Ch 2: The Accounting Cycle: During the Period
On January 1, Linden has total assets of $100,000, total liabilities of $30,000, and total stockholders' equity of $70,000. Linden purchases $20,000 of supplies on account, and $2,000 of prepaid rent for cash. After these transactions, total assets equal
$100,000 + $20,000 supplies + $2,000 prepaid rent - $2,000 cash = $120,000 total assets
Long issued 5,000 shares of stock for $10,000. Long used $2,000 of the proceeds to purchase supplies, and borrowed $8,000 cash from the bank. Long's total assets are
$18,000
If a transaction decreases cash by $100, the balance sheet will balance if which of the following occurs? (Select all that apply) a. Revenue is increased b. A liability is decreased c. Stockholders' equity is increased d. Another asset is increased
A liability is decreased; another asset is increased
Which of the following accounts would normally have a debit balance on the trial balance?
Cash/Utility Expense/Supplies
On August 2, Garner Company provides services to a long-time customer for $50,000. Payment for this service is due on September 1. Which of the following journal entries is made to record this transaction on August 2?
Debit accounts receivable; credit service revenue.
Rawlings Corp. borrows $3,000 on a note payable from Third National Bank. Which of the following is used to record this transaction?
Debit cash $3,000; credit note payable $3,000.
Farmer, Inc. purchases a tractor for $80,000 cash. Recording this transaction will require which of the following?
Debit equipment; Credit cash
Resnick purchases supplies on account. Which of the following is used to record this transaction?
Debit supplies; credit accounts payable
True or false: The term debit means increase, and the term credit means decrease.
False
True or false: The two functions of financial accounting are to measure business activities and prepare tax returns.
False
Sampson Corporation issues common stock for $25,000 cash and uses some of the proceeds to purchase equipment for $10,000 cash. Sampson also purchases $4,000 of supplies on account. After recording these transactions total assets are
Issuing common stock increases assets by $25,000 (cash) and increases equity (common stock). Purchasing equipment for cash decreases one asset and increases another asset, so there is no change in assets. Purchasing supplies on account increases assets and increases accounts payable. $25,000 + $0 + $4,000 = $29,000 total assets.
The commonly used format for recording a transaction is referred to as a(n)
Journal entry
An account that is used informally for analysis instead of drawing a formal general ledger account is referred to as a:
T-account
True or false: A trial balance is used for internal purpose to check that debits equal credits.
True
True or false: For each journal entry, debits must be equal to credits.
True
True or false: Revenue is recorded when services are performed, whereas deferred revenue is recorded when cash is received from customers in advance before services are performed.
True
True or false: The accounting equation must always remain in balance.
True
Indicate which situations would require Zenda Company to record revenue in the current period. (Select all that apply.) a. Zenda is paid in advance for services to be performed in the next period. b. Zenda signs a contract with a customer to perform services in a future period. c. Zenda performs services for cash. d. Zenda performs services on account.
Zenda preforms services for cash; Zenda preforms services on account
If debits do not equal credits on a trial balance, a possible error could be
a debit was posted to the credit column for a journal entry.
Which of the following is used to record the summary of effects on one particular item? a. An account b. A trial balance c. A general journal d. A general ledger
a. an account
What is the effect of net income on retained earnings? a. increase b. no effect c. decrease
a. increase
When services are provided on account, what is the effect on stockholders equity? a. increase b. decrease c. no change
a. increase
A(n) ______ is maintained for each financial statement item, whereas a(n) ______ contains all of the accounts of the company.
account; general ledger
The term ___ cycle refers to the full set of procedures utilized to measure and communicate business transactions to external decision makers.
accounting
The cost of equipment that will benefit future periods is typically recorded as a(n) ___.
asset
Accounts receivable are a. stockholders equity b. assets c. liability d. a component of net income and retained earnings
assets
Wolfgang Company's assets and stockholders' equity both increased by $50,000 as a result of a single transaction. Which of the following transactions would explain this increase? a. Supplies were purchased on account b. Common stock was sold for cash c. Dividends were paid to stockholders d. Equipment was paid for cash
b. Common stock was sold for cash
On May 1, Ace Electronics ordered office equipment. The equipment was delivered to Ace on May 15, and Ace agreed to pay for it by the end of the month. Ace paid for the equipment on May 31. When will Ace make the first entry in its accounting system for this purchase? a. May 1 b. May 15 c. May 31
b. May 15
After the accountant analyzes the impact of a transaction on the accounting equation, the next step in the measurement process is to a. prepare a trial balance b. determine the accounts to debit and credit c. post the transaction to the general ledger d. use source documents to prepare a financial statement
b. determine the accounts to debit or credit
Rice borrows $20,000 from the bank. Which of the following is an effect of this transaction? a. Increase stockholders equity b. Increase liabilities c. Decrease assets d. Decrease revenues
b. increase liabilities
What type(s) of transactions are typically measured only at the end of the accounting period? a. internal and external b. internal c. external
b. internal
What effect does revenue have on retained earnings? a. no effect b. decrease c. increase
c increase
The full set of accounting procedures used to measure and communicate business transactions is referred to as the a. transition cycle b. accounting information system c. accounting cycle d. financial reporting
c. accounting cycle
When a company performs services for a customer, and the customer agrees to pay for the services at a later date, the transaction is recorded in which account? a. prepaid services b. accounts receivable c. accounts payable d. deferred revenue
c. accounts recievable
On January 1, Kim pays for two years of rent in advance. The effect of this transaction a. decrease liabilities b. increase assets c. has no effect on total assets d. increases stockholders equity
c. has no effect on total assets
Claire purchases equipment for $10,000 by paying $3,000 in cash and borrowing $7,000 from the bank. The number of accounts affected by this transaction is a. one b. two c. three d. four
c. three
Rory purchases supplies for cash. Which of the following occurs? a. total asset to increase b. total asset to decrease c. total asset to remain the same
c. total asset to remain the same
Recording the repayment of a promissory note will include a credit to
cash
Tabor Company issues $20,000 of common stock to investors. Recording this transaction will include a credit to
common stock
Jeremy issues 5,000 shares of common stock for $10 per share. Which of the following accounts are affected? a. notes payable b. common stock c. revenue d. cash
common stock; cash
Roland Corporation borrows $10,000 from the bank by signing a promissory note. Recording this transaction will include:
credit to notes payable; debit to cash
Turkey Corp. provides services to customers on account for $3,000. Recording this transaction will include a
credit to revenues
The accounting equation is Assets = Liabilities + Stockholders' Equity. Accounts on the right side of this equation are increased with
credits
A list of all account names used to record transactions of a company is referred to as the a. balance sheet b. general ledger c. income statement d. chart of accounts
d. chart of accounts
Accounts on the left side of the accounting equation (assets) are increased with a(n) ___ to the account, whereas accounts on the right side of the accounting equation are increased with a(n) ___ .
debit; credit
Because dividends reduce retained earnings, a ______ to dividends is essentially a ______ to retained earnings.
debit; debit
Because expenses reduce retained earnings, a ______ to expense is essentially a(n) ______ to retained earnings.
debit; debit
When a company pays salary expense, the effects are to a. decrease stockholders equity b. increase assets c. decrease assets d. increase liabilities
decrease stockholders equity (retained earnings); decrease assets
Dividends ______ retained earnings; therefore, to increase dividends, one would ______ the dividends account.
decrease; debit
Expenses ___ stockholders' equity because they ___ retained earnings.
decrease; decrease
The acronym DEALOR can be used to remember how debits and credits affect different accounts. The three types of accounts that are increased with debits (represented by the DEA in the acronym) are
dividends, expenses, assets
Crane purchases equipment by signing a note payable with the equipment dealer for $10,000. The accounts affected for Crane are
equipment and notes payable
A(n) ___ is a cost of doing business during the period, whereas a(n) ___ is a distribution of cash to stockholders.
expense; dividend
A(n) ___ transaction involves an exchange between the company and a separate economic entity.
external
Which of the following contains a list of transactions affecting each account and the account's balance?
general ledger
Zelda purchases $10,000 of supplies on account. The effects of this transaction are to a. increase liabilities b. decrease liabilities d. increase assets c. increase stockholders equity
increase assets; increase liabilities
Revenues ______ retained earnings; therefore, to increase any revenue, one would ______ the revenue account.
increase; credit
A(n) ___ transaction is an event that affects the financial position of the company but does not include an exchange with a separate economic entity.
internal
Transactions that are typically recognized at the end of the period and do not include an exchange with a separate company are referred to as ___ transactions.
internal
A ________ entry describes the format for recording a transaction
journal
A transaction is initially recorded in the general ___ , and then subsequently posted to the general ___.
journal; ledger
The acronym DEALOR can be used to remember how debits and credits affect different accounts. The three types of accounts that are increased with credits (represented by the LOR in the acronym) are
liabilities; owners equity, revenues
The two roles of financial accounting are to: a. report cost accounting information for internal decisions b. measure and report results to taxing authorities c. communicate information to external parties for decision making purposes d. measure business activities of the company
measure business activities of the company; communicate information to external parties for decision making purposes
An increase in revenues increases ___ ___, which increases retained earnings, which increases stockholders' equity. (Enter one word per blank)
net income
The process of transferring information from a journal entry to the specific accounts affected in the general ledger is referred to as ___.
posting
Indigo Company's journal reveals that equipment was debited and notes payable was credited, both for $10,000. Indigo Company must have
purchased equipment and signed a note for the purchase price
The accumulated net amount of revenue less expenses and dividends is reflected in the balance of ___ ___
retained earnings
Consistent with the ___ recognition principle, companies record revenue at the time goods are provided to customers.
revenue
The type of information included in an account includes
the account title, columns for debits and credits
The balance in retained earnings represents
the accumulated net amount of revenue minus expenses and dividends over the company's lifetime.
A journal entry should contain which of the following information?
the date, accounts and amounts debited, accounts and amounts credited, description of the transactions
A list of all accounts and their balances at a particular date showing that debits equal credits is referred to as a(n) ___ ___.
trial balance