Unit 3

What journal entry is recorded as a result of issuing a note when borrowing money from a bank? A debit to Cash and a credit to Notes Payable A debit to Cash and a credit to Interest Expense A debit to Notes Payable Stock and a credit to Cash A debit to cash and a debit to Common Stock A debit to Cash and a credit to Retained Earnings

A debit to Cash and a credit to Notes Payable Learning objective 5 Issuing a note when borrowing money from a bank requires the company to record a liability called Notes Payable. The company also receives the cash from the bank so the balance in cash increases.

What does a general ledger of a company contain? Asset and liability accounts only Revenue and expense accounts only Asset, and stockholders' equity accounts only All the asset, liability, stockholders' equity, revenue, expense, and dividend accounts None of these

All the asset, liability, stockholders' equity, revenue, expense, and dividend accounts A general ledger lists all of the accounts of a company. These are the asset, liability, stockholders' equity, revenue, expense, and dividend accounts.

Where is the first place every transaction is recorded? In the journal In the trial balance In the financial statements In the ledger In the basic accounting equation

In the journal The first place entries are recorded is the journal. The journal is sometimes referred to as "the book of original entry."

On. Jan. 10, Novis Company purchased manufacturing equipment for $80,000 cash. What kind of activity is this? Operating activity Accrual activity Financing activity Profit activity Investing activity

Investing activity Learning objective 9 Purchasing manufacturing equipment is an investing activity.

If a company buys supplies on account, then assets increase and stockholders' equity increases. assets decrease and liabilities increase. liabilities increase and liabilities decrease. assets increase and liabilities increase. assets increase and assets decrease.

assets increase and liabilities increase. Buying supplies indicates that supplies are acquired, and supplies are assets so assets increase. Buying "on account" indicates that cash has not been paid. Rather, a liability is created for the amount owed. This transaction increases an asset (i.e., supplies) and increases a liability (i.e., accounts payable). Stockholders' equity is not affected. Chapter 3, Learning objective 1

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

increase assets and increase stockholders' equity. Basic accounting equation: Assets = Liabilities + Stockholders' Equity When services are performed for cash, the company records the transaction as an increase in cash (which is an asset) and an increase in revenue (which is a temporary account that will increase stockholders' equity when temporary accounts are closed). Thus, assets and stockholders' equity both increase. Chapter 3, Learning objective 1

Buying supplies in exchange for cash increases liabilities and increases assets. increases assets and decreases assets. decreases liabilities and increases assets. increases liabilities and decreases liabilities. increases stockholders' equity and decreases stockholders' equity.

increases assets and decreases assets. Buying supplies indicates that supplies are acquired, and supplies are assets so assets increase. Paying cash indicates that cash is decreased and cash is an asset so assets decrease. This transaction is an asset exchange where one asset (i.e., cash) is exchanged for another asset (i.e., supplies). Liabilities and stockholders' equity are not affected. Chapter 3, Learning objective 1

Issuing a 3-month, 10%, $10,000 note increases assets and increases liabilities. decreases retained earnings and increases assets. decreases stockholders' equity and increases liabilities. decreases assets and decreases liabilities. decreases liabilities and increases assets.

increases assets and increases liabilities. Issuing a note means that the company is borrowing money and signing a note payable as evidence of the loan. When a company borrows money by issuing a note, it receives cash but it also creates an obligation or a liability. This, assets increase because cash increases, and liabilities increase because notes payable increases. Chapter 3, Learning objective 1,

Receipt of an unearned revenue increases an asset and increases a revenue. decreases a revenue and increase stockholders' equity. increases an asset and increases a liability. decreases a liability and increases stockholders' equity. increases a liability and decreases stockholders' equity.

ncreases an asset and increases a liability. This event increases cash, and increases an associated liability such as unearned revenue. Receipt of unearned revenue means the company received cash from a customer before the company provides the merchandise or services being sold to the customer. This creates an obligation or a liability to the company called "unearned revenue." Liabilities increase and assets (i.e., cash) increase.

The effects of a receipt of cash in advance from a customer on the basic accounting equation are to increase assets and increase stockholders' equity. increase assets and increase liabilities. decrease assets and decrease stockholders' equity. increase liabilities and increase stockholders' equity. decrease assets and decrease liabilities.

increase assets and increase liabilities. Basic accounting equation: Assets = Liabilities + Stockholders' Equity When a receipt of cash in advance from customers occurs, the company records the transaction as an increase in cash (which is an asset) and an increase in unearned revenues (which is a liability). Thus, assets and liabilities both increase. Chapter 3, Learning objective 1

Paying for a one-year insurance policy that will expire next year increases liabilities and increases assets. decreases liabilities and increases assets. increases assets and decreases assets. increases stockholders' equity and decreases stockholders' equity. increases liabilities and decreases liabilities.

increases assets and decreases assets. 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. Chapter 3, Learning objective 1

If an account is debited in the journal entry, then that account will be credited in the ledger. the account balance is being increased. that account will be both debited and credited in the ledger. the transactions will not balance. that account will be debited in the ledger.

that account will be debited in the ledger Posting transfers journal entry amounts to ledger accounts. If the account is debited in the journal entry, that account will be debited in the posting process.

If the sum of the debit column equals the sum of the credit column in a trial balance, it indicates no errors can be discovered by any means. that all accounts reflect correct balances. no errors have been made. the mathematical equality of the accounting equation. every transaction has been recorded.

the mathematical equality of the accounting equation. A trial balance where debits equal credits simply states the mathematical equality of the accounting equation. If the trial balance' debits equals credits, errors can still exist (e.g., perhaps a company's accountant forgot to record a transaction causing debits and credits to both be wrong by the same amount).

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

Liability The unearned revenue account is classified as a liability. Unearned revenues are payments for future services to be performed or goods to be delivered. Until a company performs the services or delivers the goods, the amount is owed to the party that made the payment.

Employees have worked for one week and have earned $5,000 in wages. The company does not record wages until they are paid. Recording the payment of wages decreases liabilities and decreases stockholders' equity. decreases assets and increases liabilities. increases stockholders' equity and decreases stockholders' equity. decreases assets and decreases stockholders' equity. increases liabilities and decreases liabilities.

decreases assets and decreases When employees earn wages, the company incurs wage expense. Since the company records wages (i.e., wage expense) when it pays employees their wages, this transaction reduces assets (e.g., it reduces cash) and it reduces stockholders' equity (i.e., it increases wage expense which reduces retained earnings and stockholders' equity). Chapter 3, Learning objective 1

If a company records wages when it pays them, then recording the payment of wages decreases assets and decreases stockholders' equity. increases assets and decreases assets. decreases assets and decreases liabilities. increases stockholders' equity and decreases stockholders' equity. increases assets and increases stockholders' equity.

decreases assets and decreases stockholders' equity. When employees earn wages, the company incurs wage expense. Since the company records wages (i.e., wage expense) when it pays employees their wages, this transaction reduces assets (e.g., it reduces cash) and it reduces stockholders' equity (i.e., it increases wage expense which reduces retained earnings and stockholders' equity). Chapter 3, Learning objective 1

If a company pays for a one-year insurance policy that will expire next year, then assets increase and assets decrease. liabilities increase and liabilities decrease. assets increase and liabilities decrease. assets decrease and liabilities increase. assets increase and stockholders' equity increases.

assets increase and assets decrease. 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. Chapter 3, Learning objective 1, Pool 8

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

assets increase and stockholders' equity increases. Receiving cash from stockholders as an investment in the company by stockholders is a contribution to capital. This transaction increases the company's cash by the amount of cash received and it increases the company's stockholders' equity (specifically, it increases the common stock account). Chapter 3, Learning objective 1

Accounts with normal debit balances include stockholders' equity and revenues. expenses and liabilities. assets and liabilities. liabilities and expenses. expenses and assets.

expenses and assets. Certain accounts normally have debit balances, including assets, expenses, and dividends. Liabilities, equities, and revenues normally have credit balances.

Retained earnings is decreased by cash payments. revenues. owner's investments. expenses. assets.

expenses. Retained earnings is net income that a company retains in the business. It includes income since the inception of the business—not just the current year's net income. Retained earnings is increased by net income (which is increased by revenues and decreased by expenses) and decreased by distributions to owners (such as dividends). The costs that a firm incurs when operating its business (i.e., its expenses) cause retained earnings to decrease. Chapter 3, Learning objective 1

Which pair of accounts follows the rules of debits and credits in relation to increases and decreases in the opposite manner? Salaries Expense and Unearned Revenue Inventory and Depreciation Expense Common Stock and Retained Earnings Service Revenue and Sales Revenue Cash and Accounts Receivable

Salaries Expense and Unearned Revenue Certain types of accounts are increased with debits, including assets, expenses, and dividends. In contrast, other types of accounts are increased with credits, including liabilities, equities, and revenues. Chapter 3, Learning objective 3

Which of the following is not a part of a complete journal entry? The balance of each account affected by the transaction The accounts and amounts to be debited and credited A brief explanation of the transaction All of these are shown in a completed journal entry The date of the transaction

The balance of each account affected by the transaction The current balance of an account is not needed nor is it shown when making journal entries. The accounts involved and the debit and credit amounts being recorded must be identified in the journal entry. The date of a journal entry is required to maintain the chronology of the journal and the accounts. A brief explanation clarifies the reason the journal entry was made. Account balances are shown in the ledger—not the journal.

If cash is received from owners as an investment by stockholders stockholders' equity will increase and assets will increase. assets will increase and liabilities will decrease. retained earnings will increase and assets will increase. assets will decrease and liabilities will decrease. liabilities will increase and assets will increase.

stockholders' equity will increase and assets will increase. Receiving cash from stockholders as an investment in the company by stockholders is a contribution to capital. This transaction increases the company's assets (specifically, it increases the cash account) by the amount of cash received and it increases the company's stockholders' equity (specifically, it increases the common stock account). Chapter 3, Learning objective 1, Pool 6

Genesis Company declares and pays a $900 dividend to shareholders. This transaction will immediately affect the balance sheet and cash flows statement only. retained earnings statement and balance sheet only. income statement and retained earnings statement only. income statement only. balance sheet only.

retained earnings statement and balance sheet only. When declaring and paying a dividend, the company pays cash so its assets decrease which affects the balance sheet. Also, it increases the amount recorded in its dividends account and this will reduce retained earnings and appear on the retained earnings statement. Dividends are not expenses; the income statement will not be affected. Chapter 3, Learning objective 1

Wilson Company showed the following balances at the end of its first year: Accounts receivable, $12,000 Accounts payable, $4,000 Cash, $10,000 Common stock, ? Dividends, $1,000 Expenses, $17,000 Notes payable, $3,000 Prepaid insurance, $2,000 Revenues, $22,000 What did Wilson Company show as the balance of its common stock account? $17,000 $12,000 $13,000 $28,000 $8,000

$13,000 Certain accounts normally have debit balances: Assets, expenses, and dividends. Wilson Company's accounts with debit balances: $12,000 + 10,000 + 2,000 + 1,000 + 17,000 = $42,000 At all times, the total debit balance must equal the total credit balance. Certain accounts have credit balances: Liabilities, Stockholders' equity, and revenues. Wilson Company's accounts with credit balances = $4,000 + 3,000 + X + 22,000 = $29,000 + X. Since debits of $42,000 must equal credits of $29,000 + X, X must be $13,000. Another approach involves the basic accounting equation (i.e., Assets = Liabilities + Equity) if it is expanded to include details that affect retained earnings as follows: Assets = Liabilities + Common stock + Beg. retained earnings + Revenues - Expenses - Dividends (12,000 + 10,000 + 2,000) = (4,000 + 3,000) + Common stock + 0 + 22,000 - 17,000 - 1,000 Common stock = 13,000

At the start of the month, Hawaii Inc. reported retained earnings of $136,000. During the month, Hawaii generated revenues of $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 $8,000 credit $136,000 debit $142,000 credit $137,000 credit

$142,000 credit 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.

arrell Company began the year with $109,000 in its Common Stock account and a debit balance in Retained Earnings of $14,000. During the year, the company earned net income of $33,000 and declared and paid $5,000 of dividends. In addition, the company sold additional common stock amounting to $37,000. Based on this information, what is the ending stockholders' equity? $146,000 $160,000 $9,000 $158,000 $132,000

$160,000 Note: Retained earnings begins with a debit balance indicating the company has had a history of losses rather than profits. A debit balance rarely occurs except with new companies experiencing a slow start. This year's income eliminates is enough to eliminate the debit balance in retained earnings and change it to a credit balance. Ending retained earnings = Beginning retained earnings + net income - dividends. Ending retained earnings = $14,000 (debit balance) + $33,000 (i.e., credit Retained Earnings because of net income) - 5,000 (i.e., debit Retained Earnings because of dividends) = $14,000 (i.e., the $15,000 ending balance in Retained Earnings account is a credit balance). Ending common stock = beginning common stock + additional common stock issued Ending common stock = $109,000 + 37,000 = $146,000 Ending stockholders' equity = ending common stock + ending retained earnings. Ending stockholders' equity = $146,000 + $14,000 = $160,000

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 $2,600 debit balance. $52,400 debit balance. $$27,500 debit balance. $2,600 credit balance. $0 balance.

$2,600 debit balance. 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).

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

A credit balance of $38,000 Ending retained earnings = Beginning retained earnings + net income - dividends. Other transactions, such as purchased of equipment, are ignored. 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.

What journal entry is recorded as a result of issuing a note when borrowing money from a bank? A debit to Notes Payable Stock and a credit to Cash A debit to Cash and a credit to Notes Payable A debit to cash and a debit to Common Stock A debit to Cash and a credit to Interest Expense A debit to Cash and a credit to Retained Earnings

A debit to Cash and a credit to Notes Payable Issuing a note when borrowing money from a bank requires the company to record a liability called Notes Payable. The company also receives the cash from the bank so the balance in cash increases.

An account is a part of a company's financial information system and is described by all except which one of the following? An account is a source document. An account has a debit and credit side. An account consists of three parts with one part being the account's title. The debit side is the left side of the account's T-account. The credit side is the right side of the account's T-account.

An account is a source document. Learning objective 2 An account has three basic parts: (1) a title (such as "Cash" or Accounts Payable"), (2) a debit side (i.e., left-side column for recording account balance changes), and (3) a credit side (i.e., a right-side column for recording account balance changes). Source documents are the information sources used to record changes to account balances (e.g., invoices are source documents). Accounts are not source document.

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

An employee is terminated. Solution: All of these events are transactions that affect the company's financial statements with one exception. Termination of an employee is not a recordable event in the accounting records. In the future, the company will have a lower salaries expense, but terminating one or more employees is not an event recorded among a company's accounts. Chapter 3, Learning objective 1

Which of the following is the correct sequence of events? None of the answer choices provides the correct sequence Post it to the ledger; analyze a transaction; record it in the journal Record a transaction in the journal; analyze the transaction; post it to the ledger Analyze a transaction; post it to the ledger; record it in the journal Analyze a transaction; record it in the journal; post it to the ledger

Analyze a transaction; record it in the journal; post it to the ledger The sequence is to analyze the event, record it, and then post it to the ledger.

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

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

Which accounts normally have debit balances? Assets, liabilities, and dividends Assets, dividends, and expenses All accounts normally have debit balances. Assets, expenses, and retained earnings Assets, expenses, and revenues

Assets, dividends, and expenses Certain accounts normally have debit balances, including assets, expenses, and dividends. Liabilities, equities, and revenues normally have credit balances.

What is the appropriate order for a company's chart of accounts? Assets, liabilities, stockholders' equity, revenues, expenses, dividends Assets, dividends, expenses, liabilities, revenues, stockholders' equity None of these Assets, liabilities, stockholders' equity, expenses, dividends, revenue Assets, liabilities, revenues, expenses, stockholders' equity, dividends

Assets, liabilities, stockholders' equity, revenues, expenses, dividends The order of the accounts in the chart of accounts follows the order of the sections of the balance sheet and income statement, namely (1) assets, (2) liabilities, (3) stockholders' equity, (4) revenues, (5) expenses, and (6) dividends.

Which pair of accounts follows the rules of debits and credits in relation to increases and decreases in the same manner? Retained Earnings and Supplies Unearned Revenue and Dividends Common Stock and Prepaid Rent Interest Expense and Accounts Payable Cash and Salaries Expense

Cash and Salaries Expense Certain types of accounts are increased with debits, including assets, expenses, and dividends. In contrast, other types of accounts are increased with credits, including liabilities, equities, and revenues. Chapter 3, Learning objective 3

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

Discussing with a customer the services a company offers. All of these events are transactions that affect the company's financial statements with one exception. A discussion with a customer that describes the services offered by a company is not a recordable event in the company's accounting records. Future revenues may be affected if the customer purchases services from the company, but that revenue will be recorded in the future as they occur. Chapter 3, Learning objective 1

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

Journalize; post; prepare a trial balance The proper sequence of events is to journalize the transaction, post the journal entries to the ledger, and prepare a trial balance. These steps are part of what is called "the accounting cycle."

In what section of the statement of cash flows would the collection of cash from a customer who is paying in advance appear? Banking activity Investing activities In the notes to the statement of cash flows Financing activities Operating activities

Operating activities Cash collections from customers are operating activities regardless of whether the customer pays before receiving merchandise or services from the seller, at the same time as receiving merchandise or services from the seller, or after receiving merchandise or services from the seller.

Genesis Company pays $900 for employee salaries. This transaction will immediately affect the income statement and retained earnings statement only. retained earnings statement and balance sheet only. balance sheet only, income statement, and retained earnings statement only. income statement only. retained earnings statement and cash flows statement only.

balance sheet only, income statement, and retained earnings statement only. When paying employee salaries, the company pays cash so its assets decrease which affects the balance sheet. Also, it increases its salaries expense which affects the income statement and reduces retained earnings. This reduction in retained earnings affects the retained earnings statement and affects the retained earnings reported on the balance sheet.

Debits decrease both assets and liabilities. increase both assets and liabilities. increase assets and decrease liabilities. do not affect assets or liabilities. decrease assets and increase liabilities.

increase assets and decrease liabilities. All asset account increase with debits. All liabilities increase with credits.

A trial balance will not balance if a correct journal entry is posted twice. is a list of accounts with their balances at a given time. proves the mathematical accuracy of journalized transactions. does not distinguish between debits and credits. proves that all transactions have been recorded.

is a list of accounts with their balances at a given time. A trial balance is a list of accounts with their balances at a given time. While the trial balance does prove that debits and credits are equal after posting, it does not prove the mathematical accuracy of all journalized transactions. If a journal entry is posted twice, the trial balance will still balance. A trial balance does not prove that all transactions have been recorded.

If cash is received in advance from a customer stockholders' equity will decrease and assets will increase. liabilities will increase and assets will increase. assets will increase and liabilities will decrease. retained earnings will increase and assets will increase. assets will decrease and liabilities will decrease.

liabilities will increase and assets will increase. Receiving cash in advance means that the business receives cash from a customer before the company provides the merchandise or services being sold to the customer. This creates an obligation or a liability to the company. We call this liability "unearned revenue." Liabilities increase and assets (i.e., cash) increase.

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

transfers journal entry amounts to ledger accounts. Posting transfers journal entry amounts to ledger accounts. Posting occurs after journalizing. The process of posting transfers the information contained in journal entries to the ledger. Posting is a required step in the recording process. If it is not done, the ledger accounts will not reflect changes in the accounts resulting from transactions and the ledger would report incorrect account balances.