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Chapter 2
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
Chapter 2
4. The accounting equation can be expressed as: Assets − Liabilities = Revenues.
a.
True
b.
False
5. On a statement of cash flows, each cash transaction is recorded and classified as an operating, investing, or financing
activity.
a.
True
b.
False
Chapter 2
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
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8. Retained earnings will be increased by the amount in the dividend account.
a.
True
b.
False
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
Chapter 2
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
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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
Chapter 2
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 common stock is issued by a corporation for cash, both the income statement and the balance sheet are affected.
a.
True
b.
False
Chapter 2
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
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income statement but not the balance sheet.
a.
True
b.
False
19. The integrated financial statement approach has built-in controls to ensure that all transactions are correctly analyzed,
recorded, and summarized.
a.
True
b.
False
20. Accounts receivable is less liquid than Furniture, so it is listed after Furniture on a balance sheet.
a.
True
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b.
False
21. When comparing operating performance across companies within the same industry, companies prefer common-sized
income statements prepared through net income rather than those prepared through operating income. This is because
other income and expenses are influenced by a variety of factors that are independent of operations and that can vary
significantly across companies.
a.
True
b.
False
22. The basic financial statements include the:
a.
trial balance.
b.
bank reconciliation statement.
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c.
balance sheet.
d.
ledger account.
23. Which of the following is a control that is built into the integrated financial statement approach?
a.
Assets + Liabilities = Stockholders' Equity
b.
Cash from operating activities is equal to cash on the balance sheet.
c.
Net income on the income statement must equal the net effects of revenues and expenses on retained earnings.
d.
Total assets on balance sheet should equal income from investing activities on the statement of cash flows.
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:
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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
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26. 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
27. 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.
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28. The gross increases in stockholders' equity attributable to business activities are called:
a.
assets.
b.
liabilities.
c.
revenues.
d.
net income.
29. 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.
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30. The stockholders' equity will increase as a result of the:
a.
issue of common stock.
b.
repayment of long-term debt.
c.
buyback of common stock.
d.
issue of long-term debt.
31. 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
32. 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.
33. 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.
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34. 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.
35. Which of the following transactions changes the mix of only liabilities?
a.
Paying off accounts payables by raising a short-term loan
b.
Writing off accounts receivable as bad debt
c.
Financing the purchase of land with a long-term loan
d.
Paying accounts receivable with cash
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36. Brite Inc. had the following assets and liabilities at the end of the year:
Assets
$54,800
Liabilities
$32,000
What is the year-end stockholders' equity of Brite Inc.?
a.
$32,000
b.
$22,800
c.
$86,800
d.
Cannot be determined with this information
37. 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)
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38. 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
39. 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
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d.
No effect on the Statement of Cash Flows
40. Yuan Corporation purchased office equipment on account. What is the effect of this transaction?
a.
Cash will decrease and office equipment will increase.
b.
Total assets will increase and shareholders' equity will decrease.
c.
Total assets and total liabilities will increase.
d.
Cash flow from financing activities will decrease.
41. 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
