The operating cycle is the time that elapses between a company\'s cash payment t

Question

The operating cycle is the time that elapses between a company's cash payment to suppliers foe inventory purchases and the collection of cash from sale of inventory to customers. The time period assumption implies that the life of a business entity can be reported in time periods such as quarters and years. An example of operating revenue would be the revenue created by the sale of an automobile by a car dealership. According to the revenue realization principle, revenue is recognized at the time that cash is collected from a customer for services to be provided in the future. Unearned revenues arc reported as liabilities on the balance sheet. Expenses arc the result of decreases in assets or increases in liabilities incurred in order to generate revenues. According to the matching principle, salary expense is recognized on the income statement when the salaries arc paid rather than when the employee provides the wort. Under accrual basis accounting, revenues arc recognized when earned and expenses are recognized when incurred.

Explanation / Answer

1 The operating cycle is the time that elapses between a company's cash payment to suppliers for inventory purchases and the collection of cash from sale of inventory to customers. TRUE The operating cycle is the time it takes for a company to pay cash to suppliers, sell goods and services to customers, and collect cash from customers. 2 The time period assumption implies that the life of a business entity can be reported in time periods such as quarters and years TRUE A company's operating cycle repeats itself continuously. The time period assumption indicates that the long life of a company can be reported in shorter time periods 3 An example of operating revenues would be the revenue created by the sale of an automobile by a car dealership. TRUE Operating revenues result from an entity's sale of goods or services 4 Revenue is recognized at the time that cash is collected from a customer for services to be provided in the future. FALSE Revenue is recognized when earned, usually at the time the company provides the promised goods or services to its customer. 5 Unearned revenues are reported as liabilities on the balance sheet TRUE Unearned revenues are payments provided to a company before the goods or services are provided. Unearned revenues are liabilities reported on the balance sheet 6 Expenses are the result of decreases in assets or increases in liabilities incurred in order to generate revenues. TRUE Expenses are defined as decreases in assets or increases in liabilities from ongoing operations incurred to generate revenues during the period. 7 According to the Matching principle Salary expense is recognized on the income statement when the salaries are paid rather than when the employee provides the services FALSE Expenses are recognized when incurred. 8 Under accrual accounting, revenues are recognized when earned and expenses are recognized when incurred. TRUE In accrual basis accounting, revenues and expenses are recognized when the transaction that causes them occurs

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