Chapter 2
1. The balance sheet groups individual accounts by type (asset, liability, or shareholders’ equity) and lists these
accounts with their balances as of the balance sheet date.
2. The date of the balance sheet appears at the bottom of the balance sheet.
3. The asset and liability categories group individual accounts by the expected timing of cash receipts (for
assets) or cash payments (for liabilities).
4. If the firm expects to collect or pay more than one year after the balance sheet date, the balance sheet
classifies these as noncurrent assets and noncurrent liabilities, respectively.
5. The balance sheet begins with a list of assets and then lists liabilities and shareholders’ equity.
6. Both U.S. GAAP and IFRS require firms to report balance sheet accounts for the prior year in addition to the
current year.
7. Under U.S. GAAP, assets and liabilities appear in order of increasing closeness-to-cash.
8. Common terminology describes items whose cash receipts or payments the firm expects will occur within
one year as current assets or current liabilities, respectively.
9. Under IFRS, assets and liabilities appear in order of decreasing closeness–to-cash.
10. The balance sheet equation provides the analytical framework to understand the effects of transactions and
events on the financial statements.
11. The balance sheet equation underlies the recording of transactions and events. It captures the financial
statement effects of operating, investing, and financing transactions—three key activities of business firms.
12. The balance sheet equation shows the equality of assets with liabilities plus shareholders’ equity. This
equation requires that an entity’s assets exactly balance, or offset, an equal amount of financing provided by
creditors and owners of the corporation.
13. Total liabilities plus shareholders’ equity shows the sources of all the firm’s financing, and the assets show
how the firm holds or has invested those funds.
14. The balance sheet equation maintains equality by reporting the financial statement effects of each event and
transaction in a dual manner, or what are termed the dual effects of transactions.
15. A T-account is a device or convention for organizing and accumulating the accounting entries of
transactions that affect an individual account, such as cash, accounts receivable, bonds payable, or additional
paid-in capital.
16. The T-account looks like the letter T, with a horizontal line bisected by a vertical line. Increases in assets
appear on the left side, and decreases in assets appear on the right side of T-accounts.
17. The T-account looks like the letter T, with a horizontal line bisected by a vertical line. Increases in liabilities
appear on the right side, and decreases in liabilities appear on the left side of T-accounts.
18. The T-account looks like the letter T, with a horizontal line bisected by a vertical line. Increases in
shareholders’ equity appear on the right side, and decreases in shareholders’ equity appear on the left side of
T-accounts.
19. The income statement links the beginning and ending balance sheets.
20. The beginning balance of the shareholders’ equity account Retained Earnings plus net income from the
income statement less dividends equals the ending balance of Retained Earnings.
21. The equation that describes the relationship between the balance sheet and the income statement through the
Retained Earnings account is as follows:
Retained Earnings (beginning) + Net Income – Dividends = Retained Earnings (ending)
22. Retained earnings measures the cumulative excess of net income over dividends for the life of a firm.
Cumulative means that retained earnings aggregates all undistributed earnings.
23. Income statement accounts are temporary accounts and, as such, will have beginning and ending balances of
zero.
24. The closing process involves reducing to zero the balance in each income statement account by debiting the
revenue accounts and crediting the expense accounts, and transferring to Retained Earnings the differences
between total revenues and total expenses.
25. A balance sheet account with a debit balance requires a closing entry that credits that account, because a
credit closing entry will result in a zero ending balance in the account.
26. A balance sheet account with a credit balance requires a closing entry that debits that account, because a
debit closing entry will result in a zero ending balance in the account.
27. The first step in the accounting record-keeping process is recording each transaction in a file or other record
in the form of a journal entry.
28. The last step in the accounting record-keeping process is preparing the statement of cash flows from balance
sheet amounts and from details of transactions affecting the cash account.
29. The last step in the accounting record-keeping process is preparing the balance sheet from amounts in the
balance sheet accounts.
30. In computerized systems, posting occurs instantly and automatically after journalizing.
31. Accounting is governed by the balance sheet equation, which shows the equality of
32. To maintain the balance sheet equality, it is necessary to report every event and transaction in a dual
manner. If a transaction results in an increase in the left hand side of the balance sheet, dual transactions
recording requires that which of the following must occur, to maintain the balance sheet equation:
33. To maintain balance sheet equality, it is necessary to report every event and transaction in a dual manner. If
a transaction results in an increase in a Liability account, then which of the following must occur, to maintain
the balance sheet equation:
34. T-accounts
35. Journal entries
36. Temporary accounts are for recording
37. Current assets are expected to be converted to cash within
38. Noncurrent assets are expected to be converted to cash over
39. The _____ are linked (that is, they articulate) through the shareholders’ equity account, Retained
Earnings.
40. Retained Earnings measures the cumulative excess of _____ for the life of a firm
41. A(n) _____ entry is used to record the effects of an event or transaction that was not previously recorded.
42. A _____ is used to record properly the effects of an event or transaction that was improperly recorded
during the accounting period.
43. _____ accounts provide disaggregated information concerning the net amount of an asset, liability, or
shareholders’ equity item. Note that the use of such accounts does not affect the total of assets, liabilities,
shareholders’ equity, revenues, or expenses, but only the balances in various accounts that comprise the totals
for these items.
44. What is the key difference between the direct method and indirect method for preparing the Statement of
Cash Flows?
45. The _____ displays (lists) cash receipts and disbursements from operating activities.
46. The _____ for preparing the Statement of Cash Flows begins with net income and adjusts that amount for
noncash items.
47. Magestic Foods Group, a European food retailer that operates supermarkets in seven countries, engaged in
the following transaction during 2009: purchased and received inventory costing €500 million on account from
various suppliers. Indicate the effects of the transaction on the balance sheet equation. Magestic Foods Group
applies IFRS, and reports its results in millions of euros.
48. Cement-R-Us, a firm specializing in building materials, engaged in the following transaction during
2009: issued 2,000 shares of common stock for $7,500 million in cash. Indicate the effects of the transaction
on the balance sheet equation. Cement-R-Us applies U.S. GAAP financial reporting standards, and reports its
results in millions of dollars.
49. Benezra S.A., a large Brazilian petrochemical company, reported a balance of R$1,600 million in Accounts
Receivable at the beginning of 2009 and R$1,500 million at the end of 2009. Its income statement reported total
Sales Revenue of R$12,000 million for 2009. Assuming that Benezra makes all sales on account, compute the
amount of cash collected from customers during 2009. Benezra applies Brazilian accounting standards, and
reports its results in thousands of reals (R$), the Brazilian currency. In answering this question, assume that
Benezra uses either U.S. GAAP or IFRS; for purposes of this problem, this choice will not matter.
50. Flyme Company, a U.S. airplane manufacturer, reported a balance of $8,100 million in Inventory at the
beginning of 2009 and $9,600 million at the end of 2009. Its income statement reported Cost of Products Sold
of $45,400 million for 2009. Compute the cost of inventory either purchased or manufactured during 2009.
Flyme Company applies U.S. GAAP, and reports its results in millions of U.S. dollars.
51. C-Swiss, a Swedish firm specializing in communication networks, reported a balance in Inventories of
SEK21,500 million at the beginning of 2009 and SEK22,500 million at the end of 2009. During 2009, C-Swiss
reported SEK114,100 million in Cost of Sales. How much was C-Swisss’ inventory purchases during
2009. Assume that all of C-Swisss’ inventory purchases are made on account. C-Swiss applies IFRS, and
reports its results in millions of Swedish kronor (SEK).
52. Ying Corporation, a Japanese construction firm, reported a balance in Income Taxes Payable of ¥3,700
million at the beginning of 2009 and ¥14,300 million at the end of 2009. Net income before income taxes for
2009 totaled ¥73,000 million. Assume that the firm is subject to an income tax rate of 43%. Compute the
amount of cash payments made for income taxes during 2009. Ying Corporation applies Japanese accounting
standards, and reports its results in millions of yen (¥). In answering this question, assume that Ying
Corporation uses either U.S. GAAP or IFRS; for purposes of this problem, this choice will not matter.
53. Energy Corporation, a U.S. diversified power management company, reported a balance in Retained
Earnings of $2,800 million at the beginning of 2009 and $3,300 million at the end of 2009. Based on Energy
Corporation’s financial reports for fiscal 2009, it reported dividends declared and paid of $250 million for 2009.
Compute the amount of net income for 2009. Energy Corporation applies U.S. GAAP, and reports its results in
millions of U.S. dollars.
54. On December 31, 2008, the Merchandise Inventories account of the Japanese electronics firm Flower
Limited (Flower) had a balance of ¥408,700 million, based on Flower’s financial reports for fiscal 2008.
Assume that during 2009, Flower purchased merchandise inventories on account for ¥1,456,400 million. On
December 31, 2009, it finds that merchandise inventory on hand is ¥412,400 million. Present journal entries to
account for all changes in the Inventories during 2009. Flower applies Japanese accounting standards, and
reports its results in millions of yen (¥). In answering this question, assume that Flower uses either U.S. GAAP
or IFRS; for purposes of this problem, this choice will not matter.
55. Klothing Company, a U.S. clothing designer, manufacturer, and retailer, reported a balance in prepaid
insurance of $90.7 million, based on its financial reports dated March 31, 2009, the end of its fiscal year.
Assume that of this balance, $24 million relates to an insurance policy with two remaining months of coverage.
Give the journal entries that Klothing would make on April 30, 2009; assuming that the firm closes its books
monthly. Klothing applies U.S. GAAP, and reports its results in millions of U.S. dollars.
56. ABC Group (ABC), headquartered in Switzerland, is one of the world’s largest engineering companies.
ABC applies U.S. GAAP, and reports its results in millions of U.S. dollars. Based on ABC’s financial reports
for fiscal 2009, at January 1, 2009, ABC reported a balance in its Prepaid Rent account of $247 million; assume
that this amount reflects its prepayments of rent on factory and office space for the next month. Assume also
that on January 31, 2009, ABC paid $3,200 million as the annual rent for the period from February 1, 2009, to
January 31, 2010. ABC has a calendar year reporting period. Provide the journal entries that ABC Group would
make during January 2009 that affect the Prepaid Rent account.
57. Tokyo Motor Company (Tokyo), a Japanese car manufacturer, reported Sales of Products of ¥22,670 billion
for the year ended March 31, 2000. The Cost of Products Sold was ¥18,356 billion. Assume that Tokyo made
all sales on credit. Provide the journal entries that Tokyo made during the fiscal year ended March 31, 2007,
related to these transactions. Tokyo applies U.S. GAAP, and reports its results in millions of yen (¥).
58. Any single event or transaction will have which of the following effects on the balance sheet?
59. Under U.S. GAAP, assets and liabilities appear in order of
60. Under IFRS, assets and liabilities appear in order of
61. A T-account is a device or convention for organizing and accumulating the accounting entries of
transactions that affect an individual account. Which of the following is true?
62. The equation that describes the relationship between the balance sheet and the income statement through the
Retained Earnings account is as follows:
63. The closing process involves:
64. The last step in the accounting record-keeping process is:
65. The first step in the accounting record-keeping process is:
66. Assets are classified as current for reporting purposes when
67. The stockholders’ equity of a firm can be defined as
68. Before preparing the balance sheet and income statement, an accountant would use what accounting record
to first record the firm’s transactions?
69. The accounting system uses a device called an account. An account
70. In a modern corporate environment, the trial balance is prepared from the
71. Current liabilities
72. If a corporation issues 1,000 shares of $1 par value common stock at $5 per share, how should the
transaction be accounted for?
73. Which of the following is (are) true regarding the T-account?
74. Which of the following is (are) true regarding the T-account?
75. Which of the following is (are) true regarding T-accounts?
76. T-accounts are frequently used in textbooks, demonstration problems, and examinations to accumulate
information about the effects of business transactions on individual balance sheet accounts and to prepare the
balance sheet. Alternatively, to accomplish the same objectives, some instructors and students might prefer to
use
77. The result of closing entries is that balances in all temporary accounts
78. Prepaid assets are valued on the balance sheet at
79. The result of closing entries is that balances in all temporary accounts
80. Which of the following are not an example of adjusting entries?
81. Julia Corporation purchased an insurance policy for three years beginning January 1, Year 2, and recorded
the $6,000 premium in the Prepaid Insurance account. What adjusting entry is required to reflect the proper
balances, in the insurance-related accounts at year-end, on December 31, Year 2?
82. Electra Company purchased $50,000 worth of office supplies on January 1. Electra expects to use 60
percent of the supplies in the first year and the remainder in the second year. After adjusting entries (and before
closing entries), how much should Electra show in its Supplies Expense account?
83. On April 1, Year 1, Colonial Bookstore bought an insurance policy costing $24,000 that would insure the
retail building for two years against fire loss. What asset account and what amount are recorded on the balance
sheet at December 31, Year 1?
84. On November 1, Year 1, August Collections Agency accepted a $100,000, 3-month note from a customer.
The note earns 12% interest per year. What is the amount of interest receivable recorded by August Collections
Agency at December 31, Year 1? (Assume no other entries to record interest have been made.)
85. Charles Company reports the following:
Contributed Capital
$ 200
Total Revenues
$ 800
Total Liabilities
$1,200
Beginning Retained Earnings
($ 100)
Total Expenses
$ 500
Dividends
$ 0
What are Total Assets?
86. Darius Company reports the following:
Total Assets
$800
Contributed Capital
$300
Total Revenues
$600
Beginning Retained Earnings
$200
Total Expenses
$700
Dividends
$100
What are Total liabilities?
87. Ellie Company reports the following:
Total Assets
$1,200
Total Revenues
$ 800
Total Liabilities
$ 500
Beginning Retained Earnings
$ 200
Total Expenses
$ 400
Dividends
$ 0
What is Contributed Capital?
88. What (other than a transactions spreadsheet ) serves the function of accumulating information about the
effect of business transactions on each balance sheet and income statement account?.
89. Solve for the unknown item for each of the following independent situations.
CASE A
CASE C
Total assets
A
600
Contributed capital
100
C
Total revenues
400
400
Total liabilities
600
250
Beginning retained earnings
(50)
100
Total expenses
250
200
Dividends
0
0
90. Collette and Cohen incorporate as CC Designs, Inc. on January 1, Year 1. CC Designs creates custom wall
finishes and sells painting products. The following transactions occur during January.
a.
Cohen contributes cash of $75,000 and receives 15,000 shares of $1 par value stock.
b.
Collette contributes $35,000 cash, office furniture with a value of $5,000, and computer equipment with
a value of $10,000 and receives 15,000 shares of $1 par value stock. The furniture and equipment is
expected to last 5 years and has no salvage value.
c.
On January 2, $10,000 of painting products are purchased. CC paid $8,000 cash with the remaining
amount on account.
d.
During January, painting products are sold for $8,000 cash. The cost of the products is $2,000.
e.
Additional painting products with a value of $5,000 are sold, with a cost of $1,500, but the cash is not
collected as of January 31st. It is expected that the $5,000 will be collected in full by February 15th.
f.
Cohen is paid a salary of $2,000.
g.
CC paid $1,200 for January and February rent.
Required:
Prepare appropriate accrual basis journal entries.
a. Cash 75,000
Common Stock 15,000
Additional Paid-in Capital 60,000