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Chapter 03 The Accounting Cycle: Capturing Economic Events
Answer Key
True / False Questions
1.
The credit side of an account is the right side, while the debit side is the left side.
2.
In its simplest form an account has only three elements: a title, a left side (called debit),
and a right side (called credit).
3.
A credit to a ledger account refers to the entry of an amount on the right side of an
account.
4.
Every transaction affects equal numbers of ledger accounts and is recorded by equal
dollar amounts of debits and credits.
5.
All liability accounts normally have a credit balance.
6.
Decreases to owners' equity accounts are recorded using debits.
7.
Liability accounts should only be debited and never credited.
8.
Increases in owners' equity are recorded by credits; increases in assets and in liabilities
are recorded by debits.
9.
An increase in a liability is recorded by a credit; an increase in owners' equity by a debit.
10.
The left-hand side of an account is used for recording debits and the right-hand side for
recording credits.
11.
If the number of debit entries in an account is greater than the number of credit entries,
the account will have a debit balance.
12.
Every business transaction is recorded by a debit to a balance sheet account and a credit
to an income statement account.
13.
When making a general journal entry, there can only be one debit and one credit.
14.
When a company uses the double-entry method, the total dollar amount of debits recorded
must equal the total dollar amount of credits recorded, but the number of debit and credit
entries may differ.
15.
The ledger is a chronological, day-by-day, record of business transactions.
16.
When recording a journal entry, asset accounts are shown first, followed by liabilities, and
finally owners' equity accounts.
17.
Ledger accounts are updated first, and then transactions are recorded in the journal.
18.
Ledger accounts are updated through a process called posting.
19.
Earning revenue increases owners' equity and expenses reduce owners' equity, therefore,
revenues are recorded with debit entries and expenses are recorded with credit entries.
20.
Dividends are an expense to a corporation and appear on the income statement.
21.
The matching principle refers to the relationship between revenues and expenses.
22.
The purpose of accrual accounting is to measure the amounts of cash received and paid
during the period.
23.
The concept of applying the accounting treatment that results in the lowest, most
conservative, estimate of net income for the period is called the matching principle.
24.
The accrual basis of accounting recognizes expenses only when they are paid.
25.
A business that is profitable and liquid will have more accounts with credit balances than
with debit balances.
26.
Revenues increase owners' equity and are, therefore, recorded by crediting the revenues
account.
27.
Every transaction which affects an income statement account also affects a balance sheet
account.
28.
Since most companies update their Retained Earnings balances only once per year, the
Retained Earnings balance will always have a $0 balance
in the trial balance
.
29.
A trial balance includes only the balance sheet accounts, income statement accounts are
not included on a trial balance.
30.
A trial balance that balances provides proof that all transactions were correctly journalized
and posted to the ledger.
31.
A trial balance proves that equal amounts of debits and credits were posted to the ledger.
32.
A CEO or CFO associated with fraudulent financial reporting could be fined but not
imprisoned under the Sarbanes Oxley Act.
33.
"I was just following orders" is an acceptable defense if you committed an unethical action
during an audit.
Multiple Choice Questions
34.
The sequence of accounting procedures used to record, classify, and summarize
accounting information is called the:
35.
Which of the following is
not
a step in the accounting cycle?
36.
Steps in the accounting cycle include (1) prepare financial statements, (2) post each
journal entry to the appropriate ledger account, and (3) journalize transactions. Which of
the following reflects the correct order of these steps?
37.
The accounting cycle begins with the
38.
In the general ledger, a separate "account" is maintained for each:
39.
Which of the following is
not
true regarding the general ledger account for Cash?
40.
The cash account of Grande Home Improvement Store shows the following: a debit on
June 1 for $25,000; a credit on June 5 for $10,000, a debit on June 16 for $14,000, and a
credit on June 27 for $8,000. What is the balance in the cash account at the end of June?
41.
The purchase of equipment on credit is recorded by a:
42.
The collection of accounts receivable is recorded by a:
43.
In accounting, the terms
debit
and
credit
indicate, respectively:
44.
In a ledger, debit entries cause:
45.
Which of the following accounts normally has a credit balance?
46.
Which of the following accounts normally contain a debit balance?
47.
Sue Costa, owner of A-1 Cleaning Services, invested an additional $75,000 in the
company. Which of the following would be a part of the correct journal entry to record this
transaction?
48.
If a company purchases equipment on account:
