Accounting Quiz chapter 3

A company began the year with $84,000 in its common stock account and a credit balance in retained earnings of $36,000. During the year, the company earned net income of $124,000 and declared and paid $6,000 of dividends. In addition, the company sold additional common stock amounting to $22,000. What is its ending retained earnings?

$154,000 SolutionEnding retained earnings = Beginning retained earnings + net income - dividendsEnding retained earnings = 36,000 + 124,000 - 6,000 = 154,000

At the start of the month, a company reported a $34,000 debit balance in its cash account. During the month, the company debited cash for $30,000 and credits cash for $42,000. At the end of the month, the cash account has a

$22,000 debit balance. Solution: The ending cash balance equals the beginning cash balance plus cash receipts occurring during the period minus cash payments occurring during the period. The ending cash balance = $34,000 + 30,000 − 42,000 = $22,000

A company's financial records report the following accounts and balances at the end of the year: Accounts payable$ 4,300Accounts receivable 5,000Cash 14,400Common stock 5,900Dividends 2,500Interest expense 18,800Notes payable 5,500Prepaid insurance 3,000Retained earnings 2,700Service revenue 25,300 What would the company show as its total credits on its trial balance?

$43,700 Solution:Certain accounts normally have debit balances, including assets, expenses, and dividends. This company's accounts that have debit balances include its assets (i.e., accounts receivable, cash, prepaid insurance, accounts receivable), expenses (i.e., interest expense), and dividends. These sum to $43,700 (i.e., 5,000 + 14,400 + 2,500 + 3,000 + 18,800 = 43,700).Other accounts normally have credit balances, including liabilities, equities, and revenues. This company's accounts that have credit balances include its liabilities (i.e., accounts payable, notes payable), equities (i.e., common stock, retained earnings), and revenues (i.e., service revenue). These sum to $43,700 (i.e., 4,300 + 5,900 + 5,500 + 2,700 + 25,300 = 43,700).Note: total debits equal total credits.

Prior to recording its closing entries, a company has the following accounts and account balances at the end of its first year: Accounts payable, $3,000 Cash, $19,000 Common stock, Not given Dividends, $1,000 Expenses, $14,000 Notes payable, $4,000 Prepaid insurance, $3,000 Revenues, $23,000What is the balance of its retained earnings at the start of its second year?

$8,000 Solution: A company starts with a retained earnings balance of zero. Retained earnings accumulates a company's net income minus its dividends for the current year and all prior years. After a company's first year, retained earnings will accumulate the company's first year's revenues minus its first year's expenses and dividends. By the start of the second year, the company will have transferred the its first year's revenue, expenses, and dividends to retained earnings. Ending retained earnings = Beginning retained earnings + Revenue - Expenses - Dividends Ending retained earnings = $0 + 23,000 - 14,000 - 1,000 = $8,000 By the way, the company repeats this process annually transferring each year's revenues, expenses, and dividends to retained earnings.

At the start of the month, a corporation reported retained earnings of $136,000. During the month, it earned $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?

142,000 Solution: 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.

At the start of the current year, a corporation's retained earnings account had a credit balance of $280,000. During the year, the corporation had a net loss of $60,000 and paid dividends to the stockholders of $40,000. It also borrowed $8,000 by issuing a note. At December 31, the balance in retained earnings is

180,000 credit Solution:Ending retained earnings = Beginning retained earnings + Net income - DividendsEnding retained earnings = $280,000 - 60,000 - 40,000 = $180,000Retained earnings is an equity account; it normally has a credit balance.Certain transactions do not affect retained earnings, such as borrowing money by issuing a note.

Which of the following events is not recorded in a company's accounting records?

A decision to offer a company's services in a new geographic area. Solution: All of these events are transactions that affect the company's financial statements with one exception. A decision to offer a company's products or services in a new geographic area is not a recordable event in the company's accounting records. Future revenues and expenses may be affected by the decision, but those items will be recorded in the future as they occur.

Which of the following errors, each considered individually, would cause the trial balance to be out of balance?

A payment of $150 to a creditor was posted as a $150 debit of $150 to Accounts Payable and a $148 debit to Cash.

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. Solution: 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.

An accountant has debited an asset account for $1,000 and credited a stockholders' equity account for $500. There is one missing part of the transaction. Which of the following can be the missing part of the transaction that needs to be recorded?

Credit a different asset account for $500. Solution:The basic accounting equation is assets equal liabilities plus equity. It must stay in balance meaning total assets must equal total liabilities plus total stockholders' equity, and this relation must be maintained in every transaction. If a transaction debited assets by $1,000 then assets increased by $1,000. If that same transaction also credited an equity account by $500 then it increased equity by $500. The missing part of the transaction must cause assets to equal liabilities plus equity. Acceptable options include (1) decreasing (i.e., crediting) a different asset account for $500, (2) increasing (i.e., crediting) a liability for $500, and (3) increasing (i.e., crediting) a different equity account for $500.

Which of the following is false with regards to the double-entry system of recording transactions?

Each transaction affects at least one income statement account and at least one balance sheet account. Solution:An important step of the accounting cycle is recording transactions using debits and credits to change the balances of a company's accounts. Each transaction must affect two or more accounts to keep the basic accounting equation in balance. For each transaction, debits must equal credits. However, transactions do not necessarily affect at least one income statement account and at least one balance sheet account. For example, a company could spend cash to buy inventory which merely exchanges one asset for another asset.

A trial balance would only help in detecting which one of the following errors?

For a given transaction, the account that should have been credited was credited but no account was debited Solution: A trial balance lists accounts and their balances at a given point in time. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances. However, a trial balance has limits. A trial balance helps uncover certain errors, such as recording a different amount debited than the amount credited, omitting part of a journal entry or recording the entire journal entry using only debits (or using only credits). A trial balance does not prove that all transactions have been recorded nor does it proves that transactions have been recorded correctly. For example, a trial balance will confirm that total debit balances equal total credit balances even if a transaction were recorded twice or if it was not recorded even once. Both total debits and total credits would be wrong by the same amount. Another error not uncovered by a trial balance is recording a transaction in the wrong accounts.

A journal provides

a chronological record of transactions Solution:Transactions are recorded in chronological order in journals. This step occurs before transferring the amounts to the ledger. Journals have the following features:1. Journals discloses the complete effect of each transaction in one place.2. Journals provide a chronological record of transactions.3. Journals help prevent errors because debits and credits can be readily compared.

If a company receives cash from a customer before performing services for the customer, then

assets increase and liabilities increase. Solution: Receiving cash from a customer before the company provides the merchandise or performs services being sold to the customer creates an obligation or a liability to the company. We call this liability "unearned revenue." Liabilities increase and assets (i.e., cash) increase.

Customarily, a trial balance is prepared

at the end of an accounting period Solution:A trial balance lists accounts and their balances at a given point in time. Accounts are listed in the same order that they appear in the ledger, including assets, liabilities, equities, dividends, revenues, and expenses. Account balances appear in either of two columns. The left-side column reports the debit balances and the right side column reports the credit balance. A company prepares a trial balance at the end of the accounting period and before it prepares its financial statements. A purpose of the trial balance is to confirm that the total of the debit balances equals the total of the credit balances.

A company issues a note payable in exchange for cash. This transaction will immediately affect the

balance sheet and cash flows statement only. Solution:When issuing a note payable in exchange for cash, the company issuing the note collects cash (which increases its assets) and increases the liabilities. Collecting cash also appears on the cash flows statement. Issuing a note payable does not affect income statement accounts (e.g., revenues and expenses). Issuing a note also does not affect retained earnings.

The effects of paying a dividend on the basic accounting equation are to

decrease assets and decrease stockholders' equity. Solution:Basic accounting equation: Assets = Liabilities + Stockholders' Equity Paying a dividend decreases cash (i.e., decreases assets) and decreases retained earnings which is an equity account. Thus, asset decrease and equity decreases.

A revenue account

is increased by credits Solution:The normal balance of any account is the side which increases that account. Debits increase assets, expenses, and dividends. The normal balance of assets, expenses, and dividends is a debit balance. Credits increase liabilities, equities, and revenues. The normal balance of liabilities, equities, and revenues is a credit balance.E,3,3,1

Retained earnings is decreased by

expenses Solution: Retained earnings is net income that a company retains in the business. It includes net 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.

The effects of receiving cash from a customer in exchange for performing services on the basic accounting equation are to

increase assets and increase stockholders' equity. Solution:Basic accounting equation: Assets = Liabilities + Stockholders' Equity Receiving cash increases assets and increases the company's revenue, and an increase in revenue will increase the company's retained earnings and equity. Thus, assets increase and equity increases.

The purchase of an asset, such as supplies, on account

increases the purchaser's assets and liabilities. A purchase of an asset on account indicates that assets increased (i.e., an asset is acquired) and liabilities increased (i.e., account payable increased).

Posting is performed by transferring information from the

journal to the ledger Solution:Companies journalize transactions. Each journal entry summarizes a certain transaction or adjusting entry. Next, companies post the journal entries to the ledger. The procedure of transferring journal entry amounts to the ledger accounts is called posting. Posting is a required step in the recording process. If it is not done, the ledger's account balances will not be correct.

The accounting cycle is a series of steps and their usual sequence is

journalize transactions, post transactions to the ledger, and then prepare a trial balance. Solution:The recording process does steps in a certain order and the steps are called the accounting cycle. The first step is to identify & analyze each transaction using source documents to determine its effects on the company's accounts. Examples of source documents include a bill or invoice, a cash register document, and a sales slip. The second step is to enter or record the transaction in the journal (i.e., journalize the transaction); the journal is also called the book-of-original entry. Third, transfer the journal information to the appropriate accounts in the ledger (i.e., post it to the ledger). Fourth, after recording all of the transactions prepare a trial balance (also called an unadjusted trial balance).

If cash is received in advance from a customer

liabilities will increase and assets will increase. Solution: 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.

What type of account is unearned revenue?

liability Solution: 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

A company declares and pays a dividend to shareholders. This transaction will immediately affect the

retained earnings statement, balance sheet, and cash flows statement only. Solution: When declaring and paying a dividend, the company pays cash so its assets decrease which affects the balance sheet. Paying a dividend will also appear on the cash flows statement as a cash outflow for financing activities. 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.

If cash is received from owners as an investment by stockholders

stockholders' equity will increase and assets will increase. Solution: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).

If a transaction affected two accounts and total liabilities decreased by $4,000, then

total assets must have decreased by $4,000 or total stockholders' equity must have increased by $4,000. The accounting equation: Assets = Liabilities + EquityThe accounting equation must always be in balance. Every transaction has two effects on the accounting equation. If total liabilities decreased by $4,000 and the transaction affected only two accounts, then either (i) total assets decreased by $4,000 or (ii) total equity increased by $4,000.