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Financial Accounting, 5e (Spiceland)
Chapter 2 The Accounting Cycle: During the Period
1) External transactions are transactions the company conducts with a separate economic entity,
such as selling products to a customer, purchasing supplies from a vendor, paying salaries to an
employee, and borrowing money from a bank.
2) Internal transactions are events that affect the financial position of the company but do not
include an exchange with a separate economic entity.
3) A list of all account names used to record transactions of a company is referred to as a T-
account.
4) A source document provides information related to external transactions.
5) After recording each transaction, total assets must equal total liabilities plus stockholders'
equity.
6) If a transaction causes total assets of the company to increase by $2,000, then liabilities plus
stockholders' equity also increases by $2,000.
7) If a transaction causes total assets of the company to increase by $5,000 and total liabilities to
increase by $3,000, then stockholders' equity increases by $8,000.
8) Borrowing cash from the bank causes assets to increase and liabilities to increase.
9) Purchasing equipment using cash causes assets to increase.
10) Providing services to customers for cash causes stockholders' equity to increase.
11) Paying employees' salaries for the current month causes no change to stockholders' equity.
12) Paying dividends to its stockholders causes a company's stockholders' equity to decrease.
13) Selling common stock for cash causes assets to increase and stockholders' equity to decrease.
14) Purchasing office supplies on account causes assets to increase and liabilities to increase.
15) Providing services to customers on account causes assets to increase and stockholders' equity
to increase.
16) Receiving cash in advance from a customer for services to be provided in the future causes
assets to increase and stockholders' equity to increase.
17) Paying for one year of rent in advance causes one asset to increase and another asset to
decrease, so there is no effect on the accounting equation.
18) Purchasing supplies on account increases the balance of the Accounts Receivable account.
19) Amounts owed from customers are recorded in the Accounts Receivable account.
20) The two components of stockholders' equity are Debits and Credits.
21) Revenues have the effect of increasing retained earnings.
22) Expenses have the effect of decreasing retained earnings.
23) Receiving cash in advance from customers increases the Service Revenue account.
24) Deferred Revenue is a liability account.
25) Liability accounts increase with a debit and decrease with a credit.
26) Liability accounts increase with a credit and decrease with a debit.
27) Common Stock increases with a credit and decreases with a debit.
28) Revenue accounts increase with a debit and decrease with a credit.
29) Expense accounts increase with a debit and decrease with a credit.
30) The Dividends account increases with a credit and decreases with a debit.
31) A debit to an account balance always results in the balance increasing.
32) A credit to an account balance always results in the balance decreasing.
33) A journal provides a chronological record of all transactions affecting a firm.
34) For each transaction, there must be at least one debit amount and one credit amount.
35) For each transaction, the total debit amounts must equal the total credit amounts.
36) Selling common stock for cash is recorded with a debit to common stock.
37) Borrowing cash from the bank is recorded with a debit to cash.
38) Purchasing office supplies is recorded with a credit to office supplies.
39) Paying employees' salaries for the current period is recorded with a debit to Salaries
Expense.
40) Providing services to customers is recorded with a debit to Service Revenue.
41) The general ledger includes all accounts used to record the company's transactions.
42) The process of transferring the debit and credit information from the journal to individual
accounts in the general ledger is called journalizing.
43) After posting transactions to the general ledger accounts, the sum of the accounts with debit
balances should equal the sum of the accounts with credit balances.
44) A trial balance is a list of all accounts and their balances at a particular date, showing that
assets equal liabilities.
45) If total debits equal total credits in the trial balance, then all balances are correct.
46) Which of the following is not part of measuring external transactions?
A) Using source documents to analyze accounts affected.
B) Recording transactions.
C) Making payments on all amounts owed.
D) Analyzing transactions for their effect on the accounting equation.
47) External events include all of the following except:
A) Paying rent.
B) Purchasing equipment.
C) Using office supplies.
D) Collecting an account receivable.
48) The full set of procedures used to accomplish the measurement/communication process of
financial accounting is referred to as the:
A) Trial balance.
B) Accounting cycle.
C) Chart of accounts.
D) General ledger.
49) Which step in the process of measuring external transactions involves assessing the equality
of total debits and total credits for the period?
A) Use source documents to determine accounts affected by the transaction.
B) Prepare a trial balance.
C) Analyze the impact of the transaction on the accounting equation.
D) Post the transaction to the T-account in the general ledger.
50) Which step in the process of measuring external transactions involves determining the effect
on assets, liabilities, and stockholders' equity?
A) Use source documents to determine accounts affected by the transaction.
B) Prepare a trial balance.
C) Analyze the impact of the transaction on the accounting equation.
D) Post the transaction to the T-account in the general ledger.
51) Which of the following typically is considered a source document for gathering information
about a transaction?
A) Trial balance.
B) Income statement.
C) Sales invoice.
D) General ledger.
52) Which of the following best describes a purpose of source documents?
A) Provide information related to external transactions, such as date and amount.
B) Used by accountants to record transactions in specific accounts.
C) Keep a record of transactions between the company and its vendors, customers, and other
parties with whom the company conducts business.
D) All of the other answers provide a correct statement.
53) A(n) ________ summarizes all transactions related to a particular item over a period of time.
A) Debit
B) Account
C) Chart of accounts
D) Source document
54) A list of all account names used to record transactions of a company is referred to as the:
A) Chart of Accounts.
B) Income statement.
C) General journal.
D) Balance sheet.
55) For each transaction recorded in an accounting system, the basic equation that must be
maintained at all times is:
A) Assets = Liabilities + Stockholders' Equity.
B) Cash Increases = Cash Decreases.
C) Revenues = Expenses + Dividends.
D) Assets = Liabilities.
56) The equation which shows a company's resources equal claims to those resources is:
A) Revenues − Expenses = Net Income.
B) Cash Increases − Cash Decreases = Change in Cash.
C) Common Stock + Retained Earnings = Stockholders' Equity.
D) Assets = Liabilities + Stockholders' Equity.
57) The equation that shows assets equal liabilities plus stockholders' equity signifies that a
company:
A) Is able to pay its obligations as they come due.
B) Is profitable.
C) Has resources equal to claims to those resources.
D) All of the other answers provide a correct statement.
58) The following amounts are reported in the ledger of Mariah Company:
Assets
$
80,000
Liabilities
36,000
Retained Earnings
12,000
What is the balance in the Common Stock account?
A) $44,000.
B) $32,000.
C) $48,000.
D) $42,000.
59) When a company pays employees' salaries for the current period, how will the basic
accounting equation be affected?
A) Stockholders' equity decreases.
B) Revenues decrease.
C) Expenses decrease.
D) Liabilities decrease.
60) When cash payments are made to stockholders, what is the effect on the company's
accounts?
A) Cash decreases and dividends increase.
B) Cash increases and dividends decrease.
C) Cash decreases and common stock decreases.
D) Cash increases and common stock increases.
61) Receiving cash from customers before services are performed results in:
A) Prepaid Assets.
B) Service Revenue.
C) Deferred Revenues.
D) Accounts Receivable.
62) When the company pays stockholders a dividend, what is the effect on the accounting
equation for that company?
A) Decrease stockholders' equity and increase assets.
B) Increase liabilities and increase assets.
C) Decrease assets and decrease liabilities.
D) Decrease assets and decrease stockholders' equity.
63) Pumpkin Inc. sold $500 in pumpkins to a customer on account on January 1. On January 11,
Pumpkin collected the cash from that customer. What is the impact on Pumpkin's accounting
equation from the collection of cash?
A) No net effect to the accounting equation.
B) Decrease assets and increase liabilities.
C) Increase assets and increase liabilities.
D) Decrease assets and decrease liabilities.
64) A company receives a $50,000 cash deposit from a customer on October 15, but will not
provide services until November 20. Which of the following statements is true?
A) The company records service revenue on October 15.
B) The company records cash collection on November 20.
C) The company records deferred revenue on October 15.
D) The company records nothing on October 15.
65) Which of the following would increase assets and increase liabilities?
A) Provide services to customers on account.
B) Purchase office supplies on account.
C) Pay dividends to stockholders.
D) Receive a utility bill for the current month. Plan to pay bill beginning of next month.
66) Receiving cash from an account receivable:
A) Increases revenue and decreases an asset.
B) Decreases a liability and increases an asset.
C) Increases an asset and increases revenue.
D) Increases one asset and decreases another asset.
67) An expense has what effect on the accounting equation?
A) Decrease liabilities.
B) Decrease stockholders' equity.
C) Increase assets.
D) No effect.
68) Revenues have what effect on the accounting equation?
A) Increase liabilities.
B) Decrease assets.
C) Increase stockholders' equity.
D) No effect.
