Chapter 0 ACG3131

There must be a corresponding increase in liabilities or an increase in stockholders' equity if total assets are _______________.

Increased

What happens when services are performed on account?

Stockholders' equity increases.

What happens when a business purchase supplies on account?

Supplies increases, Accounts payable increase.

what accounting entries would you expect to accompany a $9000 decrease in cash and why?

A $9000 increase in Equipment, because cash is an asset, so an equal but opposite change to another asset account such as Equipment will offset the decrease to the Cash account. Equipment is considered an asset, similar to cash. A change in a firm's assets must be offset by an equal but opposite change in assets or an equal change in liabilities or stockholders' equity. The only option that follows this rule is the $9,000 increase in the Equipment account.

What event would lead to a decrease in a firm's retained earnings, and why? A) employee salaries, because salaries are considered an expense, and an increase in expenses will reduce a firm's retained earnings. B) Issuance of a $10,000 note payable in exchange for cash, because notes payable are considered an expense, and an increase in expenses will reduce a firm's retained earnings. C) Issuance of a $10,000 note payable in exchange for cash, because notes payable are considered a liability, and an increase in liabilities will reduce a firm's retained earnings. D) Payment of $10,000 in employee salaries, because salaries are considered a liability, and an increase in liabilities will reduce a firm's retained earnings

A) Payment of $10,000 in employee salaries, because salaries are considered an expense, and an increase in expenses will reduce a firm's retained earnings

What happens when a company issues common stock for 40,000 and uses 30,000 of the cash to purchase a truck?

Assets are increased by 40,000 because when get 40,000 assets for issuing common stock and 30,000 balances out itself when they bought the truck with cash and gaining truck as an asset.

Becker Enterprises received a cash advance of $500 from a customer. As a result, ___________ by $500.

Assets increased.

Which of the following accounting entries would you MOST expect to accompany a $2,500 increase in cash, and why? A) A $2,500 decrease in notes payable, because this reduction in liabilities would need to be offset by a corresponding increase in assets. B) A $2,500 increase in unearned service revenue, because unearned service revenue is considered a liability until the service is actually performed. C) A $2,500 decrease in notes payable, because this decrease in stockholders' equity would need to be offset by a corresponding increase in assets. D) A $2,500 decrease in unearned service revenue, because unearned service revenue is considered an asset no matter when it is received.

B) A $2,500 increase in unearned service revenue, because unearned service revenue is considered a liability until the service is actually performed. Both notes payable and unearned service revenue are considered liabilities (and not a component of stockholders' equity), while cash is considered an asset. Because any change in a firm's assets must be offset by an equal change in the firm's liabilities plus stockholders' equity, the $2,500 increase in cash must be offset by either a $2,500 increase in unearned service revenue or a $2,500 increase in notes payable.

Which one correctly records the purchase of a piece of equipment? A) a $15,000 increase in cash and a $15,000 decrease in equipment, both entered on the same date. B) a $5,000 decrease in cash, a $15,000 increase in notes payable, and a $20,000 increase in equipment, all entered on the same date. C) a $16,000 decrease in notes payable and a $16,000 increase in equipment, both entered on the same date. D) a $14,000 decrease in cash, a $4,000 increase in notes payable, and a $10,000 increase in equipment, all entered on the same date.

B) a $5,000 decrease in cash, a $15,000 increase in notes payable, and a $20,000 increase in equipment, all entered on the same date. Any change in a firm's assets must be offset by an equal change in the firm's liabilities plus stockholders' equity.

Which would lead to the largest decrease in a firm's retained earnings? A) Payment of an $18,000 dividend on common stock. B) Receipt of $20,000 for services performed. C) Issuance of $18,000 of common stock. D) Payment of $20,000 in employee salaries

D) Payment of $20,000 in employee salaries. Retained earnings is affected whenever a company recognizes revenue, incurs expenses, or pays dividends. This means that the receipt of cash for services performed would increase retained earnings, while both payment of employee salaries and the payment of dividends would decrease retained earnings. However, since the salary payment $20,000 is larger than the dividend payment 18,000, it will cause the largest drop in retained earnings.

On September 30, Jordan Consulting received $12,000 from Hank's Hardware in exchange for services performed. Upon receipt of this payment, Jordan recorded a $12,000 reduction in unearned service revenue and a $12,000 increase in cash. Did Jordan make the proper accounting entries? Why or why not?

No, Jordan did not make the proper accounting entries. Although the firm was correct to increase cash by $12,000, it should have recorded a $12,000 increase in revenue rather than a $12,000 decrease in unearned service revenue. Because the services were already performed, Jordan should have recorded the $12,000 as an increase in revenue. Because revenue is an element of retained earnings, the firm's retained earnings and thus its stockholders' equity would have increased by $12,000. Accordingly, the firm should have also recorded a $12,000 increase in cash so that its assets increased by the same amount as its liabilities and stockholders' equity combined.

On February 2, Miles Inc. pays $800 to purchase a one-year insurance policy that will expire next year on January 31. Miles indicates this transaction in this books by recording an $800 reduction in cash and an $800 increase in expenses. Did Miles make the proper accounting entries?

No, Miles did not make the proper accounting entries. Prepaid insurance is an asset, not an expense. Thus, the firm should have offset the $800 decrease in cash (an asset account) with an $800 increase in prepaid insurance (also an asset account). Only assets portion should be affected.

What is retained earnings?

Retained earnings is the amount of net income left over for the business after it has paid out dividends to it's shareholders. When the net income is not paid out to shareholders or reinvested back into company, it becomes retained earnings.

Assets and Stockholders' equity increase when

Stockholders make an investment in the business.

If assets have decreased by $4000, or stockholders' equity has increased by $4000, then total liabilities must have

decreased by $4000