Chp-03 - Chapter 3 Operating Decisions and the Income...

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Chapter 3 Operating Decisions and the Income Statement ANSWERS TO MULTIPLE CHOICE 1. b) 2. c) 3. d) 4. a) 5. b) 6. d) 7. c) 8. a) 9. c) 10. c) E3–2. Req. 1 Cash Basis Income Statement Accrual Basis Income Statement Revenues: Cash sales Customer deposits $340,000 21,000 Revenues: Sales to customers $410,000 Expenses: Inventory purchases Wages paid Utilities paid 90,000 54,200 7,200 Expenses: Cost of sales Wages expense Utilities expense 287,000 59,000 7,880 Net Income $209,600 Net Income $56,120 Req. 2 Accrual basis financial statements provide more useful information to external users. Financial statements created under cash basis accounting normally postpone (e.g., $70,000 cash sales) or accelerate (e.g., $21,000 customer deposits) recognition of revenues and expenses long before or after goods and services are produced and delivered (until cash is received or paid). They also do not necessarily reflect all assets or liabilities of a company on a particular date. 1
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E3–3. Activity Revenue Account Affected Amount of Revenue Earned in September a. Sales revenue $25,000 b. Sales revenue $21,000 c. None No transaction has occurred; exchange of promises only. d. Sales revenue $18,000 (= 1,000 shirts x $18 per shirt); revenue earned when goods are delivered. e. None Payment related to revenue recorded previously in (d) above. f. None No revenue earned in September; earnings process is not yet complete. g. None No revenue is earned; the issuance of stock is a financing activity. h. None No revenue earned in September; earnings process is not yet complete. i. Ticket sales revenue $4,000,000 (= $20,000,000 ÷ 5 games) j. None No revenue earned in September; earnings process is not yet complete. k. Interest revenue $1,000 (= $100,000 x 12% ÷ 12 months) l. None No revenue earned in September; earnings process is not yet complete. m. Sales revenue $100 2
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E3–4. Activity Expense Account Affected Amount of Expense Incurred in January a. Salary expense $45,000 incurred in January.
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