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Chapter 3 Homework

  

Questions

 

1. Goods (inventory) are purchased from a vendor on credit, the business pays the bill at a later date, the inventory is turned into goods that are sold to customers, and lastly the business receives cash for those goods.

 

3. Revenues – Expenses = Net Income.  Revenues are inflows from the operation of the business.  Expenses are outflows necessary to conduct business.  Net income is what is left over after all money has come in and all bills have been paid.

 

4. Revenues can be described as earnings from doing business.  Revenues are earned once a service has been rendered.  Gains are instances where an increase is recognize for accounting purposes.  Gains are not necessarily earned.

Losses are the general term for times that decreases are recorded.  Expenses are a more specific term referring to outflows that facilitate the operation of a business.

 

6. Revenue should be recognized when (a.) delivery of the service has been rendered, (b.) there is reasonable assurance that arrangements for payment have been made, (c.) the price is set or can be determined, and (d.) collection is reasonably assured.

 

7. The matching principle says that expenses must be recorded in the time period when the revenue was earned.

 

 

Exercises

 

E3 -2.

1. $25,000 to sales
2. $21,000 to sales.
3. No revenue.
4. $18,000 to sales.
5. Revenue already recognized.
6. No revenue.
7. $26 million to common stock
8. No revenue.
9. $4,000,000 to “season ticket sales”
10. No revenue.
11. No revenue.
12. No revenue.
13. $100 to sales.

 

E3 – 3

a.       $45,000 to wage expense.

b.      $1,500 to worker compensation expense.

c.       No expense.

d.      $4,500 to COGS.

e.       $25,000 to A/P

f.        No expense.

g.       No expense.

h.       $4,200 to commission expense.

i.         $12,000 to equipment

j.        No expense.

k.      $700 credit to inventory.

l.         $120 to wage expense.

m.     $300 credit to pre-paid insurance.

n.       $280 to maintenance.

o.      $230 to bills payable.

p.      $1,500 expense

q.      No expense.