ACC 250 · Chapter 3 Review Name: ______________________

ACC 250 · Introduction to Financial Accounting

Chapter 3 — Review Questions

Three questions on when revenue and expense are recognized,
then one month of operating transactions to record and two totals to work out.

Fall 2026

Revenue recognition

Q1

During March, Lakeside Florist delivered $18,000 of flowers and collected the cash, delivered $7,000 of flowers to a hotel that will pay in April, and received $2,000 from a bride for a wedding it will decorate in May. How much revenue should it recognize in March?

  1. A$18,000✘
  2. B$20,000✘
  3. C$25,000✔
  4. D$27,000✘
  5. ECannot be determined until the cash is collected.✘

C. Revenue is recognized when the goods are delivered, whatever the cash does. The $18,000 and the $7,000 were both delivered in March, so both count — $25,000. The $2,000 is cash in hand for flowers not yet delivered, so it is a liability (Deferred Revenue), not revenue, until May.

Expense recognition · the matching principle

Q2

Lakeside Florist reports the five items below for March. Which one of them is an expense of March?

  1. AIt paid $3,000 in March for a delivery van it will use for the next four years.✘
  2. BIts employees worked in March and will be paid on April 5.✔
  3. CIt paid $1,200 in March for insurance covering April, May and June.✘
  4. DIt received $2,000 in March for flowers it will deliver in May.✘
  5. EIt paid $4,000 in March on an account payable for supplies it used in February.✘

B. An expense belongs to the period in which the resource is used up, not the period it is paid for. March got the work, so March gets the expense even though the cash leaves in April. A and C are resources bought but not yet used, so they are still assets; E is February’s expense being paid off, and D is not an expense at all.

Net profit margin

Q3

For March, Lakeside Florist reports revenues of $25,000 and expenses of $19,000. What is its net profit margin?

  1. A6%✘
  2. B24%✔
  3. C31.6%✘
  4. D76%✘
  5. ECannot be computed without knowing total assets.✘

B. Net income is $25,000 − $19,000 = $6,000, and the margin divides it by revenue: $6,000 ÷ $25,000 = 0.24, or 24%. It says the shop keeps 24 cents of every sales dollar. Dividing by expenses instead gives option C, and option D is the share revenue spent rather than kept.

Questions 4–11 · Willow Creek Catering, Inc.

Set-up

Willow Creek Catering, Inc. had the six transactions below during April, and nothing else. Questions 4 to 9 record one each, and Questions 10 and 11 add them up.

  1. AWillow Creek catered a corporate lunch for $14,000 and collected the cash the same day.
  2. BWillow Creek catered a second event for $9,000 and billed the client, who will pay in May.
  3. CWillow Creek received $6,000 from a couple for a wedding it will cater in June.
  4. DWillow Creek paid $4,800 for a twelve-month insurance policy that begins on May 1.
  5. EWillow Creek received an $800 utility bill for April, which it will pay in May.
  6. FWillow Creek’s employees worked in April and will be paid $5,200 on May 3.

Questions 4–9 · The accounts

Set-up

Write the number of the account that belongs on each line of the journal entry. Every entry draws on the ten accounts below, and an account may be used more than once, or not at all.

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Cash
  4. 4Deferred Revenue
  5. 5Insurance Expense
  6. 6Prepaid Insurance
  7. 7Service Revenue
  8. 8Utilities Expense
  9. 9Wages Expense
  10. 10Wages Payable
The point Cash moving is not what triggers an entry to Revenue or Expense — delivering and using up are.

Q4 · Transaction A — Catered for cash

Q4

Transaction A. Willow Creek catered a corporate lunch for $14,000 and collected the cash the same day. Record transaction A.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Cash
  4. 4Deferred Revenue
  5. 5Insurance Expense
  6. 6Prepaid Insurance
  7. 7Service Revenue
  8. 8Utilities Expense
  9. 9Wages Expense
  10. 10Wages Payable
AccountDebitCredit
3. Cash (+A)14,000
7. Service Revenue (+R, +SHE)14,000

3, then 7. The lunch has been catered, so the service is delivered and the $14,000 is revenue. Cash came in at the same time, so the asset Cash is debited. Revenue raises shareholders’ equity, and equity accounts increase with a credit.

Q5 · Transaction B — Catered on account

Q5

Transaction B. Willow Creek catered a second event for $9,000 and billed the client, who will pay in May. Record transaction B.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Cash
  4. 4Deferred Revenue
  5. 5Insurance Expense
  6. 6Prepaid Insurance
  7. 7Service Revenue
  8. 8Utilities Expense
  9. 9Wages Expense
  10. 10Wages Payable
AccountDebitCredit
2. Accounts Receivable (+A)9,000
7. Service Revenue (+R, +SHE)9,000

2, then 7. The event has been catered, so the $9,000 is revenue in April even though no cash has moved. What the company holds instead is the right to collect, which is the asset Accounts Receivable. The only difference from transaction A is which asset goes up.

Q6 · Transaction C — Cash before the work

Q6

Transaction C. Willow Creek received $6,000 from a couple for a wedding it will cater in June. Record transaction C.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Cash
  4. 4Deferred Revenue
  5. 5Insurance Expense
  6. 6Prepaid Insurance
  7. 7Service Revenue
  8. 8Utilities Expense
  9. 9Wages Expense
  10. 10Wages Payable
AccountDebitCredit
3. Cash (+A)6,000
4. Deferred Revenue (+L)6,000

3, then 4. Cash arrived, so Cash is debited — but nothing has been catered, so none of it is revenue yet. The company owes the couple a wedding, and that obligation is the liability Deferred Revenue. It becomes revenue in June, when the work is done.

Q7 · Transaction D — Paying ahead

Q7

Transaction D. Willow Creek paid $4,800 for a twelve-month insurance policy that begins on May 1. Record transaction D.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Cash
  4. 4Deferred Revenue
  5. 5Insurance Expense
  6. 6Prepaid Insurance
  7. 7Service Revenue
  8. 8Utilities Expense
  9. 9Wages Expense
  10. 10Wages Payable
AccountDebitCredit
6. Prepaid Insurance (+A)4,800
3. Cash (−A)4,800

6, then 3. The cash is gone, but the coverage has not started, so nothing has been used up and there is no expense yet. What the company now owns is a year of future protection — the asset Prepaid Insurance. One asset was traded for another; Insurance Expense begins in May, a month at a time.

Q8 · Transaction E — The bill arrives first

Q8

Transaction E. Willow Creek received an $800 utility bill for April, which it will pay in May. Record transaction E.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Cash
  4. 4Deferred Revenue
  5. 5Insurance Expense
  6. 6Prepaid Insurance
  7. 7Service Revenue
  8. 8Utilities Expense
  9. 9Wages Expense
  10. 10Wages Payable
AccountDebitCredit
8. Utilities Expense (+E, −SHE)800
1. Accounts Payable (+L)800

8, then 1. The electricity was used up in April, so April carries the $800 expense whatever month the bill is paid. Nothing has been paid, so the credit is the obligation to pay: Accounts Payable. An expense reduces shareholders’ equity, and it is recorded as a debit for exactly that reason.

Q9 · Transaction F — Worked now, paid later

Q9

Transaction F. Willow Creek’s employees worked in April and will be paid $5,200 on May 3. Record transaction F.

Account choices

  1. 1Accounts Payable
  2. 2Accounts Receivable
  3. 3Cash
  4. 4Deferred Revenue
  5. 5Insurance Expense
  6. 6Prepaid Insurance
  7. 7Service Revenue
  8. 8Utilities Expense
  9. 9Wages Expense
  10. 10Wages Payable
AccountDebitCredit
9. Wages Expense (+E, −SHE)5,200
10. Wages Payable (+L)5,200

9, then 10. The work was done in April, so the $5,200 is an April expense even though payday is 3 May. The company owes its employees, so the credit is the liability Wages Payable. This is the same shape as transaction E — the resource is used up before the cash leaves.

Q10 · Revenue for April

Q10

Willow Creek had no other transactions in April. How much revenue should it report for April?

The six transactions

  • A — Catered an event for $14,000, cash collected.
  • B — Catered a $9,000 event, billed the client.
  • C — Received $6,000 in advance for a June wedding.
  • D — Paid $4,800 for insurance starting May 1.
  • E — Received an $800 April utility bill, unpaid.
  • F — Owes employees $5,200 for April work.

Revenue — April

Amount: $23,000

$23,000. Only A’s $14,000 and B’s $9,000 were earned by catering an event in April. C’s $6,000 is cash for a June wedding, so it sits in Deferred Revenue and is not revenue yet — which is why the April total is not $29,000.

Q11 · Net income for April

Q11

What is its net income for April?

The six transactions

  • A — Catered an event for $14,000, cash collected.
  • B — Catered a $9,000 event, billed the client.
  • C — Received $6,000 in advance for a June wedding.
  • D — Paid $4,800 for insurance starting May 1.
  • E — Received an $800 April utility bill, unpaid.
  • F — Owes employees $5,200 for April work.

Net income — April

Amount: $17,000

$17,000. April’s expenses are E’s $800 of utilities and F’s $5,200 of wages, $6,000 in all, so net income is $23,000 − $6,000 = $17,000. D’s $4,800 of insurance is not in it: the cash is spent, but the coverage has not started, so none of it has been used up.

The point Net income is built from what was delivered and used up, not from what was received and paid.

Revenue is recognized when goods or services are delivered, whatever the cash does.
An expense is recognized in the period the resource is used up, whatever the cash does.
Cash received before delivery is a liability (Deferred Revenue); cash paid before use is an asset (Prepaid Expenses).

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