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Chapter 02 Analyzing and Recording Transactions
MULTIPLE CHOICE QUESTIONS
1)
The first step in the processing of a transaction is to analyze the transaction and source documents.
A)
True
B)
False
2)
Preparation of a trial balance is the first step in processing a financial transaction.
A)
True
B)
False
3)
Source documents identify and describe transactions and events entering the accounting process.
A)
True
B)
False
4)
Items such as sales tickets, bank statements, checks, and purchase orders are examples of a
business's source documents.
A)
True
B)
False
5)
An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or
expense item.
A)
True
B)
False
6)
A customer's promise to pay on credit is classified as an account payable by the seller.
A)
True
B)
False
7)
Withdrawals by the owner are a business expense.
A)
True
B)
False
8)
The purchase of land and buildings will generally be recorded in the same ledger account.
A)
True
B)
False
9)
Unearned revenues are classified as liabilities.
A)
True
B)
False
10)
Cash withdrawn by the owner of a proprietorship for personal expenses, should be treated as an
expense of the business.
A)
True
B)
False
11)
When a company provides services for which cash will not be received until some future date, the
company should record the amount billed as accounts receivable.
A)
True
B)
False
12)
Owner withdrawals always decrease equity.
A)
True
B)
False
13)
Expenses always decrease equity.
A)
True
B)
False
14)
Revenues always increase equity.
A)
True
B)
False
15)
Owner investments always decrease equity.
A)
True
B)
False
16)
"Unearned" accounts are liabilities that must be fulfilled.
A)
True
B)
False
17)
A company's chart of accounts is a list of all the accounts used and includes an identification
number assigned to each account.
A)
True
B)
False
18)
An account's balance is the difference between the total debits and total credits for the account,
including any beginning balance.
A)
True
B)
False
19)
The right side of an account is called the debit side.
A)
True
B)
False
20)
In a double-entry accounting system, the total dollar amount debited must always equal the total
dollar amount credited.
A)
True
B)
False
21)
Increases in liability accounts are recorded as debits.
A)
True
B)
False
22)
Debits increase asset and expense accounts.
A)
True
B)
False
23)
Credits always increase account balances.
A)
True
B)
False
24)
Crediting an expense account decreases it.
A)
True
B)
False
25)
A revenue account normally has a debit balance.
A)
True
B)
False
26)
Asset accounts are decreased by debits.
A)
True
B)
False
27)
Debit means increase and credit means decrease for all accounts.
A)
True
B)
False
28)
Asset accounts normally have debit balances and revenue accounts normally have credit balances.
A)
True
B)
False
29)
An owner's withdrawal account normally has a debit balance.
A)
True
B)
False
30)
A debit entry is always an increase in the account.
A)
True
B)
False
31)
A transaction that credits an asset account and credits a liability account must also affect one or
more other accounts.
A)
True
B)
False
32)
A transaction that decreases a liability and increases an asset must also affect one or more other
accounts.
A)
True
B)
False
33)
If insurance coverage for the next two years is paid for in advance, the amount of the payment is
debited to an asset account called Prepaid Insurance.
A)
True
B)
False
34)
The purchase of supplies on credit should be recorded with a debit to Supplies and a credit to
Accounts Payable.
A)
True
B)
False
35)
If a company purchases equipment paying cash, the journal entry to record this transaction will
include a debit to Cash.
A)
True
B)
False
36)
If a company provides services to a customer on credit, the company providing the service should
credit Accounts Receivable.
A)
True
B)
False
37)
When a company bills a customer for $700 for services rendered, the journal entry to record this
transaction will include a $700 debit to Services Revenue.
A)
True
B)
False
38)
The debt ratio helps to assess the risk a company has of failing to pay its debts and is helpful to
both its owners and creditors.
A)
True
B)
False
39)
The higher a company's debt ratio, the lower the risk of a company not being able to meet its
obligations.
A)
True
B)
False
40)
The debt ratio is calculated by dividing total assets by total liabilities.
A)
True
B)
False
41)
A company that finances a relatively large portion of its assets with liabilities is said to have a high
degree of financial leverage.
A)
True
B)
False
42)
If a company is highly leveraged, this means that it has relatively high risk of not being able to
repay its debt.
A)
True
B)
False
43)
Booth Industries has liabilities of $105 million and total assets of $350 million. Its debt ratio is
40.0%.
A)
True
B)
False
44)
A journal entry that affects no more than two accounts is called a compound entry.
A)
True
B)
False
45)
Posting is the transfer of journal entry information to the ledger.
A)
True
B)
False
46)
Transactions are recorded first in the ledger and then transferred to the journal.
A)
True
B)
False
47)
The journal is known as a book of original entry.
A)
True
B)
False
48)
A general journal gives a complete record of each transaction in one place, and shows the debits
and credits for each transaction.
A)
True
B)
False
49)
The general journal is known as the book of final entry because financial statements are prepared
from it.
A)
True
B)
False
50)
At a given point in time, a business's trial balance is a list of all of its general ledger accounts and
their balances.
A)
True
B)
False
51)
The ordering of accounts in a trial balance typically follows their identification number from the
chart of accounts, that is, assets first, then liabilities, then owner's capital and withdrawals,
followed by revenues and expenses.
A)
True
B)
False
52)
The trial balance can serve as a replacement for the balance sheet, since total debits must equal
total credits.
A)
True
B)
False
53)
A balanced trial balance is proof that no errors were made in journalizing transactions, posting to
the ledger, and preparing the trial balance.
A)
True
B)
False
54)
If cash was incorrectly debited for $100 instead of correctly crediting it for $100, the cash account's
balance will be overstated (too high).
A)
True
B)
False
55)
The financial statement that summarizes the changes in an owner's capital account is called the
balance sheet.
A)
True
B)
False
56)
An income statement is also called an earnings statement, a statement of operations or a profit and
loss statement.
A)
True
B)
False
57)
The detail of individual revenue and expense accounts is reported on the statement of owner's
equity.
A)
True
B)
False
58)
The heading on every financial statement lists the three W's—Who (the name of the business);
What (the name of the statement); and Where (the organization's address).
A)
True
B)
False
59)
If an owner's capital account had a $10,000 credit balance at the beginning of the period, and
during the period, the owner invests an additional $5,000, the balance in the capital account listed
on the trial balance will be equal to a debit balance of $5,000.
A)
True
B)
False
60)
Owner's withdrawals are not reported on a business's income statement.
A)
True
B)
False
