CHAPTER 2: BASIC ACCOUNTING CONCEPTS
1. The basic elements of a financial accounting system include a framework for preparing
financial statements.
a. True
b. False
2. The accounting equation is expressed as follows: Assets = Liabilities + Stockholders’ Equity.
a. True
b. False
3. Any given transaction must affect at least two different parts of the accounting equation.
a. True
b. False
4. The accounting equation can be expressed as: Assets – Liabilities = Revenues.
a. True
b. False
5. A transaction can affect at most two elements of the accounting equation.
a. True
b. False
6. Equality of the accounting equation means that no errors have occurred.
a. True
b. False
7. Dividends are an example of an expense.
a. True
b. False
8. Retained earnings will be increased by the amount in the dividend account.
a. True
b. False
Chapter 2: Basic Accounting Concepts
9. By keeping a running total of the effects of transactions, the accounting equation provides a
framework for summarizing the effects of a series of transactions.
a. True
b. False
10. A business receives $10,000 cash for a sale of merchandise and records this receipt of cash as
an increase in accounts receivable by mistake. The accounting equation is still in balance.
a. True
b. False
11. The effect of every transaction is an increase or a decrease in one or more of the accounting
equation elements.
a. True
b. False
12. When a notes payable account is paid in cash, the stockholders’ equity in the business increases.
a. True
b. False
13. When an account receivable is collected in cash, the total assets of the business increase.
a. True
b. False
14. It is possible for a transaction to change the makeup of assets, but to not affect assets in total.
a. True
b. False
15. When capital stock is issued by a corporation for cash, both the income statement and the
balance sheet are affected.
a. True
b. False
Chapter 2: Basic Accounting Concepts
16. Fees earned and received in cash will increase cash flows from operating activity as well as
retained earnings.
a. True
b. False
17. Miscellaneous expenses are expenses that have an undetermined amount to be paid.
a. True
b. False
18. The payment of utilities expense in cash would affect the operating activities in the statement of
cash flows and the income statement but not the balance sheet.
a. True
b. False
19. Revenues decrease stockholders’ equity.
a. True
b. False
20. The two sides of the accounting equation do not have to be equal.
a. True
b. False
21. A common-sized income statement is prepared by expressing income statement amounts as a
percent of purchases.
a. True
b. False
22. The basic financial statements include the:
a. trial balance.
b. bank reconciliation statement.
c. balance sheet.
d. ledger account.
Chapter 2: Basic Accounting Concepts
23. Which of the following is not an element of the financial accounting system?
a. Rules for determining what, when and the amount that should be recorded
b. A framework for preparing financial statements
c. A set of rules for the stock exchange
d. Controls to determine whether errors occur during recording
24. If a $15,000 purchase of equipment for cash is incorrectly recorded as an increase to equipment
and as an increase to cash, at the end of the period assets will:
a. exceed liabilities and stockholders’ equity by $15,000.
b. equal liabilities and stockholders’ equity.
c. exceed liabilities and stockholders’ equity by $30,000.
d. exceed liabilities and stockholders’ equity by $40,000.
25. Which of the following is considered to be a liability?
a. Prepaid expenses
b. Investments
c. Unearned revenues
d. Accrued revenues
26. Which of the following accounts is a stockholders’ equity account?
a. Cash
b. Capital Stock
c. Prepaid Insurance
d. Accounts Payable
27. Which of the following group of accounts are all assets?
a. Cash, Accounts Payable, Buildings
b. Accounts Receivable, Revenue, Cash
c. Prepaid Expenses, Buildings, Patents
d. Unearned Revenues, Prepaid Expenses, Cash
Chapter 2: Basic Accounting Concepts
28. Expenses can be defined as:
a. assets consumed.
b. services used in the process of generating revenues.
c. costs that have been incurred during the normal course of business.
d. all of these.
29. The gross increases in stockholders’ equity attributable to business activities are called:
a. assets.
b. liabilities.
c. revenues.
d. net income.
30. The payment of $20,000 for expenses was incorrectly recorded by Elite Co. as an increase in
cash of $20,000 and a decrease in retained earnings of $20,000. What is the effect of this error
on the accounting equation?
a. Total assets will exceed total liabilities and stockholders’ equity by $20,000.
b. Total assets will exceed total liabilities and stockholders’ equity by $40,000.
c. Total assets will be less than total liabilities and stockholders’ equity by $40,000.
d. The error will not affect the accounting equation.
31. Which of the following will increase stockholders’ equity?
a. Expenses > revenues
b. Owners’ investment
c. Accounts payable
d. Dividends paid
32. A is an economic event that under generally accepted accounting principles affects an
element of the financial statements and must be recorded.
a. framework
b. control
c. set of rules
d. transaction
Chapter 2: Basic Accounting Concepts
33. The statement of cash flows is integrated with the balance sheet because:
a. the cash at the beginning of the period plus or minus the cash flows from operating,
investing, and financing activities equals the end of period cash reported on the balance
sheet.
b. the cash at the beginning of the period plus or minus the net income equals the end of period
cash reported on the balance sheet.
c. the cash at the beginning of the period plus or minus assets and liabilities equals the end of
period cash reported on the balance sheet.
d. the cash at the beginning of the period plus or minus the cash flows from operating activities
equals the end of period cash reported on the balance sheet.
34. Which of the following statements is true about liabilities?
a. Liabilities include insurance premium paid in advance.
b. Liabilities arise when a company sells goods on account.
c. Liabilities equal assets plus stockholders’ equity.
d. Liabilities are the debt owed by a company.
35. Which of the following situations increase stockholders’ equity?
a. Supplies are purchased on account.
b. Services are provided on account.
c. Cash is received from customers.
d. Utility bill will be paid next month.
36. Stockholders’ equity will be increased by:
a. increase in revenues.
b. increase in expenses.
c. payment of dividends.
d. issuance of bonds.
37. Sunlight, Inc. had the following assets and liabilities as of September 30, 2016:
Assets $60,600
Liabilities $27,500
What is the stockholders’ equity of Sunlight as of September 30, 2016?
a. $0
b. $33,100
c. $88,100
d. Cannot be determined with this information
Chapter 2: Basic Accounting Concepts
38. Sunlight, Inc. had the following assets and liabilities as of September 30, 2016
Assets $60,600
Liabilities $27,500
If assets increased by $4,350 and equity increased by $2,900 during October, what is the
increase or decrease in liabilities of Sunlight as of October 31, 2016?
a. ($1,450)
b. $1,450
c. $7,250
d. ($7,250)
39. Rush Corporation borrowed $25,000 from the bank. Which of the following accurately shows
the effects of the transaction?
a. Increase cash $25,000 and decrease notes payable $25,000
b. Increase cash $25,000 and increase notes payable $25,000
c. Decrease cash $25,000 and decrease notes payable $25,000
d. Decrease cash $25,000 and increase notes payable $25,000
40. Flow, Inc. received cash from fees earned. How does this transaction affect the Statement of
Cash Flows?
a. Increase cash from Operating Activities
b. Increase cash from Investing Activities
c. Increase cash from Financing Activities
d. No effect on the Statement of Cash Flows
41. Philip Corporation purchased equipment on account. What is the effect of this transaction?
a. Cash will decrease and equipment will increase.
b. Total assets will remain unchanged.
c. Cash flow from Investing Activities will decrease.
d. Total assets and total liabilities will both increase.
42. Johnson, Inc. paid rent expense of $3,500 for the month of October. How are the accounts
affected due to this transaction?
a. Increase in cash $3,500 and increase in retained earnings $3,500
b. Increase in cash $3,500 and decrease in retained earnings $3,500
c. Decrease in cash $3,500 and decrease in retained earnings $3,500
d. Decrease in cash $3,500 and increase in retained earnings $3,500
Chapter 2: Basic Accounting Concepts
43. Johnson, Inc. purchased land for cash. What effect does this transaction have?
a. Increase in Cash and decrease in Land
b. Decrease in Cash and decrease in Land
c. Increase in Cash and increase in Land
d. Decrease in Cash and increase in Land
44. Johnson, Inc. issued $15,000 in capital stock in exchange for cash. What is the effect of this
transaction?
a. Total assets remain unchanged.
b. Cash flow from Financing Activities will increase.
c. Net Income will increase.
d. Total Retained Earnings will increase.
45. Johnson, Inc. receives $5,000 cash for fees earned. What is the effect of this transaction?
a. Total assets remain unchanged.
b. Cash flow from Financing Activities will increase.
c. Net income will increase.
d. Retained earnings will remain unchanged.
46. Stockholders’ equity will be reduced by:
a. payment of dividends.
b. increase in revenues.
c. owners’ investments.
d. issuance of bonds.
47. ABC Company deposited $20,000 in a bank account in return for issuing shares in the
corporation. This transaction would affect which two financial statement elements?
a. Assets and stockholders’ equity
b. Assets and liabilities
c. Liabilities and stockholders’ equity
d. None of these
Chapter 2: Basic Accounting Concepts
48. BNC Company earns revenues and as a result collects cash. Which of the following financial
statement elements increased?
a. Cash only
b. Stockholders’ equity only
c. Liabilities
d. Cash and stockholders’ equity
49. DAF Company paid a utility bill of $300 and paid rent of $700 in December. By how much
would these events reduce stockholders’ equity?
a. $300
b. $1,000
c. $400
d. $700
50. Declaring and paying cash dividends affects which balance sheet accounts?
a. Cash only
b. Stockholders’ equity only
c. Cash and stockholders’ equity
d. Cash and capital stock
51. Which of the following transactions changes the mix of assets only?
a. Paid for supplies with cash.
b. Borrowed money from Second National Bank.
c. Received money for fees earned.
d. Received a utility bill.
52. If assets have a balance of $80,000 and stockholders’ equity has a balance of $60,000, then
liabilities must have a balance of:
a. $140,000.
b. $60,000.
c. $80,000.
d. $20,000.
Chapter 2: Basic Accounting Concepts
53. If liabilities have a balance of $10,000 and stockholders’ equity has a balance of $60,000, then
assets must have a balance of:
a. $50,000.
b. $60,000.
c. $70,000.
d. $10,000.
Exhibit 2-1
Total Assets Total Liabilities
Beginning of the year $300,000 $130,000
End of the year $800,000 $550,000
54. Refer to Exhibit 2-1. Determine the net income (or loss), assuming no stock was issued and no
dividends were paid?
a. $420,000
b. $250,000
c. $80,000
d. $170,000
55. Refer to Exhibit 2-1. Determine the net income (or loss), assuming no stock was issued and
dividends of $40,000 were paid?
a. $40,000
b. $210,000
c. $120,000
d. $290,000
56. Refer to Exhibit 2-1. Determine the net income (or loss), assuming $50,000 of stock was issued
and no dividends were paid?
a. $130,000
b. $30,000
c. $80,000
d. $220,000
57. Refer to Exhibit 2-1. Determine the net income (or loss), assuming $50,000 of stock was issued
and $40,000 of dividends were paid?
a. $70,000
b. $210,000
c. $260,000
d. $10,000
Chapter 2: Basic Accounting Concepts
58. Lewis Company has $25,000 in retained earnings, $40,000 in assets, and $11,000 in liabilities.
How much is in common stock?
a. $29,000
b. $25,000
c. $14,000
d. $4,000
59. A to Z Corporation paid a $10,000 cash dividend. On the Statement of Cash Flows, the
transaction would be classified as:
a. Cash Flows from Operating Activities.
b. Cash Flows from Investing Activities.
c. Cash Flows from Financing Activities.
d. Noncash transaction.
60. A to Z Corporation purchased a building for $80,000 cash. On the Statement of Cash Flows, the
transaction would be classified as:
a. Cash Flows from Operating Activities.
b. Cash Flows from Investing Activities.
c. Cash Flows from Financing Activities.
d. Noncash transaction.
61. A to Z Corporation issued a $30,000 note payable to borrow cash from the bank. On the
Statement of Cash Flows, the transaction would be classified as:
a. Cash Flows from Operating Activities.
b. Cash Flows from Investing Activities.
c. Cash Flows from Financing Activities.
d. Noncash transaction.
62. An increase in Stockholders’ Equity from revenues earned will also result in an increase in:
a. liabilities.
b. assets.
c. expenses.
d. cash flow from financing activities.
Chapter 2: Basic Accounting Concepts
63. For EFG Co., the transaction “payment to creditors” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease stockholders’ equity.
64. For EFG Co., the transaction “cash sales to customers at a profit” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease stockholders’ equity.
65. For EFG Co., the transaction “payment of interest expense” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. increase stockholders’ equity.
66. For EFG Co., the transaction “purchase of store equipment with cash” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease stockholders’ equity.
67. For EFG Co., the transaction “payment of dividends” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. increase stockholders’ equity.
68. For EFG Co., the transaction “purchase of store equipment with a note payable” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease total liabilities.
Chapter 2: Basic Accounting Concepts
69. For EFG Co., the transaction “payment of quarterly taxes” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. increase stockholders’ equity.
70. For EFG Co., the transaction “receipt of interest income” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease total liabilities.
71. For EFG Co., the transaction “receipt of a utility bill” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. decrease total liabilities.
72. For EFG Co., the transaction “billed a customer for fees earned” would:
a. increase total assets.
b. decrease total assets.
c. have no effect on total assets.
d. increase total liabilities.
73. The income statement for August indicates net income of $100,000. The corporation also paid
$25,000 in dividends during the same period. If the company is in operation for only one month
and has no beginning balance in retained earnings, what is the ending balance in retained
earnings?
a. $75,000
b. $100,000
c. $20,000
d. $125,000