Ch 3: Accounting Information System

Stockholders' equity is not affected when A. stockholders invest money in the company. B. the company pays expenses. C. the company performs services for cash. D. the company pays a portion of an account payable.

D. the company pays a portion of an account payable.

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

A. 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.

How will Nantucket Law Firm record the following transaction on July 8th? Paid $320 for supplies that had been purchased on June 12th. The correct account name that should be entered in the second row of the journal entry form in order to correctly record this transaction is No alt text provided for this image A. Cash B. Accounts Payable C. Accounts Receivable D. Supplies

A. Cash The transaction is a debit to Accounts Payable and a credit to Cash. When purchased on June 12th, the company debited Supplies and credited Accounts Payable

Stockholders' equity accounts A. Include revenues, Dividends, Common Stock, and Retained Earnings with normal credit balances and expenses with a normal debit balance. B. Include revenues, Common Stock, and Retained Earnings with normal credit balances, but expenses and Dividends have normal debit balances. C. all have normal credit balances similar to liabilities. D. Include Common Stock and Retained Earnings with normal credit balances, but revenues, expenses, and Dividends have debit balances.

B. Include revenues, Common Stock, and Retained Earnings with normal credit balances, but expenses and Dividends have normal debit balances. Retained Earnings has a credit balance and is increased with revenues and decreased with expenses and dividends. So, dividends and expenses are increased using debits, the opposite of other equity accounts.

On August 31, Cole Corporation has the following balances in its accounts: No alt text provided for this image After preparing the firm's trial balance, Cole's accounting staff notices that the total of the debit column is $52,500, while the total of the credit column is $40,900. What does this finding suggest? A. The difference between the two columns suggests that the accounting staff mistakenly categorized Equipment as a credit. B. The difference between the two columns suggests that the accounting staff mistakenly categorized Accounts Payable as a debit. C. The difference between the two columns suggests that the accounting staff mistakenly categorized Notes Payable as a debit. D. The difference between the two columns suggests that the accounting staff mistakenly categorized Accounts Receivable as a credit.

B. The difference between the two columns suggests that the accounting staff mistakenly categorized Accounts Payable as a debit. When properly compiled, a trial balance proves the mathematical equality of debits and credits after posting. Here, the difference between the columns suggests that an error has been made. If we compile our own trial balance using the amounts listed here, we find the total debits (Cash, Prepaid Insurance, Equipment, Accounts Receivable, Dividends, and Salaries and Wages) add up to $46,700, as do the total credits (Notes Payable, Accounts Payable, Common Stock, and Service Revenue). Thus, Cole's staff must have improperly categorized one of the values as a debit rather than a credit, or vice versa, or both. As the total of Cole's debit column is $5,800 more than it should be, the firm's staff must have improperly categorized Accounts Payable as a debit instead of a credit.

How does a company record a service it has performed but has not yet received payment for? A. by debiting revenue from services and crediting Accounts Receivable (asset account) B. by debiting Accounts Receivable (asset account) and crediting revenue from services (shareholder account) C. by debiting revenue from services and crediting Accounts Payable (liability account) D. by making no entry until cash is received

B. by debiting Accounts Receivable (asset account) and crediting revenue from services (shareholder account)

If cash is received from customers for services provided last month, then A. Cash will be debited and a liability account will be debited. B. Cash will be credited and the Retained Earnings account will be debited. C. Cash will be debited and another asset account will be credited. D. Cash will be credited and another asset account will be debited.

C. Cash will be debited and another asset account will be credited.

Suppose that, as a firm, you have sought to raise capital and were able to do this by issuing $750,000 of common stock and taking on a $500,000 debt. What would your journal entries be? A. Debit Cash $750,000, Credit Common Stock $1,250,000 and Credit Notes Payable $500,000. B. Debit Cash $1,250,000, Credit Common Stock $500,000 and Credit Notes Payable $750,000. C. Debit Cash $750,000, Credit Common Stock $500,000 and Credit Notes Payable $1,250,000. D. Debit Cash $1,250,000, Credit Common Stock $750,000 and Credit Notes Payable $500,000.

D. Debit Cash $1,250,000, Credit Common Stock $750,000 and Credit Notes Payable $500,000. Both issuing common stock and obtaining a long-term loan will increase cash, which is posted as a debit to Cash ($750,000 + $500,000 = $1,250,000). The credits for this transaction would then be to Common Stock ($750,000) and Notes Payable ($500,000).

Which of the following events would lead to a decrease in a firm's retained earnings, and why? A. 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 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. 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 D. 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

D. 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 Retained earnings is affected whenever a company recognizes revenue, incurs expenses, or pays dividends; it is not affected by changes in a firm's liabilities. Here, payment of employee salaries increases the firm's expenses, while issuance of the note payable increases the firm's liabilities. The salary-related increase in expenses is what causes the decrease in the firm's overall stockholders' equity

In which of the following cases will a trial balance not balance? A. when a correct journal entry is posted twice B. when a transaction is not posted at all C. when a $300 payment on accounts payable is debited to Accounts Payable for $30 and credited to Cash for $30 D. when a $50 cash dividend is debited to Dividends for $500 and credited to Cash for $50

D. when a $50 cash dividend is debited to Dividends for $500 and credited to Cash for $50