Chapter 2 SmartBook

True or false: An external transaction is a transaction the firm conducts with a separate economic entity.

True

True or false: The accounting equation must always remain in balance.

True

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

Clem Corporation issues 1,000 shares of common stock for $25,000. Clem purchased equipment for $10,000 by borrowing from the bank. Clem's total assets are

$35,000

What are the three steps for analyzing the effect of transactions in the correct order?

1. Determine one account in the accounting equation that will increase or decrease 2. Determine a second account in the accounting equation that will increase or decrease 3. Confirm that assets are equal to liabilities plus stockholders' equity

Jeremy issues 5,000 shares of common stock for $10 per share. Which of the following accounts are affected?

1.) Common stock 2.) Cash

A transaction will always affect at least ______ accounts.

2

Claire purchases equipment for $10,000 by paying $3,000 in cash and borrowing $7,000 from the bank. How many accounts are affected?

3 (Three accounts are affected: equipment, notes payable, and cash.)

When supplies are purchased on account, which of the following occurs?

A liability increases.

If a transaction decreases cash by $100, the balance sheet will balance if which of the following occurs? (Select all that apply)

Another asset is increased & A liability is decreased

Analysis of Mueller Company's accounts show that as a result of a single transaction, both cash and notes payable increased by $10,000. Which of the following transactions would have caused this increase?

Borrowing cash and signing a promissory note

Shriver Corp. borrows $25,000 from a bank and signs a two-year promissory note. What accounts will be affected by this transaction and what is the effect?

Cash increases, notes payable increases

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?

Common stock was sold for cash

On February 1, Domino Corporation ordered inventory. The inventory was received on February 15. Domino paid for the inventory on February 27. On which of the following dates will Domino record a transaction? (Select all that apply)

Feb 15th & 27th

Lexington Company borrows $10,000 from a bank by signing a promissory note. What are the effects of this transaction on the accounting equation?

Increase assets and increase liabilities

Rice borrows $20,000 from the bank. Which of the following is an effect of this transaction?

Increase liabilities

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?

May 15th (Ace received the equipment and owes the company money; therefore, a transaction has occurred.)

What are the three components of retained earnings?

Revenues, expenses, and dividends

Rory purchases supplies for cash. Which of the following occurs?

The total assets remain the same

A company records the effects of transactions for a particular item in a(n)

account

Slim purchases equipment with cash. The accounts affected are

cash and equipment.

London Corp. issues 1,000 shares of stock for $20 per share. What are the effects of this transaction?

cash is increased and common stock is increased

The two components of stockholders' equity are

common stock and retained earnings.

Expenses will cause retained earnings to

decrease

What is the effect of dividends on retained earnings?

decrease

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

Revenues cause retained earnings to

increase

Cray purchases equipment for cash. Total assets will

remain the same.

Prepaid rent is

rent paid in advance

Which of the following are components of calculating net income?

revenues and expenses

The purpose of an account is to

summarize all transactions for that item.