Operating a Business and

the Income Statement

Chapter 3

‫القسم العملي‬

© 2009 The McGraw-Hill Companies, Inc.

 Match each term with its related definition by entering
Question 1 the appropriate letter in the space provided.
1. Accrual Basis Costs incurred to generate revenues should be recognized in the same
__2__
Accounting period to match costs with benefits.
2. Matching Revenues are recorded when earned and expenses are recorded when
__1__
Principle incurred to generate revenues.
The process by which a company acquires and pays for goods and
3. Time Period
services and then sells goods and services to customers who pay cash to __4__
Assumption
the company.
It is assumed that, to measure income for a specific period of time, the
4. Operating Cycle __3__
long life of a company can be reported in shorter time periods.
5. Expanded A list of individual accounts, usually in financial statement order, with
Transaction their ending balances from the ledger indicated in the appropriate column __7__
Analysis Model (debit or credit).
Revenues are recorded when cash is received and expenses are
6. Revenues __9__
recorded when cash is paid.
7. Unadjusted Trial
Revenue should be recognized in the period in which earned. __8__
Balance
8. Revenue Amounts charged to customers for sales of goods and services
__6__
Principle provided.
9. Cash Basis Includes all five accounting elements and shows how business
__5_
Accounting activities affect each element.
__10__
10. Expenses
Costs incurred to generate revenues.
McGraw-Hill/Irwin Slide 2
 For each item listed below match the transaction with the
Question 2 account that would most likely be affected by the transaction.

1. Prepaid
Customer pays for services in advance 2
Expenses

2. Unearned
3-month insurance policy is purchased. 1
Revenue

3. Accounts Advertising expenses for the current month are

4
Payable paid.

4. Advertising
Sale made on account and customer is billed. 5
Expenses

5. Accounts Utilities bill is received in the mail for current

3
Receivable month expense; the bill is due in 30 days.
McGraw-Hill/Irwin Slide 3
Question 3

A company's operating cycle:

A. Begins when the company receives a cash

payment from a customer.
B. Begins when revenues are earned.
C. Ends when the company receives a
customer's payment.
D. Ends when the company makes a payment
to a supplier for inventory.

Answer is C
McGraw-Hill/Irwin Slide 4
Question 4

Expenses are:

A. Incurred only when cash is paid.

B. Costs incurred to generate revenues.
C. Increases to owner's equity.
D. Recorded as credits in journal entries.

Answer is B
McGraw-Hill/Irwin Slide 5
Question 5

Revenues are earned when:

A. A customer pays for goods or services.

B. Goods are exchanged for a promise to pay.
C. A firm pays an expense.
D. A customer is given an invoice.

Answer is B
McGraw-Hill/Irwin Slide 6
Question 6

Cash basis accounting records:

A. Revenues when a sale is made.

B. Expenses when incurred.
C. Revenues when services are rendered.
D. Revenues when cash is received.

Answer is D
McGraw-Hill/Irwin Slide 7
Question 7
Under accrual basis accounting, revenue is
recorded when:

A. A customer buys goods.

B. Cash is received from a customer for a sale
last month.
C. A customer makes a down payment for
future services.
D. A customer receives a cash refund.

Answer is A
McGraw-Hill/Irwin Slide 8
Question 8
For each account listed below indicate whether the
account is increased/decreased with a debit or a
credit. The first account has been completed as an
example

McGraw-Hill/Irwin Slide 9
 Question 9
American Fitness Club had the following transactions
for the month of May. For each transaction determine
the Journal entry.

1. Received $500 for fees for use in the month of May.

2. Received a bill and paid $200 for utilities for May.
3. Billed customers $10500 for May memberships
which will paid by members in June.
4. Purchased a 6-month insurance policy for $600
which will coverage for June through November.
5. Sold fitness apparel for $250 to customers on
account.

McGraw-Hill/Irwin Slide 10
 Question 9

6. Received $500 an advance payment from hospital to

host a wellness clinic in July.
7. paid employees $2500 for wages earned in May.
8. Paid $3000 for a bill for fitness equipment which was
received in April.
9. Received a $300 bill for advertising for May the bill
is due in June.
10. received $2000 for membership fees for April . The
fees were billed to customer in April and recorded as
revenue in April.

McGraw-Hill/Irwin Slide 11
 Journal entry

Activity Accounts Titels Debit Credit

Cash (+A) 500
1
Fee Revenue (+R, +OE) 500
Utilities Expense (+E, -OE) 200
2
Cash (-A) 200
Accounts Receivable (+A) 10,500
3
Fee Revenue (+R, +OE) 10,500
Prepaid Insurance (+A) 600
4
Cash (-A) 600
Accounts Receivable (+A) 250
5
Apparel Revenue (+R, +OE) 250
Cash (+A) 500
6
Unearned Revenue (+L) 500
Wages Expense (+E, -OE) 2,500
7
Cash (-A) 2,500
Accounts Payable (-L) 3,000
8
Cash (-A) 3,000
Advertising Expense (+E, -OE) 300
9
Accounts Payable (+L) 300
Cash (+A) 2,000
10
Accounts Receivable (-A) 2,000
McGraw-Hill/Irwin Slide 12
 Question 10
The following unadjusted trial balance is available for Mayhem
Company, owned by Jon Mayhem, for the year ended
December 31, 2010. Prepare an income statement
(unadjusted) in good form

McGraw-Hill/Irwin Slide 13
 Question 10

McGraw-Hill/Irwin Slide 14
 Question 11

McGraw-Hill/Irwin Slide 15
 Question 11
The following activities occurred during May 2010:

a. Purchased and used gasoline for mowers, paying

$90 in cash at local gas station.
b. Received $1600 cash from the city in advance for
lawn service for May through August.
C. Purchased $300 of insurance covering six months
May to October .
d. Mowed lawns for customer $5200 in May and
billed customers.
e. Received payments of $3500 from customer on
their accounts.
McGraw-Hill/Irwin Slide 16
 Question 11

f. Paid wages every two weeks, total cash paid

in May was $3900.
g. Received a bill for $320 from gas station for
additional gasoline purchased on account and
used in May. The bill will be paid in June.
h. Paid $40 interest expense on notes owed to
XYZ supply.
i. Paid $100 on accounts payable.
j. Steve Delancey withdrew $2000 from the
business.
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End of Chapter 3

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