Chapter 2: The Basics of Record Keeping and Financial Statement
Preparation: Balance Sheet Key
1. The T-account looks like the letter T, with a horizontal line bisected by a vertical line. Increases in
shareholders’ equity appear on the right side, and decreases in shareholders’ equity appear on the left side of
T-accounts.
2. The T-account looks like the letter T, with a horizontal line bisected by a vertical line. Increases in liabilities
appear on the right side, and decreases in liabilities appear on the left side of T-accounts.
3. The T-account looks like the letter T, with a horizontal line bisected by a vertical line. Increases in assets
appear on the left side, and decreases in assets appear on the right side of T-accounts.
4. A T-account is a device or convention for organizing and accumulating the accounting entries of transactions
that affect an individual account, such as cash, accounts receivable, bonds payable, or additional paid-in
capital.
5. The balance sheet equation maintains equality by reporting the financial statement effects of each event and
transaction in a dual manner, or what are termed the dual effects of transactions.
6. The balance sheet equation shows the equality of assets with liabilities plus shareholders’ equity. This
equation requires that an entity’s assets exactly balance, or offset, an equal amount of financing provided by
creditors and owners of the corporation.
7. The balance sheet equation underlies the recording of transactions and events. It captures the financial
statement effects of operating, investing, and financing transactions—three key activities of business firms.
8. The balance sheet equation provides the analytical framework to understand the effects of transactions and
events on the financial statements.
9. The balance sheet groups individual accounts by type (asset, liability, or shareholders’ equity) and lists these
accounts with their balances as of the balance sheet date.
10. The date of the balance sheet appears at the bottom of the balance sheet.
11. The asset and liability categories group individual accounts by the expected timing of cash receipts (for
assets) or cash payments (for liabilities).
12. If the firm expects to collect or pay more than one year after the balance sheet date, the balance sheet
classifies these as noncurrent assets and noncurrent liabilities, respectively.
13. The balance sheet begins with a list of assets and then lists liabilities and shareholders’ equity.
14. Both U.S. GAAP and IFRS require firms to report balance sheet accounts for the prior year in addition to
the current year.
15. Under U.S. GAAP, assets and liabilities in the balance sheet appear in order of increasing
closeness-to-cash.
16. Common terminology describes items whose cash receipts or payments the firm expects will occur within
one year as current assets or current liabilities, respectively.
17. Under IFRS, assets and liabilities appear in the statement of financial position in order of decreasing
closeness-to-cash.
18. Total liabilities plus shareholders’ equity shows the sources of all the firm’s financing, and the assets show
how the firm holds or has invested those funds.
19. The beginning balance of the shareholders’ equity account Retained Earnings plus net income from the
income statement less dividends equals the ending balance of Retained Earnings.
20. The equation that describes the relationship between the balance sheet and the income statement through the
Retained Earnings account is as follows:
Retained Earnings (beginning) + Net Income – Dividends = Retained Earnings (ending)
21. Retained earnings measures the cumulative excess of net income over dividends for the life of a firm.
Cumulative means that retained earnings aggregates all undistributed earnings.
22. Income statement accounts are temporary accounts and, as such, will have beginning and ending balances of
zero.
23. The closing process involves reducing to zero the balance in each income statement account by debiting the
revenue accounts and crediting the expense accounts, and transferring to Retained Earnings the differences
between total revenues and total expenses.
24. A balance sheet account with a debit balance requires a closing entry that credits that account, because a
credit closing entry will result in a zero ending balance in the account.
25. A balance sheet account with a credit balance requires a closing entry that debits that account, because a
debit closing entry will result in a zero ending balance in the account.
26. The first step in the accounting record-keeping process is recording each transaction in a file or other record
in the form of a journal entry.
27. A balance sheet prepared according to U.S. GAAP lists assets from most liquid to least liquid, where liquid
refers to the ease of converting the asset into cash.
28. A balance sheet prepared according to U.S. GAAP lists liabilities starting with those that the firm will
discharge soonest (the most current or closest to maturity liabilities) and ending with those that it will pay latest
(the most noncurrent or distant to maturity liabilities).
29. Firms that use International Financial Reporting Standards (IFRS) may, but need not, list their assets from
least liquid to most liquid, with the same ordering used to list liabilities.
30. Depreciation allocates the asset’s cost to the periods of benefit in some systematic and rational way, and it
attempts to track changes in the asset’s fair value.
31. Shareholders’ equity is a residual interest or claim—that is, the owners (shareholders) of a firm have a claim
on assets not required to meet the claims of creditors.
32. The amounts that firms report as received from owners are equal to the amounts the firm received when it
originally issued the shares of stock.
33. The balance sheet amount of shareholders’ equity does not, and is not intended to, provide the user of the
financial reports with a measure of the market value of common equity.
34. A potential investor can easily ascertain market value of common equity for a given publicly traded firm by
looking up the most recent share price (as reported in various online services) and then multiplying this share
price times the number of common shares outstanding, as reported on the balance sheet.
35. The balance sheet provides all the information an analyst wants or needs about a firm’s resources and the
claims on those resources.
36. Accounting does not normally recognize mutually unexecuted contracts as assets or liabilities.
37. Both U.S. GAAP and IFRS require the disclosure, in the notes to the financial statements, of selected
information about business segments.
38. In computerized systems, posting occurs instantly and automatically after journalizing.
39. Accounting is governed by the balance sheet equation, which shows the equality of
40. To maintain the balance sheet equality, it is necessary to report every event and transaction in a dual
manner. If a transaction results in an increase in the left hand side of the balance sheet, dual transactions
recording requires that which of the following must occur, to maintain the balance sheet equation?
41. A detailed system of accounts allows the preparer of financial statements to decompose,
or __________, each transaction to convey information about the effects of the transaction.
42. To maintain balance sheet equality, it is necessary to report every event and transaction in a dual manner. If
a transaction results in an increase in a Liability account, then which of the following must occur, to maintain
the balance sheet equation?
43. T-accounts
44. A T-account is a device or convention for organizing and accumulating the accounting entries of
transactions that affect an individual account. Which of the following is/are true?
45. Brice Foods Group, a European food retailer that operates supermarkets in seven countries, engaged in the
following transaction during 2013: purchased and received inventory costing €500 million on account from
various suppliers. Indicate the effects of the transaction on the balance sheet equation. Brice Foods Group
applies IFRS, and reports its results in millions of euros.
46. Composite, Inc., a firm specializing in building materials, engaged in the following transaction during
2013: issued 2,000 shares of common stock for $7,500 million in cash. Indicate the effects of the transaction
on the balance sheet equation. (Composite Inc. applies U.S. GAAP financial reporting standards, and reports its
results in millions of dollars.)
47. The equation that describes the relationship between the balance sheet and the income statement through the
Retained Earnings account is as follows:
48. Any single event or transaction will have which of the following effect(s) on the balance sheet?
49. Which of the following is/are true regarding the T-account?
50. Which of the following is/are true regarding the T-account?
51. Which of the following is/are true regarding T-accounts?
52. Horton Company reports the following:
Contributed Capital
$ 200
Total Revenues
$ 800
Total Liabilities
$1,200
Beginning Retained Earnings
($ 100)
Total Expenses
$ 500
Dividends
$ 0
What are Total Assets?
53. Conrad Company reports the following:
Total Assets
$800
Contributed Capital
$300
Total Revenues
$600
Beginning Retained Earnings
$200
Total Expenses
$700
Dividends
$100
What are Total liabilities?
54. The accounting system uses a device called an account. An account
55. Marianne Company reports the following:
Total Assets
$1,200
Total Revenues
$ 800
Total Liabilities
$ 500
Beginning Retained Earnings
$ 200
Total Expenses
$ 400
Dividends
$ 0
What is Contributed Capital?
56. Journal entries
57. Temporary accounts are for recording
58. Current assets are expected to be converted to cash within
59. Noncurrent assets are expected to be converted to cash over
60. Retained Earnings measures the cumulative excess of _____ for the life of a firm
61. _____ accounts provide disaggregated information concerning the net amount of an asset, liability, or
shareholders’ equity item. Note that the use of such accounts does not affect the total of assets, liabilities,
shareholders’ equity, revenues, or expenses, but only the balances in various accounts that comprise the totals
for these items.
62. Benezra S.A., a large Brazilian petrochemical company, reported a balance of R$1,600 million in Accounts
Receivable at the beginning of 2013 and R$1,500 million at the end of 2013. Its income statement reported total
Sales Revenue of R$12,000 million for 2013. Assuming that Benezra makes all sales on account, compute the
amount of cash collected from customers during 2013. Benezra applies Brazilian accounting standards, and
reports its results in thousands of reals (R$), the Brazilian currency. (In answering this question, assume that
Benezra uses either U.S. GAAP or IFRS; for purposes of this problem, this choice will not matter.)
63. Skyway Company, a U.S. airplane manufacturer, reported a balance of $8,100 million in Inventory at the
beginning of 2013 and $9,600 million at the end of 2013. Its income statement reported Cost of Products Sold
of $45,400 million for 2013. Compute the cost of inventory either purchased or manufactured during 2013.
(Skyway Company applies U.S. GAAP, and reports its results in millions of U.S. dollars.)
64. C-Swiss, a Swedish firm specializing in communication networks, reported a balance in Inventories of
SEK21,500 million at the beginning of 2013 and SEK22,500 million at the end of 2013. During 2013, C-Swiss
reported SEK114,100 million in Cost of Sales. How much was C-Swisss’ inventory purchases during
2013? [Assume that all of C-Swisss’ inventory purchases are made on account and C-Swiss applies IFRS, as
well as reports its results in millions of Swedish kronor (SEK).]
65. Ying Corporation, a Japanese construction firm, reported a balance in Income Taxes Payable of ¥3,700
million at the beginning of 2013 and ¥14,300 million at the end of 2013. Net income before income taxes for
2013 totaled ¥73,000 million. Assume that the firm is subject to an income tax rate of 43%. Compute the
amount of cash payments made for income taxes during 2013. (Ying Corporation applies Japanese accounting
standards, and reports its results in millions of yen (¥). In answering this question, assume that Ying
Corporation uses either U.S. GAAP or IFRS; for purposes of this problem, this choice will not matter.)
66. Energy Corporation, a U.S. diversified power management company, reported a balance in Retained
Earnings of $2,800 million at the beginning of 2013 and $3,300 million at the end of 2013. Based on Energy
Corporation’s financial reports for fiscal 2013, it reported dividends declared and paid of $250 million for 2013.
Compute the amount of net income for 2013. (Energy Corporation applies U.S. GAAP, and reports its results in
millions of U.S. dollars.)
67. On December 31, 2013, the Merchandise Inventories account of the Japanese electronics firm Flower
Limited (Flower) had a balance of ¥408,700 million, based on Flower’s financial reports for fiscal 2013.
Assume that during 2014, Flower purchased merchandise inventories on account for ¥1,456,400 million. On
December 31, 2014, it finds that merchandise inventory on hand is ¥412,400 million. Select the correct journal
entries to account for all changes in the Inventories during 2014. (Flower applies Japanese accounting
standards, and reports its results in millions of yen (¥). In answering this question, assume that Flower uses
either U.S. GAAP or IFRS; for purposes of this problem, this choice will not matter.)
68. Klothing Company, a U.S. clothing designer, manufacturer, and retailer, reported a balance in prepaid
insurance of $90.7 million, based on its financial reports dated March 31, 2013, the end of its fiscal year.
Assume that of this balance, $24 million relates to an insurance policy with two remaining months of coverage.
Select the correct journal entries that Klothing would make on April 30, 2013 (Assume that the firm closes its
books monthly. Klothing applies U.S. GAAP, and reports its results in millions of U.S. dollars.)
69. ABC Group (ABC), headquartered in Switzerland, is one of the world’s largest engineering companies.
ABC applies U.S. GAAP, and reports its results in millions of U.S. dollars. Based on ABC’s financial reports
for fiscal 2013, at January 1, 2013, ABC reported a balance in its Prepaid Rent account of $247 million; assume
that this amount reflects its prepayments of rent on factory and office space for the next month. Assume also
that on January 31, 2013, ABC paid $3,200 million as the annual rent for the period from February 1, 2013, to
January 31, 2014. ABC has a calendar year reporting period. Select the correct journal entries that ABC Group
would make during January 2013 that affect the Prepaid Rent account.
70. Tokyo Motor Company (Tokyo), a Japanese car manufacturer, reported Sales of Products of ¥22,670 billion
for the year ended March 31, 2014. The Cost of Products Sold was ¥18,356 billion. Assume that Tokyo made
all sales on credit. Select the correct journal entries that Tokyo made during the fiscal year ended March 31,
2014, related to these transactions. [Tokyo applies U.S. GAAP, and reports its results in millions of yen (¥).]
71. Under U.S. GAAP, assets and liabilities in the balance sheet appear in order of
72. Under IFRS, assets and liabilities in the statement of financial position appear in order of
73. The first step in the accounting record-keeping process is:
74. Assets are classified as current for reporting purposes when
75. Before preparing the balance sheet and income statement, an accountant would use what accounting record
to first record the firm’s transactions?
76. Current liabilities
77. If a corporation issues 1,000 shares of $1 par value common stock at $5 per share, how should the
transaction be accounted for?
78. T-accounts are frequently used in textbooks, demonstration problems, and examinations to accumulate
information about the effects of business transactions on individual balance sheet accounts and to prepare the
balance sheet. Alternatively, to accomplish the same objectives, some instructors and students might prefer to
use
79. Prepaid assets are valued on the balance sheet at
80. On April 1, Year 1, Colonial Bookstore bought an insurance policy costing $24,000 that would insure the
retail building for two years against fire loss. What asset account and what amount are recorded on the balance
sheet at December 31, Year 1?
81. What (other than a transactions spreadsheet ) serves the function of accumulating information about the
effect of business transactions on each balance sheet and income statement account?
82. What does the word “marketable” imply as far as “marketable securities”?
83. Which of the following is false regarding a merchandising firm?
84. Which of the following is/are not true regarding a merchandising firm?
85. For manufacturing firms, the balance sheet reports the costs of incomplete items as
86. Solve for the unknown item for each of the following independent situations.
CASE A
CASE B
Total assets
A
400
Contributed capital
100
150
Total revenues
400
300
Total liabilities
600
B
Beginning retained earnings
(50)
100
Total expenses
250
350
Dividends
0
50
87. The transactions listed below relate to Mountain Corporation. Indicate whether or not each transaction
immediately gives rise to an asset or liability of Mountain Corporation under generally accepted accounting
principles. If accounting recognizes an asset or a liability, give the account title and amount.
a.
Mountain Corporation signs a 3-year employment contract with Robert Lindsey, the chief financial officer, for $375,000.
b.
Mountain Corporation sends a check for $2,400 for two years’ property insurance coverage beginning next month that would normally cost
$2,000 for a one-year policy.
c.
The firm paid $250 for one-year subscriptions to ski magazines. None of the magazines have been received to date. In addition, it will cost
the publisher $100 to fulfill the subscription commitment.
d.
The firm acquires inventory with a list price of $2,000, at a 3% discount for cash payment. The firm treats cash discounts as a reduction of
acquisition cost.
e.
The firm agrees to purchase 25,000 units of inventory from a supplier over the next 3 years at an agreed cost of $4/unit.
88. Culinary Delites, a European food retailer engaged in the following three transactions during 2013: (1)
purchased and received inventory costing €978 million on account from various suppliers; (2) returned
inventory costing €57 million because of damage that occurred during shipment; (3) paid the various suppliers
the total amount due. Indicate the effects of each of these three transactions on the balance sheet equation.
Culinary Delites applies IFRS and reports its results in millions of euros (€).
Shareholders’
Transaction Assets = Liabilities + Equity
(1) + €978 + €978
(2) – € 57 – € 57
(3) – €921 – €921