2) Service provided to company? Expense
3) Asset used up? Expense
ONLY YES answers are reported on the income statement for June.
June 1: purchased $15,000 of items to be sold to the customer
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? NO (inventory is not yet provided to customers)
June 3: paid $3,600 and rented a warehouse for a year; stored the items to be sold to customers beginning in June
1) Goods or service provided to customers? NO
2) Service provided to company? Yes, Rent Expense; 1 month = $300
3) Asset used up? NO
June 7: paid $1,200 for insurance for six months beginning June 1
1) Goods or service provided to customers? NO
2) Service provided to company? Yes, Insurance expense, 1 month = $200
3) Asset used up? NO (note: there is $1,000 prepaid expense)
June 15: employees worked and the company owes them $3,200
1) Goods or service provided to customers? NO
2) Service provided to company? Yes, Salary Expense; $3,200
3) Asset used up? NO
June 21: sold goods to customers for $16,000. The goods provided to customers cost the company $7,500
1) Goods or service provided to customers? YES, Sales $16,000
2) Service provided to company? NO
3) Asset used up? Yes, Inventory used is Cost of Goods Sold; $7,500
June 25: paid $2,500 for advertising run in several trade magazines during the month of June
1) Goods or service provided to customers? NO
2) Service provided to company? YES, Advertising Expense; $2,500
3) Asset used up? NO
June 30: paid employees for work for the first part of the month; $3,200
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? NO
Note: The service was expensed on the Income statement on June 15.
When payment occurs does not matter to the income statement.
The income statement for the month of June will report:
| Sales | 16,000 |
| Cost of Goods Sold |
( 7,500) |
| Gross Profit | 8,500 |
| Rent Expense | ( 300) |
| Salary Expense | ( 3,200) |
| Advertising Expense | ( 2,500) |
| Insurance Expense |
( 200) |
| Income | 2,300 |
12. Prepare an income statement for Talk Now, Inc (a company that buys and sells used cell phones) for the month of March. The company had the following transactions.
a. purchased used cell phones for $8,000 from AT&T, on account in March
b. rented store front space in a shopping center; paid $4,800 for a year beginning in March
c. hired employees; employees work and earned $2,600 in March. Employees were paid $2,200 in March and $400 in April
d. sold cell phones to customers for $7,000 that cost the company $1,800 in March. Customers paid for the cell phones in April.
e. paid $625 for advertising that was run during March
f. paid $900 for liability insurance for 6 months, beginning in March
g. rented furniture and fixtures for $360 in March
h. employees worked in April and were paid $2,900 in May
i. advertising was run in April at a cost of $400. The amount was paid in March.
j. paid AT&T $8,000 for the cell phones previously purchased on account
Answer
a. purchased used cell phones for $8,000 from AT&T, on account in March
No revenue or expense: Inventory and accounts payable will change.
b. rented store front space in a shopping center; paid $4,800 for a year beginning in March
Rent Expense for March ($4,800 / 12 = $400 for one month)
When the cash is paid does not matter to the income statement.
c. hired employees; employees work and earned $2,600 in March. Employees were paid $2,200 in March and $400 in April.
Employees working is a service provided: Salary Expense $2,600
When the cash is paid does not matter to the income statement.
d. sold cell phones to customers for $7,000 that cost the company $1,800 in March. Customers paid for the cell phones in April.
Selling phones to customers is goods provided to customers in March;
Sales Revenue of $7,000
Providing inventory to customers is using an asset; inventory.
Using inventory is an expense called Cost of Goods Sold; $1,800
e. paid $625 for advertising that was run during March.
A service was provided to the company in March; Advertising Expense $625
f. paid $900 for liability insurance for 6 months, beginning in March
A service was provided to the company in March; Insurance Expense $150
The cost for one month is $150 ($900 / 6 months)
When the cash is paid does not matter to the income statement
g. rented furniture and fixtures for $360 in March
A service was provided to the company; the use of furniture. Rent Expense: $360
h. employees worked in April and were paid $2,900 in May
Employees provided a service to the company in April;
No salary expense is reported on the March income statement
When the cash is paid does not matter to the income statement.
i. advertising was run in April at a cost of $400. The amount was paid in March.
A service was provided to the company in April. This is reported on the April Income statement. When the cash is paid does not matter to the income statement.
j. paid AT&T $8,000 for the cell phones previously purchased on account
Nothing is reported on the income statement.
The two accounts that change are cash and accounts payable.
The income statement for the month of March will report:
| Sales | 7,000 |
| Cost of Goods Sold | ( 1,800) |
| Gross Profit | 5,200 |
| Rent Expense | ( 760) |
| Salary Expense | ( 2,600) |
| Advertising Expense | ( 625) |
| Insurance Expense | ( 150) |
| Income | 1,065 |
13. Prepare an income statement for We Care, Inc. (an in home health care provider) for the month of September. The company had the following transactions.
a. nurses worked in September and earned $6,200. The nurses were paid $6,000 in September and the rest was paid in October.
b. gasoline reimbursement to nurses for driving to patients cost $620 in September. The nurses were reimbursed/paid in October.
c. $12,800 of customer care was provided in September.
d. the cost of liability insurance for each month is $400. This cost is paid in January for the entire year.
e. management travel to the state capital in September to meet with regulators cost $1,300. The cost was paid in October.
f. administrative employees earned $8,200 for the month of September.
g. nursing supplies were purchased on account; $850
h. advertising brochures that cost $900 were provided to a target market; half in September and half in October
i. nursing supplies that cost $500 were used up in September
j. cell phone usage cost $710 for all nurses for the month of September
Answer
a. nurses worked in September and earned $6,200. The nurses were paid $6,000 in September and the rest was paid in October.
A service was provided to the company; Salary Expense $6,200.
When the employees are paid does not matter to the income statement
b. gasoline reimbursement to nurses for driving to patients cost $620 in September. The nurses were reimbursed/paid in October.
A service was provided to the company: Travel Expense of $620
When the nurses are paid does not matter to the income statement.
c. $12,800 of customer care was provided in September.
A service was provided to the customers; Service Revenue $12,800
When the customer pays the company does not matter to the income statement.
d. the cost of liability insurance for each month is $400. This cost is paid in January for the entire year.
A service is provided to the company during September.
This was prepaid and the prepaid asset for September was used up.
Insurance Expense $400. When the cash is paid does not matter.
e. management travel to the state capital in September to meet with
regulators cost $1,300. The cost was paid in October.
A service was provided to the company in September (air and hotel).
Travel Expense $1,300. When the cost is paid does not matter to the income statement.
f. administrative employees earned $8,200 for the month of September.
A service was provided to the company in September; Salary Expense $8,200.
When the cash is paid to employees does not matter to the income statement.
g. nursing supplies were purchased on account; $850
Supplies is an asset. The asset is not expensed until the supplies are used up.
h. advertising brochures that cost $900 were provided to a target market;
half in September and half in October
A service is provided to the company in September; 1/2 the cost.
Advertising Expense $450
i. nursing supplies that cost $500 were used up in September
An asset was used in September; Supplies Expense $500
j. cell phone usage cost $710 for all nurses for the month of September
A service was provided to the company in September.
Telephone Expense: $710
When the cost is paid does not matter to the income statement.
The income statement for the month of September will report:
| Service Revenue | 12,800 |
| Supplies Expense | ( 500) |
| Travel Expense | ( 1,920) |
| Salary Expense | ( 14,400) |
| Advertising Expense | ( 450) |
| Cell Phone Expense | ( 710) |
| Insurance Expense | ( 400) |
| Income/(Loss) | ( 5,580) |