978-1337276337 Test Bank Chapter 3 Part 1

Chapter 3

Page 1

True / False

1. All transactions refer to external events.

a. True

b. False

2. The use of equipment in a company is an external event.

a. True

b. False

3. The payment of wages to employees is an internal event.

a. True

b. False

Page 2

4. An external event involves interaction between an entity and its environment.

a. True

b. False

5. Not all recognizable events are supported by a standard source document.

a. True

b. False

6. A source document is a record used to accumulate amounts for each individual asset, liability, revenue, expense, and

component of stockholders’ equity.

a. True

b. False

Page 3

7. The issuance of stock decreases a company’s assets and increases its stockholders’ equity.

a. True

b. False

8. Payment of a cash dividend decreases both cash and stockholders’ equity of the distributing business.

a. True

b. False

9. Under the cost principle, assets are always carried at their original cost or historical cost.

a. True

b. False

Page 4

10. Every accounting transaction affects both the balance sheet and the income statement.

a. True

b. False

11. The accounting equation must balance after each transaction.

a. True

b. False

12. Dividends are a determinant of net income.

a. True

b. False

Page 5

13. If a company purchases equipment by issuing a note payable, its total assets will not change.

a. True

b. False

14. A company’s chart of accounts will reflect the nature of its business.

a. True

b. False

15. The origins of single-entry accounting were documented in a book written by Pacioli over 500 years ago. It includes

the concepts of bookkeeping that are still applied today.

a. True

b. False

Page 6

16. There is a universal chart of accounts that is applicable to all businesses.

a. True

b. False

17. A T account for Cash cannot contain any credits.

a. True

b. False

18. A debit entry increases assets, decreases liabilities, or decreases stockholders’ equity.

a. True

b. False

Page 7

19. The normal balance of the Dividends account is a credit.

a. True

b. False

20. Under the double-entry system of accounting, every transaction is entered in at least two accounts on opposite sides of

T accounts.

a. True

b. False

21. A debit is a negative entry.

a. True

b. False

Page 8

22. With few exceptions, the balance of an account should be on the side of the T account that causes the increase.

a. True

b. False

23. The credit side of an account is the right side, while the debit side is the left side.

a. True

b. False

24. Debits are good and credits are bad in financial terms.

a. True

b. False

Page 9

25. When making a general journal entry, there can only be one debit and one credit.

a. True

b. False

26. The initial step in the recording process is posting.

a. True

b. False

27. Every business transaction is recorded by a debit to a balance sheet account and a credit to an income statement

account.

a. True

b. False

Page 10

28. Only events that can be measured will be reflected in the journal entries.

a. True

b. False

29. The ledgers are an example of an accounting book of original entry.

a. True

b. False

30. The general journal is often used to record repetitive transactions.

a. True

b. False

Chapter 3

Page 11

31. The general ledger is sometimes called the book of original entry because it is the accounting record where

transactions are first recorded.

a. True

b. False

32. A trial balance is the listing of each account and its balance at a specific point in time.

a. True

b. False

33. If debits equal credits in a trial balance, then all entries were correctly posted to the accounts.

a. True

b. False

Chapter 3

Page 12

34. A trial balance can be distributed to stockholders in place of the balance sheet.

a. True

b. False

35. A trial balance that balances provides proof that all transactions were correctly journalized and posted to the ledger.

a. True

b. False

36. A trial balance is a financial statement.

a. True

b. False

Chapter 3

Page 13

37. A trial balance can be as informal as an adding machine tape with the account titles penciled in next to the debit and

credit amounts.

a. True

b. False

38. Which one of the following statements is true?

a. External events (transactions) involve interactions between an entity and a party outside the entity.

b. Every event or transaction that affects an entity is identified from a source document.

c. All economic events can be reliably measured.

d. The movement of raw materials into production is an external event.

39. Which of the following is an internal event (transaction)?

a. Life guard salaries are paid by a swim club.

b. Dividends are distributed to shareholders.

c. Eggs used to make omelets in a restaurant are purchased.

d. None of these are correct.

Chapter 3

Page 14

40. Which one of the following best defines an internal event in terms of accounting?

a. Every type of transaction is an internal event

b. An event recognized in a set of financial statements

c. A happening of consequence to an entity

d. An event occurring entirely within an entity

41. All of the following are external events (transactions) except for a department store

a. moving goods from the stock-room to the retail floor for sale.

b. running ads in a local newspaper.

c. purchasing merchandise from a clothing manufacturer.

d. selling clothing to customers on credit.

42. Which of the following events (transactions) is an internal event for a business entity?

a. An accountant provides services for clients.

b. An accountant purchases computer equipment to maintain business records and prepare legal documents.

c. An accountant receives cash payments from clients for services performed.

d. Periodically, the historical cost of the computer equipment used by an accountant is recorded as depreciation

expenses.

Chapter 3

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43. All of the following events (transactions) would be identified from standard source documents except for

a. freight charges for merchandise purchased from suppliers.

b. the amount to be paid to settle a lawsuit for discrimination in hiring employees.

c. wages to be paid to hourly employees.

d. commissions earned by sales employees.

44. Which of the following statements is true?

a. Only the effects of internal transactions must be recognized and recorded in the entity’s accounting system.

b. An internal event is a transaction between an entity and its environment.

c. Not all recognizable events are supported by a standard source document.

d. Only the effects of external events must be recognized, measured, and recorded in an entity’s accounting system.

45. Which of the following would be a case where an event as a transaction is not supported by a source document?

a. Purchase of inventory on credit

b. Cash sale

c. Credit sale

d. None of these are correct

Chapter 3

Page 16

46. Which of the following statements is false?

a. Checks and deposit slips are the main source of documents backing up the bank statement.

b. Retailers use cash register tapes to recognize sales.

c. Stock certificates are evidence of being a creditor of the company.

d. Time cards are used as the source of information to record wages.

47. The purchase of office equipment on credit has what effect on the accounting equation?

a. Assets increase and liabilities increase.

b. Liabilities increase and stockholders’ equity decreases.

c. Assets decrease and stockholders’ equity decreases.

d. Assets decrease and liabilities decrease.

48. The payment of employee salaries has what effect on the accounting equation?

a. Assets decrease and stockholders’ equity decreases.

b. Liabilities decrease and stockholders’ equity decreases.

c. Assets decrease and liabilities increase.

d. Assets increase and liabilities decrease.

Chapter 3

Page 17

49. During November, ABC, Inc. purchased office supplies for cash. The supplies will be used in November. What effect

does this purchase transaction have on the accounting equation?

a. Assets increase and stockholders’ equity decreases.

b. Assets increase and liabilities increase.

c. Assets decrease and liabilities decrease.

d. There is no effect on the accounting equation as one asset account increases while another asset account

decreases.

50. XYZ Corp. made cash sales to customers. What effect does this transaction have on the accounting equation?

a. Liabilities increase and stockholders’ equity increases.

b. There is no effect on the accounting equation as one asset account increases while another asset account

decreases.

c. Assets increase and liabilities increase.

d. Assets increase and stockholders’ equity increases.

51. Blake and Ryan each invest $30,000 in a business and are given shares of stock in Jones Industries as evidence of their

ownership interests. For this transaction, identify the effect on the accounting equation.

a. Assets increase and liabilities increase.

b. Assets increase and stockholders’ equity increases.

c. Liabilities increase and stockholders’ equity decreases.

d. Liabilities decrease and assets decrease.

52. A truck is purchased on credit. For this transaction, identify the effect on the accounting equation.

a. Assets increase and liabilities increase.

b. Assets increase and owners’ equity increases.

c. Liabilities increase and owners’ equity decreases.

d. Liabilities decrease and assets decrease.

Chapter 3

Page 18

53. Services are provided for customers who are sent bills for the amount they owe. For this transaction, identify the effect

on the accounting equation.

a. Assets increase and liabilities increase.

b. Assets increase and stockholders’ equity increases.

c. Liabilities increase and stockholders’ equity decreases.

d. Liabilities decrease and assets decrease.

54. Payment is received from customers who were billed earlier for services provided for them. For this transaction,

identify the effect on the accounting equation.

a. Assets increase and liabilities increase.

b. Assets increase and stockholders’ equity increases.

c. Liabilities increase and stockholders’ equity decreases.

d. There is no effect on the accounting equation as one asset account increases while another asset account

decreases.

55. Payment is made for land purchased earlier on credit. For this transaction, identify the effect on the accounting

equation.

a. Assets increase and liabilities increase.

b. Assets increase and stockholders’ equity increases.

c. Liabilities increase and stockholders’ equity decreases.

d. Liabilities decrease and assets decrease.

Chapter 3

Page 20

59. Owners of Tri-States Industries, Ralph and Maureen, are sent a dividend check from the company. For this

transaction, what is the effect on the accounting equation for Tri-States Industries?

a. Assets decrease and stockholders’ equity decreases.

b. Assets increase and stockholders’ equity increases.

c. Liabilities increase and stockholders’ equity decreases.

d. Liabilities decrease and stockholders’ equity increases.

60. One effect on the accounting equation when a firm borrows money is that

a. stockholders’ equity decreases.

b. assets increase.

c. liabilities decrease.

d. assets decrease.