Atrills Accounting for Business Students 1st Australian Edition Atrill McLaney - Test Bank

Chapter 3

Measuring and reporting financial performance

Choose the one alternative that best completes the statement or answers the question.

1) Which accounting statement is specifically designed to measure and report on how much profit an entity has made?

A) The statement of cash flows

B) The statement of financial position

C) The statement of financial performance

D) All of the above

Answer: C

Difficulty: Basic

Learning Objective: 3.1 Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position.

Topic: The statement of financial performance—its nature and purpose, and its relationship with the statement of financial position

AACSB: 1 Written and oral communication

2) Under accrual accounting, profit is measured as:

A) income minus expenses.

B) assets minus liabilities.

C) sales minus cost of sales.

D) cash sales minus payments for expenses.

Answer: A

Difficulty: Basic

Learning Objective: 3.1 Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position.

Topic: The statement of financial performance—its nature and purpose, and its relationship with the statement of financial position

AACSB: 3 Analytical thinking

3) Under accrual accounting, income is:

A) the cash received from customers for goods or services provided by the business.

B) the cash collected from accounts receivable.

C) the money the owner puts into the business to start operations.

D) the inflow of assets or the reduction in liabilities that arise as a result of trading operations.

Answer: D

Difficulty: Basic

Learning Objective: 3.1 Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position.

Topic: The statement of financial performance—its nature and purpose, and its relationship with the statement of financial position

AACSB: 3 Analytical thinking

4) Which type of business would call its main source of income sales?

A) Financial adviser

B) Accounting firm

C) Bank

D) Clothing shop

Answer: D

Difficulty: Basic

Learning Objective: 3.1 Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position.

Topic: The statement of financial performance—its nature and purpose, and its relationship with the statement of financial position

AACSB: 8 Application of knowledge

5) Which statement is not correct?

A) A loss is incurred when expenses > income

B) A profit is earned when income < expenses

C) A loss is incurred when income < expenses

D) A profit is earned when income > expenses

Answer: B

Difficulty: Moderate

Learning Objective: 3.1 Explain the nature and purpose of a statement of financial performance, usually referred to as an income statement, and its relationship with the statement of financial position.

Topic: The statement of financial performance—its nature and purpose, and its relationship with the statement of financial position

AACSB: 3 Analytical thinking

6) What is the expense in the statement of financial performance which represents the purchase price of the goods that have been sold?

A) Payments for stock

B) Cost of sales

C) Sales