Chapter 02 Financial Statements and the Accounting System Answer
Key
True / False Questions
1.
The first step to get from transactions and events to financial statements is to identify each
transaction from source documents.
2.
Preparation of a trial balance is the first step in processing a financial transaction.
3.
Source documents identify and describe business transactions and are the basis for
accounting entries.
4.
Items such as sales tickets, 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 paid to the stockholders are 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 paid to stockholders by the business of a corporation and used for personal expenses,
should be treated as an expense of the business.
11.
When a company provides services for which cash will not be received until some future date,
the company should record the amount charged as accounts receivable.
12.
A company’s chart of accounts is a list of all the accounts used and includes an identification
number assigned to each account.
13.
An account’s balance is the difference between the total debits and total credits for the
account, including any beginning balance.
14.
The right side of an account is called the
debit
side.
15.
In a double-entry accounting system, the total dollar amount debited must always equal the
total dollar amount credited.
16.
Increases in liability accounts are recorded as debits.
17.
Debits increase asset and expense accounts.
18.
Credits
always increase account balances.
19.
Crediting
an expense account decreases it.
20.
A revenue account normally has a debit balance.
21.
Asset accounts are normally decreased by debits.
22.
Debit
means increase and
credit
means decrease for all accounts.
23.
Asset accounts normally have debit balances and revenue accounts normally have credit
balances.
24.
A dividend normally has a debit balance.
25.
A debit entry is always an increase in the account.
26.
A transaction that credits an asset account and credits a liability account must also affect one
or more other accounts.
27.
A transaction that decreases a liability and increases an asset must also affect one or more
other accounts.
28.
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.
29.
The purchase of supplies on credit should be recorded with a debit to Supplies and a credit to
Accounts Payable.
30.
If a company purchases equipment paying cash, the journal entry to record this transaction
will include a debit to Cash.
31.
If a company provides services to a customer on credit, the company providing the service
should credit Accounts Receivable.
32.
When a company bills a customer for $700 for services rendered, the journal entry to record
this transaction will include a $700 debit to Services Revenue.
33.
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.
34.
The higher a company’s debt ratio, the lower the risk of a company not being able to meet its
obligations.
35.
The debt ratio is calculated by dividing total assets by total liabilities.
36.
A company that finances a relatively large portion of its assets with liabilities is said to have a
high degree of financial leverage.
37.
If a company is highly leveraged, this means that it has relatively high risk of not being able to
repay its debt.
38.
Booth Industries has liabilities of $105 million and total assets of $350 million. Its debt ratio is
40.0%.
39.
A journal entry that affects no more than two accounts is called a compound entry.
40.
Posting
is the transfer of journal entry information to the ledger.
41.
Transactions are recorded first in the ledger and then transferred to the journal.
42.
The journal is known as a book of original entry.
43.
A general journal gives a complete record of each transaction in one place, and shows the
debits and credits for each transaction.
44.
The general journal is known as the book of
final
entry because financial statements are
prepared from it.
45.
At a given point in time, a business’s trial balance is a list of all of its general ledger accounts
and their balances.
46.
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 common stock and dividends,
followed by revenues and expenses.
47.
The trial balance can serve as a replacement for the balance sheet, since total debits must
equal total credits.
48.
A balanced trial balance is proof that no errors were made in journalizing transactions, posting
to the ledger, and preparing the trial balance.
49.
If cash was incorrectly debited for $100 instead of correctly crediting it for $100, the cash
account’s balance will be overstated (too high).
50.
The financial statement that summarizes the changes in retained earnings is called the
balance sheet.
51.
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).
52.
If common stock account had a $10,000 credit balance at the beginning of the period, and
during the period, the stockholders invest an additional $5,000, the balance in the common
stock account listed on the trial balance will be equal to a debit balance of $5,000.
53.
Dividends are not reported on a business’s income statement.
54.
An income statement reports the revenues earned less the expenses incurred by a business
over a period of time.
55.
The balance sheet reports the financial position of a company at a point in time.
56.
The same four basic financial statements are prepared by both U.S. GAAP and IFRS.
57.
Neither U.S. GAAP nor IFRS require the use of accrual basis accounting.
Multiple Choice Questions
58.
The accounting process to get from transactions and events to financial statements begins
with:
59.
All of the following statements regarding a sales invoice are true
except
:
60.
A business’s source documents may include all of the following
except
:
61.
A business’s source documents:
62.
A business’s record of the increases and decreases in a specific asset, liability, equity,
revenue, or expense is known as a(n):