Business Activities—The Source of Accounting Information ♦ 67
72. A credit entry is used to record increases to
a.
cost of goods sold
b.
notes payable
c.
wages expense
d.
cash
73. As used in accounting, what do the terms “debit” and “credit” mean?
a.
bad and good things, respectively, that happen to a business
b.
down and up, respectively
c.
left and right sides, respectively, of an account
d.
first and second, respectively
MATCHING
For each of the account names below, identify which type of account it is. Use the following
identification system:
a.
asset
b.
liability
c.
owners’ equity
d.
revenue
e.
expense
1. Contributed capital
2. Cost of goods sold
3. Land
4. Supplies inventory
5. Investment by owners
6. Retained earnings
7. Notes payable
8. Employee wages
9. Sales
10. Merchandise inventory
11. Cash
12. Equipment
68 ♦ Chapter 2
Indicate the organizational activity which best describes the events listed below:
a.
Financing
b.
Investing
c.
Operating
13. Issuance of Stock
14. Payment of wages
15. Purchase of land
16. Sale of merchandise
17. Borrowing money
18. Sale of old equipment
Business Activities—The Source of Accounting Information ♦ 69
For each of the following transactions for Bartlett Co., indicate whether it is a:
a.
Financing Activity
b.
Investing Activity
c.
Operating Activity
19. Borrowed $45,000 from a bank
20. Paid $300 for electricity
21. Paid $3,000 for a delivery truck
22. Paid $600 toward the loan in #19 above
23. Received $3,000 cash from owner
24. Paid $800 for inventory
25. Sold Equipment for $1,000
26. Received $900 for sale of inventory
27. Paid $2,000 to employees for wages
28. Owner withdrew $75
70 ♦ Chapter 2
PROBLEM
1. William & Sons had the following transactions during February:
1. Received cash from owners investing in the business.
2. Paid wages for February.
3. Purchased equipment and signed a note payable for payment in the future.
4. Performed services for customers for cash.
5. Paid utilities for February.
6. Paid an amount on the note payable(in #3) .
Required:
For each transaction, show how its financial effects would affect the different elements of the
firm’s accounting system. Indicate increases with a plus (+) sign and decreases with a minus (-).
Where there is no effect on an item, leave the space blank.
Item
Assets
Liabilities
Equity
Revenue
Expenses
ANS:
Item
Assets
Liabilities
Equity
Revenue
Expenses
Business Activities—The Source of Accounting Information ♦ 71
2. For each event below, determine which of the categories in the firm’s accounting system would be
changed. If a category would increase, indicate this with a plus (+). If a category would decrease,
indicate this with a minus (-). If a category would not change, leave that line blank. (Item “a” is
completed as an example.)
NOTE: Do NOT make entries to the accounting system here. Instead, you are determining the
EFFECT of a transaction on account balances.
Assets
Liabilities
Equity
Revenue
Expense
a.
Wages earned by employees
but not yet paid
+
+
b.
$2,000 of inventory was
purchased using a note
payable to be paid later
c.
$8,000 was borrowed from
a bank
d.
Cash was distributed to
owners of the firm
e.
Equipment was acquired for
cash
f.
Inventory costing $600 was
sold for $800 cash
Assets
Liabilities
Equity
Revenue
Expense
a.
Wages were earned by
employees but not yet paid
+
+
c.
$8,000 was borrowed from
a bank
+
+
d.
Cash was distributed to
owners of the firm
–
e.
Equipment was acquired for
f.
Inventory costing $600 was
sold for $800 cash
+
+
+
72 ♦ Chapter 2
3. Adams Enterprises had the following events occur during a recent month. For each event,
determine which of the categories in the firm’s accounting system would be changed. If a category
would increase, indicate this with a plus (+). If a category would decrease, indicate this with a
minus (-). If a category would not change, leave that line blank. (Item “a” is completed as an
example.)
NOTE: Do NOT make entries to the accounting system here. Instead, you are determining the
EFFECT of a transaction on account balances.
Assets
Liabilities
Equity
Revenue
Expense
a.
$8,000 was borrowed from
a bank on a note payable
+
+
b.
Inventory was sold for cash
at a price above cost
c.
Equipment costing $5,000
was purchased for cash
d.
Services were performed
for customers who paid
cash
e.
Inventory was purchased
for cash
f.
Owners contributed cash to
start the company
a.
$8,000 was borrowed from
a bank on a note payable
b.
Inventory was sold for cash
at a price above cost
c.
Equipment costing $5,000
was purchased for cash
e.
Inventory was purchased
f.
Owners contributed cash to
Business Activities—The Source of Accounting Information ♦ 73
4. Young & Company completed the following transactions during October, its first month of
operations:
1. Owners invested $60,000 cash in the business.
2. $1,800 was paid for one month’s office rent.
3. Equipment was purchased by signing a $8,000 note.
4. Services were performed for customers for $5,000 cash.
5. Goods were sold to customers for $8,000 cash.
6. Paid $2,000 on the note signed in transaction #3.
Required:
After these transactions, what is the total amount of:
a. Assets
b. Liabilities
c. Owners’ equity
d. Net income
74 ♦ Chapter 2
5. Seaside Company completed the following transactions during, March, its first month of
operations:
1. Owners invested $100,000 cash in the business.
2. $3,200 was paid for one month’s office rent.
3. Equipment was purchased by signing a $120,000 note.
4. Services were performed for customers for $10,000 cash.
5. Goods were sold to customers for $14,000 cash.
6. Paid $4,000 on the note signed in transaction #3.
Required:
After these transactions, what is the total amount of:
a.
Assets
b.
Liabilities
c.
Notes payable
d.
Owners’ equity
Assets
b.
Liabilities
c.
Owners’ equity
d.
Net income
1.
2.
3.
4.
5.
6.
Totals
Business Activities—The Source of Accounting Information ♦ 75
6. Marine Stock Company began business on September 1. Transactions for the first month of
business were as follows:
Sept 1:
Tony and Ken each contributed $5,400 to the firm.
Sept 5:
Equipment costing $4,320 was purchased with cash.
Sept 12:
Inventory costing $1,440 was acquired for cash.
Sept 21:
Supplies having a cost of $585 were purchased for cash.
Sept 25:
The entire inventory was sold to a customer for $3,780 cash.
Sept 30:
The last of the supplies were used up.
Required:
Answer the following questions as of the close of business on September 30:
a.
Total assets
b.
Total expenses for the month of September
c.
Cost of sales for September
d.
Total liabilities
e.
Total owners’ equity
f.
Retained earnings
a.
Total assets
b.
Total expenses for the month of September
c.
Cost of sales for September
d.
Total liabilities
e.
Total owners’ equity
f.
Retained earnings
Cash
10,800
Owner’s Investment
Cash
-4,320
Equipment
Cash
-1,440
Inventory
Cash
-585
Supplies
Cash
3,780
Sales Revenue
3,780
Inventory
-1,440
Cost of goods sold
Supplies
-585
Supplies Expense
Totals
76 ♦ Chapter 2
7. The five major categories of information in an accounting system are assets, liabilities, equities,
revenues, and expenses. Below are listed several business events. Indicate which category (or
categories) of information will be INCREASED by each event.
Information category (or categories)
that will increase
a.
An auto dealership sold three
cars, costing a total of $60,000,
for $90,000.
b.
Mark Evers, the owner of Evers Company,
rented a video projector to show his
employees three training films. At
the time of renting, he paid the fee.
c.
Fox Drugstore borrowed $6,000
from the local bank.
d.
Martin Supply paid $8,000 to its
landlord for the current month’s
rent.
e.
Sage Corporation sold $200,000 in
stock to investors.
Business Activities—The Source of Accounting Information ♦ 77
8. For each of the transactions that follow, identify the accounts in the accounting system that would
be affected by the transaction and indicate whether the account balance would increase or
decrease:
Transaction
Account
Increase or
Decrease?
a.
Three partners invested
$50,000 in their partnership.
b.
A carpet cleaning business
cleaned the carpeting in an
office building for $1,000
cash.
c.
Office supplies costing $300
were used during the month.
d.
Owners withdrew cash
totaling $15,000.
e.
A grocery sold inventory
costing $25,000, for $35,000.
f.
Meyerson Company paid off
a $800 note it owed to a
supplier.
Transaction
Increase or
Decrease?
partners)
b.
A carpet cleaning business
office building $1,000 cash.
Cash
Retained Earning
Increase
Increase
were used during the month.
Expense (supplies expense)
Retained Earnings
Increase
Decrease
d.
Owners were paid dividends
totaling $15,000.
Cash
Retained earnings
Decrease
Decrease
costing $25,000, for $35,000.
Revenue (sales revenue)
Inventory
Cost of goods sold
Retained Earnings
Increase
Decrease
Increase
Increase
supplier.