Accounting I – Chapter 7

For a service business, the revenue reported on an income statement is often compared to two items: total expenses and net income.

A balance sheet reports financial information on a specific date and includes the assets, liabilities, and owner's equity.

The net income calculated for the income statement and the net income on the work sheet can be different because of adjusting entries.

The formula for calculating the total expenses ratio is total expenses divided by net income.

An amount written in parentheses on a financial statement indicates an estimate.

A financial ratio is a comparison between two components of financial information.

The formula for calculating the net income ratio is net income divided by total sales.

The calculation and interpretation of a financial ratio is called ratio analysis.

The area of accounting that focuses on reporting information to internal users is called managerial accounting.

A balance sheet reports financial information for a specific date.

When a business has two different sources of revenue, a separate income statement should be prepared for each kind of revenue.

An income statement reports information for a specific date indicating the financial progress of a business in earning a net income or a net loss.

The Owner's Equity section of a balance sheet may report different kinds of details about owner's equity, depending on the need of the business.

The Adequate Disclosure accounting concept is applied when financial statements contain all information necessary to understand a business's financial condition.

If a business has a net loss for the period, expenses should be reported before revenues on the income statement.

Vertical analysis is reporting an amount on a financial statement as a percentage of another item on the same financial statement.

The owner's capital amount reported on a balance sheet is calculated as capital account balance less drawing account balance plus net income.

The Matching Expenses with Revenue accounting concept is applied when the revenue earned and the expenses incurred to earn that revenue are reported in the same fiscal period.

The area of accounting that focuses on reporting information to external users is called managerial accounting.

Return on sales (ROS) is the ratio of net income to total sales.

The date on a monthly income statement prepared on September 30 is written as (A) September 30, 20--. (B) For Month Ended September 30, 20--. (C) 20--, September 30. (D) none of these.

The amount of net income calculated on an income statement is correct if (A) it is the same as the net income shown on the work sheet. (B) debits equal credits. (C) it is the same as the net income shown on the balance sheet. (D) none of these.

Preparing financial statements at the end of each monthly fiscal period is an application of the accounting concept (A) Adequate Disclosure. (B) Going Concern. (C) Objective Evidence. (D) Accounting Period Cycle.

Information needed to prepare an income statement's Expense section is obtained from a work sheet's Account Title column and (A) Income Statement Debit column. (B) Income Statement Credit column. (C) Balance Sheet Debit column. (D) Balance Sheet Credit column.

An income statement reports a business's (A) financial condition over a specific period of time. (B) financial progress over a specific period of time. (C) financial condition on a specific date. (D) financial progress on a specific date.

When preparing a balance sheet, the amount of owner's capital is calculated using amounts obtained from (A) the general ledger. (B) the income statement. (C) the journal. (D) none of these.

The formula for calculating the net income ratio is (A) net income divided by total sales. (B) total sales divided by total expenses. (C) total sales minus total expenses divided by net income. (D) none of these.

Information needed to prepare a balance sheet's Assets section is obtained from a work sheet's Account Title column and (A) Income Statement Debit column. (B) Income Statement Credit column. (C) Balance Sheet Debit column. (D) Balance Sheet Credit column.

Assuring that financial statements contain all information necessary to understand a business's financial condition is an application of the accounting concept (A) Adequate Disclosure. (B) Going Concern. (C) Objective Evidence. (D) Accounting Period Cycle.