Income Statement
Self Test
Introduction to Accounting
Income Statement
Self Test
Click the “Check Your Answer” box below each problem to reveal the correct answer and explanation.
1. When total revenues are greater than total expenses, a company has
a. a net loss
b. a net income
c. a net gain
d. a decrease in net assets
Answer
2. An investor uses the income statement to determine
a. if the company has enough cash to pay current liabilities
b. if the company has invested too much cash in current assets
c. how much a company earned for a given period of time
d. how much a company earned cumulatively as of a given date
Answer
C. The income statement reports how much a company earned during a period of time. It is not a cumulative statement. (a.) and (b.) are determined using the balance sheet.
3. Revenues are technically defined as
a. the value of goods and services provided to customers
b. amounts collected from providing goods and services
c. decreases in net assets
d. decreases in net assets as a result of day to day activities
Answer
A. The technical definition of a revenue is the value of goods and services provided to customers in exchange for an asset. When cash is collected does not matter as long as the company believes it will be collected. Revenues result in an increase in assets.
4. Which of the following is a condition that must be met for revenue to be recognized on the income statement?
a. cash must be collected
b. delivery of goods or services has occurred
c. a promise to deliver goods or services has been made
d. all of the above
Answer
B. Revenue is recognized when the goods or services have been provided to the customer. When cash is collected does not matter. Nothing is recorded when a promise occurs because an exchange has not occurred.
5. The word “incurred” means
a. a good or service has been provided to customers
b. a service has been provided to the company
c. a service has been provided to the company and the company has paid for the service
d. a revenue is reported on the income statement
Answer
B. The word “incurred” means that an expense has occurred and is reported on the income statement. Expenses are “incurred” when: 1) a service is provided to the company, or 2) an asset is used (up). When the service is paid for does not matter to the income statement.
6. The word “earned” refers to
a. a good or service has been provided to customers and cash is expected to be collected in exchange
b. a service has been provided to the customer and cash is collected
c. a service has been provided to the company and the company has paid for the service
d. a customer places an order for goods or services.
Answer
A. “Earned” refers to revenue. Revenue is earned when the goods or service is provided to the customer and collection is reasonably assured. Cash does not have to be collected in order for revenue to be earned. When cash is collected (or paid) does not matter to the income statement. An order is not recorded as revenue until the goods or service is provided to the customer. Service provided to the company is an expense.
7. The income statement reports
a. cumulative cash collected and paid
b. the value provided to customers and the cost of providing to customers during a specific period of time
c. orders received from customers and assets expected to be used during a specific period of time
d. cash collected and paid during a specific period of time
Answer
B. The income statement reports “what happened” during a period of time. It includes goods and services provided to customers (revenues) and the cost of providing to customers (expenses: services provided to the company and assets used.) during a specific period of time When cash is paid or collected does not matter to the income statement.
8. Which of the following will be recorded as revenue in the current period’s income statement?
a. cash collected from customers for last period’s services provided
b. the value of services provided last period
c. cash collected for services to be provided next period
d. the value of services provided in the current period
Answer
D. To be reported as revenue in the current period, the goods or services have to be provided in the current period. When cash is collected does not matter. Services provided last month are reported on last month’s income statement and services provided next month are reported on next month’s income statement.
9. Which of the following situations is a violation of the revenue recognition principle?
a. recording revenues when the goods are provided to the customer
b. recording revenues when the service is provided to the customer
c. recording revenues when the service is provided and cash is expected to be received
d. recording revenues when the cash is received and the service has been provided.
Answer
D. The revenue recognition principle states that revenues must be recorded in the period the goods or services are provided. When cash is received does not matter. As long as the service is provided during this period and cash is expected to be collected; revenue is reported.
10. The major difference between revenues and gains is
a. revenues are from providing goods and services to customers and gains
result from selling assets at more than the cost on the balance sheet
b. GAAP makes no distinction between the two, they are the same
c. revenues are from peripheral activities
d. gains cause a decrease in net assets
Answer
A. GAAP distinguishes between the two, as defined in (a.). Revenues are from the primary business activities of the company; providing goods and services. Gains occur when you sell an asset for more than was originally paid for the asset. A gain results in a net increase in total assets.