Chapter 3

Question 1

Include buying goods and services from suppliers and employees, and selling goods and services to customers and then collecting cash from them.

Answer 1

Operating Activities

Question 2

Dividing the company’s long life into shorter chunks of time such as months, quarters, and years.

Answer 2

Time Period Assumptions

Question 3

Records revenues when cash is received and expenses when cash is paid.

Answer 3

Cash Basis Accounting

Question 4

Records revenues when they are earned and expenses in the same period as the revenues to which they relate, regardless of the timing of cash receipts or payments.

Answer 4

Accrual Basis Accounting

Question 5

Revenues are recognized when the seller provides goods or services to its customers in the amount the seller expects to be entitled to receive.

Answer 5

Revenue Recognition Principle

Question 6

Record expenses in the same period as the revenues with which they can be reasonably associated

Answer 6

Timing of Reporting Expenses versus Cash Payments

Question 7

Net Profit Margin Equation

Answer 7

Net Profit Margin = Net Income / Revenues

Question 8

Income Statement Limitations

Answer 8

(1) Net Income does not equal cash
(2) Net Income does not equal value
(3) Net Income is not exact