CHAPTER 4: Equation Expanded To Show Operating Performance

Question 1

Effect of Recognizing Revenue

Answer 1

it increases owner’s equity and increases assets in cash (if immediately collected) or in accounts receivable (if not immediately collected).

Question 2

Principle under Accrual Concept. Recognizes revenue when it is earned regardless of whether or not cash is immediately collected.

Answer 2

Revenue Recognition Principle

Question 3

Principle under Accrual Concept. Recognizes expense when incurred regardless of whether or not cash is immediately paid.

Answer 3

Expense Recognition Principle

Question 4

Effect of Recognizing Expenses

Answer 4

it decreases owner’s equity and decreases assets (if immediately paid or increases liability (if not immediately paid).

Question 5

Expense is recognized when revenue is recognized because it is not possible to earn revenue without incurring expenses.

Answer 5

Matching Principle

Question 6

Three ways of recognizing expenses in generating income

Answer 6

1. Expense is recognized when revenue is recognized because it is not possible to earn revenue without incurring expenses. This is also called the Matching Principle.
2. Resources or assets that will benefit the business over a number of years should be allocated or spread out as expenses over the years the asset will be used.
3. Some expenses are regularly incurred such as salaries for service received from employees, rent for use of office space, and such.

Question 7

Requires that assets, liabilities, revenues and expenses be recognized based on the time they relate or based on their occurrence rather than on whether cash is received or paid.

Answer 7

Accrual Concept

Question 8

Recognizes Revenue only when cash is collected and Expenses are paid in cash.

Answer 8

Cash Concept

Question 9

Factors that Increase Owner’s Equity

Answer 9

Contributions and Revenues

Question 9

Factors that Decrease Owner’s Equity

Answer 9

Withdrawals and Expenses

Question 10

The inflow of cash or other assets coming from a client or customer for service rendered or merchandise sold.

Answer 10

Income

Question 11

Income comes from the normal course of business, such as amounts received by an airline or bus company from passengers for transportation services rendered.

Answer 11

Revenue

Question 12

Account title used to describe revenue common to all servicers.

Answer 12

Service Income

Question 13

Revenue tile used by merchandisers and manufacturers.

Answer 13

Sales

Question 14

Effect of Revenue on Assets and Owner’s Equity

Answer 14

Increase in Assets, Increase in Owner’s Equity

Question 15

Effect of Revenue on Liabilities and Owner’s Equity

Answer 15

Decrease in Liabilities, Increase in Owner’s Equity

Question 16

The consumption of an asset or using up of service to generate revenue.

Answer 16

Expense

Question 17

Effect of Expenses on Assets and Owner’s Equity

Answer 17

Decrease in Assets, Decrease in Owner’s Equity

Question 18

Effect of Expenses on Liabilities and Owner’s Equity

Answer 18

Increase Liabilities, Decrease in Owner’s Equity

Question 19

ENTRY: March 21, A tourist hired the services of the agency for a tour in Baguio. Cash of P15,000 was received from the tourist.

Answer 19

Increase in ASSETS: Cash P15,000
Increase in OWNER’S EQUITY:
Service Income P15,000

Question 20

ENTRY: March 22, Cash was paid for the following: Gas and Oil, P500 and repair of car, P1,000.

Answer 20

Decrease in ASSETS: Cash P1,500
Decrease in OWNER’S EQUITY:
Repair Expense P1,000
Gas & Oil Expense 500

Question 21

ENTRY: March 24, Mr. Gray hired the services of the agency for his visitors and promised to pay P16,000 on March 31.

Answer 21

Increase in ASSETS:
Accounts Receivable P16,000
Increase in OWNER’s EQUITY:
Service Income P16,000

Question 22

ENTRY: March 25, Paid telephone bill for P500.

Answer 22

Decrease in ASSETS: Cash P500
Decrease in OWNER’S EQUITY: P500

Question 23

ENTRY: March 27, The Faculty Club of Angelicum Academy hired the services of the agency tour in MAnila. A bill was issued to them for P20,000, 50% of which was collected.

Answer 23

Increase in ASSETS:
Cash P10,000
Accounts Receivable 10,000
Increase in OWNER’S EQUITY:
Service Income P20,000

Question 24

ENTRY: March 30, Mr. Gray paid one hald of his account in cash.

Answer 24

INCREASE AND DECREASE IN ASSETS:
Cash + P8,000
Accounts Receivable -8,000

Question 25

ENTRY: March 31, Paid for rental of office space, P10,000 and salaries of employees and workers P9,000.

Answer 25

Decrease in ASSETS: Cash P19,000
Decrease in OWNER’S EQUITY:
Rent Expense P10,000
Salary Expense 9,000

Question 26

This represents the period of time it takes for the cash to be converted back into cash.

Answer 26

Operating Cycle

Question 27

Statement that requires an entity to present income and expenses.

Answer 27

Statement of Comprehensive Income

Question 28

Requires the preparation of this statement for a certain period of time. This summarizes the cash activities of the business.

Answer 28

Statement of Cash Flows

Question 29

Three sources of company to obtain cash.

Answer 29

1. The contribution of owner
2. The loan from the bank
3. From the operation of the business

Question 30

Cash flows activities represent the increase in cash coming from owner’s contribution and from the amount borrowed from the bank against a cash decrease because of the owner’s personal drawings.

Answer 30

Financing Activities

Question 31

Cash flows activities represents payments for the acquisition of assets.

Answer 31

Investing Activities

Question 32

Include cash and cash equivalents that are not restricted in use, as well as other assets expected to be realized into cash, or sold or consumed within normal operating cycle of the business or one year.

Answer 32

Current Assets

Question 33

In the form of plant, property, and equipment, long term investments, intangible assets and other assets.

Answer 33

Non-Current Assets

Question 34

Debts or obligations reasonably expected to be liquidated in the normal course of the enterprise’s operating cycle or paid within a period of one year.

Answer 34

Current Liabilities

Question 35

Long term liabilities or obligations that are payable longer than one year.

Answer 35

Non-Current Liabilities