Chapter 2: Balance Sheet

In May, Pasta Disasta, Inc. pays its suppliers $1,000 for supplies received in April. The effect on the accounting equation is a ______.

$1,000 decrease in assets $1,000 decrease in liabilities

Which of these line items appear on a balance sheet?

Liabilities Assets Stockholders' Equity

Which accounts are affected by borrowing from a bank?

Notes Payable Cash

______ to a corporation's stockholders' equity accounts cause its total stockholders' equity to ______.

Debits; decrease

When should the total dollar value of debits equal the total dollar value of credits in a transaction?

always

Cost Principle

assets and liabilities are recorded at the amounts that were measurable at the time transactions occurred.

A company purchased land in exchange for a $25,000, 10-year note payable. The increase in the Notes Payable account would be recorded with a ______.

credit;

What is the effect on total stockholders' equity when a company purchases a cash register for a cash payment of $1,200?

no effect

What is the effect on total assets when a company purchases a cash register for a cash payment of $1,200?

no effect; Equipment is increased and Cash is decreased. Both are assets, thus there is no effect on total assets since they offset one another.

Retained Earnings is ______.

part of stockholders' equity

A classified balance sheet shows subtotals for current

assets and liabilities

The beginning balance in Lucre's Notes Payable account was $50,000. During the month, Lucre borrowed $60,000 cash from Last National Bank and then paid First National Bank the $40,000 it had borrowed 5 months prior. The balance in Lucre's Notes Payable account is now a ______.

Credit of $70,000. To get the ending Notes Payable balance, you must start with the beginning credit balance of $50,000, add the new borrowings of $60,000, and subtract the payment of $40,000. The ending balance equals $70,000 (=$50,000 + 60,000 - 40,000).

Liabilities represent the <blank> claims to a business assets.

Creditors

Every company establishes a <blank> of accounts which is a list that designates a name and reference number that the company will use when recording transactions.

chart

The formula for calculating the current ratio is ______.

current assets divided by current liabilities

A company made a $1,000 payment on its $100,000, 20-year mortgage. The decrease in liabilities would be recorded with a ______ to Notes Payable.

debit; credits increase notes Payable while debits decrease

The line item, Land, on the balance sheet results from a(n) ______.

investing activity

The Equipment account is increased with an entry on the ______________ side of the Equipment T-account.

left

What is the effect on total liabilities when a company buys a building in exchange for a 20-year note payable?

Total liabilities will increase.

When a company receives an invoice for goods purchased and received from a supplier, it records ______.

an increase in Accounts Payable

A chart of accounts is a ______.

list of account titles with corresponding reference numbers used by companies so that transaction items are consistently named

Two sources of financing for a new business are ______.

stockholders creditors

Current liabilities ______.

will be paid or fulfilled within 12 months

The beginning balance in Acme's Accounts Payable was $4,000. Acme then bought $100 of supplies on account and paid $700 of the amount that it owed for supplies purchased on account last month. The ending balance in Acme's Accounts Payable was a credit of ______.

$4,000+ 100 - 700 = $3,400. Purchases of supplies "on account" increases and payments decrease Accounts Payable.

A company's beginning Cash is $10,000. It had a $100,000 of cash receipts and $70,000 of cash payments during the period. The company's ending Cash balance equals a _____ balance.

$40,000 debit. Cash, an asset, equals a $40,0000 debit balance (=$10,000 debit + 100,000 debit - 70,000 credit).

A company's beginning Notes Payable is $100,000. It borrowed $50,000 by issuing a promissory note to the bank and repaid $60,000 of the amounts owed. The Notes Payable ending balance equals a _____ balance.

$90,000 credit

If Cash has a beginning balance of $100,000 and collects $1,000,000 and pays $800,000 during its 2nd year of business, its ending balance equals <blank>. In its 3rd year of business, Cash will have a beginning balance of <blank>.

300,000

Which account is affected by recording the buying of goods on credit?

Accounts Payable

When a company buys an asset on account ______.

Assets increase Liabilities increase Reason: The company receives an asset in exchange for a payable increases liabilities. Later, when the company pays for the amounts owed, the payable and cash will be decreased.

Which of the following are on the credit side of the Accounts Payable T-account?

Beginning balance Ending balance Purchases on account

Financing activities involve which of the following activities?

Borrowing from banks Obtaining contributions from owners

Which transactions are recorded in the accounting system?

Both external exchanges and internal events

Which of the following are non-current assets that are found on the balance sheet?

Buildings Equipment Land Machinery

What does a business typically receive when it issues stock to owners?

Cash

Which of the following accounting cycle steps describes the summarizing in ledger accounts?

Dollars amounts from journal entries are copied (posted) to the appropriate accounts in the ledger, so that account balances can be totaled.

The first step in starting a business is to obtain cash from owners and/or creditors. Is this activity an investing activity or a financing activity?

Financing

How do financing activities differ from investing activities?

Financing activities may involve an exchange of cash for a company's own stock; investing activities do not. Financing activities may involve an exchange of cash for debt; investing activities do not.

Show the effect of recording the borrowing of $10,000 from a bank on the accounting equation. _____ by $10,000.

Liabilities increase Assets increase

Buildings and equipment owned and used by a company are ______.

Non-current assets

Identify the account title that may be used to record borrowing cash in exchange for a promissory note.

Note Payable

Which of the following have normal credit balances?

Notes Payable Common Stock Accounts Payable

Which of the following are true about Notes Payable and Accounts Payable?

Notes Payable are interest-bearing, Accounts Payable are not. Both Notes Payable and Accounts Payable are liabilities.

Which of the following are on the debit side of the Accounts Payable T-account?

Payments of purchases made on account

Increases and decreases in individual accounts, as well as an ending balance, are shown in a(n) ______.

T-account ledger

MMM Pizza bought and received $1,500 of supplies purchased on account. What is the effect of recording this transaction on the company's total assets?

Total assets will increase. Since the supplies were purchased "on account", MMM Pizza receives supplies, an asset, in exchange for a promise to pay, a liability. Thus, assets, Supplies, and liabilities, Accounts Payable, will both increase.

What is the effect on total assets when a company buys a building in exchange for a 20-year note payable?

Total assets will increase; The company receives Equipment (+A) and gives a promise to pay in the future, Notes Payable (+L).

MMM Pizza bought $1,500 of equipment on account (i.e., on credit). What is the effect of recording this transaction on the company's total liabilities?

Total liabilities will increase

Burrows, Inc. borrowed $100,000 from Last Bank by signing a formal agreement to repay the bank in 10 years. Burrows' journal entry to record this transaction will include a debit to ______.

cash

Which of the following is a current asset?

cash

Which of the following have normal debit balances?

cash, supplies, equipment

The beginning balance in Lucre's Cash account was $1,200. During the month, Lucre borrowed $5,000 cash from Last National Bank and paid a supplier $500. The balance in Lucre's Cash account is now a ______.

debit of $4500. To get the ending cash balance, you must start with the beginning balance of $1,200, add the receipt of $5,000, and subtract the payment of $500; $1,200 + 5,000 - 500 = $5,700. Cash is usually considered a debit

The duality of effects refers to the fact that each transaction ______.

has at least two effects on the basic accounting equation

All transactions ______.

have at least two effects on the accounting equation affect assets, liabilities, and/or stockholders' equity

A debit to Cash and a credit to Common Stock is recorded when a company ______.

incorporates and its owners contribute cash

Equipment on a balance sheet is the result of a(n) ______ activity.

investing

All accounting systems ______.

record and summarize financial effects of transactions follow the accounting cycle combine beginning balances with the activity during the accounting cycle to yield the ending balances for each account.

Journals are used to ______.

record transactions chronologically

Two sources of equity financing which increase stockholders' equity are ______.

retained earnings common stock

The Common Stock account is increased with an entry on the <blank> side of the T-account.

right

A ledger is used to ____

show increases and decreases in individual accounts, as well as an ending balance

Classified Balance Sheet

shows subtotals for current assets and current liabilities

Equity financing is financing obtained from ______.

stockholders

Lox, Stock and Bagel, Inc., issued $100,000 of common stock. It recorded the transaction by increasing Cash and decreasing Common Stock. As a result of this entry, ______.

the accounting equation will be out of balance

A company purchased a new cash register in exchange for a cash payment of $1,200. The company recorded only an increase of $1,200 in the Equipment account. No entry was made to the Cash account. As a result, ______.

total assets are too high the accounting equation is not in balance

A company purchased a $100,000 building in exchange for a 20-year note payable. The company recorded a $100,000 increase in the Building account and a $100,000 decrease in Cash. As a result of this error, ______.(Check all that apply.)

total assets are too low total liabilities are too low Total assets are too low because the Cash, an asset, was decreased and should not have been. Instead, Notes Payable, a liability, should have been increased.

The creditors' claim to a company's resources is represented by

total liabilities

Identify the key activities necessary to start a business.

Purchase assets Obtain financing

Business activities that affect the basic accounting equation and are recorded in the accounting system are called

transactions

Which of the following are possible effects on the accounting equation when recording a transaction that increases a liability by $100?

An asset increases by $100 A stockholders' equity account decreases by $100

The accounting cycle consists of 3 steps, place the following steps in their correct order with the first step listed first.

Analyze, Record and Summarize the transaction

List the components of a classified balance sheet in the proper order in accordance with GAAP. List from top to bottom.

Current Assets Non-current Assets Current Liabilities Non-current Liabilities Stockholder's Equity

Who has first claim to a business's assets should the company go out of business?

Creditors

Identify which of the following statements are true.

Credits increase stockholders' equity. Credits increase liabilities. Assets are on the left side of the accounting equation and have a normal debit balance. Liabilities are on the right side of the accounting equation and have normal credit balances.

Select the financing activities from the list below.

Issuing a note payable Issuing stock

Which of the following are possible effects on the accounting equation when recording a transaction that affects two accounts?

One asset account increases and one asset account decreases One asset account increases and one stockholders' equity account increases

Select the investing activities from the list below.

Purchasing land Purchasing equipment Purchasing a company logo

When a business issues common stock, what does it give to its owners?

Stock certificates

Company X issued $10,000 of common stock to its owners for cash. It recorded the transaction by increasing assets and increasing liabilities. Which of the following statements are correct?

Stockholders' equity will be too low. Liabilities will be too high.

True or false: A transaction can cause one asset to increase and different asset to decrease and still have the accounting equation balance.

True: Transactions do not have to straddle the equal sign of A=L+SE. One asset may be exchanged for another and still balance. Total assets remain the same as do total liabilities plus stockholders' equity.

Melon-Cauli Grocers, Inc. received $50,000 worth of computers on account promising to pay next month. The journal entry to record this transaction would include ______ of $50,000.

a credit to Accounts Payable a debit to Equipment

Able Company purchased $25,000 worth of equipment in exchange for a promise to pay at the end of the month. The journal entry to record this transaction would include ______ of $25,000.

a debit to Equipment a credit to Accounts Payable

The journal entry to record the purchase of land for $30,000 cash includes ______.

a debit to Land and a credit to Cash

The journal entry to record the payment of $30,000 cash for the creation of the company's logo includes ______.

a debit to Logo/Trademarks and a credit to Cash

A company paid $500 cash for a new printer. The entry to record this transaction would include a ______ to Cash.

credit

A company purchased supplies and promised to pay $200 for them next month. The increase in Accounts Payable would be recorded with a ______.

credit

An increase in Retained Earnings would be recorded with a ______.

credit

The Land account is increased with an entry on the <blank> side of the Land T-account.

debit

The line item, Common Stock, on the balance sheet results from a(n) ______ activity

financing

A company paid $5,000 cash to purchase equipment. The company recorded a debit to Equipment of $5,000 and a credit to Cash of only $500. This company's accounting records are ______.

incorrect because debits do not equal credits

Company X receives $10,000 from issuing common stock to its owners. The effect on the accounting equation is a(n) _____.

increase in assets increase in stockholders' equity

A transaction may be recorded with an increase in an asset and a decrease in a(n) ______.

another asset

Which of the following are similarities between Notes Payable and Accounts Payable? They both ______.

are amounts owed to creditors are liabilities

A company's beginning Equipment account is $100,000. It purchased $10,000 of new equipment and sold $4,000 of its equipment during the period. The company's ending Equipment balance equals a _____ balance.

$106,000 debit. Equipment, an asset, equals a $106,0000 debit balance (=$100,000 debit + 10,000 debit - 4,000 credit).

List the steps from top to bottom in the order they occur in the accounting system.

Transactions are recorded in the journal Transactions are posted in the ledger Account balances are computed