chapter 01

Chapter 001 Accounting in Business

Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

True/FalseItem DL LO Item DL LO Item DL LO

1. Easy C1 33. Med C5 65. Easy A2



4. Easy C2 36. Med C5 68. Med A2


6. Easy C2 38. Med C5 70. Hard A2


8. Easy C2 40. Hard C5 72. Med A3

9. Med C2 41. Hard C5 73. Med A3

10. Med C2 42. Hard C5 74. Hard A3

11. Med C2 43. Easy C6 75. Hard A3

12. Easy C3 44. Easy C6 76. Easy A4

13. Med C4 45. Easy C6 77. Easy A4

14. Med C4 46. Med C6 78. Med A4

15. Med C4 47. Med C6 79. Easy P1

16. Med C4 48. Med C6 80. Easy P1

17. Easy C5 49. Hard C6 81. Easy P1

18. Easy C5 50. Easy A1 82. Easy P1




22. Easy C5 54. Easy A1 86. Med P1



25. Easy C5 57. Med A1 89. Med P1

26. Easy C5 58. Med A1 90. Med P1

27. Easy C5 59. Med A1 91. Hard P1



30. Med C5 62. Hard A1 94. Hard P1

31. Med C5 63. Hard A1

32. Med C5 64. Easy A2

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Multiple Choice

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Item DL LO Item DL LO Item DL LO

95. Med C1 131. Hard C5 167. Easy A2

96. Med C1 132. Hard C5 168. Med A2

97. Easy C2 133. Hard C5 169. Med A2

98. Easy C2 134. Hard C5 170. Med A2

99. Med C2 135. Hard C5 171. Med A2

100. Med C2 136. Hard C5 172. Med A2

101. Easy C3 137. Hard C5 173. Hard A2

102. Easy C3 138. Med C6 174. Hard A2

103. Med C3 139. Med C6 175. Hard A2

104. Med C3 140. Med C6 176. Hard A2

105. Med C3 141. Med C6 177. Easy A3

106. Easy C4 142. Hard C6 178. Easy A3

107. Med C4 143. Hard C6 179. Hard A3

108. Hard C4 144. Easy A1 180. Med A3

109. Easy C5 145. Easy A1 181. Hard A3

110. Med C5 146. Easy A1 182. Hard A3

111. Med C5 147. Easy A1 183. Med A4

112. Med C5 148. Easy A1 184. Med A4

113. Med C5 149. Easy A1 185. Easy P1

114. Med C5 150. Easy A1 186. Easy P1

115. Med C5 151. Easy A1 187. Easy P1

116. Med C5 152. Easy A1 188. Med P1

117. Med C5 153. Easy A1 189. Med P1

118. Med C5 154. Med A1 190. Med P1

119. Med C5 155. Med A1 191. Med P1

120. Med C5 156. Med A1 192. Med P1

121. Med C5 157. Med A1 193. Med P1

122. Med C5 158. Med A1 194. Med P1

123. Med C5 159. Med A1 195. Med P1

124. Med C5 160. Med A1 196. Med P1

125. Med C5 161. Med A1 197. Med P1

126. Med C5 162. Med A1 198. Med P1

127. Med C5 163. Hard A1 199. Med P1

128. Med C5 164. Med A1 200. Med P1

129. Hard C5 165. Med A1 201. Hard P1

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130. Hard C5 166. Hard A1 202. Hard P1

Multiple Choice


203. Hard P1 206. Hard P1

204. Hard P1

205. Hard P1

MatchingItem DL LO Item DL LO Item DL LO

207. Med C1-C6 211. Med C5,A1,P1 215. Med P1

208. Med C1-C4 212. Med C5,A1,P1 216. Med P1

209. Easy C2 213. Med A1 217. Med P1

210. Hard C5 214. Med A1

Short EssayItem DL LO Item DL LO Item DL LO

218. Med C1 225. Med C5 232. Med A1

219. Med C1 226. Med C5 233. Hard A1

220. Hard C2 227. Med C5 234. Med A3

221. Hard C2 228. Hard C5 235. Med

222. Med C3 229. Hard C5 236. Hard A4

223. Hard C4 230. Med C6 237. Easy P1

224. Med C5 231. Med A1 238. Hard P1

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ProblemsItem DL LO Item DL LO Item DL LO

239. Med C5 254. Med A2 269. Med P1

240. Med C5 255. Med A2 270. Med P1

241. Med C5 256. Med A2 271. Med P1

242. Hard C5 257. Med A2 272. Med P1

243. Easy A1 258. Med A2 273. Med P1

244. Easy A1 259. Med A2 274. Med P1

245. Easy A1 260. Med A2 275. Hard P1

246. Hard A1 261. Med A2 276. Hard P1

247. Hard A1,P1 262. Hard A2 277. Hard P1

248. Hard A1,P1 263. Hard A3 278. Hard P1

249. Easy A2 264. Hard A3 279. Hard P1

250. Easy A2 265. Hard A4 280. Hard P1

251. Easy A2 266. Easy P1 281. Hard P1

252. Easy A2 267. Easy P1 282. Hard P1

253. Easy A2 268. Med P1 283. Hard P1

Completion ProblemsItem DL LO Item DL LO Item DL LO

284. Med C1 299. Hard C5 314. Med A1

285. Hard C1 300. Easy C6 315. Med A1

286. Easy C2 301. Easy C6 316. Med A1

287. Med C2 302. Med C6 317. Med A1

288. Med C2 303. Med C6 318. Med A1

289. Med C2 304. Easy C6 319. Med A1

290. Med C2 305. Easy A1 320. Easy A2

291. Easy C4 306. Easy A1 321. Easy A3

292. Easy C5 307. Easy A1 322. Med A3

293. Easy C5 308. Easy A1 323. Easy A4



296. Med C5 311. Easy A1 326. Easy P1

297. Med C5 312. Easy A1 327. Easy P1

298. Med C5 313. Easy A1 328. Easy P1

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True / False Questions

1. Accounting is an information and measurement system that identifies, records, and communicates relevant, reliable, and comparable formation about an organization's business activities. TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: EasyLearning Objective: C1

2. Bookkeeping is the same as accounting. FALSE


3. Bookkeeping is the recording of transactions and events and is only part of accounting. TRUE


4. An accounting information system communicates data to help businesses make better decisions. TRUE


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5. Managerial accounting is the area of accounting that provides internal reports to assist the decision making needs of internal users. TRUE


6. Internal operating activities include research and development, distribution, and human resources. TRUE


7. The primary objective of financial accounting is to provide general purpose financial statements to help external users analyze and interpret an organization's activities. TRUE


8. External auditors examine financial statements to verify that they are prepared according to generally accepted accounting principles. TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C2

1-7


9. External users include lenders, shareholders, customers, and regulators. TRUE


10. Regulators often have legal authority over certain activities of organizations. TRUE

AACSB: CommunicationsAICPA BB: LegalAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C2

11. Internal users include lenders, shareholders, brokers and managers. FALSE


12. Opportunities in accounting include auditing, consulting, market research, and tax planning. TRUE


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13. Identifying the proper ethical path is easy. FALSE

AACSB: Ethical understandingAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C4

14. The Sarbanes-Oxley Act (SOX) requires each issuer of securities to disclose whether is has adopted a code of ethics for its senior financial officers and the contents of that code. TRUE

AACSB: Ethical understandingAICPA BB: LegalAICPA FN: MeasurementDifficulty: MediumLearning Objective: C4

15. Good ethics are good business. TRUE

AACSB: Ethical understandingAICPA BB: Resource ManagementAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C4

16. The Sarbanes-Oxley Act (SOX) does not require public companies to apply both accounting oversight and stringent internal controls. FALSE

AACSB: Ethical understandingAICPA BB: LegalAICPA FN: Decision MakingDifficulty: EasyLearning Objective: C4

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17. A partnership is a business owned by two or more people. TRUE

AACSB: CommunicationsAICPA BB: LegalAICPA FN: Decision MakingDifficulty: EasyLearning Objective: C5

18. Owners of a corporation are called shareholders or stockholders. TRUE


19. In the partnership form of business, the owners are called stockholders. FALSE


20. A sole proprietorship is one or more individuals selling products or services for profit. FALSE


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21. Accounting information is communicated to various parties through financial statements. TRUE


22. The balance sheet shows whether or not the firm had net income or loss over a period of time. FALSE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: ReportingDifficulty: EasyLearning Objective: C5

23. The Financial Accounting Standards Board is the private group that sets both broad and specific accounting principles. TRUE

AACSB: CommunicationsAICPA BB: LegalAICPA FN: ReportingDifficulty: EasyLearning Objective: C5

24. The business entity principle means that a business will continue operating for an indefinite period of time. FALSE


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25. Generally accepted accounting principles are the basic assumptions, concepts, and guidelines for preparing financial statements. TRUE


26. The business entity principle means that a business is accounted for separately from other business entities, including its owner or owners. TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: MeasurementDifficulty: EasyLearning Objective: C5

27. As a general rule, revenues should not be recognized in the accounting records until it is received in cash. FALSE


28. Specific accounting principles are basic assumptions, concepts, and guidelines for preparing financial statements and arise out of long-used accounting practice. FALSE


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29. General accounting principles arise from long-used accounting practice. TRUE


30. A sole proprietorship is a business owned by one or more persons. FALSE


31. Unlimited liability is an advantage of a sole proprietorship. FALSE


32. Understanding generally accepted accounting principles is not necessary to use and interpret financial statements. FALSE


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33. The International Accounting Standards board (IASB) has the authority to impose its standards on companies around the world. FALSE


34. Objectivity means that financial information is supported by independent unbiased evidence. TRUE


35. The idea that a business will continue to operate until it can sell its assets to pay its creditors underlies the going-concern assumption. FALSE


36. According to the cost principle, it is preferable for managers to report an estimate of an asset's value. FALSE


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37. The monetary unit assumption means that all international transactions must be expressed in dollars. FALSE

AACSB: CommunicationsAICPA BB: GlobalAICPA FN: MeasurementDifficulty: MediumLearning Objective: C5

38. The International Accounting Standards Board (IASB) is the government group that establishes reporting requirements for companies that issue stock to the public. FALSE


39. A limited liability company offers the limited liability of a partnership or proprietorship and the tax treatment of a corporation. FALSE

AACSB: CommunicationsAICPA BB: LegalAICPA FN: Decision MakingDifficulty: HardLearning Objective: C5

40. The Securities and Exchange Commission (SEC) is the government group that establishes reporting requirements for companies that issue stock to the public. TRUE


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41. The Securities and Exchange Commission (SEC) is the private group that sets both broad and specific accounting standards. FALSE


42. The three common forms of business ownership include sole proprietorship, partnership, and non-profit. FALSE


43. The three major types of business activities are operating, financing, and investing. TRUE


44. Planning is defining an organization's ideas, goals, and actions. TRUE

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: Decision MakingDifficulty: EasyLearning Objective: C6

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45. Strategic management is the process of determining the right mix of operating activities for the type of organization, its plans, and its markets. TRUE

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C6

46. Planning activities are the means an organization uses to pay for resources like land, buildings, and equipment to carry out its plans. FALSE

AACSB: CommunicationsAICPA BB: Critical ThinkingAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C6

47. The three major activities of a business are recording, financing, and investing. FALSE


48. Investing activities are the acquiring and selling of resources that an organization uses to acquire and sell its products or services. TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: HardLearning Objective: C6

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49. Owner financing refers to resources contributed by creditors or lenders. FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: EasyLearning Objective: A1

50. Revenues are increases in equity from a company's earning activities. TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: EasyLearning Objective: A1

51. A net loss occurs when revenues exceed expenses. FALSE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementDifficulty: EasyLearning Objective: A1

52. Net income occurs when revenues exceed expenses. TRUE


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53. Expenses decrease equity and are the costs of assets or services used to earn revenues. TRUE


54. Liabilities are the owner's claim on assets. FALSE


55. Assets are the resources owned or controlled by a business. TRUE


56. Withdrawals are expenses. FALSE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: A1

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57. The accounting equation can be restated as: Assets - Equity = Liabilities. TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementDifficulty: MediumLearning Objective: A1

58. The accounting equation implies that: Assets + Liabilities = Equity. FALSE


59. The balance sheet is also called the statement of financial position because it describes the financial position of the business at a point in time. TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: ReportingDifficulty: MediumLearning Objective: A1

60. Revenues occur when expenses exceed assets. FALSE


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61. A company might provide a service or product on credit. "On credit" implies that the cash payment will occur on a later date. TRUE

AACSB: AnalyticAICPA BB: Critical ThinkingAICPA FN: MeasurementDifficulty: HardLearning Objective: A1

62. Owner's investments are gross increases in equity from a company's earnings activities. FALSE


63. The legitimate claims of a business's creditors take precedence over the claims of the business owner. TRUE

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementDifficulty: EasyLearning Objective: A2

64. Net income is the excess of expenses over revenues, whereas net loss is the excess of revenues over expenses. FALSE


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65. Every business transaction leaves the accounting equation in balance. TRUE


66. An external transaction is an exchange of value within an organization. FALSE


67. From an accounting perspective, an event is a happening that affects an entity's accounting equation, but cannot be measured. FALSE


68. Owner's equity is increased when cash is received from customers in payment of previously recorded accounts receivable. FALSE


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69. An owner's investment in a business always creates an asset (cash), a liability (note payable), and owner's equity (investment.) FALSE


70. Net assets always increase when revenue is recorded. TRUE


71. Return on assets is often stated in ratio form as the amount of average total assets divided by income. FALSE


72. Return on assets is also known as return on investment. TRUE


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73. Return on assets is useful to decision makers for evaluating management, analyzing and forecasting profits, and in planning activities. TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: HardLearning Objective: A3

74. Reebok's net income of $117 million and average assets of $1,400 million results in a return on assets of 8.36%. TRUE


75. Return on assets measures the effectiveness of an organization's ability to generate profit using its assets. TRUE


76. Risk is the amount of uncertainty about the return we expect to earn. TRUE

AACSB: Reflective ThinkingAICPA BB: IndustryAICPA FN: Risk AnalysisDifficulty: EasyLearning Objective: A4

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77. Generally the lower the risk, the lower the return that can be expected. TRUE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisDifficulty: MediumLearning Objective: A4

78. U. S. Government Treasury bonds provide high return and low risk to investors. FALSE

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisDifficulty: MediumLearning Objective: A4

79. The four basic financial statements include the balance sheet, income statement, statement of owner's equity, and statement of cash flows. TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: ReportingDifficulty: EasyLearning Objective: P1

80. An income statement reports on investing and financing activities. FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty: EasyLearning Objective: P1

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81. A balance sheet covers a period of time such as a month or year. FALSE


82. The income statement is a financial statement that shows revenues earned and expenses incurred during a specified period of time. TRUE


83. The statement of cash flows shows the net effect of revenues and expenses for a reporting period. FALSE


84. The income statement shows the financial position of a business on a specific date. FALSE


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85. The first section of the income statement reports cash from operations. FALSE


86. The balance sheet is based on the accounting equation. TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty: MediumLearning Objective: P1

87. Owner's contributions and withdrawals are reported on the income statement. FALSE


88. Investing activities involve the buying and selling of assets such as land and equipment that are held for long-term use in the business. TRUE


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89. Operating activities include long-term borrowing and repaying cash from lenders, and cash investments or withdrawals by the owner. FALSE


90. The purchase of supplies appears on the statement of cash flows as an investing activity because it involves the purchase of assets. FALSE


91. The income statement reports on operating activities at a point in time. FALSE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: ReportingDifficulty: HardLearning Objective: P1

92. The statement of cash flows reports on cash flows separated into operating, investing, and financing activities over a period of time. TRUE


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93. Chuck Taylor invested $175,000 cash in FastForward. This amount would be reported in the statement of cash flows under financing activities. TRUE


94. Chuck Taylor withdrew $6,000 in cash from FastForward. This amount should be included as an expense on the income statement. FALSE


Multiple Choice Questions

95. Accounting is an information and measurement system that: A. Identifies business activities.B. Records business activities.C. Communicates business activities.D. Helps people make better decisions.E. All of these.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C1

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96. Technology A. Has replaced accounting.B. Has not changed the work that accountants do.C. Has closely linked accounting with consulting, planning, and other financial services.D. In accounting has replaced the need for decision makers.E. In accounting is only available to large corporations.

AACSB: TechnologyAICPA BB: IndustryAICPA FN: Leveraging TechnologyDifficulty: MediumLearning Objective: C1

97. The primary objective of financial accounting is: A. To serve the decision-making needs of internal users.B. To provide financial statements to help external users analyze an organization's activities.C. To monitor and control company activities.D. To provide information on both the costs and benefits of looking after products and services.E. To know what, when, and how much to produce.


98. Internal users of accounting information include: A. Shareholders.B. Managers.C. Lenders.D. Suppliers.E. Customers.


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99. The area of accounting aimed at serving the decision making needs of internal users is: A. Financial accounting.B. Managerial accounting.C. External auditing.D. SEC reporting.E. Bookkeeping.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: ReportingDifficulty: MediumLearning Objective: C2

100. The operating functions of a business include: A. Research and development.B. Purchasing.C. Marketing.D. Distribution.E. All of these.


101. External users of accounting information include: A. Shareholders.B. Customers.C. Creditors.D. Government regulators.E. All of these.


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102. Career opportunities in accounting include: A. Auditing.B. Management consulting.C. Tax accounting.D. Cost accounting.E. All of these.


103. Career opportunities in accounting include: A. Budgeting.B. Auditing.C. Cost accounting.D. Internal Auditing.E. All of these.


104. Accounting certifications include the: A. Certified Public Accountant.B. Certified Management Accountant.C. Certified Internal Auditor.D. Personal Financial SpecialistE. All of these.


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105. A Certified Public Accountant A. Must meet education and experience requirementsB. Must pass an examinationC. Must exhibit ethical characterD. May also be a Certified Management Accountant.E. All of these.


106. Ethical behavior requires: A. That auditors' pay not depend on the figures in the client's reports.B. Auditors to invest in businesses they audit.C. Analysts to report information favorable to their companies.D. Managers to use accounting information to benefit themselves.E. All of these.

AACSB: EthicsAICPA BB: LegalAICPA FN: Decision MakingDifficulty: EasyLearning Objective: C4

107. Social responsibility: A. Is a concern for the impact of our actions on society.B. Is a code that helps in dealing with confidential information.C. Is required by the SEC.D. Requires that all businesses conduct social audits.E. All of these.

AACSB: EthicsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C4

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108. Ethics: A. Are beliefs that separate right from wrong.B. And law often coincide.C. Help to prevent conflicts of interest.D. Are critical in accounting.E. All of these.

AACSB: EthicsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: HardLearning Objective: C4

109. The accounting guideline that requires financial statement information to be supported by independent, unbiased evidence other than someone's belief or opinion is the: A. Business entity principle.B. Monetary unit principle.C. Going-concern principle.D. Cost principle.E. Objectivity principle.

AACSB: CommunicationsAICPA BB: LegalAICPA FN: MeasurementDifficulty: EasyLearning Objective: C5

110. Businesses can take the following form(s): A. Sole proprietorship.B. Common stock.C. Partnership.D. A and C only.E. All of these.


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111. A corporation: A. Is a business legally separate from its owners.B. Is controlled by the FASB.C. Has shareholders who have unlimited liability for the acts of the corporation.D. Is the same as a limited liability partnership.E. All of these.


112. The rules adopted by the accounting profession as guides in preparing financial statements are: A. Comprised of both general and specific principles.B. Known as generally accepted accounting principles.C. Abbreviated as GAAP.D. Intended to make information in financial statements relevant, reliable, and comparable.E. All of these.


113. The committee that attempts to create more harmony among the accounting practices of different countries by identifying preferred practices and encouraging their worldwide acceptance is the: A. AICPA.B. FASB.C. CAP.D. SEC.E. IASB.

AACSB: CommunicationsAICPA BB: GlobalAICPA FN: ReportingDifficulty: MediumLearning Objective: C5

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114. The private group that currently has the authority to establish generally accepted accounting principles is the: A. APB.B. FASB.C. AAA.D. AICPA.E. SEC.

AACSB: CommunicationsAICPA BB: LegalAICPA FN: MeasurementDifficulty: MediumLearning Objective: C5

115. The accounting assumption that requires every business to be accounted for separately from other business entities, including its owner or owners is known as the: A. Objectivity principle.B. Business entity assumption.C. Going-concern assumption.D. Revenue recognition principle.E. Cost principle.

AACSB: CommunicationsAICPA BB: LegalAICPA FN: ReportingDifficulty: MediumLearning Objective: C5

116. The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it will not continue, is the: A. Going-concern principle.B. Business entity principle.C. Objectivity principle.D. Cost Principle.E. Monetary unit principle.


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117. Rules adopted by the accounting profession as guides in measuring, recording, and reporting the financial condition and activities of a business: A. Are comprised of both general and specific principles.B. Are known as generally accepted accounting principles.C. Are abbreviated as GAAP.D. Arise from both long-used practices and from rulings of authoritative groups.E. All of these.


118. If a parcel of land that was originally acquired for $85,000 is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000, and is sold for $137,000, the land should be recorded in the purchaser's books at: A. $95,000.B. $137,000.C. $138,500.D. $140,000.E. $150,000.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: C5

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119. To include the personal assets and transactions of a business's owner in the records and reports of the business would be in conflict with the: A. Objectivity principle.B. Realization principle.C. Business entity principle.D. Going-concern principle.E. Revenue recognition principle.


120. The accounting principle that requires accounting information to be based on actual cost and requires assets and services to be recorded initially at the cash or cash-equivalent amount given in exchange, is the: A. Accounting equation.B. Cost principle.C. Going-concern principle.D. Realization principle.E. Business entity principle.


121. Generally accepted accounting principles: A. Are based on long used accounting practices.B. Are basic assumptions, concepts, and guidelines in preparing financial statements.C. Are detailed rules used in reporting on business transactions and events.D. Arise from the rulings of authoritative bodies.E. All of these.


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122. The objectivity principle: A. Means that information is supported by independent, unbiased evidence.B. Means that information can be based on what the preparer thinks is true.C. Means that financial statements should contain information that is optimistic.D. Means that a business may not reorganize revenue until cash is received.E. All of these.


123. The rule that (1) requires revenue to be recognized at the time it is earned, (2) allows the inflow of assets associated with revenue to be in a form other than cash, and (3) measures the amount of revenue as the cash plus the cash equivalent value of any noncash assets received from customers in exchange for goods or services, is called the: A. Going-concern principle.B. Cost principle.C. Revenue recognition principle.D. Objectivity principle.E. Business entity principle


124. The question of when revenue should be recognized on the income statement (according to GAAP) is addressed by the: A. Revenue recognition principle.B. Going-concern principle.C. Objectivity principle.D. Business entity principle.E. Cost principle.


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125. The International Accounting Standards Board (IASB) A. Hopes to create harmony among accounting practices of different countriesB. Is the government group that establishes reporting requirements for companies that issue stock to the public.C. Has the authority to impose its standards on companies.D. Is the only source of generally accepted accounting principles (GAAP).E. Only applies to companies that are members of the European Union.

AACSB: CommunicationsAICPA BB: GlobalAICPA FN: ReportingDifficulty: MediumLearning Objective: C5

126. The Maximum Experience Company acquired a building for $500,000. Maximum Experience had the building appraised, and found that the building was easily worth $575,000. The seller had paid $300,000 for the building 6 years ago. Which accounting principle would require Maximum Experience use to record the building on its records at $500,000? A. Monetary unit principleB. Going-concern principleC. Cost principleD. Business entity principleE. Revenue recognition principle


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127. On December 15, 2007, Myers Legal Services signed a $50,000 contract with a client to provide legal services to the client in 2008. Which accounting principle would require Myers Legal Services to record the legal fees revenue in 2008 and not 2007? A. Monetary unit principleB. Going-concern principleC. Cost principleD. Business entity principleE. Revenue recognition principle


128. Marian Mosely is the owner of Mosely Accounting Services. Which accounting principle requires Marian to keep her personal financial information separate from the financial information of Mosely Accounting Services? A. Monetary unit principleB. Going-concern principleC. Cost principleD. Business entity principleE. None of these. Since Marian is a sole proprietor, she is not required to separate her personal financial information from the financial information of Mosely Accounting Services.


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129. A limited partnership: A. Includes a general partner with unlimited liability.B. Is subject to double taxation.C. Has owners called stockholders.D. Is the same as a corporation.E. May only have two partners.

AACSB: CommunicationsAICPA BB: LegalAICPA FN: ReportingDifficulty: HardLearning Objective: C5

130. A partnership: A. Is also called a sole proprietorship.B. Has unlimited liability.C. Has to have a written agreement in order to be legal.D. Is a legal organization separate from its owners.E. Has owners called shareholders.


131. According to generally accepted accounting principles, a company's balance sheet should show the company's assets at: A. The cash equivalent value of what was given up or received.B. The current market value of the asset received in all cases.C. The cash paid only, even if something other than cash was given in the exchange.D. The best estimate of a certified internal auditor.E. The objective value to external users.

AACSB: CommunicationsAICPA BB: LegalAICPA FN: MeasurementDifficulty: HardLearning Objective: C5

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132. If a business is not being sold or closed, the amounts reported in the accounts for assets used in operations are based on costs. This practice is best justified by the: A. Cost principle.B. Going-concern principle.C. Objectivity principle.D. Business entity principle.E. Both A and B.

AACSB: CommunicationsAICPA BB: LegalAICPA FN: MeasurementDifficulty: HardLearning Objective: C5

133. Which of the following accounting principles would require that all goods and services purchased be recorded at cost? A. Going-concern principle.B. Continuing-concern principle.C. Cost principle.D. Business entity principle.E. Consideration principle.


134. Revenue is properly recognized: A. When the customer's order is received.B. Only if the transaction creates an account receivable.C. At the end of the accounting period.D. Upon completion of the sale or when services have been performed and the business obtains the right to collect the sales price.E. When cash from a sale is received.


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135. If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000, and is sold for $137,000, the land account transaction amount to handle the sale of the land in the seller's books is: A. $85,000 increaseB. $85,000 decreaseC. $137,000 increaseD. $137,000 decreaseE. None of these

AACSB: AnalyticAICPA BB: LegalAICPA FN: MeasurementDifficulty: HardLearning Objective: C5

136. If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000, and is sold for $137,000. What is the effect of the sale on the accounting equation for the seller? A. Assets increase $52,000; owner's equity increases $52,000B. Assets increase $85,000; owner's equity increases $85,000C. Assets increase $137,000; owner's equity increases $137,000D. Assets increase $140,000; owner's equity increases $140,000E. None of these

$137,000 - $85,000 = $52,000


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137. If a parcel of land that was originally purchased for $85,000 is offered for sale at $150,000, is assessed for tax purposes at $95,000, is recognized by its purchasers as easily being worth $140,000, and is sold for $137,000. At the time of the sale, assume that the seller still owed $30,000 to TrustOne Bank on the land that was purchased for $85,000. Immediately after the sale, the seller paid off the loan to TrustOne Bank. What is the effect of the sale and the payoff of the loan on the accounting equation? A. Assets increase $52,000; owner's equity increases $22,000; liabilities decrease $30,000B. Assets increase $52,000; owner's equity increases $30,000; liabilities decrease $30,000C. Assets increase $22,000; owner's equity increases $52,000; liabilities decrease $30,000D. Assets decrease $30,000; owner's equity decreases $30,000; liabilities decrease $30,000E. Assets decrease $55,000; owner's equity decreases $55,000; liabilities decrease $30,000

$137,000 - $85,000 - 30,000 = 22,000


138. An example of a financing activity is: A. Buying office supplies.B. Obtaining a long-term loan.C. Buying office equipment.D. Selling inventory.E. Buying land.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingDifficulty: MediumLearning Objective: C6

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139. An example of an operating activity is: A. Paying wages.B. Purchasing office equipment.C. Borrowing money from a bank.D. Selling stock.E. Paying off a loan.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingDifficulty: MediumLearning Objective: C6

140. Planning activities: A. Are the means organizations use to pay for resources.B. Involve the acquiring and disposing of resources that an organization uses to acquire and sell its products or services.C. Involve defining the ideas, goals, and actions of an organization.D. Are the carrying out of an organization's plans.E. Involve using resources to research, develop, purchase, produce, and market products and services.


141. Operating activities: A. Are the means organizations use to pay for resources like land, buildings and equipment.B. Involve using resources to research, develop, purchase, produce, distribute and market products and services.C. Involve acquiring and disposing of resources that a business uses to acquire and sell its products or services.D. Are also called asset management.E. Are also called strategic management.


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142. The major activities of a business include: A. Operating.B. Financing.C. Investing.D. All of these.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: ReportingDifficulty: HardLearning Objective: C6

143. An example of an investing activity is: A. Paying wages of employees.B. Withdrawals by the owner.C. Purchase of land.D. Selling inventory.E. Contribution from owner.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingDifficulty: HardLearning Objective: C6

144. Net Income: A. Decreases equity.B. Represents the amount of assets owners put into a business.C. Equals assets minus liabilities.D. Is the excess of revenues over expenses.E. Represents owners' claims against assets.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: MeasurementDifficulty: EasyLearning Objective: A1

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145. If equity is $300,000 and liabilities are $192,000, then assets equal: A. $108,000.B. $192,000.C. $300,000.D. $492,000.E. $792,000.

Assets = $192,000 + $300,000 = $492,000

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: EasyLearning Objective: A1

146. Resources owned or controlled by a company that are expected to yield future benefits are: A. Assets.B. Revenues.C. Liabilities.D. Owner's Equity.E. Expenses.


147. Gross increases in equity from a company's earnings activities are: A. Assets.B. Revenues.C. Liabilities.D. Owner's Equity.E. Expenses.


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148. Net income is: A. Assets minus liabilities.B. The excess of revenues over expenses.C. An asset.D. The same as revenue.E. The excess of expenses over equity.


149. The difference between a company's assets and its liabilities, or net assets is: A. Net income.B. Expense.C. Equity.D. Revenue.E. Net loss.


150. Creditors' claims on the assets of a company are called: A. Net losses.B. Expenses.C. Revenues.D. Equity.E. Liabilities.


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151. Decreases in equity that represent costs of assets or services used to earn revenues are called: A. Liabilities.B. Equity.C. Withdrawals.D. Expenses.E. Owner's Investment.


152. The description of the relation between a company's assets, liabilities, and equity, which is expressed as Assets = Liabilities + Equity, is known as the: A. Income statement equation.B. Accounting equation.C. Business equation.D. Return on equity ratio.E. Net income.


153. Assets = Liabilities + Equity is known as the: A. Income statement equation.B. Cost principle.C. Objectivity principle.D. Accounting equation.E. Transaction principle.


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154. Expenses: A. Increase equity.B. Are gross increases in equity from a company's earning activity.C. Are the costs of assets or services used to earn revenues.D. Occur when equity exceeds revenue.E. Are creditors claims on assets.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: A1

155. Net income: A. Occurs when revenues exceed expenses.B. Is the same as revenue.C. Equals resources owned or controlled by a company.D. Occurs when expenses exceed assets.E. Represents assets taken from a company for an owner's personal use.


156. Revenues are: A. The same as net income.B. The excess of expenses over assets.C. Resources owned or controlled by a companyD. The gross increase in equity from a company's earning activities.E. The costs of assets or services used.


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157. Accounting A. Is an information and measurement system.B. Identifies, records, and communicates information about business activitiesC. Helps people make better decisionsD. Involves interpreting information and designing information systems to provide useful reports that monitor and control a company's activities.E. All of these


158. If assets are $99,000 and liabilities are $32,000, then equity equals: A. $32,000.B. $67,000.C. $99,000.D. $131,000.E. $198,000.

Equity = $99,000 - $32,000 = $67,000

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: A1

159. Another name for equity is: A. Net income.B. Expenses.C. Net assets.D. Revenue.E. Net loss.


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160. The excess of expenses over revenues for a period is: A. Net assets.B. Equity.C. Net loss.D. Net income.E. A liability.


161. Which of the following statements is true about assets? A. They are economic resources owned or controlled by the business.B. They are expected to provide future benefits to the business.C. They appear on the balance sheet.D. Claims on them can be shared between creditors and owners.E. All of these.


162. A payment to an owner is called a(n): A. Liability.B. Withdrawal.C. Expense.D. Contribution.E. Investment.


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163. Distributions by a business to its owners are called: A. Withdrawals.B. Expenses.C. Assets.D. Retained earnings.E. Net Income.


164. The balance sheet equation is: A. Revenues minus expenses equals net income.B. Debits equal credits.C. The bookkeeping phase of accounting.D. Another name for the accounting equation.E. Assets minus liabilities and equity.


165. The assets of a company total $700,000; the liabilities, $200,000. What are the claims of the owners? A. $900,000.B. $700,000.C. $500,000.D. $200,000.E. It is impossible to determine unless the amount of this owners' investment is known.

$700,000 - $200,000 = $500,000


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166. On June 30 of the current year, the assets and liabilities of Phoenix Phildell are as follows: Cash $20,500; Accounts Receivable, $7,250; Supplies, $650; Equipment, $12,000; Accounts Payable, $9,300. What is the amount of owner's equity as of July 1 of the current year? A. $8,300B. $13,050C. $20,500D. $31,100E. $40,400

$20,500 + $7,250 + $650 + $12,000 - $9,300 = $31,100

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: HardLearning Objective: A1

167. Assets created by selling goods and services on credit are: A. Accounts payable.B. Accounts receivable.C. Liabilities.D. Expenses.E. Equity.


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168. An exchange of value between two entities is called: A. The accounting equation.B. Recordkeeping or bookkeeping.C. A business transaction.D. An asset.E. Net Income.


169. Photometer Company paid off $30,000 of its accounts payable in cash. What would be the effects of this transaction on the accounting equation? A. Assets, $30,000 increase; liabilities, no effect; equity, $30,000 increase.B. Assets, $30,000 decrease; liabilities, $30,000 decrease; equity, no effect.C. Assets, $30,000 decrease; liabilities, $30,000 increase; equity, no effect.D. Assets, no effect; liabilities, $30,000 decrease; equity, $30,000 increase.E. Assets, $30,000 decrease; liabilities, no effect; equity $30,000 decrease.


170. How would the accounting equation of Boston Company be affected by the billing of a client for $10,000 of consulting work completed? A. +$10,000 accounts receivable, -$10,000 accounts payable.B. +$10,000 accounts receivable, +$10,000 accounts payable.C. +$10,000 accounts receivable, +$10,000 cash.D. +$10,000 accounts receivable, +$10,000 revenue.E. +$10,000 accounts receivable, -$10,000 revenue.


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171. Zion Company has assets of $600,000, liabilities of $250,000, and equity of $350,000. It buys office equipment on credit for $75,000. What would be the effects of this transaction on the accounting equation? A. Assets increase by $75,000 and expenses increase by $75,000.B. Assets increase by $75,000 and expenses decrease by $75,000.C. Liabilities increase by $75,000 and expenses decrease by $75,000.D. Assets decrease by $75,000 and expenses decrease by $75,000.E. Assets increase by $75,000 and liabilities increase by $75,000.


172. Viscount Company collected $42,000 cash on its accounts receivable. The effects of this transaction as reflected in the accounting equation are: A. Total assets decrease and equity increases.B. Both total assets and total liabilities decrease.C. Total assets, total liabilities, and equity are unchanged.D. Both total assets and equity are unchanged and liabilities increase.E. Total assets increase and equity decreases.


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173. If the liabilities of a business increased $75,000 during a period of time and the owner's equity in the business decreased $30,000 during the same period, the assets of the business must have: A. Decreased $105,000.B. Decreased $45,000.C. Increased $30,000.D. Increased $45,000.E. Increased $105,000.

Change in Assets = Change in Liabilities + Change in Owner's EquityChange in Assets = $75,000 + (-$30,000) = +$45,000


174. If the assets of a business increased $89,000 during a period of time and its liabilities increased $67,000 during the same period, equity in the business must have: A. Increased $22,000.B. Decreased $22,000.C. Increased $89,000.D. Decreased $156,000.E. Increased $156,000.

Change in Assets = Change in Liabilities + Change in EquityChange in Owner's equity = + $89,000 - $67,000 = +$22,000


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175. If the liabilities of a company increased $74,000 during a period of time and equity in the company decreased $19,000 during the same period, what was the effect on the assets? A. Assets would have increased $55,000.B. Assets would have decreased $55,000.C. Assets would have increased $19,000.D. Assets would have decreased $19,000.E. None of these.

Assets = Liabilities + EquityAssets = $74,000 + (-$19,000) = $55,000


176. If a company paid $38,000 of its accounts payable in cash, what was the effect on the assets, liabilities, and equity? A. Assets would decrease $38,000, liabilities would decrease $38,000, and equity would decrease $38,000.B. Assets would decrease $38,000, liabilities would decrease $38,000, and equity would increase $38,000.C. Assets would decrease $38,000, liabilities would decrease $38,000, and equity would not change.D. There would be no effect on the accounts because the accounts are affected by the same amount.E. None of these.


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177. If assets are $365,000 and equity is $120,000, then liabilities are: A. $120,000.B. $245,000.C. $365,000.D. $485,000.E. $610,000.

Liabilities = $365,000 - $120,000 = $245,000


178. Return on assets is: A. Also called return on investment.B. ROA.C. Computed by dividing net income by average total assets.D. Used in helping evaluate management.E. All of these.


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179. Reebok had income of $150 million and average invested assets of $1,800 million. Its return on assets is: A. 8.3%.B. 83.3%.C. 12%.D. 120%.E. 16.7%.

$150 million/$1,800 million = 8.3%


180. Nike had income of $350 million and average invested assets of $2,000 million. Its ROA is: A. 1.8%.B. 35%.C. 17.5%.D. 5.7%.E. 3.5%.

$350 million/$2,000 million = 17.5%


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181. FastForward has net income of $18,955, and assets at the beginning of the year of $200,000. Assets at the end of the year total $246,000. Compute its return on assets. A. 7.7%.B. 8.5%.C. 9.5%.D. 11.8%.E. 13.0%.

$18,955/[($200,000 +$246,000)/2] = $18,955/$223,000 = 8.5%


182. Harris Co. has a net income of $43,000, assets at the beginning of the year are $250,000 and assets at the end of the year are $300,000. Compute its return on assets. A. 8.4%B. 17.2%C. 14.3%D. 15.6%E. 1.5%

$43,000/(($250,000 + $300,000)/2) = 15.6%


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183. U. S. government bonds are: A. High-risk and high-return investments.B. Low-risk and low-return investments.C. High-risk and low-return investments.D. Low-risk and high-return investments.E. High risk and no-return investments.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Risk AnalysisDifficulty: MediumLearning Objective: A4

184. Risk is: A. Net income divided by average total assets.B. The reward for investment.C. The uncertainty about the expected return to be earned.D. Unrelated to expected return.E. Derived from the idea of getting something back from an investment.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Risk AnalysisDifficulty: MediumLearning Objective: A4

185. The statement of cash flows reports on cash flows for: A. Operating activities.B. Investing activities.C. Financing activities.D. Planning activities.E. A, B and C only.


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186. The basic financial statements include the: A. Balance Sheet.B. Income Statement.C. Statement of Owner's Equity.D. Statement of Cash Flows.E. All of these.


187. The statement of cash flows reports information on: A. Revenue activities.B. Operating activities.C. Financing activities.D. Investing activities.E. B, C, and D.


188. The statement of owner's equity: A. Reports how equity changes at a point in time.B. Reports how equity changes over a period of time.C. Reports on cash flows for operating, financing, and investing activities over a period of time.D. Reports on cash flows for operating, financing, and investing activities at a point in time.E. Reports on amounts for assets, liabilities, and equity at a point in time.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: ReportingDifficulty: MediumLearning Objective: P1

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189. The financial statement that reports whether the business earned a profit and also lists the types and amounts of the revenues and expenses is called: A. A Balance sheet.B. A Statement of owner's equity.C. A Statement of cash flows.D. An Income statement.E. A Statement of financial position.


190. A balance sheet lists: A. The types and amounts of the revenues and expenses of a business.B. Only the information about what happened to equity during a time period.C. The types and amounts of assets, liabilities, and equity of a business as of a specific date.D. The inflows and outflows of cash during the period.E. The assets and liabilities of a company but not the owner's equity.


191. A financial statement providing information that helps users understand a company's financial status, and which lists the types and amounts of assets, liabilities, and equity as of a specific date, is called a(n): A. Balance sheet.B. Income statement.C. Statement of cash flows.D. Statement of owner's equity.E. Financial Status Statement.


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192. The financial statement that describes where a company's cash came from and where it went during the period is the: A. Statement of financial position.B. Statement of cash flows.C. Balance sheet.D. Income statement.E. Statement of changes in owner's equity.


193. The financial statement that shows the beginning balance of owner's equity; the changes in equity that resulted from new investments by the owner, net income (or net loss); withdrawals; and the ending balance, is the: A. Statement of financial position.B. Statement of cash flows.C. Balance sheet.D. Income statement.E. Statement of owner's equity.


194. Cash investments by owners are listed on which of the following statements? A. Balance sheet.B. Income statement.C. Statement of owner's equity.D. Statement of cash flows.E. Both C and D.


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195. Accounts payable appear on which of the following statements? A. Balance sheet.B. Income statement.C. Statement of owner's equity.D. Statement of cash flows.E. Transaction statement.


196. The income statement reports all of the following except: A. Revenues earned by a business.B. Expenses incurred by a business.C. Assets owned by a business.D. Net income or loss earned by a business.E. The time period over which the earnings occurred.


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197. Use the following information as of December 31 to determine equity.

A. $57,000.B. $141,000.C. $297,000.D. $438,000.E. $579,000.

Assets = $57,000 + $206,000 + $175,000 = $438,000Equity = $438,000 - $141,000 = $297,000

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: P1

198. Determine the net income of a company for which the following information is available for the month of May.

A. $190,000.B. $210,000.C. $230,000.D. $400,000.E. $610,000.

Expenses: $180,000 + $10,000 + $20,000 = $210,000Net income = $400,000 - $210,000 = $190,000


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199. A company acquires equipment for $75,000 cash. This represents a(n) A. Operating activity.B. Investing activity.C. Financing activity.D. Revenue activity.E. Expense activity.


200. A company borrows $125,000 from the Eastside Bank and receives the loan proceeds in cash. This represents a(n): A. Revenue activity.B. Operating activity.C. Expense activity.D. Investing activity.E. Financing activity.


201. Flash had cash inflows from operations $62,500; cash outflows from investing activities of $47,000; and cash inflows from financing of $25,000. The net change in cash was: A. $40,500 increase.B. $40,500 decrease.C. $134,500 decrease.D. $134,000 increase.E. $9,500 increase.

$62,500 - $47,000 + $25,000 = $40,500 increase


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202. Flash has beginning equity of $257,000, net income of $51,000, withdrawals of $40,000 and investments by owners of $6,000. Its ending equity is: A. $223,000.B. $240,000.C. $268,000.D. $274,000.E. $208,000.

$257,000 + $51,000 - $40,000 + $6,000 = $274,000


203. Rent expense that is paid with cash appears on which of the following statements? A. Balance sheet.B. Income statement.C. Statement of owner's equity.D. Statement of cash flows.E. Both B and D.


204. Fees earned (but not yet received in cash) by a business in exchange for services it provided appear on which of the following statements? A. Balance sheet.B. Income statement.C. Statement of owner's equity.D. Statement of cash flows.E. Both A and B.


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205. A company's balance sheet shows: cash $22,000, accounts receivable $16,000, office equipment $50,000, and accounts payable $17,000. What is the amount of owner's equity? A. $17,000.B. $29,000.C. $71,000.D. $88,000.E. $105,000.

Assets = $22,000 + $16,000 + $50,000 = $88,000Liabilities = $17,000Owner's Equity = $88,000 - $17,000 = $71,000

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: HardLearning Objective: P1

206. A company reported total equity of $145,000 on its December 31, 2008 balance sheet. The following information is available for the year ended December 31, 2009:

What are the total assets of the company at December 31, 2009? A. $45,000.B. $92,000.C. $98,000.D. $210,000.E. $282,000.

Net income = $210,000 - $165,000 = $45,0002008 equity = $145,000 + $45,000 = $190,0002008 assets = $190,000 + $92,000 = $282,000


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Matching Questions

207. Match the following terms with the appropriate definition.

1. Social responsibility

The acquisition and disposing of resources that an organization uses to acquire and sell products and services. 5

2. Internal users Beliefs that distinguish right from wrong. 7 3. Operating activities

The part of accounting that involves recording transactions and events, either electronically or manually. 8

4. Financing activities

Persons using accounting information who are directly involved in managing the organization. 2

5. Investing activities

An information and measurement system that identifies, records and communicates relevant reliable and

comparable information about an organization's business activities. 6

6. Accounting

Provide the means organizations use to pay for resources such as land, buildings, and equipment to carry

out plans. 4 7. Ethics Concern for the impact of actions on society. 1

8. Recordkeeping The use of resources to research, develop, purchase, produce, distribute, and market products and services. 3

9. External users Persons using accounting information who are not directly involved in the running of the organization. 9

AACSB: Communications and EthicsAICPA BB: Industry and LegalAICPA FN: ReportingDifficulty: MediumLearning Objective: C1- C6

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208. Match each of the following terms with the most appropriate definition.

1. Risk A financial ratio useful in evaluating management,

analyzing and forecasting profits, and planning activities. 7 2. Liabilities Area of accounting aimed at serving external users. 8 3. Net income Costs of assets or services used to earn revenues. 4 4. Expenses The uncertainty about the expected return to be earned. 1 5. Managerial accounting Creditor's claims on a company's assets. 2 6. Planning Defining the idea, goals, and actions of an organization. 6 7. Return on assets The excess of revenue over expenses 3 8. Financial accounting

Area of accounting aimed at serving the decision making needs of internal users. 5

AACSB: CommunicationsAICPA BB: Industry and LegalAICPA FN: Reporting and Risk AnalysisDifficulty: MediumLearning Objective: C1-C4

209. The following is a list of selected users of accounting information. Match the appropriate user to the following information needs.

1. Production Managers

Judge the soundness of a customer before making sales on credit. 3

2. Lenders Measuring risk and return of loans. 2 3. Suppliers Assessing the risk and return of acquiring shares. 5 4. Employees Monitor costs and ensure quality. 1 5. Shareholders Assessing employment opportunities. 4

AACSB: CommunicationsAICPA BB: Industry and LegalAICPA FN: Reporting and Risk AnalysisDifficulty: EasyLearning Objective: C2

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210. Match each of the following transactions and events to the accounting principle applicable to recording and reporting them.

a. Business entity principleb. Objectivity principlec. Cost principled. Going concern principlee. Monetary unit principlef. Revenue recognition principle

1. An insurance company receives insurance premiums for six future month's worth of coverage. f 1 2. Helen Cho, a sole proprietor, pays for her daughter's preschool out of business funds. c 4 3. To make the balance sheet look better, Helen Cho added several thousand dollars to the Equipment account that she believed was undervalued. a 2 4. A building is for sale at $480,000. An appraisal is given for $450,000. e 5 5. Mayan Imports receives a shipment from Mexico. The invoice is stated in pesos. b 3

AACSB: CommunicationsAICPA BB: Industry and LegalAICPA FN: Reporting and MeasurementDifficulty: HardLearning Objective: C5

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211. Match the following definitions with terms 1 through 8. Place the letter that identifies the best definition in the blank space next to the term.

a. The accounting principle that requires assets and services to be recorded initially at the cash or cash-equivalent amount given in exchange.b. A principle that requires the information in financial statements to be supported by independent unbiased evidence.c. Gross increase in equity from a company's earnings activities.d. A principle that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold.e. Resources owned or controlled by a company that are expected to yield future benefits.f. A financial statement that reports the changes in equity over the reporting period; including increases such as owner investment and net income and for decreases such as owner withdrawals or net loss.g. Assets an owner takes from the company for personal use.h. Another term for equity.

1. Net assets e 4 2. Owner withdrawal d 8 3. Objectivity principle f 7 4. Assets h 1 5. Revenues b 3 6. Cost principle a 6 7. Statement of owner's equity. g 2 8. Going-concern principle c 5

AACSB: CommunicationsAICPA BB: Industry and LegalAICPA FN: Reporting and MeasurementDifficulty: MediumLearning Objective: A1Learning Objective: C5Learning Objective: P1

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212. Match the following definitions with the terms 1 through 9. Place the letter that identifies the best definition in the blank space next to the term.

a. The relation between a company's assets, liabilities, and equity.b. An exchange of value between two parties.c. The principle that assumes transactions and events can be expressed in money units.d. A financial statement that reports the changes in equity over the reporting period; adjusted for increases such as owner investment and net income and for decreases such as owner withdrawals or net loss.e. A financial statement that lists cash inflows (receipts) and cash outflows (payments); the cash flows are arranged by operating, investing, and financing activities.f. Creditor's claims on assets.g. The cost of assets or services used to earn revenue.h. The principle that requires a business to be accounted for separately from its owners.i. The principle that revenue is recognized when earned.

1. Business transaction e 8 2. Accounting equation b 1 3. Liabilities c 6 4. Statement of owner's equity h 9 5. Revenue recognition principle i 5 6. Monetary unit principle a 2 7. Expenses d 4 8. Statement of cash flows g 7 9. Business entity principle f 3

AACSB: CommunicationsAICPA BB: Industry and LegalAICPA FN: Reporting and MeasurementDifficulty: MediumLearning Objective: A1Learning Objective: C5Learning Objective: P1

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213. Identify each of the following business activities 1 through 6 into the appropriate category a, b, and c.

a. Operatingb. Investingc. Financing

1. Paid employee wages. a 5 2. Purchase of land. c 6 3. Sale of used equipment. b 2 4. Borrowed money from a bank on a long-term note. b 3 5. Paid utilities expenses. c 4 6. Withdrawal of funds by owners. a 1


214. Match each of the following items 1 through 8 with the financial statement a through d in which each item would most likely appear. An item may appear on more than one statement.

a. Income statementb. Statement of owner's equityc. Balance sheetd. Statement of cash flows

1. Cash from investing activities. c 8 2. Equity. b 6 3. Revenues. a 3 4. Liabilities. d 1 5. Cash from operating activities. a 7 6. Withdrawals. c 4 7. Costs and expenses. d 5 8. Assets. b and c 2


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215. Select the appropriate financial statement for each of the following accounts. (Note: Some items may appear on more than one financial statement.)


1. Rent Expense c, d 4 2. Withdrawals b 2 3. Notes payable c 3 4. Cash a 8 5. Accounts receivable b,c 6 6. Jay Miller, Capital c 5 7. Supplies Expense a 1 8. Fees earned a 7


216. Select the appropriate financial statement for each of the following items. (Note: some items may appear on more than one financial statement.)


1. Consulting Revenue c 5 2. Ahmad Khan, Capital b, d 6 3. Cash investments by owner b, c 2 4. Cash proceeds from a long-term loan a 8 5. Supplies d 7 6. Cash withdrawals by owner. b, d 3 7. Cash payments to purchase equipment a 1 8. Advertising Expense d 4


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217. Classify the following activities according to the appropriate section of the statement of cash flows.

a. Operating activityb. Investing activityc. Financing activity

1. Cash paid for withdrawals by owners. b 3 2. Cash paid for utilities. c 1 3. Cash received from a one-time sale of used office equipment. a 6 4. Cash paid for a delivery van to be used in the business. c 5 5. Cash received from owner contributions. a 2 6. Cash received from customers. b 4


Short Answer Questions

218. Explain the role of accounting in the information age.

Accounting is an information and measurement system. It identifies, records, and communicates relevant, reliable and comparable information about business activities. Accounting also includes the crucial process of analysis and interpretation.


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219. What is the balance sheet? What is its purpose?

The balance sheet is a listing of the types and amounts of assets, liabilities, and equity of a business at a specified point in time. The statement's purpose is to provide information that helps users assess the financial condition of the business.


220. Identify the users and uses of accounting information.

There are two general types of users of accounting information. (1) Internal users are managers and officers of businesses. They require information about business activities in order to make decisions about planning, monitoring, and control. (2) External users rely on financial statements to make business decisions. These users include lenders, and shareholders. Lenders need information for measuring the risk and return of loans. Shareholders need information for assessing the risk and return in owning shares.


221. What are two questions that an owner might be able to answer by looking at accounting information?

Some possible questions are: 1) How, what, when and how much must be purchased? 2) What are the projected sales and costs? 3) What are the costs and benefits of particular products and service? 4) What were the payroll costs last month? 5) What is the projected number of employees needed in the next month? Many other questions are possible.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: HardLearning Objective: C2

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222. Identify several opportunities in accounting and its related fields.

The traditional areas of accounting include financial accounting, managerial accounting, and tax accounting. Work in related fields includes lending, underwriting, market research, and business valuation.


223. Explain why ethics are an integral part of accounting.

The purpose of accounting is to provide useful information for decision makers. For information to be useful, it must be trusted. This requires ethical behavior by accountants and managers in all phases of gathering, analyzing and reporting financial information so that good decisions are made.


224. Describe the three important guidelines for revenue recognition.

The three important guidelines for revenue recognition include: (1) Revenue is recognized when earned. (2) Assets received from selling products and services do not need to be in cash. (3) Revenue recognized is measured by cash received plus the cash equivalent of other assets received.

AACSB: CommunicationsAICPA BB: LegalAICPA FN: MeasurementDifficulty: MediumLearning Objective: C5

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225. Identify the three basic forms of business organizations.

The three basic forms of business organizations are sole proprietorships, partnerships, and corporations.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: LegalDifficulty: MediumLearning Objective: C5

226. How does the objectivity principle support ethical behavior?

The objectivity principle supports ethical behavior since it requires that financial information be documented by independent, unbiased evidence. Consequently, the impact of belief and opinions on the recording and reporting of business transactions and events is lessened.

AACSB: EthicsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C5

227. Why should assets be recorded at historical cost?

Assets should be recorded at historical cost to provide users with reliable, objective information regarding completed business transactions.


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228. Identify the two main groups involved in establishing generally accepted accounting principles.

The FASB is the private group that establishes GAAP. The SEC establishes reporting requirements for companies that issue stock to the public.


229. How does the going-concern principle affect reporting asset values of a business?

The going-concern principle means that financial statements reflect an assumption that the business continues in operation instead of being closed or sold. Assets are therefore reported at historical cost rather than at liquidation value.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: MeasurementDifficulty: HardLearning Objective: C5

230. Identify and describe the three major activities of business organizations.

The three major activities of a business are operating, financing, and investing. Operating activities are using resources to research, develop, purchase, produce, distribute and market products and services. Financing activities provide the means organizations use to pay for resources like land, buildings, and equipment. Investing activities are the acquiring and disposing of resources used to acquire and sell its products and services.


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231. Describe the relation between revenues, expenses, and net income.

Revenues are the gross increases in equity from a company's earnings activities. Expenses are the costs of assets or services used to earn revenues. Net income is the excess of revenues over expenses.


232. Explain the accounting equation, and define its terms.

The accounting equation is stated as: Assets = Liabilities + Equity. Assets are resources owned or controlled by a business. Creditors' claims on assets are called liabilities. The owner's claim on assets is called equity. The accounting equation shows that the ownership of business assets can be shared between creditors and owners.


233. What distinguishes liabilities from equity?

Liabilities are creditors' claims on assets. They reflect obligations to transfer assets or provide products or services to others. Equity is owner's claim to assets. Equity is also called net assets or residual interest.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: MeasurementDifficulty: HardLearning Objective: A1

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234. What is the purpose of return on assets as an analytical tool?

Return on assets is useful in evaluating management, analyzing and forecasting profits, and planning activities.


235. Shawn Nelson, owner of LoveSac, made a decision to open a retail store in a local mall. He signed a three-month lease. His goal was to sell one Sac per day and this would cover his rent and allow him and his cousin to receive a $10 hourly wage. Identify the risk and return for Shawn.

Shawn may not sell one Sac per day and he and his cousin would have to give up their $10 hourly wage and if sales are not enough to cover the monthly lease payments Shawn will have to seek some type of financing. On the other hand, sales could meet or exceed his expectations and the risk is nullified. The return is that Shawn would be able to pay the lease, pay the wages and expand his business.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisDifficulty: Medium

236. Discuss the relation between risk and return.

Net income is related to return. Risk is the uncertainty about the amount of the expected return. In general; the lower the risk of an investment; the lower the expected return is. Higher return is expected in exchange for accepting higher risk.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisDifficulty: HardLearning Objective: A4

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237. Describe the three types of activities reported on the statement of cash flows.

The three types of activities reported in the statement of cash flows are (1) operating, which are the cash inflows and outflows from operations; (2) financing, which are the cash inflows and cash outflows related to owner investments and withdrawal and long-term borrowing and repaying cash from lending and (3) investing, which represent the cash inflows and outflows from the purchase and sale of long-term assets.


238. Identify and describe the four basic financial statements:

The four basic financial statements are the balance sheet, income statement, statement of owner's equity, and statement of cash flows. The balance sheet describes the company's financial position and lists the types and amounts of assets, liabilities, and equity at a point in time. The income statement describes the company's revenues, expenses, and net income over a period of time. The statement of owner's equity explains changes in equity from net income or loss, and from owner investments and withdrawals over a period of time. The statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: ReportingDifficulty: HardLearning Objective: P1

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Problems

239. The characteristics below apply to at least one of the forms of business organization. a. Is a separate legal entity.b. Is allowed to be owned by one person only.c. Owner or owners are personally liable for debts of the business.d. Is a taxable entity.e. Is a business entity.f. May have a contract specifying the division of profits among the owners.g. Has an unlimited life

Use the following format to indicate (with a "yes" or "no") whether or not a characteristic applies to each type of business organization.


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240. A parcel of land is offered for sale at $600,000, is assessed for tax purposes at $500,000, is recognized by its purchasers as easily being worth $575,000, and is sold for $570,000. At what amount should the land be recorded in the purchaser's books? What accounting principle supports your answer?

$570,000. The cost principle requires the acquisition of an asset to be recorded in the accounting records at cost.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: C5

241. Prior to purchasing a tract of land, Flash had the land appraised at $300,000. The management of Flash purchased the land for $275,000. At what amount should the land be recorded on Flash books? What accounting principle supports your answer?

$275,000; The cost principle.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: C5

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242. You are reviewing the accounting records of Cathy's Antiques, owned by Cathy Miller. You have uncovered the following situations. Compose a memo to Ms. Miller. Cite the appropriate accounting principle and suggest an action for each separate item. 1. In August, a check for $500 was written to Wee Day Care Center. This amount represents child care for her son Brandon. 2. Cathy plans a Going Out of Business Sale for May, since she will be closing her business for a month-long vacation in June. She plans to reopen July 1 and will continue operating Cathy's Antiques indefinitely. 3. Cathy received a shipment of pine furniture from Quebec, Canada. The invoice was stated in Canadian dollars. 4. Joseph Clark paid $1,500 for a dining table. The amount was recorded as revenue. The table will be delivered to Mr. Clark in six weeks.

1. Business entity principle. Cathy Miller should refund the $500 to the business or record it as a withdrawal. In the future, she should use a personal check to pay for day care.2. Going-concern principle. Cathy's Antiques is not going out of business. The business is just closing for vacation. She should hold an inventory reduction sale or other appropriate sale.3. Monetary unit principle. The invoice should be restated in U.S. dollars for accounting purposes.4. Revenue recognition principle. Since the table has not been delivered, revenue should not be recognized. The $1,500 should be placed in an account such as Deposits Received from Customers (a type of unearned revenue) until the table is delivered.

AACSB: AnalyticAICPA BB: Industry and LegalAICPA FN: MeasurementDifficulty: HardLearning Objective: C5

243. Lorton's Web Services has assets of $265,000 and liabilities of $130,000. Calculate the amount of equity.

$265,000 - $130,000 = $135,000


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244. A Company has liabilities of $475,000 and $925,000 of equity. What is the amount of its assets?

Assets = $475,000 + $925,000 = $1,400,000


245. A company has assets of $500,000 and equity of $350,000. What is the amount of liabilities?

$500,000 - $350,000 = $150,000


246. At the beginning of the year, a company had $120,000 worth of liabilities. During the year, assets increased by $160,000 and at year-end they equaled $360,000. Liabilities decreased $20,000 during the year. Calculate the beginning and ending values of equity.

Beginning equity = $80,000Ending equity = $260,000

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: HardLearning Objective: A1Learning Objective: P1

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247. The accounts of Garfield Company with the increases or decreases that occurred during the past year are as follows:

Except for net income, an investment of $3,000 by the owner, and a withdrawal of $11,000 by the owner, no other items affected the owner's capital account. Using the balance sheet equation, compute net income for the past year.

To maintain the balance sheet equation, Assets = Liabilities + Equity, net income must be $23,000.


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248. Annie's Attic has the following account balances for the dates given:

Also, its net income, for September 1 through September 30 was $20,000 and there were no investments or withdrawals by the owner. Determine the equity at both September 1 and September 30.

At September 1:Assets = Liabilities + Equity80,000 = 6,000 + Equity

Equity = $74,000

or:September 1 Equity + NI + September 30 equity$74,000 + $20,000 = $94,000


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249. On May 1, Chuck Taylor formed Flash, a shoe consulting business. In order to start the business he invested $750,000 in cash. Enter the appropriate amounts reflecting the transaction into the accounting equation format shown below.


250. A company spent $52,000 in cash for this period's advertising activities. Enter the appropriate amounts that reflect this transaction into the accounting equation format shown below.


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251. A company acquired $7,000 of supplies and testing equipment on credit. Enter the appropriate amounts that reflect this transaction into the accounting equation format shown below.


252. A company performed testing services for a client. The client paid the company $3,000 in cash. Enter the appropriate amounts that reflect this transaction into the company's accounting equation format shown below.


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253. A company paid its employees $90,000 in cash for two weeks' wages. Enter the appropriate amounts that reflect this transaction into the accounting equation format shown below.


254. If the liabilities of a business increased $86,000 during a period of time and equity in the business decreased $23,000 during the same period, would the assets of the business have increased or decreased? By what amount?

Assets would have increased $63,000.


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255. If the liabilities of a company increased $92,000 during a period of time and equity in the business decreased $30,000 during the same period, did the assets of the company increase or decrease? By what amount?

Assets increased $62,000.Assets = Liabilities + Equity$62,000 = $92,000 - $30,000


256. If Madiera Company paid $42,000 of its accounts payable in cash, what would be the effect of this transaction on assets, liabilities, and equity?

Assets would decrease $42,000, liabilities would decrease $42,000, and equity would not change.Assets = Liabilities + Equity-$42,000 = -$42,000 + $0


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257. Halley Burton began a Web Consulting practice and completed these transactions during September of the current year:

Show the effects of the above transactions on the accounting equation of Halley Burton, Consultant. Use the following format for your answers. The first item is shown as an example.Increase = I Decrease = D No effect = N

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258. For each of the following transactions, identify the effects as reflected in the accounting equation. Use "+" to indicate an increase and "-" to indicate a decrease. Use "A", "L", and "E" to indicate assets, liabilities, and equity, respectively. Part A has been completed as an example.

a. +A +Eb. +A +Lc. +A +Ed. +A - Ae. +A - Af. -A - Eg. -A - L


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259. Sara Bloom has prepared the following analysis of September transactions for her business, Blooming Florist. Unfortunately, she has lost some information. Determine the missing amounts (a) through (c) below.


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260. The following schedule reflects shows the first month's transactions of the Bill Blue Real Estate Company:

Provide descriptions for each transaction.

1. Investment of cash in business by owner or performed services for cash.2. Purchased equipment for cash.3. Purchased supplies on credit.4. Performed services for cash or investment of cash in business by owner.5. Performed services for both cash and on credit.6. Paid accounts payable.7. Received cash for an account receivable.8. Used supplies in business.9. Withdrawal of cash from business by owner for personal use or paid expense of business.


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261. A company paid its landlord $15,000 cash for this month's rent. Enter the appropriate amounts that reflect this transaction into the accounting equation format shown below.


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262. The accountant of Magic Video Games prepared a balance sheet immediately after each transaction was recorded. During September, the first month of operation, the following balance sheets were prepared:

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Required: Describe the nature of each of these five transactions for the month of September.


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263. Flash reported net income of $17,500 for the past year. At the beginning of the year the company had $200,000 in assets. By the end of the year, assets had increased to $300,000. Calculate the return on assets.

$17,500/[(200,000 + $300,000)/2] = $17,500/$250,000 = 7%


264. Quick Computer Service had net income for the year of $30,000. Its assets at the beginning of the year were $400,000. At the end of the year assets were worth $450,000. Calculate its return on assets.

$30,000/[($400,000 + $450,000)/2] = $30,000/$425,000 = 7.1%


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265. Identify the risk and the return in each of the following examples. a. Investing $500 in a CD at 4.5% interest.b. Placing a $100 bet on an NBA game.c. Investing $10,000 in Microsoft stock.d. Borrowing $20,000 in student loans.

a. The risk involved is that the investor may need the money in the CD before the CD matures and would have to give up the interest. The return is the 4.5% interest on the $500 invested in the CD.b. The risk is that the team bet on may not beat the point spread and the bet would be lost. The return would be any winnings based on the odds.c. The risk is that the value of Microsoft stock could go down. The return would come from increase in the value of the stock.d. The risk is that the student might not be able to find a job that pays enough to live on and allow for loan payments with interest. The return is that the student would be able to finance an education and earn higher wages.

AACSB: Reflective ThinkingAICPA BB: Critical ThinkingAICPA FN: Risk AnalysisDifficulty: HardLearning Objective: A2

266. ParFour's total liabilities are $130,000 and its equity is $340,000. Calculate the company's total assets.

$130,000 + $340,000 = $470,000.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: EasyLearning Objective: P1

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267. Della's Donuts has revenues of $83,000 and expenses of $64,000. Calculate its net income.

$83,000 - $64,000 = $19,000.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: EasyLearning Objective: P1

268. Cool Tours had beginning equity of $72,000; net income of $25,000, and withdrawals by owners of $9,000. Calculate the ending equity.

$72,000 + $25,000 - $9,000 = $88,000.


269. Della's Donuts had cash inflows from operating activities of $27,000; cash outflows from investing activities of $22,000, and cash outflows from financing activities of $12,000. Calculate the net increase or decrease in cash.

$27,000 - $22,000 - $12,000 = $7,000 decrease.


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270. Presented below is selected financial information for Stanley's Bike Shop. Using the appropriate information, prepare the income statement for 2009.


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271. Prepare a November 30 balance sheet in proper form for Green Bay Delivery Service from the following alphabetical list of the accounts at November 30:


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272. Prepare a December 31 balance sheet in proper form for Surety Insurance from the following items and amounts:


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273. Ann Maslow's consulting practice had equity of $172,500 at December 31, 2008. Net income for 2009 amounted to $56,400. Ann's withdrawals during 2009 were $48,000, and Ann made no investments in the business during 2009. Prepare the statement of owner's equity for 2009.


On November 1 of the current year, Lois Bell began Lois Bell, Interior Design with an initial investment of $50,000 cash. On November 30 her records showed the following (alphabetically arranged) items and amounts:

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274. From the information given, prepare a November income statement.


275. From the information given, prepare a November statement of owner's equity.


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276. From the information given, prepare a November 30 balance sheet.


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277. Presented below is selected financial information for Stanley's Bike Shop. Use the appropriate information to prepare balance sheet at December 31, 2009.

2009 Net income = $46,000 - $38,000 = $8,0002009 Equity = $48,000 + $8,000 = $56,000


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278. The following information is available for the Skate and Boards Rental.

Using the above information prepare an Income Statement, Statement of Owner's Equity, and Statement of Cash Flows for the Skate and Boards Rental for 2008. Also prepare its Balance Sheet as of December 31, 2009.

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279. Data for Madison Realty are as follows:

The owner, Mary Madison, withdrew a total of $30,000 for personal use during 2009. From the above data, prepare Madison Realty's Statement of Owner's Equity for the year ended December 31, 2009.


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280. FastForward has the following beginning cash balance and cash transactions for the month of January. Using this information prepare a statement of cash flows.


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The records of Skymaster Airplane Rentals show the following information as of December 31, 2009.

Skymaster withdrew $52,000 during 2009 for personal expenses.

281. Using the above information, prepare an income statement for 2009.


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282. Using the above information, prepare a Statement of Owner's Equity for 2009.


283. Using the above information, prepare a balance sheet at December 31, 2009.


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Fill in the Blank Questions

284. __________________________ is the recording of transactions or events, and is just one part of accounting. Recordkeeping (or bookkeeping)


285. Accounting is an ______________________ that identifies, records and communicates relevant, reliable and comparable information about an organization's economic activities. Information and measurement system (or information system)


286. A ____________________ is a business that is owned by only one person. Sole proprietorship


287. ______________ users of accounting information are not directly involved in running the organization. External


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288. ______________ is the area of accounting aimed at serving external users. Financial accounting


289. Shareholders are owners of a corporation and typically elect ______________________ to oversee their interests in the corporation. A board of directors


290. Congress passed the ______________________ to help curb financial abuses at companies that issue their stock to the public. Sarbanes-Oxley Act


291. _________ are beliefs that separate right from wrong. Ethics

AACSB: EthicsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: EasyLearning Objective: C5

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292. The principle that requires that a business be accounted for separately from its owners is the __________________ principle. Business entity

AACSB: CommunicationsAICPA BB: LegalAICPA FN: ReportingDifficulty: EasyLearning Objective: C5

293. The _______________ principle requires that financial information is supported by independent, unbiased evidence. Objectivity


294. The ______________ principle assumes business will continue operating indefinitely instead of being closed or sold. Going-concern


295. The ________________ principle states that transactions and events are expressed in money units. Monetary unit


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296. A primary purpose of ________________ is to make information in financial statements relevant, reliable and comparable. GAAP


297. In accounting, the rule that requires that assets, services, and liabilities be recorded initially at the cash or cash-equivalent value of what was given up or of the item received is called ______________________________. The cost principle


298. A disadvantage of a sole proprietorship is the fact that the owner has ___________________. Unlimited liability


299. There are at least three types of partnerships that limit the partners' liability. They are 1)_______________________, 2) ___________________, and 3)______________________. Limited partnership, limited liability partnership, and limited liability company


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300. __________ is the defining of the ideas, goals and actions of an organization. Planning

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Risk AnalysisDifficulty: EasyLearning Objective: C6

301. An audit is _______________ of an organization's accounting systems and records. A check or review or test


302. ________________ activities are the means organizations use to pay for resources such as land, building, and equipment. Financing


303. ________________ activities involve the acquisition and disposal of resources that an organization uses to acquire and sell its products or services. Investing


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304. ______________ activities involve using resources to research, develop, purchase, produce, distribute, and market products and services. Operating

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: ReportingDifficulty: EasyLearning Objective: A1

305. A ___________ occurs when expenses are greater than revenues. Loss or net loss


306. The accounting equation is: Assets = ___________ + Equity. Liabilities


307. Assets removed from the business by the business owner for personal use are called ____________. Withdrawals


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308. The ______________ reports revenues earned and expenses incurred by a business over a period of time. Income statement


309. ____________ are the gross increases in equity from a company's earnings activities Revenues


310. A common characteristic of __________ is their ability to provide expected future benefits to a business. Assets


311. _____________ is increased by owner's investments and revenues. It is decreased by withdrawals and expenses. Owner's equity


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312. Creditors claims on assets that reflect obligations to transfer assets are called _____________. Liabilities


313. The owner's claim on assets is called __________________. Equity


314. The accounting equation is ______________________________. Assets = Liabilities + Owner's Equity


315. During the accounting period, the assets of a business increased $64,000 and liabilities decreased $17,000; consequently, equity in the business must have __________________ (increased, decreased) $__________________________. Increased $81,000


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316. The term __________________ refers to a liability that promises a future outflow of resources. Payable


317. Using the accounting equation, equity is equal to ________________________. Assets minus liabilities.


318. For a proprietorship, owner investment and revenues increase __________________ and owner withdrawals and expenses decrease it. Equity


319. A __________________ occurs when expenses exceed revenues. Net loss


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320. ______________________ is the recording of financial transactions and events, either manually or electronically. Recordkeeping or bookkeeping.


321. _________________ is net income divided by average total assets. Return on investment


322. Return on assets = ______________ divided by average total assets. Net income


323. Risk is the _________________ about the return an investor expects to earn. Uncertainty

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Risk AnalysisDifficulty: EasyLearning Objective: P1

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324. ________________________________ reports changes in the owner's claim on the business's assets over a period of time. The statement of owner's equity.


325. The ____________________ describes a company's revenues and expenses over a period of time due to earnings activities. Income Statement


326. The _________________________ describes a company's financial position and types and amounts of assets, liabilities, and equity at a point in time. Balance Sheet


327. The _________________ reports on changes in equity over the reporting period. Statement of owner's equity


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328. The _______________________ identifies cash inflows and outflows over a period of time. Statement of cash flows


Summary of Questions by Difficulty Level (DL) and Learning Objective (LO)

True/FalseItem DL LO Item DL LO Item DL LO

33. Easy C1 65. Med C5 95. Med A2



36. Easy C2 68. Med C5 98. Easy C5

37. Easy C2 69. Med C5 99. Easy P1




41. Med C3 73. Hard C5 103. Hard C1

42. Med C3 74. Hard A1 104. Easy P2

43. Med C3 75. Hard A1 105. Easy P2

44. Med C3 76. Med A1 106. Med P2

45. Med C3 77. Med A1 107. Med P2

46. Hard C3 78. Med A1 108. Med P2

47. Easy C4 79. Hard A1 109. Med P2

48. Easy C3 80. Hard A1 110. Med P3


50. Easy C5 82. Med A2 112. Med P3

51. Easy C5 83. Med A2 113. Med P3

52. Easy C5 84. Med A2

1-132


Multiple ChoiceItem DL LO Item DL LO Item DL LO

131. Easy C1 130. Med C5 165. Med A2

132. Easy C2 131. Med C5 166. Hard A2

133. Med C2 132. Hard C5 167. Hard A2

134. Med C2 133. Easy A1 168. Hard A2

135. Med C2 134. Easy A1 169. Easy P1


137. Med C3 136. Med A1 171. Easy P1

138. Med C3 137. Med A1 172. Easy P1

139. Med C3 138. Hard A1 173. Med P1

140. Med C3 139. Hard A1 174. Med P1

141. Med C3 140. Hard A1 175. Med P1

142. Med C3 141. Hard A1 176. Hard P2

143. Med C3 142. Hard A1 177. Hard P1

144. Med C4 143. Hard A1 178. Easy P2

145. Med C4 144. Hard A1 179. Easy P2

146. Med C4 145. Hard A1 180. Med P2

147. Easy C5 146. Hard A1 181. Med A1

148. Easy C5 147. Hard A1 182. Med P2

149. Easy C5 148. Med A1 183. Med P2

150. Med C5 149. Hard A1 184. Med P2

151. Easy C5 150. Med A2 185. Med P2

152. Easy C5 151. Med A2 186. Hard P2

153. Med C5 152. Med A2 187. Hard P2

154. Med C5 153. Med A2 188. Med P3

MatchingItem DL LO Item DL LO Item DL LO

132. Med C1-C5 135. Easy C3 137. Med A1

133. Med C1-C5,A2

136. Med P3 138. Hard A1

134. Med C1-C5

1-133


Short EssayItem DL LO Item DL LO Item DL LO

139. Med C1 142. Med C4 145. Med P1

140. Med C2 143. Hard C5 146. Med P2

141. Med C3 144. Med A2 147. Med P3

ProblemsItem DL LO Item DL LO Item DL LO

148. Easy C2 157. Med P1 166. Med A2

149. Med C5 158. Med P1 167. Easy P1

150. Med C5 159. Hard P1 168. Med P2

151. Easy A1 160. Med A1,P2 169. Med P2

152. Med A1 161. Hard A1,P3 170. Med P2

153. Med A1 162. Hard A1,P3 171. Hard P2

154. Med A1 163. Hard A1,P3 172. Hard P2

155. Med P1 164. Hard A1,P3 173. Med P3

156. Med P1 165. Med A2 174. Med P3

Completion ProblemsItem DL LO Item DL LO Item DL LO

175. Med C1 182. Easy C3 189. Med C5

176. Med C1 183. Med C3 190. Med A1

177. Med C1 184. Med C3 191. Med A2

178. Med C2 185. Med C4 192. Easy P1

179. Easy C3 186. Med C5 193. Easy P1

180. Easy C3 187. Easy C5 194. Med P1

181. Easy C3 188. Easy C5 195. Med P1

Problems


196. Hard P1 198. Easy C5 200. Easy P3

197. Hard P3 189. Easy C5.

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True / False Questions

1. Accounting records are also referred to as the books. TRUE


2. The first step in the processing of a transaction is to analyze the transaction and source documents. TRUE


3. Preparation of a trial balance is the first step in the analyzing and recording process. FALSE


4. Source documents provide evidence of business transactions and are the basis for accounting entries. TRUE


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5. Items such as sales tickets, bank statements, checks, and purchase orders are source documents. TRUE


6. An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item. TRUE


7. A customer's promise to pay is called an account payable to the seller. FALSE


8. Withdrawals by the owner are a business expense. FALSE


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9. As prepaid expenses are used, the expired costs of the assets become expenses. TRUE


10. Land and buildings are generally recorded in the same ledger account. FALSE


11. It is not necessary to keep separate accounts for all items of importance for business decisions. FALSE


12. Unearned revenues are liabilities. TRUE


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13. Cash withdrawn by the owner of a proprietorship should be treated as an expense of the business. FALSE


14. When a company provides services for which cash will not be received until some future date, the company should record the amount received as unearned revenue for the amount charged to the customer. FALSE


15. The chart of accounts is a list of all the accounts used by a company and includes an identification number assigned to each account. TRUE


16. An account balance is the difference between the debits and credits for an account including any beginning balance. TRUE


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17. Debit means the right side of an account. FALSE


18. In a double-entry accounting system, the total amount debited must always equal the total amount credited. TRUE


19. Increases in liability accounts are recorded as debits. FALSE


20. Debits increase asset and expense accounts. TRUE


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21. Credits always increase account balances. FALSE


22. Crediting an expense account decreases it. TRUE


23. Double entry accounting requires that each transaction affect, and be recorded in, at least two accounts. TRUE


24. A revenue account normally has a debit balance. FALSE


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25. Accounts are normally decreased by debits. FALSE


26. The owner's withdrawal account normally has a credit balance since it is an equity account. FALSE


27. Asset accounts normally have credit balances and revenue accounts normally have debit balances. FALSE


28. An owner's capital account normally has a debit balance. FALSE


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29. A debit entry is always favorable. FALSE


30. A transaction that decreases an asset account and increases a liability account must also affect one or more other accounts. TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: HardLearning Objective: A1

31. A transaction that increases an asset and decreases a liability must also affect one or more other accounts. TRUE


32. If insurance coverage for the next three years is paid for in advance, the amount of the payment is debited to an asset account called Prepaid Insurance. TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: A1

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33. The purchase of supplies on credit should be recorded with a debit to Supplies and a credit to Accounts Payable. TRUE


34. If a company purchases land paying cash, the journal entry to record this transaction will include a debit to Cash. FALSE


35. If a company provides services to a customer on credit the selling company should credit Accounts Receivable. FALSE


36. When a company bills a customer for $600 for services rendered, the journal entry to record this transaction will include a $600 debit to Services Revenue. FALSE


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37. The debt ratio helps to assess the risk a company has of failing to pay its debts and is helpful to both its owners and creditors. TRUE


38. The higher a company's debt ratio is, the higher the risk of a company not being able to meet its obligations. TRUE


39. The debt ratio is calculated by dividing total assets by total liabilities. FALSE


40. A company that finances a relatively large portion of its assets with liabilities is said to have a high degree of financial leverage. TRUE


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41. If a company is highly leveraged, this means that it has relatively low risk of not being able to repay its debt. FALSE


42. Hamilton Industries has liabilities of $105 million and total assets of $350 million. Its debt ratio is 40.0%. FALSE

$105 million/$350 million = 30.0%


43. High financial leverage is always bad for a company's owners. FALSE


44. A compound journal entry affects no more than two accounts. FALSE

AACSB: Reflective ThinkingAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: EasyLearning Objective: C5

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45. Posting is the transfer of journal entry information to the ledger. TRUE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: EasyLearning Objective: P1

46. Transactions are first recorded in the ledger. FALSE


47. The journal is known as a book of original entry. TRUE


48. A journal gives a complete record of each transaction in one place, and shows the debits and credits for each transaction. TRUE


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49. The journal is known as the book of final entry because financial statements are prepared from it. FALSE


50. A trial balance that balances is not proof of complete accuracy in recording transactions. TRUE


51. The trial balance is a list of all accounts and their balances at a point in time taken from the ledger. TRUE


52. Generally, the ordering of accounts in a trial balance typically follows their identification number from the chart of accounts, that is, assets first, then liabilities, then owner's capital and withdrawals, followed by revenues and expenses. TRUE

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: P2

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53. The trial balance can serve as a replacement for the balance sheet, since debits must equal with credits. FALSE


54. A trial balance that is in balance is proof that no errors were made in journalizing the transactions, posting to the ledger, and preparing the trial balance. FALSE

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: P2

55. If cash was incorrectly debited for $100 instead of correctly credited for $100, the cash account is out of balance by $100. FALSE


56. The balance sheet provides a link between beginning and ending income statements. FALSE


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57. The heading on each financial statement lists the three W's – Who (the name of the organization), What (the name of the statement), and Where (the organization's address) FALSE


58. An income statement reports the revenues earned less expenses incurred by a business over a period of time. TRUE


59. The balance sheet reports the financial position of a company at a point in time. TRUE


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Multiple Choice Questions

60. The accounting process begins with: A. Analysis of business transactions and source documents.B. Preparing financial statements and other reports.C. Summarizing the recorded effect of business transactions.D. Presentation of financial information to decision-makers.E. Preparation of the trial balance.


61. A sales invoice: A. Is a type of source document.B. Is used by sellers to record the sale.C. Is used by buyers to record purchases.D. Gives rise to an entry in the accounting process.E. All of these.


62. Source documents include all of the following except: A. Sales tickets.B. Ledgers.C. Checks.D. Purchase orders.E. Bank statements.


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63. Source documents: A. Include the ledger.B. Are the sources of accounting information.C. Must be in electronic form.D. Are based on accounting entries.E. Include the chart of accounts.


64. Various types of documents and other papers that companies use when they conduct their business: A. Are called source documents.B. Can include sales tickets.C. Are the source of information for recording accounting entries.D. Can be in electronic form.E. All of these.


65. A record of the increases and decreases in a specific asset, liability, equity, revenue, or expense is a(n): A. Journal.B. Posting.C. Trial balance.D. Account.E. Chart of accounts.


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66. An account used to record the owner's investments in the business is called a(n): A. Withdrawals account.B. Capital account.C. Revenue account.D. Expense account.E. Liability account.


67. The account used to record the transfers of assets from a business to its owner is: A. A revenue account.B. The owner's withdrawals account.C. The owner's capital account.D. An expense account.E. A liability account.


68. Which of the following statements is correct? A. When a future expense is paid in advance, the payment is normally recorded in a liability account called Prepaid Expense.B. Promises of future payment are called accounts receivable.C. Increases and decreases in cash are always recorded in the owner's capital account.D. An account called Land is commonly used to record increases and decreases in both the land and buildings owned by a business.E. Accrued liabilities include accounts receivable.


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69. Unearned revenues are: A. Revenues that have been earned and received in cash.B. Revenues that have been earned but not yet collected in cash.C. Liabilities created when a customer pays in advance for products or services before the revenue is earned.D. Recorded as an asset in the accounting records.E. Increases to owners' capital.


70. Prepaid expenses are: A. Payments made for products and services that do not ever expire.B. Classified as liabilities on the balance sheet.C. Decreases in equity.D. Assets that represent prepayments of future expenses.E. Promises of payments by customers.


71. A written promise to pay a definite sum of money on a specified future date is a(n): A. Unearned revenue.B. Prepaid expense.C. Credit account.D. Note payable.E. Account receivable.


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72. A collection of all accounts and their balances used by a business is called a: A. Journal.B. Book of original entry.C. General Journal.D. Balance column journal.E. Ledger.


73. A ledger is: A. A record containing increases and decreases in a specific asset, liability, equity, revenue, or expense item.B. A journal in which transactions are first recorded.C. A collection of documents that describe transactions and events entering the accounting process.D. A list of all accounts with their debit balances at a point in time.E. A record containing all accounts and their balances used by a company.


74. A list of all accounts and the identification number assigned to each account used by a company is called a: A. Source document.B. Journal.C. Trial balance.D. Chart of accounts.E. General Journal.


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75. The numbering system used in a company's chart of accounts: A. Is the same for all companies.B. Is determined by generally accepted accounting principles.C. Depends on the source documents used in the accounting process.D. Typically begins with balance sheet accounts.E. Typically begins with income statement accounts.


76. A debit is: A. An increase in an account.B. The right-hand side of a T-account.C. A decrease in an account.D. The left-hand side of a T-account.E. An increase to a liability account.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: EasyLearning Objective: C5

77. The right side of a T-account is a(n): A. Debit.B. Increase.C. Credit.D. Decrease.E. Account balance.


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78. Which of the following statements is incorrect? A. The normal balance of accounts receivable is a debit.B. The normal balance of owner's withdrawals is a debit.C. The normal balance of unearned revenues is a credit.D. The normal balance of an expense account is a credit.E. The normal balance of the owner's capital account is a credit.


79. A credit is used to record: A. A decrease in an expense account.B. A decrease in an asset account.C. An increase in an unearned revenue account.D. An increase in a revenue account.E. All of these.


80. A simple account form widely used in accounting as a tool to understand how debits and credits affect an account balance is called a: A. Withdrawals account.B. Capital account.C. Drawing account.D. T-account.E. Balance column sheet.


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81. Which of the following statements is correct? A. The left side of a T-account is the credit side.B. Debits decrease asset and expense accounts, and increase liability, equity, and revenue accounts.C. The left side of a T-account is the debit side.D. Credits increase asset and expense accounts, and decrease liability, equity, and revenue accounts.E. In certain circumstances the total amount debited need not equal the total amount credited for a particular transaction.


82. An account balance is: A. The total of the credit side of the account.B. The total of the debit side of the account.C. The difference between the total debits and total credits for an account including the beginning balance.D. Assets = liabilities + equity.E. Always a credit.


83. Of the following accounts, the one that normally has a credit balance is: A. Cash.B. Office Equipment.C. Sales Salaries Payable.D. Owner, Withdrawals.E. Sales Salaries Expense.


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84. A debit is used to record: A. A decrease in an asset account.B. A decrease in an expense account.C. An increase in a revenue account.D. An increase in the balance of an owner's capital account.E. An increase in the balance of the owner's withdrawals account.


85. A credit entry: A. Increases asset and expense accounts, and decreases liability, owner's capital, and revenue accounts.B. Is always a decrease in an account.C. Decreases asset and expense accounts, and increases liability, owner's capital, and revenue accounts.D. Is recorded on the left side of a T-account.E. Is always an increase in an account.


86. Double-entry accounting is an accounting system: A. That records each transaction twice.B. That records the effects of transactions and other events in at least two accounts with equal debits and credits.C. In which each transaction affects and is recorded in two or more accounts but that could include two debits and no credits.D. That may only be used if T-accounts are used.E. That insures that errors never occur.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: HardLearning Objective: C5

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87. Rocky Industries received its telephone bill in the amount of $300, and immediately paid it. Rocky's general journal entry to record this transaction will include a A. Debit to Telephone Expense for $300.B. Credit to Accounts Payable for $300.C. Debit to Cash for $300.D. Credit to Telephone Expense for $300.E. Debit to Accounts Payable for $300.


88. Management Services, Inc. provides services to clients. On May 1, a client prepaid Management Services $60,000 for 6-months services in advance. Management Services' general journal entry to record this transaction will include a A. Debit to Unearned Management Fees for $60,000.B. Credit to Management Fees Earned for $60,000.C. Credit to Cash for $60,000.D. Credit to Unearned Management Fees for $60,000.E. Debit to Management Fees Earned for $60,000.


89. Wisconsin Rentals purchased office supplies on credit. The general journal entry made by Wisconsin Rentals will include a: A. Debit to Accounts Payable.B. Debit to Accounts Receivable.C. Credit to Cash.D. Credit to Accounts Payable.E. Credit to Wisconsin Rentals, Capital.


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90. An asset created by prepayment of an expense is: A. Recorded as a debit to an unearned revenue account.B. Recorded as a debit to a prepaid expense account.C. Recorded as a credit to an unearned revenue account.D. Recorded as a credit to a prepaid expense account.E. Not recorded in the accounting records until the earnings process is complete.


91. Robert Haddon contributed $70,000 in cash and land worth $130,000 to open a new business, RH Consulting. Which of the following general journal entries will RH Consulting make to record this transaction?

A.

B.

C.

D.

E.


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92. A liability created by the receipt of cash from customers in payment for products or services that have not yet been delivered to the customers is: A. Recorded as a debit to an unearned revenue account.B. Recorded as a debit to a prepaid expense account.C. Recorded as a credit to an unearned revenue account.D. Recorded as a credit to a prepaid expense account.E. Not recorded in the accounting records until the earnings process is complete.


93. On September 30, the Cash account of Value Company had a normal balance of $5,000. During September, the account was debited for a total of $12,200 and credited for a total of $11,500. What was the balance in the Cash account at the beginning of September? A. A $0 balance.B. A $4,300 debit balance.C. A $4,300 credit balance.D. A $5,700 debit balance.E. A $5,700 credit balance.

Beg. Bal. + $12,200 - $11,500 = $5,000Beg. Bal. $4,300 debit


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94. On April 30, Holden Company had an Accounts Receivable balance of $18,000. During the month of May, total credits to Accounts Receivable were $52,000 from customer payments. The May 31 Accounts Receivable balance was $13,000. What was the amount of credit sales during May? A. $ 5,000.B. $47,000.C. $52,000.D. $57,000.E. $32,000.

$18,000 + Credit Sales - $52,000 = $13,000Credit Sales = $47,000


95. During the month of February, Hoffer Company had cash receipts of $7,500 and cash disbursements of $8,600. The February 28 cash balance was $1,800. What was the January 31 beginning cash balance? A. $700.B. $1,100.C. $2,900.D. $0.E. $4,300.

Beg. Bal. + $7,500 - $8,600 = $1,800Beg. Bal. = $2,900


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96. The following transactions occurred during July: 1. Received $900 cash for services provided to a customer during July. 2. Received $2,200 cash investment from Barbara Hanson, the owner of the business. 3. Received $750 from a customer in partial payment of his account receivable which arose from sales in June. 4. Provided services to a customer on credit, $375. 5. Borrowed $6,000 from the bank by signing a promissory note. 6. Received $1,250 cash from a customer for services to be rendered next year. What was the amount of revenue for July? A. $ 900. B. $ 1,275. C. $ 2,525. D. $ 3,275. E. $11,100.

Revenues = $900 (1) + $375 (4) = $1,275


97. If Tim Jones, the owner of Jones Hardware proprietorship, uses cash of the business to purchase a family automobile, the business should record this use of cash with an entry to: A. Debit Salary Expense and credit Cash.B. Debit Tim Jones, Salary and credit Cash.C. Debit Cash and credit Tim Jones, Withdrawals.D. Debit Tim Jones, Withdrawals and credit Cash.E. Debit Automobiles and credit Cash.


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98. Zed Bennett opened an art gallery and as a dealer completed these transactions: 1. Started the gallery, Artery, by investing $40,000 cash and equipment valued at $18,000. 2. Purchased $70 of office supplies on credit. 3. Paid $1,200 cash for the receptionist's salary. 4. Sold a painting for an artist and collected a $4,500 cash commission on the sale. 5. Completed an art appraisal and billed the client $200. What was the balance of the cash account after these transactions were posted? A. $12,230. B. $12,430. C. $43,300. D. $43,430. E. $61,430.

$40,000 (1) - $1,200 (3) + $4,500 (4) = $43,300


99. At the beginning of January of the current year, Thomas Law Center's ledger reflected a normal balance of $52,000 for accounts receivable. During January, the company collected $14,800 from customers on account and provided additional services to customers on account totaling $12,500. Additionally, during January one customer paid Thomas $5,000 for services to be provided in the future. At the end of January, the balance in the accounts receivable account should be: A. $54,700.B. $49,700.C. $2,300.D. $54,300.E. $49,300.

$52,000 beginning balance - $14,800 of collections + $12,500 of additional services on credit = $49,700.


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100. During the month of March, Cooley Computer Services made purchases on account totaling $43,500. Also during the month of March, Cooley was paid $8,000 by a customer for services to be provided in the future and paid $36,900 of cash on its accounts payable balance. If the balance in the accounts payable account at the beginning of March was $77,300, what is the balance in accounts payable at the end of March? A. $83,900.B. $91,900.C. $6,600.D. $75,900.E. $4,900.

Beginning balance of $77,300 + $43,500 of purchases on account - $36,900 of payments on account = $83,900.


101. On January 1 of the current year, Bob's Lawn Care Service reported owner's capital totaling $122,500. During the current year, total revenues were $96,000 while total expenses were $85,500. Also, during the current year Bob withdrew $20,000 from the company. No other changes in equity occurred during the year. If, on December 31 of the current year, total assets are $196,000, the change in owner's capital during the year was: A. A decrease of $9,500.B. An increase of $9,500.C. An increase of $30,500.D. A decrease of $30,500E. Impossible to determine from the information provided.

During the year, revenues were $96,000 while expenses were $85,500 and withdrawals were $20,000. Since there were no other changes in equity, equity must have decreased by $9,500.


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102. Andrea Conaway opened Wonderland Photography on January 1 of the current year. During January, the following transactions occurred and were recorded in the company's books: 1. Conaway invested $13,500 cash in the business. 2. Conaway contributed $20,000 of photography equipment to the business. 3. The company paid $2,100 cash for an insurance policy covering the next 24 months. 4. The company received $5,700 cash for services provided during January. 5. The company purchased $6,200 of office equipment on credit. 6. The company provided $2,750 of services to customers on account. 7. The company paid cash of $1,500 for monthly rent. 8. The company paid $3,100 on the office equipment purchased in transaction #5 above. 9. Paid $275 cash for January utilities. Based on this information, the balance in the cash account at the end of January would be: A. $41,450. B. $12,225 C. $18,700. D. $15,250. E. $13,500.

(1) $13,500 - (3) $2,100 + (4) 5,700 - (7) $1,500 - (8) $3,100 - (9) $275 = $12,225


103. Based on the information included in Question #102, the balance in the Andrea Conaway, Capital account reported on the Statement of Owner's Equity at the end of the month would be: A. $31,400.B. $39,200.C. $31,150.D. $40,175.E. $30,875.

(1) $13,500 + (2) $20,000 + (4) $5,700 + (6) $2,750 - (7) $1,500 - (9) $275 = $40,175.


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104. The debt ratio is used: A. To measure the relation of equity to expenses.B. To reflect the risk associated with a company's debts.C. Only by banks when a business applies for a loan.D. To determine how much debt a firm should pay off.E. All of these.


105. Which of the following is the formula used to calculate the debt ratio? A. Total Equity/Total Liabilities.B. Total Liabilities/Total Equity.C. Total Liabilities/Total Assets.D. Total Assets/Total Liabilities.E. Total Equity/Total Assets.


106. Which of the following statements is incorrect? A. Higher financial leverage involves higher risk.B. Risk is higher if a company has more liabilities.C. Risk is higher if a company has higher assets.D. The debt ratio is one measure of financial risk.E. Lower financial leverage involves lower risk.


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107. Stride Rite has total assets of $425 million. Its total liabilities are $110 million. Its equity is $315 million. Calculate the debt ratio. A. 38.6%.B. 13.4%.C. 34.9%.D. 25.9%.E. 14.9%.



108. Stride Rite has total assets of $385 million. Its total liabilities are $100 million and its equity is $285 million. Calculate its debt ratio. A. 35.1%.B. 26.0%.C. 38.5%.D. 28.5%.E. 58.8%.



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109. Which of the following statements describing the debt ratio is false? A. It is of use to both internal and external users of accounting information.B. A relatively high ratio is always desirable.C. The dividing line for a high and low ratio varies from industry to industry.D. Many factors such as a company's age, stability, profitability and cash flow influence the determination of what would be interpreted as a high versus a low ratio.E. The ratio might be used to help determine if a company is capable of increasing its income by obtaining further debt.


110. At the end of the current year, Norman Company reported total liabilities of $300,000 and total equity of $100,000. The company's debt ratio on the last year-end was: A. 300%.B. 33.3%C. 75.0%.D. $400,000.E. Cannot be determined from the information provided.

On the last year-end, total liabilities were $300,000 and total equity was $100,000. That means total assets were $400,000. Therefore, the debt to assets ratio was $300,000 / $400,000 or 75.0%.


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111. At the beginning of the current year, Taunton Company's total assets were $248,000 and its total liabilities were $175,000. During the year, the company reported total revenues of $93,000, total expenses of $76,000 and owner withdrawals of $5,000. There were no other changes in owner's capital during the year and total assets at the end of the year were $260,000. Taunton Company's debt ratio at the end of the current year is: A. 70.6%.B. 67.3%.C. 32.7%.D. 48.6%.E. Cannot be determined from the information provided.

If total assets were $248,000 and total liabilities were $175,000, total equity was $73,000 at the beginning of the period. Add to that figure $93,000 of revenues during the year and subtract $76,000 of expenses and $5,000 of withdrawals during the year and equity obviously ended the year at $85,000. If total assets at the end of the year were $260,000 and total equity was $85,000, total liabilities were $175,000. Thus, the debt ratio was $175,000 / $260,000 = 67.3%.


112. The process of transferring general journal information to the ledger is: A. Double-entry accounting.B. Posting.C. Balancing an account.D. Journalizing.E. Not required unless debits do not equal credits.


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113. A column in journals and ledger accounts used to cross reference journal and ledger entries is the: A. Account balance column.B. Debit column.C. Posting reference column.D. Credit column.E. Description column.


114. The record in which transactions are first recorded is the: A. Account balance.B. Ledger.C. Journal.D. Trial balance.E. Cash account.


115. The general journal provides a place for recording: A. The transaction date.B. The names of the accounts involved.C. The amount of each debit and credit.D. An explanation of the transaction.E. All of these.


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116. A balance column ledger account is: A. An account entered on the balance sheet.B. An account with debit and credit columns for posting entries and another column for showing the balance of the account after each entry is posted.C. Another name for the withdrawals account.D. An account used to record the transfers of assets from a business to its owner.E. A simple form of account that is widely used in accounting to illustrate the debits and credits required in recording a transaction.


117. A general journal is: A. A ledger in which amounts are posted from a balance column account.B. Not required if T-accounts are used.C. A complete record of any transaction and the place from which transaction amounts are posted to the ledger accounts.D. Not necessary in electronic accounting systems.E. A book of final entry because financial statements are prepared from it.


118. A record in which the effects of transactions are first recorded and from which transaction amounts are posted to the ledger is a(n): A. Account.B. Trial balance.C. Journal.D. T-account.E. Balance column account.


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119. A company had the following accounts and balances year-end:

If all of the accounts have normal balances, what are the totals for the trial balance? A. $ 45,200.B. $ 67,000.C. $104,800.D. $209,600.E. $186,600.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: HardLearning Objective: P2

120. An accountant has debited an account for $3,500 and credited a liability account for $2,000. Which of the following would be an incorrect way to complete the recording of this transaction: A. Credit another asset account for $1,500.B. Credit another liability account for $1,500.C. Credit an expense account for $1,500.D. Credit the owner's capital account for $1,500.E. Debit another asset account for $1,500.


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121. A report that lists accounts and their balances, in which the total debit balances should equal the total credit balances, is called a(n): A. Account balance.B. Trial balance.C. Ledger.D. Chart of accounts.E. General Journal.


122. Which of the following statements is true? A. If the trial balance is in balance, it proves that no errors have been made in recording and posting transactions.B. The trial balance is a book of original entry.C. Another name for the trial balance is the chart of accounts.D. The trial balance is a list of all accounts from the ledger with their balances at a point in time.E. The trial balance is another name for the balance sheet as long as debits balance with credits.


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123. While in the process of posting from the journal to the ledger a company failed to post a $50 debit to the Office Supplies account. The effect of this error will be that: A. The Office Supplies account balance will be overstated.B. The trial balance will not balance.C. The error will overstate the debits listed in the journal.D. The total debits in the trial balance will be larger than the total credits.E. All of these effects will be caused by the error.


124. A $15 credit to Sales was posted as a $150 credit. By what amount is Sales in error? A. $150 understated.B. $135 overstated.C. $150 overstated.D. $15 understated.E. $135 understated.


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125. A trial balance taken at year-end showed total credits exceed total debits by $4,950. This discrepancy could have been caused by: A. An error in the general journal where a $4,950 increase in Accounts Receivable was recorded as an increase in Cash.B. A net income of $4,950.C. The balance of $49,500 in Accounts Payable being entered in the trial balance as $4,950.D. The balance of $5,500 in the Office Equipment account being entered on the trial balance as a debit of $550.E. An error in the general journal where a $4,950 increase in Accounts Payable was recorded as a decrease in Accounts Payable.


126. In which of the following situations would the trial balance not balance? A. A $1,000 collection of an account receivable was erroneously posted as a debit to Accounts Receivable and a credit to Cash.B. The purchase of office supplies on account for $3,250 was erroneously recorded in the journal as $2,350 debit to Office Supplies and credit to Accounts Payable.C. A $50 cash receipt for the performance of a service was not recorded at all.D. The purchase of office equipment for $1,200 was posted as a debit to Office Supplies and a credit to Cash for $1,200.E. The cash payment of a $750 account payable was posted as a debit to Accounts Payable and a debit to Cash for $750.


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127. The credit purchase of a delivery truck for $4,700 was posted to Delivery Trucks as a $4,700 debit and to Accounts Payable as a $4,700 debit. What effect would this error have on the trial balance? A. The total of the Debit column of the trial balance will exceed the total of the Credit column by $4,700.B. The total of the Credit column of the trial balance will exceed the total of the Debit column by $4,700.C. The total of the Debit column of the trial balance will exceed the total of the Credit column by $9,400.D. The total of the Credit column of the trial balance will exceed the total of the Debit column by $9,400.E. The total of the Debit column of the trial balance will equal the total of the Credit column.


128. If the Debit and Credit column totals of a trial balance are equal, then: A. All transactions have been recorded correctly.B. All entries from the journal have been posted to the ledger correctly.C. All ledger account balances are correct.D. The total debit entries and total credit entries are equal.E. The balance sheet would be correct.


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129. Of the following errors, which one by itself will cause the trial balance to be out of balance? A. A $200 cash salary payment posted as a $200 debit to Cash and a $200 credit to Salaries Expense.B. A $100 cash receipt from a customer in payment of his account posted as a $100 debit to Cash and a $10 credit to Accounts Receivable.C. A $75 cash receipt from a customer in payment of his account posted as a $75 debit to Cash and a $75 credit to Cash.D. A $50 cash purchase of office supplies posted as a $50 debit to Office Equipment and a $50 credit to Cash.E. An $800 prepayment from a customer for services to be rendered in the future was posted as an $800 debit to Unearned Revenue and an $800 credit to Cash.


130. A $130 credit to Office Equipment was credited to Fees Earned by mistake. By what amounts are the accounts under- or overstated as a result of this error? A. Office Equipment, understated $130; Fees Earned, overstated $130.B. Office Equipment, understated $260; Fees Earned, overstated $130.C. Office Equipment, overstated $130; Fees Earned, overstated $130.D. Office Equipment, overstated $130; Fees Earned, understated $130.E. Office Equipment, overstated $260; Fees Earned, understated $130.


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131. Which of the following groups of accounts are not balance sheet accounts? A. Assets.B. Liabilities.C. Revenues.D. Equity accounts.E. All of these are balance sheet accounts.


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Matching Questions

132. Match the following definitions and terms by placing the letter that identifies the best definition in the blank space next to the term.

a. Decrease in an asset and expense account, and increase in a liability, owner's capital and revenue account; recorded on the right side of a T-account.b. A file containing all accounts of a company and their balances.c. An accounting system where each transaction affects and is recorded in at least two accounts; the sum of the debits for each entry must equal its credits.d. A company's record of each transaction in one place that shows debits and credits for each transaction.e. An increase in an asset and expense account, and decrease in a liability, owner's capital, and revenue account; recorded on the left side of a T-account.f. A record of the increases and decreases in a specific asset, liability, equity, revenue, or expense item.g. A simple account form used as a helpful tool in showing the effects of transactions and events on specific accounts.h. Another name for the accounting books, or simply the books.i. The process of transferring journal entry information to the ledger.j. The sources of accounting information.

1. Posting j 2 2. Source documents e 3 3. Debit i 1 4. Account c 10 5. Ledger b 5 6. T-account d 8 7. Credit f 4 8. Journal a 7 9. Accounting records g 6 10. Double-entry accounting h 9

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C1-C5

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a. An increase in an asset and expense account, and a decrease in a liability, owner's capital, and revenue account; recorded on the left side of a T-account.b. A decrease in an asset and expense account, and an increase in a liability, owner's capital, and revenue account; recorded on the right side of a T-account.c. A written promise to pay a definite sum of money on a specified future date.d. The difference between total debits and total credits for an account including the beginning balance.e. A list of accounts and their balances at a point in time; the total debit balances should equal the total credit balances.f. A list of all accounts used by a company and the identification number assigned to each account.g. The ratio of total liabilities to total assets; used to reflect the risk associated with the company's debts.h. An account with debit and credit columns for recording entries and a third column for showing the balance of the account after each entry.i. A complete record of each transaction in one place that shows debits and credits for each transaction.j. A file containing all accounts of a company and their balances.

1. Credit a 7 2. Note payable c 2 3. Balance column account j 9 4. Account balance i 5 5. Journal g 6 6. Debt ratio f 8 7. Debit e 10 8. Chart of accounts b 1 9. Ledger d 4 10. Trial balance h 3

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: A2Learning Objective: C1-C5

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a. A simple form used as a helpful tool in understanding the effect of transactions and events on specific accounts.b. The most flexible type of journal, it can be used to record any kind of transaction.c. A journal entry that affects at least three accounts.d. A written promise from a customer to pay a definite sum of money on a specified future date.e. A record of the increases and decreases in a specific asset, liability, equity, revenue, or expense item.f. A list of all accounts used by a company and the identification number assigned to each account.g. The process of transferring journal entry information to the ledger.h. A list of accounts and their balances at a point in time; the total debit balances should equal the total credit balances.i. A column in journals where individual account numbers are entered when entries are posted to ledger accounts.j. Liabilities created when customers pay in advance for products or services; satisfied by delivering the products or services in the future.

1. Account b 2 2. General journal f 6 3. Posting reference column d 5 4. T-account a 4 5. Note receivable j 10 6. Chart of accounts c 8 7. Posting i 3 8. Compound journal entry g 7 9. Trial Balance e 1 10. Unearned revenues h 9

AACSB: CommunicationsAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: MediumLearning Objective: C1-C5

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135. Identify each of the following accounts as a revenue (R), expense (E), asset (A), liability (L), or equity (OE) by placing initials (R,E,A,L or OE) in the blanks.

1. Unearned Fee Revenue E 5 2. Fees Revenue A 6 3. Owner, Capital A 11 4. Supplies OE 3 5. Salary Expense R 2 6. Cash A 7 7. Accounts Receivable L 9 8. Prepaid Insurance OE 12 9. Accounts Payable A 4 10. Office Furniture L 1 11. Equipment A 8 12. Owner, Withdrawals A 10


136. The following accounts appear on either the Income Statement (IS) or Balance Sheet (BS). In the space provided next to each account write the letters, IS or BS, that identify the statement on which the account appears.

1. Owner, Capital BS 7 2. Wages Payable IS 4 3. Cash BS 5 4. Rent Expense IS 4 5. Unearned Fees Revenues BS 6 6. Accounts Payable BS 1 7. Office Equipment IS 10 8. Notes Receivable BS 3 9. Rent Expense BS 8 10. Fees Revenue BS 2

AACSB: CommunicationsAICPA BB: LegalAICPA FN: ReportingDifficulty: MediumLearning Objective: P3

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Essay Questions

137. Vicki Lake is a computer consultant. Shown below are (a) several accounts in her ledger with each account preceded by an identification number, and (b) several transactions completed by Lake. Indicate the accounts debited and credited when recording each transaction by placing the proper account identification numbers to the right of each transaction.


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138. David Roberts is a real estate appraiser. Shown below are (a) several accounts in his ledger with each account preceded by an identification number, and (b) several transactions completed by Roberts. Indicate the accounts debited and credited when recording each transaction by placing the proper account identification numbers to the right of each transaction.

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Short Answer Questions

139. List the steps in processing transactions.

Business transactions and events are the starting point. Source documents are analyzed for the effects of the transactions and events on the accounting records. The information is recorded into the journal. The information is then posted to the accounts and a trial balance is prepared. The final step is the preparation of financial statements and reports for decision makers.


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140. Describe source documents and their purpose.

Source documents are the sources of information that identify and describe transactions and events. They provide objective and reliable evidence about transactions and their amounts. Examples of source documents include checks, invoices, sales receipts, credit card statements, and bank statements. They can be in hard copy or electronic form.


141. Explain how accounts are used in recording information about transactions.

Accounts are classified into three general categories: assets, liabilities and equity. Accounts are records of increases and decreases of specific items in these categories. The accounts serve as the information resource for financial statements and reports.


142. Explain the difference between a ledger and a chart of accounts.

A ledger is a record containing all of the accounts of a business and their balances. The chart of accounts is a list of all of the accounts in the ledger that includes an identification number for the accounts.


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143. Explain debits and credits and their role in the accounting system.

Debit refers to the left side of an account and credit refers to the right side of an account. Debits and credits are part of the double-entry accounting system. This system is based on the concept that all transactions and events affect at least two accounts. The double entry system is organized around the accounting equation which states that assets = liabilities + equity. Assets and expenses have normal debit balances, and liabilities, owner's equity and revenues have normal credit balances


144. Explain the debt ratio and its use in analyzing a company's financial condition.

The debt ratio is calculated by dividing total liabilities by total assets. It reveals the percentage of the company's assets that are financed by creditors. The higher the ratio, the more risk a company has in trying to repay the debt with interest.


145. Explain the recording and posting processes.

Information from business transactions and events is recorded in the journal in the form of journal entries. The journal entries include the date, the account titles, and debit and credit amounts. Journal entries may also include a further description of the transaction. During the posting process the debit and credit amounts recorded in the journal are transferred to the individual accounts in the ledger.


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146. What is a trial balance? What is its purpose?

The trial balance is a list of all of the accounts in the ledger with balances at a point in time. The list is organized by debit and credit balances. The purpose of the trial balance is to summarize the account totals and to verify the accuracy of the total debits and credits. If the total debits and credits are not equal, then the trial balance is out of balance which indicates an error in the accounting records. However, even if debits do equal credits this is no guarantee that no errors were made in recording and posting transactions.


147. Describe the link between the income statement, the statement of owner's equity, and the balance sheet.

The income statement shows the amount of net income the company has earned. That income is carried to the statement of owner's equity. The net income is added to the beginning owner's equity, and owner's withdrawals are subtracted to determine the ending owner's equity. The ending owner's equity is then carried to the balance sheet.

AACSB: CommunicationsAICPA BB: LegalAICPA FN: ReportingDifficulty: MediumLearning Objective: P3

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Problems

148. Identify each of the following items would likely serve as a source document by marking an X in the appropriate column. The first one is done as an example


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149. Indicate whether a debit or credit entry would be made to record the following changes in each account. a. To decrease Cashb. To increase Owner, Capitalc. To decrease Accounts Payable.d. To increase Salaries Expense.e. To decrease Supplies.f. To increase Revenue.g. To decrease Accounts Receivable.h. To increase Owner, Withdrawals.

a. Credit, b. Credit, c. Debit, d. Debit, e. Credit, f. Credit, g. Credit, h. Debit


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150. The following is a list of accounts and identification letters A through J for Shannon Management Co.:

Use the form below to identify the type of account and its normal balance. The first item is filled in as an example.


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151. Dolly Barton began Barton Office Services in October and during that month completed these transactions: a. Invested $10,000 cash, and $15,000 of computer equipment.b. Paid $500 cash for an insurance premium covering the next 12 months.c. Completed a word processing assignment for a customer and collected $1,000 cash.d. Paid $200 cash for office supplies.e. Paid $2,000 for October's rent.Prepare journal entries to record the above transactions. Explanations are unnecessary.


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152. A company sends a $1,500 bill to a customer for delivery services rendered. Set up the necessary T-accounts below and show how this transaction would be recorded directly in those accounts.


153. A company paid $2,500 cash to satisfy a previously recorded account payable. Set up the necessary T-accounts below and show how this transaction would be recorded directly in those accounts.


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154. A business paid $100 cash to Karen Smith (the owner of the business) for her personal use. Set up the necessary T-accounts below and show how this transaction would be recorded directly in those accounts.


155. On December 3, the Matador Company paid $5,400 cash in salaries to office personnel. Prepare the general journal entry to record this transaction.


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156. On February 5, Textron Stores purchased a van that cost $35,000. The firm made a down payment of $5,000 cash and signed a long-term note payable for the balance. Show the general journal entry to record this transaction.


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157. Krenz Car Care, owned and operated by Karl Krenz, began business in September of the current year. Karl, a master mechanic, had no experience with keeping a set of books. As a result, Karl entered all of September's transactions directly to the ledger accounts. When he tried to locate a particular entry he found it confusing and time consuming. He has hired you to improve his accounting procedures. The accounts in his General Ledger follow:

Prepare the general journal entries, in chronological order (a) through (e), from the T-account entries shown. Include a brief description of the probable nature of each transaction.

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158. Flora Accounting Services completed these transactions in February: a. Purchased office supplies on account, $300.b. Completed work for a client on credit, $500.c. Paid cash for the office supplies purchased in (a).d. Completed work for a client and received $800 cash.e. Received $500 cash for the work described in (b).f. Received $1,000 from a client for accounting services to be performed in March.

Prepare journal entries to record the above transactions. Explanations are not necessary.


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159. Leonard Matson completed these transactions during December of the current year:

Prepare general journal entries to record these transactions.

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160. Maria Sanchez began business as Sanchez Law Firm on November 1. Record the following November transactions by making entries directly to the T-accounts provided. Then, prepare a trial balance, as of November 30. a) Sanchez invested $15,000 cash and a law library valued at $6,000.b) Purchased $7,500 of office equipment from Johnson Bros. on credit.c) Completed legal work for a client and received $1,500 cash in full payment.d) Paid Johnson Bros. $3,500 cash in partial settlement of the amount owed.e) Completed $4,000 of legal work for a client on credit.f) Sanchez withdrew $2,000 cash for personal use.g) Received $2,500 cash as partial payment for the legal work completed for the client in (e).h) Paid $2,500 cash for the legal secretary's salary.

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AACSB: AnalyticAICPA BB: IndustryAICPA FN: MeasurementDifficulty: MediumLearning Objective: A1Learning Objective: P2

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161. Josephine's Bakery had the following assets and liabilities at the beginning and end of the current year:

If Josephine made no investments in the business and withdrew no assets during the year, what was the amount of net income earned by Josephine's Bakery?

Beginning owner's equity = $114,000 - $68,000 = $46,000Ending owner's equity = $135,000 - $73,000 = $62,000Increase in owner's equity = $62,000 - $46,000 = $16,000Since there were no investments or withdrawals during the year, the net income is $16,000.



If Josephine invested an additional $12,000 in the business during the year, but withdrew no assets during the year, what was the amount of net income earned by Josephine's Bakery?

Beginning owner's equity = $114,000 - $68,000 = $46,000Ending owner's equity = $135,000 - $73,000 = $62,000Increase in owner's equity = $62,000 - $46,000 = $16,000Net income = $16,000 - $12,000 = $4,000


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If Josephine made no investments in the business but withdrew $5,000 during the year, what was the amount of net income earned by Josephine's Bakery?

Beginning owner's equity = $114,000 - $68,000 = $46,000Ending owner's equity = $135,000 - $73,000 = $62,000Increase in owner's equity = $62,000 - $46,000 = $16,000Net income = $16,000 + $5,000 = $21,000



If Josephine invested an additional $12,000 in the business and withdrew $5,000 during the year, what was the amount of net income earned by Josephine's Bakery?

Beginning owner's equity = $114,000 - $68,000 = $46,000Ending owner's equity = $135,000 - $73,000 = $62,000Increase in owner's equity = $62,000 - $46,000 = $16,000Net income = $16,000 - $12,000 + $5,000 = $9,000


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165. A company had total assets of $350,000 and total liabilities of $101,500 and total equity of $248,500. Calculate its debt ratio.

$101,500/$350,000 = 29%

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision Making; Risk AnalysisDifficulty: MediumLearning Objective: A2

166. Montgomery Marketing Co. had assets of $475,000; liabilities of $275,500; and equity of $199,500. Calculate its debt ratio.

$275,500/$475,000 = 58%

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision Making and Risk AnalysisDifficulty: MediumLearning Objective: A2

167. List the steps in recording transactions.

1. Analyze transactions and source documents.2. Apply double-entry accounting.3. Record the journal entry.4. Post entry to ledger.


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168. For each of the following errors, indicate on the table below the amount by which the trial balance will be out of balance and which trial balance column (debit or credit) will have the larger total as a result of the error. a. $100 debit to Cash was debited to the Cash account twice.b. $1,900 credit to Sales was posted as a $190 credit.c. $5,000 debit to Office Equipment was debited to Office Supplies.d. $625 debit to Prepaid Insurance was posted as a $62.50 debit.e. $520 credit to Accounts Payable was not posted.


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169. After preparing an (unadjusted) trial balance at year-end, G. Chu of Chu Design Company discovered the following errors: 1. Cash payment of the $225 telephone bill for December was recorded twice. 2. Cash payment of a note payable was recorded as a debit to Cash and a debit to Notes Payable for $1,000. 3. A $900 cash withdrawal by the owner was recorded to the correct accounts as $90. 4. An additional investment of $5,000 cash by the owner was recorded as a debit to G. Chu, Capital and a credit to Cash. 5. A credit purchase of office equipment for $1,800 was recorded as a debit to the Office Equipment account with no offsetting credit entry. Using the form below, indicate whether the error would cause the trial balance to be out of balance by placing an X in either the yes or no column. Would the error cause the trial balance to be out of balance?

Would the error cause the trial balance to be out of balance?


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170. The balances for the accounts of Mike's Maintenance Co. for the year ended December 31 are shown below. Each account shown had a normal balance.

Calculate the correct balance for Cash and prepare a trial balance.


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171. At year-end, Harris Cleaning Service noted the following errors in its trial balance: 1. It understated the total debits to the Cash account by $500 when computing the account balance. 2. A credit sale for $311 was recorded as a credit to the revenue account, but the offsetting debit was not posted. 3. A cash payment to a creditor for $2,600 was never recorded. 4. The $680 balance of the Prepaid Insurance account was listed in the credit column of the trial balance. 5. A $24,900 truck purchase was recorded as a $24,090 debit to Vehicles and a $24,090 credit to Notes Payable. 6. A purchase of office supplies for $150 was recorded as a debit to Office Equipment. The offsetting credit entry was correct. 7. An additional investment of $4,000 by Del Harris was recorded as a debit to Del Harris, Capital and as a credit to Cash. 8. The cash payment of the $510 utility bill for December was recorded (but not paid) twice. 9. The revenue account balance of $79,817 was listed on the trial balance as $97,817. 10. A $1,000 cash withdrawal was recorded as a $100 debit to Del Harris, Withdrawal and $100 credit to cash. Using the form below, indicate whether each error would cause the trial balance to be out of balance, the amount of any imbalance, and whether a correcting journal entry is required.

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172. The following trial balance is prepared from the general ledger of Hal's Auto Repair.

Because the trial balance did not balance, you decided to examine the accounting records. You found that the following errors had been made:1 A purchase of supplies on account for $245 cash was posted as a debit to Supplies and as a debit to Accounts Payable.2 An investment of $500 cash by the owner was debited to Hal Frederick, Capital and credited to Cash.3 In computing the balance of the Accounts Receivable account, a debit of $600 was omitted from the computation.4 One debit of $300 to the Hal Frederick, Withdrawals account was posted as a credit.5 Office equipment purchased for $800 was posted to the Repair Equipment account.6 One entire entry was not posted to the general ledger. The transaction involved the receipt of $125 cash for repair services performed for cash.

Prepare a corrected trial balance for the Hal's Auto Repair as of October 31.

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aCash: Balance $975 + $1,000 (2) + 125 (6) = $2,100bAccounts Receivable: Bal. $3,800 + 600 (3) = $4,400cRepair Equipment: Bal. $13,000 - 800 (5) = $12,200dOffice Equipment: Bal. $6,600 + 800 (5) = $7,400eAccounts Payable: Bal $4,510 + 490 (1) = $5,000fHal Frederick, Capital: Bal. $23,000 + 1,000 (2) = $24,000gHal Frederick, Withdrawals: Bal. $4,200 + 600 (4) = $4,800hRepair fees earned: Bal $10,875 = 125 (6) = $11,000


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173. The following are all of the accounts of Flaherty Company that have a balance at the end of August. All accounts have normal balances:

a. Calculate net income.b. Determine the amount of owner's equity to be shown on the August 31 balance sheet.

AACSB: AnalyticAICPA BB: LegalAICPA FN: ReportingDifficulty: MediumLearning Objective: P3

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174. Based on the following trial balance for Sal's Beauty Shop, prepare an income statement, statement of owner's equity, and a balance sheet. Sal made no additional investments in the company during the year.

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Fill in the Blank Questions

175. ____________________________ and _____________________ are the starting points for the analyzing and recording process. Business transactions; events


176. The second step in the analyzing and recording process is to record the transactions and events in the _____________________________. Journal


177. The third step in the analyzing and recording process is to post the information to _________________________. Ledger accounts.


178. _________________ identify and describe transactions and events and provide objective evidence and amounts for recording. Source documents


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179. Revenues and expenses are two categories of ____________________ accounts. Equity


180. The _______________________ is a record containing all accounts used by a company. General ledger (or ledger)


181. The three general categories of accounts in a general ledger are __________________, _________________, and __________________________. Assets, liabilities, equity


182. ___________________ are promises of payment from customers to sellers. Accounts receivable


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183. Unearned revenue is classified as _______________ that is satisfied by delivering products or services in the future. A Liability


184. The four categories of equity accounts are _____________________, __________________, ______________________, and ______________________. Owner, Capital; owner withdrawals; revenues, expenses


185. A _______________ is a list of all the accounts used by a company and their identification codes. Chart of accounts


186. A ___________________ is a record containing all accounts for a company along with their balances. Ledger


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187. _____________________________ requires that each transaction affect, and be recorded in, at least two accounts. It also means that total amounts debited must equal total amounts credited for each transaction. Double-entry accounting


188. The difference between total debits and total credits for an account, including any beginning balance is the ________________________. Account balance


189. Increases in assets are _______________ to asset accounts, increases in liabilities are _______________ to liability accounts. Debited, credited


190. FastForward purchased $25,000 of equipment for cash. The Equipment asset account is _______________ for $25,000 and the cash account is _______________ for $25,000. Debited, credited


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191. Stride Rite had total liabilities of $130 million and total assets of $375 million. Its debt ratio was _______________. $130 million/$375million = 34.7%


192. _______________ is the process of transferring journal entry information to the ledger. Posting


193. A ___________________________ gives a complete record of each transaction in one place, and shows debits and credits for each transaction. Journal


194. An account format that is similar to a T-account in that it has columns for debits and credits, but that is different in that it has columns for transaction date, explanation, and the account balance is the ___________________________________. Balance column account


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195. The posting process is the link between the _______________ and the _____________. Journal; ledger


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Problems

196. James Haley owned a sailboat and was tired of his current job. He decided to open a business that provides day sails to tourists in his hometown. Prepare journal entries to record the following transactions.

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197. Based on the following trial balance for Smyth's Repair Shop, prepare an income statement, statement of owner's equity, and a balance sheet. Smyth made no additional investments in the company during the year.

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AACSB: CommunicationsAICPA BB: Industry or LegalAICPA FN: ReportingDifficulty: HardLearning Objective: P3

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198. For each of the following (1) identify the type of account as an asset, liability, equity, revenue, or expense, and (2) identify the normal balance of the account.


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199. Identify whether a debit or credit yields the indicated change for each of the following accounts.


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200. Indicate the financial statement on which each of the following items appears. Use I for income statement, E for statement of owner's equity, and B for balance sheet.

AACSB: AnalyticAICPA BB: IndustryAICPA FN: Decision MakingDifficulty: EasyLearning Objective: P3

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chapter 01

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