Accounting Chapter 2 1 When a company provides services for which cash will not be received until some future date, the company should record the amount billed as accounts receivable

Financial and Managerial Accounting, 8e (Wild)

Chapter 2 Accounting for Business Transactions

1) Business transactions and events are the starting points of financial statements.

2) Preparation of a trial balance is the first step in processing a financial transaction.

3) Source documents identify and describe transactions and events entering the accounting

process.

4) Items such as sales receipts, bank statements, checks, and purchase orders are examples of a

business’s source documents.

5) An account is a record of increases and decreases in a specific asset, liability, equity, revenue,

or expense item.

6) A customer’s promise to pay on credit is classified as an account payable by the seller.

7) Dividends are subtracted on the income statement as a business expense.

8) The purchase of land and buildings will generally be recorded in the same ledger account.

9) Unearned revenues are classified as liabilities.

10) Cash dividends paid to stockholders are not reported on the income statement.

11) When a company provides services for which cash will not be received until some future

date, the company should record the amount billed as accounts receivable.

12) Dividends always decrease equity.

13) Expenses always decrease equity.

14) Revenues always increase equity.

15) The issuance of common stock always decrease equity.

16) Unearned revenue is a liability that is settled in the future when a company delivers its

products or services.

17) A company’s chart of accounts is a list of all the accounts used and includes an identification

number assigned to each account.

18) An account’s balance is the difference between the total debits and total credits for the

account, including any beginning balance.

19) The right side of an account is called the debit side.

20) In a double-entry accounting system, total debits must equal total credits for all entries, and

total debit account balances in the ledger must equal total credit account balances.

21) Increases in liability accounts are recorded as debits.

22) Debits increase asset and expense accounts.

23) Credits always increase account balances.

24) An expense account normally has a credit balance.

25) A revenue account normally has a debit balance.

26) Asset accounts are decreased by debits.

27) Debit means increase and credit means decrease for all accounts.

28) Asset accounts normally have debit balances and revenue accounts normally have credit

balances.

29) The Dividends account normally has a debit balance.

30) A debit entry always increases an account.

31) A transaction that credits an asset account and credits a liability account must also affect one

or more other accounts.

32) A transaction that decreases a liability and increases an asset must also affect one or more

other accounts.

33) If insurance coverage for the next two years is paid for in advance, the amount of the

payment is debited to an asset account called Prepaid Insurance.

34) The purchase of supplies on credit should be recorded with a debit to Supplies and a credit to

Accounts Payable.

35) If a company purchases equipment paying cash, the journal entry to record this transaction

will include a debit to Cash.

36) If a company provides services to a customer on credit, the company providing the service

should credit Accounts Receivable.

37) When a company bills a customer for $700 for services performed, the journal entry to

record this transaction will include a $700 debit to Services Revenue.

38) 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.

39) The higher a company’s debt ratio, the lower the risk of a company not being able to pay its

debts.

40) The debt ratio is calculated by dividing total assets by total liabilities.

41) A company that finances a relatively large portion of its assets with liabilities is said to have

a high degree of financial leverage.

42) If a company is highly leveraged, this means that it has relatively high risk of not being able

to repay its debt.

43) Stark Co. has liabilities of $105 million and total assets of $350 million. Its debt ratio is

40.0%.

44) A journal entry that affects only two accounts is called a compound entry.

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

46) Transactions are recorded first in the ledger and then transferred to the journal.

47) A general journal gives a complete record of each transaction in one place, and shows the

debits and credits for each transaction.

48) The general journal is a collection of all accounts and their balances.

49) At a given point in time, a trial balance is a list of all ledger accounts and their balances.

50) Errors made in journalizing transactions, posting to the ledger, and preparing the trial balance

can still exist in a balanced trial balance.

51) The trial balance can serve as a replacement for the balance sheet, since total debits must

equal total credits.

52) A balanced trial balance is proof that no errors were made in journalizing transactions,

posting to the ledger, and preparing the trial balance.

53) If cash was incorrectly debited for $100 instead of correctly debiting accounts receivable for

$100, assuming no other errors, the trial balance will balance.

54) The financial statement that summarizes how equity changes over the reporting period is

called the balance sheet.

55) An income statement reports revenues earned minus expenses incurred over a period of time.

56) The detail of individual revenue and expense accounts is reported on the balance sheet.

57) The heading on every financial statement lists the three W’s—Who (the name of the

business); What (the name of the statement); and Where (the organization’s address).

58) If the Common stock account had a $10,000 credit balance at the beginning of the period,

and during the period, an additional $5,000 of common stock is issued, the balance in the

common stock account listed on the trial balance will be equal to a debit balance of $5,000.

59) Dividends paid to stockholders are not reported on a business’s income statement.

60) An income statement reports the revenues earned minus expenses incurred by a business

over a period of time.

61) The balance sheet reports the financial position of a company at a point in time.

62) The same four basic financial statements are prepared by both U.S. GAAP and IFRS.

63) Neither U.S. GAAP nor IFRS require the use of accrual basis accounting.

64) The amount of net income is added on the statement of retained earnings.

65) The accounting process begins with:

A) Analysis of business transactions and source documents.

B) Preparing financial statements and other reports.

C) Analysis of prepared financial statements.

D) Presentation of financial information to decision-makers.

E) Preparation of the trial balance.

66) Which of the following statements is not true:

A) Accounts receivable are held by a seller.

B) Accounts receivable arise from credit sales.

C) Accounts receivable are increased by customer payments.

D) Accounts receivable are classified as assets.

E) Accounts receivable are increased by billings to customers.

67) A business’s source documents may include all of the following except:

A) Sales receipts.

B) Ledgers.

C) Checks.

D) Purchase orders.

E) Bank statements.

68) A business’s source documents:

A) Include the ledger.

B) Provide objective evidence that a transaction has taken place.

C) Must be in electronic form.

D) Are records of all increases and decreases in specific asset.

E) Include the chart of accounts.

69) A record of the increases and decreases in a specific asset, liability, equity, revenue, or

expense is known as a(n):

A) Journal.

B) Posting.

C) Trial balance.

D) Account.

E) Chart of accounts.

70) When cash is received from a stockholder in exchange for common stock, the transaction is

recorded by debiting Cash and crediting a(n):

A) Asset account.

B) Equity account.

C) Revenue account.

D) Expense account.

E) Liability account.

71) Identify the account used by businesses to record the transfer of assets from a business to its

stockholders:

A) A revenue account.

B) The Dividends account.

C) The Common stock account.

D) An expense account.

E) A liability account.

72) Identify the statement below that 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 by the customer are called accounts receivable.

C) Increases and decreases in cash are always recorded in the common stock 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.

73) Unearned revenues are generally:

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 common stock.