Chapter 02 – Analyzing Business Transactions
TRUE/FALSE
1. When a company receives a product previously ordered, a recordable transaction has occurred.
2. When a business pays a new employee for the first time, a recordable transaction has occurred.
3. The valuation issue deals with how the components of a transaction should be categorized.
4. In accounting, to value means to record a transaction or event.
5. The cost principle is a solution to the recognition issue.
6. The recognition issue deals with when a business transaction should be recorded.
7. The most generally accepted value used in accounting is market value.
8. Cost Value is the exchange price associated with a business transaction at the time the transaction is
recognized.
9. The classification issue involves the assignment of accounts to business transactions.
10. When a company makes an order, a transaction has occurred.
11. All business transactions require the application of two basic accounting concepts: recording a
transaction at the right time and placing the right value on it.
12. Purchase requisitions are recognized in the accounting records.
13. When a company purchases goods that it will resell, it must record the goods in an asset account.
14. A credit to an asset account means that asset account has been increased.
15. A debit has a favorable effect on an account.
16. For a T account, an account balance is the difference in total dollars between total debit footings and
total credit footings.
17. Column totals are called account balances.
18. A decrease in a liability is recorded by a debit.
19. An increase in an asset is recorded by a debit.
20. The double-entry system is possible because all business transactions have two equal and opposite
aspects.
21. A decrease in a dividend account is recorded with a credit.
22. An increase in revenue is recorded with a credit.
23. Dividends should appear on the balance sheet.
24. The dividends account has a normal credit balance.
25. Revenues have a normal debit balance.
26. Retained Earnings has a normal debit balance.
27. Accounts Payable has a normal debit balance.
28. A basic storage unit for accounting data is the account.
29. When stockholders make an investment, the Common Stock account is debited.
30. When a dividend is declared and paid, the Dividends account is credited and Cash is debited.
31. Liabilities are established with debits and eliminated with credits.
32. When payment is received for services not yet rendered, no entry is recorded until that service has
been rendered.
33. When revenue has been earned, an entry can often be recorded before the related cash has been
collected.
34. A contract is an example of a source document.
35. Wages payable is a type of liability.
36. Dividends are classified as an expense.
37. Unearned revenues are classified as assets on the balance sheet.
38. Another word for expense is debt.
39. Office supplies are classified as an asset.
40. Investments by stockholders are recorded in the Common Stock account, not in the Retained Earnings
account.
41. Revenue should be recorded when the related cash has been collected, not when it has been earned.
42. Expenses should be recorded when they have been incurred, not when they are paid.
43. A net income of $10,000 means that the business received $10,000 more in cash from its customers
than it spent to run the business.
44. Accounts Receivable and Accounts Payable are used when there is a time delay between a transaction
and its related cash flow.
45. Generally, before Accounts Payable is credited, it is debited.
46. Generally, before Accounts Receivable is credited, it is debited.
47. In a trial balance, accounts are listed in the order they appear on the financial statements.
48. A trial balance is normally prepared at the end of each week.
49. When the columns of the trial balance equal each other, it means that no errors have occurred in
recording and posting the transactions.
50. A transposition error will cause the trial balance to be out of balance by an amount that is evenly
divisible by 7.
51. Recording an account with a debit balance as a credit, or vice versa, will cause the trial balance to be
out of balance by an amount that is evenly divisible by 2.
52. The ledger is a chronological record of all transactions.
53. Entering transactions into the journal is called posting.
54. In a journal entry, debits are always recorded before credits.
55. In a journal entry, credits are always indented.
56. In a journal entry, the Post. Ref. column is always left blank.
57. It is sometimes correct for a compound entry’s debit totals and credit totals to be unequal.
58. The journal account form has a Balance column.
59. One might see “J2” correctly placed in the Post. Ref. column of the journal.
60. Despite the advantages of a computer accounting information system, the ledger still must be
maintained manually.
61. Journal entries are typically posted only at the end of the year.
62. In a financial report, a single line is placed below the final total(s).
63. Another name for the ledger is the book of original entry.
64. The general journal makes finding accounts in the ledger easier.
65. All companies use the same standard set of accounts.
66. The accounts in a chart of accounts are normally listed in order of their account number.
67. The numbering scheme of a chart of accounts usually contains gaps.
68. The amount of profit would always be equal to the ending cash balance.
69. One can obtain a clear picture of a company’s liquidity by referring to its income statement.
70. One can obtain a clear picture of a company‘s liquidity by referring to its statement of cash flows.
MULTIPLE CHOICE
1. A purchase is recognized in the accounting records when
a.
an order is placed with the seller
b.
the purchase requisition is sent to the purchasing department.
c.
title transfers from the seller to the buyer.
d.
the buyer receives the bill from the seller
2. Which of the following is not a measurement issue in accounting?
a.
When to record a business transaction
b.
How to classify the items of a business transaction
c.
What value to place on a business transaction
d.
Where to record a business transaction
3. The issue of deciding when to record a transaction is solved by
a.
properly classifying the transaction.
b.
determining a point of recognition.
c.
assigning actual cost to the transaction.
d.
assigning a recurring order date.
4. Which of the following is not a measurement issue in accounting?
a.
Valuation
b.
Recognition
c.
Evaluation
d.
Classification
5. Fair value relates most closely to the
a.
recognition point.
b.
recognition issue.
c.
valuation issue.
d.
classification issue.
6. The practice of recording transactions at cost is called
a.
cost classification.
b.
the cost principle.
c.
the valuation issue.
d.
cost recognition.
7. Which of the following business events is not a transaction?
a.
Signing a contract
b.
Paying wages
c.
Receiving goods
d.
Purchasing a service
8. When a business records revenue when it has been earned, it is addressing the measurement issue of
a.
recognition.
b.
evaluation.
c.
classification.
d.
valuation.
9. When a business reports an asset at an inflated dollar amount, it has violated the measurement issue of
a.
recognition.
b.
valuation.
c.
classification.
d.
realization.
10. When a business correctly records its expenses and assets, it has correctly addressed the measurement
issue of
a.
communication.
b.
classification.
c.
valuation.
d.
recognition.
11. Which of the following is a business event that is not considered a recordable transaction?
a.
A company receives a product previously ordered.
b.
A company pays an employee for work performed.
c.
A customer inquires about the availability of a service.
d.
A customer purchases a service.
12. Which of the following is a business event that is considered a recordable transaction?
a.
A company hires a new employee.
b.
A customer purchases merchandise.
c.
A customer inquires about the availability of a product.
d.
The purchasing department sends a purchase order to the supplier.
13. Which of the following is an illustration of the classification issue?
a.
At what amount should an old machine be shown on the balance sheet?
b.
At what point should the purchase of art supplies be recorded?
c.
Should tools be recorded as an asset or as an expense?
d.
At what point should a bill be paid for the purchase of an item?
14. Which of the following events does not require a journal entry?
a.
Purchase of a one-year insurance policy
b.
Agreement to perform a service at a future date
c.
Performance of a service agreed to at a past date
d.
Payment for a service performed previously
15. Which of the following accounts has a normal credit balance?
a.
Dividends
b.
Automotive Equipment
c.
Advertising Fees Earned
d.
Interest Expense
16. Which of the following accounts has a normal debit balance?
a.
Dividends
b.
Common Stock
c.
Accounts Payable
d.
Retained Earnings
17. Which of the following accounts has a normal debit balance?
a.
Revenues Earned
b.
Accounts Payable
c.
Inventory
d.
Retained Earnings
18. Which of the following accounts has a normal credit balance?
a.
Accounts Receivable
b.
Common Stock
c.
Wages Expense
d.
Dividends
19. Which of the following accounts has a normal debit balance?
a.
Wages Payable
b.
Fees Earned
c.
Rent Expense
d.
Common Stock
20. Which of the following accounts is decreased with a debit?
a.
Accounts Payable
b.
Accounts Receivable
c.
Rent Expense
d.
Dividends
21. Which of the following accounts is decreased with a credit?
a.
Advertising Fees Earned
b.
Utilities Expense
c.
Common Stock
d.
Loan Payable
22. Which of the following accounts is increased with a debit?
a.
Common Stock
b.
Rent Payable
c.
Legal Fees Earned
d.
Dividends
23. Which of the following accounts is increased with a credit?
a.
Cash
b.
Revenues Earned
c.
Rent Expense
d.
Dividends
24. Which account does not affect retained earnings?
a.
Dividends
b.
Sales Revenue
c.
Rent Expense
d.
Common Stock
25. Which pair of accounts follows the rules of debit and credit in the same manner?
a.
Revenue from Services and Equipment
b.
Inventory and Advertising Expense
c.
Repair Expense and Accounts Payable
d.
Common Stock and Cash
26. Which pair of accounts follows the rules of debit and credit in the opposite manner?
a.
Fixed Assets and Dividends
b.
Advertising Expense and Equipment
c.
Dividends and Medical Fees Earned
d.
Rent Payable and Common Stock
27. If Accounts Receivable has debit postings of $58,000, credit postings of $44,000, and a normal ending
balance of $48,000, which of the following was its beginning balance?
a.
$62,000 Dr.
b.
$34,000 Dr.
c.
$34,000 Cr.
d.
$62,000 Cr.
28. If Accounts Payable has debit postings of $34,000, credit postings of $28,000, and a normal ending
balance of $12,000, what was its beginning balance?
a.
$18,000 Cr.
b.
$6,000 Cr.
c.
$18,000 Dr.
d.
$6,000 Dr.
29. To determine the balance of a particular account, one should refer to the
a.
source documents.
b.
chart of accounts.
c.
book of original entry.
d.
ledger.
30. All of the following are examples of source documents except
a.
checks.
b.
contracts.
c.
ledgers.
d.
receipts.
31. When collection is made on Accounts Receivable,
a.
stockholders’ equity increases.
b.
total assets decrease.
c.
total assets remain the same.
d.
total assets increase.
32. If office equipment is sold at cost in exchange for a promissory note,
a.
total liabilities decrease.
b.
stockholders’ equity decrease.
c.
total assets decrease.
d.
total assets remain the same.
33. The declaration and payment of a dividend will
a.
decrease net income.
b.
increase liabilities.
c.
not affect total assets.
d.
decrease stockholders’ equity.
34. Payment on a portion of Accounts Payable will
a.
decrease total liabilities
b.
decrease net income.
c.
increase total liabilities.
d.
increase total assets
35. A $4,000 machine is purchased by paying $1,000 cash and issuing a promissory note for the
remainder. The journal entry should include a
a.
credit to Machinery.
b.
credit to Notes Payable.
c.
credit to Notes Receivable.
d.
debit to Cash.
36. Which of the following transactions increases both assets and stockholders’ equity?
a.
Payment received from a credit customer
b.
Received a bank loan
c.
Rendered a service, payment not yet received
d.
Declared and paid a dividend
37. Which of the following accounts will not affect stockholders’ equity?
a.
Rent Expense
b.
Dividends
c.
Equipment
d.
Sales Revenue
38. A dividend will reduce which of the following accounts?
a.
Dividends
b.
Retained Earnings
c.
Common Stock
d.
Accounts Payable
39. Which of the following transactions affects retained earnings?
a.
Declaration and payment of dividends
b.
Prepayment of rent
c.
Investments by stockholders
d.
Obtaining a new loan
40. The Office Supplies account is classified as a(n)
a.
expense.
b.
stockholders’ equity account.
c.
asset.
d.
liability, if the supplies have not yet been paid for.
41. The Unearned Fees account is classified as a(n)
a.
liability.
b.
revenue.
c.
asset.
d.
dividend.
42. Which of the following accounts is an asset?
a.
Retained Earnings
b.
Notes Payable
c.
Prepaid Rent
d.
Supplies Expense
43. Which of the following accounts is not a stockholders’ equity account?
a.
Common Stock
b.
Retained Earnings
c.
Unearned Fees
d.
Dividends
44. Which of the following accounts is a liability?
a.
Unexpired Insurance
b.
Insurance Expense
c.
Prepaid Insurance
d.
Unearned Insurance Fees
45. Cash is received for services not yet performed. This transaction affects an asset account and a(n)
a.
asset account.
b.
liability account.
c.
revenue account.
d.
expense account.
46. Unearned revenues are recorded by companies that
a.
receive money in advance of the performance of a service.
b.
pay money at the time the performance of a service is complete.
c.
receive money at the time the performance of a service is complete.
d.
pay money in advance of the performance of a service.
47. Office supplies become expenses
a.
when they are consumed (used up).
b.
when cash is paid for them.
c.
at no time, since they are an asset.
d.
when they are initially acquired.
48. Which of the following accounts is classified differently from the others listed?
a.
Accounts Receivable
b.
Retained Earnings
c.
Prepaid Rent
d.
Cash
49. Which of the following accounts is classified differently from the others listed?
a.
Utilities Payable
b.
Unearned Revenue
c.
Accounts Payable
d.
Rent Expense
50. For which of the following accounts would a related Accumulated Depreciation account be recorded?
a.
Office Equipment
b.
Land
c.
Office Supplies
d.
Prepaid Rent
51. Which of the following accounts might be used when there is a time delay between a transaction and
its related cash flow?
a.
Accounts Payable
b.
Unearned Revenue
c.
Equipment
d.
Prepaid Utilities
52. A transaction in which six months’ rent is paid in advance results in which of the following journal
entries?
a.
Prepaid Rent – Debit; Cash – Credit
b.
Rent Receivable – Debit; Cash – Credit
c.
Rent Revenue – Debit; Cash – Credit
d.
Rent Expense– Debit; Cash – Credit
53. Which of the following events does not result in the recording of an expense?
a.
Payment of insurance six months in advance
b.
Purchase of gasoline for fill-up of a company car
c.
Receipt of a bill from the electricity company
d.
Payment of wages
54. A company receives money in advance of performing a service. What is the journal entry for the
transaction?
a.
Unearned Revenue – Debit; Accounts Payable – Credit
b.
Cash – Debit; Unearned Revenue – Credit
c.
Cash – Debit; Prepaid Fees – Credit
d.
Cash – Debit; Accounts Receivable. – Credit
55. When a company has performed a service but has not yet received payment, what is the required
journal entry to be recorded?
a.
Accounts Receivable – Debit; Revenue from Services – Credit
b.
Revenue from Services – Debit; Cash – Credit
c.
Unearned Revenue from Services – Debit; Accounts Receivable – Credit
d.
Revenue from Services – Debit; Accounts Receivable – Credit
56. When a company receives an electric bill but does not pay it right away, what is the required journal
entry to be recorded?
a.
Utilities Expense – Debit; Accounts Receivable – Credit
b.
No entry is required until the bill is paid.
c.
Utilities Expense – Debit; Accounts Payable – Credit
d.
Accounts Payable – Debit; Utilities Expense – Credit
57. When a magazine company receives advance payment for a subscription, what is the required journal
entry to be recorded?
a.
Cash – Debit; Unearned Subscriptions Revenue – Credit
b.
Accounts Receivable – Debit; Unearned Subscriptions Revenue – Credit
c.
Cash – Debit; Subscriptions Revenue – Credit
d.
Subscriptions Revenue – Debit; Cash – Credit
58. When a service has been performed, but no cash has been received, which of the following statements
is true?
a.
The entry would include a debit to Accounts Receivable.
b.
No journal entry would be made.
c.
The entry would include a debit to Accounts Payable.
d.
The entry would include a credit to Unearned Revenue.
59. Which of the following transactions increases liabilities and decreases stockholders’ equity?
a.
Declaration and payment of a dividend
b.
Advance payment made for insurance
c.
Receipt of a phone bill to be paid at a later time
d.
Payment of a liability
60. The primary purpose of the trial balance is to test the
a.
recording of transactions.
b.
analysis of transactions.
c.
equality of debit and credit balances in the ledger.
d.
equality of debit and credit entries in the journal.
61. Which of the following gives the correct sequence of accounting procedures?
a.
Financial statements, trial balance, ledger, journal
b.
Financial statements, journal, ledger, trial balance
c.
Journal, ledger, trial balance, financial statements
d.
Ledger, trial balance, journal, financial statements