ACG CHAPTER 3 EXAM REVIEW

Which of the following events is not recorded in a company's accounting records? A) The owner withdraws cash for personal use. B) Performs services for a customer on account. C) Issuing a note in exchange for cash. D) Discussing with a customer the services a company offers. E) A collection of cash in advance from a customer.

D) Discussing with a customer the services a company offers.

A company receives cash in advance from customers. This transaction will immediately affect the income statement only. A) balance sheet and cash flows statement only. B) income statement, retained earnings statement, cash flows statement, and balance sheet. C) income statement and cash flows statement only. D) income statement, balance sheet, and retained earnings statement only.

A) balance sheet and cash flows statement only. Solution: When collecting cash in advance from customers, the company receives cash (which increases its assets) and increases its liabilities (the liability account is called unearned revenues). Thus, assets increase and liabilities increase by the same amount. Collecting cash also affects the cash flows statement. This transaction does not affect income statement accounts (e.g., revenues and expenses). It also does not affect retained earnings or the retained earnings statement.

If a previously unrecorded expense is recorded when it is paid with cash recording the the transaction will A) increase expenses and increase liabilities. B) increase expenses and increase retained earnings. C) increase expenses and decrease expenses by an equal amount. D) increase expenses and decrease assets. E) decrease expenses and increase liabilities.

C) increase expenses and decrease expenses by an equal amount.

If a transaction affected two accounts and total liabilities decreased by $4,000, then total assets must have decreased by $4,000 or total stockholders' equity must have increased by $4,000. total stockholders' equity must have decreased by $4,000. total assets must have decreased by $4,000. total assets must have increased by $4,000 or stockholders' equity must have decreased by $4,000. total assets and total stockholders' equity each must have increased by $2,000.

total assets must have decreased by $4,000 or total stockholders' equity must have increased by $4,000.

A company has the following accounts and account balances at the end of its first year: Accounts payable, $4,000 Cash, $22,000 Common stock, Not given Dividends, $4,000 Expenses, $17,000 Notes payable, $3,000 Prepaid insurance, $5,000 Revenues, $28,000 What is the balance of its common stock account at the end of the first year? $13,000 $7,000 $9,000 $8,000 $3,000

$13,000 Solution: The basic accounting equation (i.e., Assets = Liabilities + Equity) must stay in balance. The accounting equation can be expanded as follows:Assets = Liabilities + Common stock + Retained earnings Wilson's assets include cash and prepaid insurance (i.e., 22,000 + 5,000 = 27,000). Wilson's liabilities include accounts payable and notes payable (i.e., 4,000 + 3,000 = 7,000). This is Wilson Company's first year. Its retained earnings at the start of the first year is zero. Retained earnings increases y net income and it decreases by dividends.Wilson's retained earnings at the end of the first year equals retained earnings at the start of the current year plus current-year net income minus current year dividends (i.e., 0 + 28,000 - 17,000 - 4,000 = 7,000). Assets = liabilities + retained earnings + common stock Common stock = Assets - liabilities - retained earnings Common stock = 27,000 - 7,000 - 7,000 Common stock = 13,000

A company began the year with $75,000 in its common stock account and a credit balance in retained earnings of $24,000. During the year, the company earned net income of $35,000 and declared and paid $10,000 of dividends. In addition, the company sold additional common stock amounting to $15,000. Based on this information, what is the ending total of stockholders' equity? $149,000 $64,000 $134,000 $124,000 $139,000

$139,000 Solution: $139,000 = common stock + retained earnings = (75,000 + 15,000) + (24,000 + 35,000 - 10,000)

At the start of the month, a corporation reported retained earnings of $136,000. During the month, it earned $20,000, incurred expenses of $12,000, purchased equipment for $5,000 and paid dividends of $2,000. What is the balance in retained earnings at the end of the month? $184,000 credit $142,000 credit $137,000 credit $8,000 credit $136,000 debit

$142,000 credit Solution: Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period. Ending retained earnings = $136,000 + $20,000 - 12,000 − 2,000 = $142,000 Retained earnings normally has a credit balance. This is a profitable company, so its retained earnings balance would be a credit balance. Note: Purchasing equipment increased equipment (i.e., assets) and either decreased cash (i.e., assets) or increased notes payable (i.e., liabilities); purchasing equipment did not affect net income or retained earnings.

A company began the year with $52,000 in its common stock account and a credit balance in retained earnings of $37,000. During the year, the company earned net income of $46,000 and declared and paid $4,000 of dividends. In addition, the company sold additional common stock amounting to $25,000. Based on this information, what is the ending total of stockholders' equity? $160,000 $135,000 $131,000 $104,000 $156,000

$156,000 Solution: Stockholders' equity = common stock + retained earnings Stockholders' equity = (52,000 + 25,000) + (37,000 + 46,000 - 4,000) = $156,000

At the start of the month, a corporation reported retained earnings of $154,000. During the month, it incurred expenses of $10,000, earned revenues of $25,000, received $9,000 of cash from stockholders in exchange for additional common stock, and paid dividends of $6,000. What is the balance in retained earnings at the end of the month? $160,000 credit $163,000 credit $179,000 debit $184,000 credit $166,000 debit

$163,000 credit

At the start of the month, a corporation reported retained earnings of $154,000. During the month, it incurred expenses of $10,000, earned revenues of $25,000, received $9,000 of cash from stockholders in exchange for additional common stock, and paid dividends of $6,000. What is the balance in retained earnings at the end of the month? $160,000 credit $166,000 debit $163,000 credit $179,000 debit $184,000 credit

$163,000 credit Solution: Ending retained earnings = Beginning retained earnings + revenues for the current period - expenses for the current period - dividends for the current period. Ending retained earnings = $154,000 + $25,000 - 10,000 - 6,000 = $163,000

In its first month of operations, a company's cash account has total debit entries amounting to $27,500 and total credit entries amounting to $24,900. At the end of the month, the cash account has a $52,400 debit balance. $2,600 credit balance. $2,600 debit balance. $$27,500 debit balance. $0 balance.

$2,600 debit balance. Solution: When a company begins, all of its accounts have a zero balance. This company has debit entries for cash of $27,500 and credits of $24,900 in its cash account during its first month. Debits increase asset accounts' balances, such as cash, and credits decrease assets' accounts balances. The balance in the cash account at the end of the period will be $2,600 debit balance (i.e., $27,500 dr. − $24,900 cr. = $2,600 dr.; when an account's debits exceed its credits, the account has a debit balance).

At the start of the month, a company reported a $34,000 debit balance in its cash account. During the month, the company debited cash for $30,000 and credits cash for $42,000. At the end of the month, the cash account has a $22,000 debit balance. $22,000 credit balance. $34,000 debit balance. $64,000 credit balance. $64,000 debit balance.

$22,000 debit balance. Solution: The ending cash balance equals the beginning cash balance plus cash receipts occurring during the period minus cash payments occurring during the period. The ending cash balance = $34,000 + 30,000 − 42,000 = $22,000.

At the start of the month, a company reported a $34,000 debit balance in its cash account. During the month, the company debited cash for $30,000 and credits cash for $42,000. At the end of the month, the cash account has a $22,000 debit balance. $64,000 credit balance. $34,000 debit balance. $22,000 credit balance. $64,000 debit balance.

$22,000 debit balance. Solution: The ending cash balance equals the beginning cash balance plus cash receipts occurring during the period minus cash payments occurring during the period. The ending cash balance = $34,000 + 30,000 − 42,000 = $22,000.

At the start of the month, a company reported a $34,000 debit balance in its cash account. During the month, the company debited cash for $30,000 and credits cash for $42,000. At the end of the month, the cash account has a $64,000 debit balance. $22,000 credit balance. $22,000 debit balance. $34,000 debit balance. $64,000 credit balance.

$22,000 debit balance. Solution: The ending cash balance equals the beginning cash balance plus cash receipts occurring during the period minus cash payments occurring during the period. The ending cash balance = $34,000 + 30,000 − 42,000 = $22,000.

At the start of the current year, a corporation's retained earnings account had a credit balance of $282,000. During the year, the corporation earned revenues of $40,000, incurred expenses of $24,000. At the end of the year, it purchased equipment for $10,000 in exchange for a $10,000 note and it paid dividends of $4,000. What is the balance in retained earnings at the end of May? $282,000 debit $294,000 credit $16,000 credit $284,000 credit $298,000 credit

$294,000 credit Solution: Ending retained earnings = Beginning retained earnings + Revenues - Expenses - Dividends Ending retained earnings = $282,000 + 40,000 - 24,000 - 4,000 = $294,000 Retained earnings is an equity account; it normally has a credit balance. Certain transactions do not affect retained earnings, such as borrowing money by issuing a note and purchasing equipment.

What would the company show as its total credits on its trial balance? $36,400 $29,900 $37,100 $35,700 $37,800

$36,400 Solution: Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $36,400 (i.e., 3,500 + 14,000 + 700 + 700 + 17,500 = 36,400). Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $36,400 (i.e., 2,800 + 4,400 + 4,200 + 1,000 + 24,000 = 36,400). Note: total debits equal total credits.

What would the company show as its total credits on its trial balance? $36,400 $32,600 $38,400 $38,900 $37,200

$37,200 Solution: Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $37,200 (i.e., 3,700 + 13,100 + 1,200 + 1,700 + 17,500 = 37,200). Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $37,200 (i.e., 3,000 + 4,600 + 4,200 + 1,400 + 24,000 = 37,200). Note: total debits equal total credits.

A company's financial records report the following accounts and balances at the end of the year: What would the company show as its total credits on its trial balance? $325,600 $35,600 $38,900 $38,400 $38,200

$38,200 Solution: Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $38,200 (i.e., 3,900 + 13,300 + 1,400 + 1,900 + 17,700 = 38,200).Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $38,200 (i.e., 3,200 + 4,800 + 4,400 + 1,600 + 24,200 = 38,200).Note: total debits equal total credits.

A company has the following accounts and account balances at the end of its first year:Accounts payable, $3,000 Cash, $19,000 Common stock, Not given Dividends, $1,000 Expenses, $14,000 Notes payable, $4,000 Prepaid insurance, $3,000 Revenues, $23,000 What is the balance of its common stock account at the end of the first year? $3,000 $7,000 $9,000 $8,000 $13,000

$7,000 Solution: The basic accounting equation (i.e., Assets = Liabilities + Equity) must stay in balance. The accounting equation can be expanded as follows: Assets = Liabilities + Common stock + Retained earnings Wilson's assets include cash and prepaid insurance (i.e., 19,000 + 3,000 = 22,000). Wilson's liabilities include accounts payable and notes payable (i.e., 3,000 + 4,000 = 7,000). This is Wilson Company's first year. Its retained earnings at the start of the first year is zero. Retained earnings increases y net income and it decreases by dividends. Wilson's retained earnings at the end of the first year equals retained earnings at the start of the current year plus current-year net income minus current year dividends (i.e., 0 + 23,000 - 14,000 - 1,000 = 8,000). Assets = liabilities + retained earnings + common stock Common stock = Assets - liabilities - retained earnings Common stock = 22,000 - 7,000 - 8,000 Common stock = 7,000

A company has the following accounts and account balances at the end of its first year:Accounts payable, $4,000 Cash, $20,000 Common stock, Not given Dividends, $1,000 Expenses, $17,000 Notes payable, $6,000 Prepaid insurance, $2,000 Revenues, $22,000 What is the balance of its common stock account at the end of the first year? $13,000 $7,000 $8,000 $3,000 $9,000

$8,000

A company started the year with $75,000 in its common stock account and a credit balance in retained earnings of $42,000. During the year, the company earned net income of $60,000 and declared and paid $17,500 of dividends. In addition, the company sold additional common stock amounting to $32,000. As a result, the amount of its retained earnings at the end of the year would be $159,500 $84,500 $24,500 $191,500 $119,500

$84,500 Solution: Ending retained earnings = $84,500 = Beginning Retained Earnings + Net Income - Dividends Ending retained earnings = 42,000 + 60,000 - 17,500

Which two accounts follow the rules of debit and credit in relation to increases and decreases in the same manner? (i) Equipment and (ii) Selling Expense (i) Dividends and (ii) Service Revenue (i) Rent Expense and (ii) Accounts Payable (i) Retained Earnings and (ii) Supplies (i) Service Revenue and (ii) Accounts Receivable

(i) Equipment and (ii) Selling Expense

During its first year, a corporation earned revenues of $135,000 and incurred expenses of $87,000. The corporation also paid cash dividends of $10,000 and purchased $25,000 of equipment in exchange for cash during the first year. What is the balance in the company's retained earnings account at the end of its first year? A credit balance of $33,000 A debit balance of $38,000 A debit balance of $33,000. A credit balance of $38,000 A credit balance of $23,000

A credit balance of $38,000 Solution: Ending retained earnings = Beginning retained earnings + net income - dividends. Ending retained earnings = $0 + $135,000 - $87,000 - $10,000 = $38,000. Retained earnings normally has a credit balance; it occurs when revenues exceed expenses and dividends.

During its first year, a corporation earned revenues of $135,000 and incurred expenses of $87,000. The corporation also paid cash dividends of $10,000 and purchased $25,000 of equipment in exchange for cash during the first year. What is the balance in the company's retained earnings account at the end of its first year? A credit balance of $38,000 A credit balance of $33,000 A credit balance of $23,000 A debit balance of $38,000 A debit balance of $33,000.

A credit balance of $38,000 Solution: Ending retained earnings = Beginning retained earnings + net income - dividends. Ending retained earnings = $0 + $135,000 - $87,000 - $10,000 = $38,000. Retained earnings normally has a credit balance; it occurs when revenues exceed expenses and dividends.

Which of the following is not an example of a source document that provides evidence of a transaction? A utility bill received in the mail A trial balance prepared at year-end A check received in the mail from a customer A bill or invoice received from a supplier A cash register document summarizing the days' sales

A trial balance prepared at year-end

A trial balance will balance even if A) $1,000 journal entry was posted twice. B) both accounts affected by a $1,000 transaction were debited. C) None of these D) a $1,000 cash payment for supplies was debited to the Supplies account for $1,000 and credited to the Cash account for $100. E) the account that should be debited was credited and the account that should be credited was credited..

A) $1,000 journal entry was posted twice.

A company began the year with $60,000 in its common stock account and a credit balance in retained earnings of $40,000. During the year, the company earned net income of $75,000 and declared and paid $25,000 of dividends. In addition, the company sold additional common stock amounting to $100,000. Based on this information, what is the ending total of stockholders' equity? A) $250,000 B) $175,000 C) $150,000 D) $190,000 E) $275,000

A) $250,000 Solution: Stockholders' equity = common stock + retained earnings Stockholders' equity = (60,000 + 100,000) + (40,000 + 75,000 - 25,000) = $250,000

On April1, a company hires a new employee who will start to work a week later. The employee will be paid on the last day of each month. Should a journal entry be made on March 6? Why or why not? A) No, hiring an employee is an important event; however it is not an economic event that should be recorded. B) Yes, failure to record the event would cause the financial statements to be misleading. C) Yes, the company is now obligated to pay the employee, thus that event must be recorded. D) No, the financial position of the company has been changed, but cash has not yet been paid. E) None of these

A) No, hiring an employee is an important event; however it is not an economic event that should be recorded.

If a company does not record employees' wages until it pays them, the effects of paying employees' wages on the basic accounting equation are to A) decrease assets and decrease stockholders' equity. B) increase assets and increase liabilities. C) increase assets and decrease assets by the same amount.Total assets do not change. D) increase liabilities and increase stockholders' equity. E) decrease assets and decrease liabilities.

A) decrease assets and decrease stockholders' equity. Solution: Basic accounting equation: Assets = Liabilities + Stockholders' Equity If a company does not record employees' wages until it pays them, then the company had not previously recorded salaries and wages payable. Paying the employees a wage decreases cash (i.e., decreases assets) and increases wages expense and an increase in expenses decreases retained earnings which is an equity account. Thus, assets decrease and equity decreases.

Payment of a dividend A) decreases cash and decreases retained earnings. B) increases expenses and decreases cash. C) increases cash and increases stockholders' equity. D) increases retained earnings and increases expenses. E) decreases cash and increases stockholders' equity.

A) decreases cash and decreases retained earnings.

A company pays the current month's rent. This transaction will immediately affect the A) income statement, retained earnings statement, cash flows statement, and balance sheet. B) balance sheet and retained earnings statement only. C) income statement, balance sheet, and retained earnings statement only. D) income statement and cash flows statement only. E) income statement only.

A) income statement, retained earnings statement, cash flows statement, and balance sheet.

A ledger A) is a collection of all of the accounts used by a company with their balances and changes in balances. B) provides a chronological record of transactions with all of the effects of each transaction recorded in one place. C) shows only accounts' balances and not changes in their balances. D) is the first place a company records its transactions. E) contains only asset, liability, and equity accounts, but does not contain revenue or expense accounts.

A) is a collection of all of the accounts used by a company with their balances and changes in balances.

The purpose of the ledger is to A) provide the balance in each account as well as track changes in their balances. B) list the company's assets, liabilities, and equities including their pre-closing balances. C) disclose in one place the complete effect of each transaction. D) physically store source documents that support each transaction. E) list the company's accounts without providing information about account balances or summaries of transactions.

A) provide the balance in each account as well as track changes in their balances.

Which of the following events is not recorded in a company's accounting records? An employee is terminated. A cash investment is made into the business. Equipment is purchased on account. A company provides services to a customer for cash. The owner withdraws cash for personal use.

An employee is terminated.

A trial balance would only help in detecting which one of the following errors? A journal entry that is posted twice. For a given transaction, the account that should have been debited was credited and the account that should have been credited was debited. A trial balance would help detect all of these errors. An error when transferring the debit side of journal entry to the ledger occurred; it was recorded as a credit. The credit side of the transaction was recorded correctly. A transaction that is not journalized.

An error when transferring the debit side of journal entry to the ledger occurred; it was recorded as a credit. The credit side of the transaction was recorded correctly.

Which of the following statements is false? A) Expenses have normal debit balances. B) Liabilities increase with debits. C) Common Stock increases with a credit. D) Dividends have a normal debit balance. E) Revenue accounts are increased with credits.

B) Liabilities increase with debits.

An accountant has debited an asset account for $1,000 and credited a stockholders' equity account for $500. There is one missing part of the transaction. Which of the following can be the missing part of the transaction that needs to be recorded? A) Debit another liability account for $1,000. B) Credit a different asset account for $500. C) Credit another asset account for $1,000. D) Debit a different stockholders' equity account for $500. E) Nothing further must be done.

B) Credit a different asset account for $500. Solution: The basic accounting equation is assets equal liabilities plus equity. It must stay in balance meaning total assets must equal total liabilities plus total stockholders' equity, and this relation must be maintained in every transaction. If a transaction debited assets by $1,000 then assets increased by $1,000. If that same transaction also credited an equity account by $500 then it increased equity by $500. The missing part of the transaction must cause assets to equal liabilities plus equity. Acceptable options include (1) decreasing (i.e., crediting) a different asset account for $500, (2) increasing (i.e., crediting) a liability for $500, and (3) increasing (i.e., crediting) a different equity account for $500.

Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not? A) None of these B) No, revenue cannot be recognized until the work is performed. C) Yes, they are treated as revenue at the time of receipt because the company has the cash. D) Yes, the intent of the company is to perform the work and the customer is confident that the services will be completed. E) No, the amount of revenue cannot be adequately determined until the company completes the work.

B) No, revenue cannot be recognized until the work is performed.

Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not? A) Yes, they are treated as revenue at the time of receipt because the company has the cash. B) No, revenue cannot be recognized until the work is performed. C) Yes, the intent of the company is to perform the work and the customer is confident that the services will be completed. D) None of these E) No, the amount of revenue cannot be adequately determined until the company completes the work.

B) No, revenue cannot be recognized until the work is performed.

A trial balance will not balance if A) a $500 receipt of a customer's advance payment for services was recorded as a $500 debit to Cash and a $500 credit to Service Revenue. B) a $50 cash dividend was debited to Dividends for $500 and credited to cash for $50. C) a $50 cash purchase of supplies was posted twice. D) a $500 collection of cash was not posted. E) a $500 payment of an account payable was debited to Accounts Payable for $50 and credited to Cash for $50.

B) a $50 cash dividend was debited to Dividends for $500 and credited to cash for $50.

If a company pays for a one-year insurance policy that will expire next year, then A) assets increase and stockholders' equity increases. B) assets increase and assets decrease. C) assets increase and liabilities decrease. D) assets increase and stockholders' equity increases. E) assets decrease and liabilities increase. F) liabilities increase and liabilities decrease.

B) assets increase and assets decrease. Solution: Paying for a one-year insurance policy reduces the company's cash so assets decrease. In exchange for the cash, the company receives insurance coverage that will benefit the company for the next 12 months, and that coverage is an asset. So, assets increase and decrease by equal amounts, and liabilities and stockholders' equity are not affected.

If a company receives cash from an owner in exchange for shares of the company's common stock, then A) assets increase and stockholders' equity decreases. B) assets increase and stockholders' equity increases. C) assets increase and liabilities increase. D) assets decrease and liabilities increase. E) assets increase and liabilities decrease.

B) assets increase and stockholders' equity increases.

Retained earnings is decreased by A) cash payments for assets. B) expenses. C) cash payments. D) contributions from owners. E) revenues.

B) expenses.

A trial balance proves A) that the financial statements are correct. B) the mathematical equality of debits and credits after the posting process. C) that all transactions have been journalized correctly. D) None of these E) transactions were recorded correctly in the ledger.

B) the mathematical equality of debits and credits after the posting process.

Powell Company provided consulting services and collected $500 for the services provided. As a result of this transaction A) assets and equity decreased by $500. B) equity remained unchanged. C) assets and equity increased by $500. D) assets and liabilities decreased by $500. E) liabilities decreased and equity increased by $500

C) assets and equity increased by $500.

A company buys supplies on account. This transaction will immediately affect the A) income statement, retained earnings statement, and balance sheet only. B) income statement and retained earnings statement only. income statement only. C) balance sheet only. D) cash flows statement only.

C) balance sheet only.

Borrowing cash by signing a note payable A) decreases the payer's liabilities and increases its stockholders' equity B) decreases the payer's assets and increases its liabilities. C) increases the payer's assets and liabilities. D) decreases the payer's assets and stockholders' equity. E) decreases the payer's assets and liabilities.

C) increases the payer's assets and liabilities.

Norman Company had a transaction that decreased its assets by $5,000 and increased its assets by $5,000 with a net effect of no change in its assets. This transaction could have been a(n) A) payment of rent for the month. B) a note payable issued to a creditor in exchange for a loan. C) payment for a one-year insurance policy that will expire next year. D)payment of wages to the employees. E) receipt of cash in exchange for performing services to a customer.

C) payment for a one-year insurance policy that will expire next year.

The effects of purchasing supplies on account on the basic accounting equation are to A) decrease assets and decrease liabilities. B) increase liabilities and increase stockholders' equity. C) decrease assets and decrease stockholders' equity. D) increase assets and increase liabilities. E) increase assets and decrease assets by the same amount. Total assets do not change.

D) increase assets and increase liabilities. Solution: Basic accounting equation: Assets = Liabilities + Stockholders' Equity Purchasing supplies on account increases supplies (i.e., increases assets) and increases a liability account called accounts payable. Thus, asset increase and liabilities increase.

If a transaction affected two accounts and total equity increased by $4,000, then A) total assets must have increased by $4,000. B) total assets must have decreased by $4,000 or total liabilities must have increased by $4,000. C) total assets and total liabilities each must have decreased by $2,000. D) total assets must have increased by $4,000 or total liabilities must have decreased by $4,000. E) total liabilities must have increased by $4,000.

D) total assets must have increased by $4,000 or total liabilities must have decreased by $4,000. SOLUTION: The accounting equation: Assets = Liabilities + Equity The accounting equation must always be in balance. Every transaction has two effects on the accounting equation. If total equity increased by $4,000 and the transaction affected only two accounts, then either (i) total assets increased by $4,000 or (ii) total liabilities decreased by $4,000.

Which two accounts follow the rules of debits and credits in relation to increases and decreases in the same manner? A) (i) Interest Expense and (ii) Accounts Payable B) (i) Retained Earnings and (ii) Supplies C) (i) Dividends and (ii) Accumulated Depreciation D) (i) Common Stock and (ii) Rent Expense E) (i) Cash and (ii) Interest Expense

E) (i) Cash and (ii) Interest Expense Solution: Assets, expenses, and dividends are increased by debits. Liabilities equities, and revenues are increased with credits. Cash is an asset account, and salaries expense is an expense account; both are increased by debits. Note that Accumulated Depreciation—Equipment is reported among assets but the company reports the asset (such as equipment) less accumulated depreciation. In this sense, accumulated depreciation accounts are the opposite of assets and accumulated depreciation accounts are decreased by debits.

Which of the following occurs when an account payable is paid with cash? A) Assets increase and liabilities increase B) Assets increases and liabilities decreases C) Assets decrease and stockholders' equity increases D) Stockholders' equity decreases and liabilities decrease E) Assets decreases and liabilities decrease

E) Assets decreases and liabilities decrease Solution: Accounts payable is a liability (i.e., it is an obligation). Paying an account payable reduces the liability and the payment of cash reduces cash (i.e., it reduces assets).

Are advanced receipts from customers treated as revenue at the time of receipt? Why or why not? A) No, the amount of revenue cannot be adequately determined until the company completes the work. B) Yes, they are treated as revenue at the time of receipt because the company has the cash. C) Yes, the intent of the company is to perform the work and the customer is confident that the services will be completed. D) None of these E) No, revenue cannot be recognized until the work is performed.

E) No, revenue cannot be recognized until the work is performed.

If a company pays for a one-year insurance policy that will expire next year, then A) assets increase and liabilities decrease. B) liabilities increase and liabilities decrease. C) assets increase and stockholders' equity increases. D) assets increase and stockholders' equity increases. E) assets increase and assets decrease. F) assets decrease and liabilities increase.

E) assets increase and assets decrease.

If a trial balance's two columns equal one another, it indicates A) no errors have been made in recording transactions. B) the mathematical equality of the accounting equation. C) all transactions have been recorded. D) that all accounts report their correct balances. E) the mathematical equality of debits and credits.

E) the mathematical equality of debits and credits.

Which of the following is false with regards to the double-entry system of recording transactions? None of these are false. Each transaction is recorded with an equal dollar amount of debits and credits. All of these are false. Each transaction affects the balances of at least two different accounts. Each transaction affects at least one income statement account and at least one balance sheet account.

Each transaction affects at least one income statement account and at least one balance sheet account.

Which of the is true with regards to the retained earnings account? It is a liability account and it normally has a debit balance. It is an expense account and it normally has a credit balance. It is an equity account and it normally has a credit balance. It is a revenue account and it normally has a credit balance. It is an asset account and it normally has a credit balance.

It is an equity account and it normally has a credit balance.

Which of the following is the sequence of events for the recording process? Journalize; post; prepare a trial balance Prepare a trial balance; journalize; post Post; journalize; prepare a trial balance Post; prepare a trial balance; journalize Prepare a trial balance; post; journalize

Journalize; post; prepare a trial balance

What type of account is unearned revenue? Asset Revenue Liability Equity Expense

Liability

What type of account is unearned revenue? Expense Equity Revenue Asset Liability

Liability

If a company borrows money from a bank, then assets increase and stockholders' equity increases. assets decrease and liabilities increase. assets increase and liabilities decrease. assets increase and stockholders' equity decreases. assets increase and liabilities increase.

assets increase and liabilities increase.

A company issues a note payable in exchange for cash. This transaction will immediately affect the income statement, retained earnings statement, cash flows statement, and balance sheet. income statement, balance sheet, and retained earnings statement only. income statement and cash flows statement only. balance sheet and cash flows statement only. income statement only.

balance sheet and cash flows statement only.

A company that receives money in advance of performing a service debits Cash and credits Service Revenue. debits Cash and credits Accounts Receivable. debits Cash and credits Unearned Service Revenue. debits Unearned Service Revenue and credits Accounts Payable. debits Cash and credits Prepaid Insurance.

debits Cash and credits Unearned Service Revenue.

The effects of paying a dividend on the basic accounting equation are to decrease assets and decrease liabilities. increase assets and decrease assets by the same amount. Total assets do not change. decrease assets and decrease stockholders' equity. increase liabilities and increase stockholders' equity. increase assets and increase liabilities.

decrease assets and decrease stockholders' equity.

The effects of performing services for cash on the basic accounting equation are to increase assets and increase stockholders' equity. decrease assets and decrease stockholders' equity. increase liabilities and increase stockholders' equity. decrease assets and decrease liabilities. increase assets and increase liabilities.

increase assets and increase stockholders' equity.

A transaction that increases an unearned revenue increases a liability and decreases stockholders' equity. decreases a liability and increases stockholders' equity. increases an asset and increases a revenue. decreases a revenue and increases stockholders' equity. increases an asset and increases a liability.

increases an asset and increases a liability.

Immediately after a transaction has been recorded in the journal, it should be recorded in the journal. ledger. bank reconciliation. trial balance. income statement.

ledger.

Howard Company had a transaction that increased its assets by $5,000 and increased its liabilities by $5,000. This transaction could have been a(n) payment of a $5,000 dividend. purchase of supplies for $5,000 on account. investment of $5,000 cash in the business by the stockholders. repayment of a $5,000 bank loan. payment of $5,000 of wages to employees.

purchase of supplies for $5,000 on account.

If a transaction affected two accounts and total liabilities decreased by $4,000, then total assets must have increased by $4,000 or stockholders' equity must have decreased by $4,000. total assets and total stockholders' equity each must have increased by $2,000. total assets must have decreased by $4,000 or total stockholders' equity must have increased by $4,000. total stockholders' equity must have decreased by $4,000. total assets must have decreased by $4,000.

total assets must have decreased by $4,000 or total stockholders' equity must have increased by $4,000.

Posting is an optional step in the recording process. occurs after finishing the financial statements. transfers ledger transaction data to the journal. normally occurs before journalizing. transfers journal entry amounts to ledger accounts.

transfers journal entry amounts to ledger accounts.

An accounting record that lists all of a business's accounts and their debit versus credit balances at a given time for the purpose of proving the mathematical equality of debits and credits is called a trial balance. chart of accounts. general journal. general ledger. balance sheet.

trial balance.