Question

Under cash-basis accounitng, which of the following would be recorded as an expense?

	a.	Insurance that expires in the current period that was paid for in the previous period.
	b.	Cash paid for dividends in the current period.
	c.	Cash paid for rent in the current period.
	d.	Employee salaries in the current period that will be paid next period.
	e.	Two of the other answers are correct.

At the time a company purchases land using cash, which of the following is true?

	a.	The value of the company does not change.
	b.	Total resources of the company increase.
	c.	The amount owed to creditors increases.
	d.	There is a reduction in retained earnings.
	e.	The total resources claimed by owners increase.

The balance of Service Revenue can best be described as:

	a.	The cost of providing services to customers in the current period.
	b.	The value generated for owners over the life of the company.
	c.	The amount of services provided to customers over the life of the company.
	d.	The amount of services provided to customers in the current period.
	e.	The profit earned by the company in the current period.

Total revenues	$100,000
Total cash paid for operating activities	70,000
Total liabilities	90,000
Total cash received from customers	110,000
Total expenses	80,000
Total assets	120,000

	a.	$30,000
	b.	$50,000
	c.	$20,000
	d.	$40,000
	e.	$10,000

When a company pays cash for an expense, what is the effect on the accounting equation for that company?

	a.	Decrease assets and increase liabilities
	b.	Decrease assets and decrease stockholders’ equity
	c.	Increase stockholders’ equity and decrease assets
	d.	Increase assets and increase stockholders’ equity
	e.	Decrease liabilities and decrease assets

Which of the following describes dividends?

	a.	Dividends reduce the balance of retained earnings.
	b.	Two of the other answers are correct.
	c.	Dividends reduce the amount of total liabilities.
	d.	None of the other answers are correct.
	e.	Dividends reduce the reported amount of net income.

Below are amounts for the first three years of operations:

	Revenues	Cash Inflows	Expenses	Cash Outflows
Year 1	$10,000	$8,000	$8,000	$5,000
Year 2	$15,000	$18,000	$10,000	$11,000
Year 3	$20,000	$17,000	$14,000	$15,000
Total	$45,000	$43,000	$32,000	$31,000

The company paid no dividends. What is the balance of retained earnings at the end of the third year?

	a.	$12,000
	b.	$25,000
	c.	$6,000
	d.	$13,000
	e.	$2,000

Answer 1

Solution 1:

Cash paid for rent in the current period would be recorded as an expense.

Hence option c is correct.

Solution 2:

At the time a company purchases land using cash, the true statement is "The value of the company does not change."

Hence option a is correct.

Solution 3:

The balance of Service Revenue can best be described as "The amount of services provided to customers in the current period."

Hence option d is correct.

Solution 4:

When a company pays cash for an expense, effect on accounting equation is "Decrease assets and decrease stockholders’ equity"

Hence option b is correct.

Solution 5:

Dividends reduce the balance of retained earnings.

Hence option a is correct.

Solution 6:

Balance in retained earnings after 3 years = Total revenue - Total expenses = $45,000 - $32,000 = $13,000

Hence option d is correct.