Ch 2 Smartbook questions

A transaction that involves an exchange of assets, liabilities and/or stockholders' equity between the company and someone else is called a(n) _______ exchange.

external exchange

True or false: If one asset increased, it must be the case that either liabilities or stockholders' equity increased by the same amount.

false One asset may be exchanged for another and thus have no effect on liabilities or stockholders' equity. The accounting equation remains in balance because an increase in one asset is offset by the decrease in another asset.

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

has at least two effects on the basic accounting equation

What is the effect on total assets when a company purchases land for a cash payment of $10,000? Multiple choice question.

no effect Land (+A) is increased and Cash (-A) is decreased. Both are assets, thus there is no effect on total assets since they offset one another.

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

non-current assets Buildings and equipment are not current assets because they are not intended to be used up or turned into cash within 12 months.

On the balance sheet, Equipment is reported at its ______.

original cost

When a company pays its supplier for amounts owed, its Cash and Accounts _______ accounts are decreased.

payable

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

stock certificates

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 ______.

3,400 The beginning balance is a $4,000 normal credit balance + 100 credit for purchases on account - 700 debit for amounts paid = $3,400 credit ending balance

All transactions must...

#1 - Must affect assets, liabilities, and/or stockholders' equity #2 - Must have at least two effects on the accounting equation

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 The effect is to decrease Accounts Payable, a liability, and Cash, an asset.

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

Another asset If one asset is increased, for the accounting equation to remain in balance either another asset is decreased, and/or a liability is increased, and/or a stockholders' equity account is increased.

Similarities between Notes Payable and Accounts Payable? They both ______...

Are liabilities Are amounts owed to creditors

Given a company's accounting equation at the end of the accounting period consists of Assets of $100,000, Liabilities of $60,000 and Stockholders' Equity of $40,000, whats the correct description for each amount?

Assets of $100,000 = Economic resources owned Liabilities of $60,000 = Creditors' claims to the economic resources Stockholders' Equity of $40,000 = Owners' claims to the economic resources

Which transactions are recorded in the accounting system?

Both external exchanges and internal events

Current assets divided by current liabilities is the _____ ratio

current

The formula for calculating the current ratio is ______.

current assets divided by current liabilities

A company received $5,000 cash when it issued stock certificates to shareholders. The increase in cash would be recorded with a ______ to the Cash account.

debit

Assets have a normal _____ balance

debit

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

incorporates and its owners contribute cash

Complete the accounting equation: Assets = _________ + stockholders' equity

liabilities

When a company buys an asset on account ______.

liabilities increase assets increase

Liquidity

measures a company's ability to pay liabilities as they come due in the short run

A classified balance sheet ______.

shows subtotals for current assets and current liabilities

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

true

Which of the following are characteristics of Notes Payable and not Accounts Payable?

Notes Payable are amounts borrowed from a lender; Accounts Payable are not. Notes Payable are documented with formal documents called notes. Only notes Payable have interest charges.

Which of the following is an appropriate application of the cost principle regarding land that was purchased 20 years ago and has increased in value?

The land is reported on the balance sheet at the original price paid for it

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? Multiple choice question.

Total assets will increase

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.

Liabilities have a normal ______ balance

credit

Financial information needed to manage a company is provided by a(n) ______ system.

accounting

When a company pays its supplier for amounts owed, its Cash and Accounts ______ accounts are decreased

accounts payable

When a company borrows from a bank by signing a formal agreement, an asset titled Cash is increased and a _________ titled _________ is increased.

and a liability titled notes payable

A classified balance sheet shows subtotals for current ______ and current ______

assets liabilities

The issuance of common stock is recorded with a debit to ______ and a credit to ______ Multiple choice question.

cash common stock

Which accounts are affected by borrowing from a bank?

cash notes payable

In May, Pasta Disasta, Inc. paid its suppliers $500 that it owed for the pizza pans purchased and received in April. Which accounts are affected?

cash is decreased accounts payable is decreased

All accounting systems ______.

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

A company paid $2,000 cash to an employee for this month's salary. The entry to record this transaction would include a ______ to Cash.

credit

If a company issues $100,000 common stock, the Common Stock T-account will have $100,000 posted on the ________ side

credit right

The beginning balance in Ace's Accounts Payable was $3,000. Ace then bought $200 of supplies paying cash. It also paid $500 of the amount that it owed for supplies purchased on account last month. The ending balance in Ace's Accounts Payable is a ______.

credit of $2,500 $3,000 - 500 = $2,500; the supplies purchased with cash does not affect Accounts Payable.

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

credit or right

Acme Enterprises issued $20,000 of stock in exchange for cash. The journal entry to record this transaction will include a ______ of $20,000.

credit to common stock debit to cash

The beginning balance in Acme's Cash account was $100,000. During the month, Acme issued $25,000 of common stock for cash. The balance in Acme's Cash account is now a ______.

debit of $125,000

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

debit, or left

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

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

Accounts Payable is increased with an entry on the _____ side of the T-account.

Credit / right

The Mortgage Payable account is increased with an entry on the ______ side of the T-account.

Credit or right

The Retained Earnings account is increased with an entry on the _____ side of the account

Credit or right

_______ liabilities are obligations that will be paid or met within 12 months of the balance sheet date, whereas ______ liabilities are not due within 12 months of the balance sheet date.

Current Noncurrent, or long-term

A company paid $500 for supplies that it purchased last month. The decrease in liabilities would be recorded with a ______ to Accounts Payable.

Debit Credits increase, not decrease, Accounts Payable.

True or false: When a company issues common stock, it gives cash to its owners in exchange for stock.

False When a company issues common stock, it receives cash and gives stock certificates to its owners

The current ratio measures a company's ______.

ability to pay in the upcoming year short-term liquidity

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

transactions