Income Statement
Easy Practice Test
Introduction to Accounting
Income Statement
Easy Practice Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. Which of the following are categories that are reported on an income statement?
a. current assets and current liabilities
b. revenues and expenses
c. sales and assets
d. expenses and liabilities
Answer
2. The difference in revenues and expenses during a specific period of time is
a. net income
b. net liabilities
c. net assets
d. net sales
Answer
A. Revenues less expenses = net income. Net assets = Total Assets – Total Liabilities which is also Total Owner’s Equity.
3. The price of goods or services provided to customers in exchange for an asset is a (an)
a. expense
b. liability
c. asset
d. revenue
Answer
D. The definition of revenue is providing goods or services to a customer in exchange for an asset (cash or accounts receivable). An expense is a service provided to the company or using an asset. A liability is what is owed. An asset is something that you have.
4. Revenue reported on the income statement would be the same as
a. the amount of cash collected during the period
b. the value of services provided to customers during the period
c. the amount of cash collected less customer returns
d. the amount of cash collected less what is owed
Answer
B. Revenues are recognized when earned which means the goods or services are provided. The amount recorded is the price to the customer, or the value of services provided. When cash is collected is not considered when recording revenue.
5. A business reports revenue when
a. cash is collected from customers
b. goods and services are provided to customers
c. expenses are paid and cash is collected
d. only when revenues are greater than expenses
Answer
B. Revenues are reported when earned which means the goods or services have been provided to the customer and cash collection is reasonable assured. When the cash is collected from the customer does not matter. Revenues are not always greater than expenses.
6. Which of the following items is reported as revenue during the period?
a. interest earned
b. interest paid
c. collections from customers before providing the service to customers
d. paying for an expense before it is provided
Answer
A. Revenue occurs when the company provides goods or services to the customer.
Revenue is not reported because cash is received. Interest is earned when a company provides the service of the use of their money. Paying an expense before it is provided is a prepaid expense, an asset. Paying interest is related to incurring an expense. “Earned” by the company always refers to revenue.
7. Expenses are reported this period for
a. all things the company pays for this period
b. the cost of providing goods and services this period
c. amounts owed this period
d. only items that will be paid for in the future
Answer
B. The technical definition of an expense is the cost of providing goods and services or the using up of an asset to provide goods and services. When something is paid for is not relevant to reporting an expense. The company also pays for assets that give future benefit. An expense does not give future benefit, it is used up or provides benefit only for the current period.
8. Which of the following is not considered an expense for this period?
a. cost of goods sold during this period
b. prepaid expenses during this period
c. the cost of facilities used this period
d. utilities used during this period
Answer
B. Prepaid expenses is an asset that is paid for ahead of time and will be used in the future to provide goods or services. The asset does not become an expense until it is used up. Cost of goods sold is inventory used up when it is provided to the customer, an expense. Utilities used this period are a service that was provided to the company this period, an expense.
9. Which of the following refers to when an item is reported on the income statement?
a. earned and collected
b. incurred and paid
c. earned and incurred
d. cumulative and earned
Answer
C. Earned refers to revenues and incurred refers to expenses. Cash paid or collected does not matter to the income statement. The income statement reports what happened during a period of time and is not cumulative.
10. An expense is considered to be incurred when
a. a cost is paid for
b. a service is provided to the customer
c. an asset is used to provide goods and services to customers
d. a service is paid for
Answer
C. The two things that happen to incur expenses include: 1) a service is provided to the company, and 2) an asset is used to provide to the customer. When cash is paid is not relevant to the income statement. Service provided to the customer is revenue.
11. Answer the following questions to help you determine what is reported on the income statement for each transaction. State the name of the revenue or expense.
1) Goods or service provided to customers?
2) Service provided to company?
3) Asset used up?
a. cash was received from owners in exchange for ownership
b. lawn equipment was purchased and used
c. gasoline was purchased and used up
d. lawns were cut for customers
e. supplies (weed eating twine, bags, grass squares) were purchased
f. employees worked
g. advertising flyers were placed on potential customer’s doors
h. a new lawn was planted for a customer
i. supplies were used up (grass squares)
j. an insurance company provided liability coverage for the business
Answer
a. cash was received from owners in exchange for ownership
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? NO
b. lawn equipment was purchased and used
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? Yes, Using a long-term asset is call Depreciation Expense
c. gasoline was purchased and used up
1) Goods or service provided to customers? NO (consider only what is stated,
do not assume that a service was provided when the gasoline was used)
2) Service provided to company? NO
3) Asset used up? YES, Gasoline Expense
d. lawns were cut for customers
1) Goods or service provided to customers? YES, Lawn Service Revenue
2) Service provided to company? NO
3) Asset used up? NO
e. supplies (weed eating twine, bags, grass squares) were purchased
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? NO, this is an asset until the supplies are used up
f. employees worked
1) Goods or service provided to customers? NO
2) Service provided to company? YES, Salary Expense
3) Asset used up? NO
g. advertising flyers were placed on potential customer’s doors
1) Goods or service provided to customers? NO
2) Service provided to company? YES, Advertising Expense
3) Asset used up? NO
h. a new lawn was planted for a customer
1) Goods or service provided to customers? YES, Lawn Service Revenue
2) Service provided to company? NO
3) Asset used up? NO
i. supplies were used up (grass squares)
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? YES, Supplies Expense
j. an insurance company provided liability coverage for the business
1) Goods or service provided to customers? NO
2) Service provided to company? YES, Insurance Expense
3) Asset used up? NO
12. Answer the following questions to help you determine what is reported on the income statement for each transaction. State the name of the revenue or expense that will be reported on the income statement.
1) Goods or service provided to customers?
2) Service provided to company?
3) Asset used up?
Before doing business with customers:
a. rented a building and established a reception area and exercise areas.
b. purchased exercise mats and equipment
During the period of doing business with customers:
c. paid for the utility expense for the period
d. paid for insurance coverage for the period
e. advertised on the radio during the period
f. printed coupons and a local marketing company gave the coupons to local businesses during the period
g. customers participated in 14 exercise classes during the period
h. customers participated in 22 personal training sessions during the period
i. computer equipment was used during the period
j. used exercise mats and equipment during the period
Answer
a. rented a building and established a reception area and exercise areas.
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? NO, not YET used to produce revenues
b. purchased exercise mats and equipment
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? NO, not YET used to produce revenues, only purchased
c. paid for the utility expense for the period
1) Goods or service provided to customers? NO
2) Service provided to company? YES, utility expense
3) Asset used up? NO
d. paid for insurance coverage for the period
1) Goods or service provided to customers? NO
2) Service provided to company? YES, insurance expense
3) Asset used up? NO
e. advertised on the radio during the period
1) Goods or service provided to customers? NO
2) Service provided to company? YES, advertising expense
3) Asset used up? NO
f. printed coupons and a local marketing company gave the coupons to local businesses during the period
1) Goods or service provided to customers? NO
2) Service provided to company? YES, advertising expense
3) Asset used up? NO
g. customers participated in 14 exercise classes during the period
1) Goods or service provided to customers? YES
2) Service provided to company? NO
3) Asset used up? NO
h. customers participated in 22 personal training sessions during the period
1) Goods or service provided to customers? YES
2) Service provided to company? NO
3) Asset used up? NO
i. computer equipment was used during the period
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? YES, depreciation expense
j. used exercise mats and equipment during the period
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? YES, depreciation expense
13. Answer the following questions to help you determine what is reported on the income statement for each transaction. State the name of the revenue or expense that will be reported on the income statement.
1) Goods or service provided to customers?
2) Service provided to company?
3) Asset used up?
a. rented a building in a retail location; used the building this period
b. hired employees to work in the store, no work is done yet
c. utilities were provided during the period
d. frames were purchased to be used to frame pictures for customers
e. supplies were purchased to be used to frame pictures for customers
f. employees worked framing pictures for customers during the period
g. 29 pictures were framed for customers during the period
h. google ads provided advertising on the internet during the period
i. purchased and used furniture and computer equipment during the period
j. insurance coverage was provided during the period
Answer
a. rented a building in a retail location, used the building this period
1) Goods or service provided to customers? NO
2) Service provided to company? YES, rent expense
3) Asset used up? NO
b. hired employees to work in the store, no work is done yet
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? NO
c. utilities were provided during the period
1) Goods or service provided to customers? NO
2) Service provided to company? YES, utilities expense
3) Asset used up? NO
d. frames were purchased to be used to frame pictures for customers
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? NO, it is inventory until it is provided to customers
e. supplies were purchased to be used to frame pictures for customers
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? NO, supplies is an asset until it is used
f. employees worked framing pictures for customers during the period
1) Goods or service provided to customers? NO (focus only on employees)
2) Service provided to company? YES, salary and wage expense
3) Asset used up? NO
g. 29 pictures were framed for customers during the period
1) Goods or service provided to customers? YES
2) Service provided to company? NO
3) Asset used up? NO (focus only on what was provided to customers)
h. Google ads provided advertising on the internet during the period
1) Goods or service provided to customers? NO
2) Service provided to company? YES, advertising expense
3) Asset used up? NO
i. purchased and used furniture and computer equipment during the period
1) Goods or service provided to customers? NO
2) Service provided to company? NO
3) Asset used up? YES, depreciation expense
j. insurance coverage was provided during the period
1) Goods or service provided to customers? NO
2) Service provided to company? YES, insurance expense
3) Asset used up? NO