Chapter 02 – Analyzing Business Transactions
TRUE/FALSE
1. When a company receives a product previously ordered, a recordable transaction has occurred.
2. When a business hires a new employee, a recordable transaction has occurred.
3. The valuation issue deals with how the components of a transaction should be categorized.
4. In accounting, to recognize means to record a transaction or event.
5. Purchase requisitions are recognized in the accounting records.
6. When a company purchases goods that it will resell, it must record the goods in an expense account.
7. The cost principle is a solution to the recognition issue.
8. The recognition issue deals with when a user of financial statements should use accounting
information.
9. The most generally accepted value used in accounting is market value.
10. Fair Value is the exchange price associated with a business transaction at the time the transaction is
recognized.
11. The classification issue involves the assignment of accounts to business transactions.
12. When a company receives an order, a transaction has occurred.
13. A credit to an asset account means that asset account has been increased.
14. A debit has an unfavorable effect on an account.
15. For a T account, an account balance is the difference in total dollars between total debit footings and
total credit footings.
16. Column totals are called footings.
17. A decrease in a liability is recorded by a debit.
18. An increase in an asset is recorded by a debit.
19. The double-entry system is possible because all business transactions have two equal and opposite
aspects.
20. A decrease in a stockholders’ equity account is recorded with a credit.
21. An increase in revenue is recorded with a credit.
22. Dividends should appear on the statement of retained earnings.
23. The account Dividends has a normal credit balance.
24. Revenues have a normal credit balance.
25. Retained Earnings has a normal debit balance.
26. Accounts Payable has a normal credit balance.
27. When stockholders make an investment, the Common Stock account is debited.
28. When a dividend is declared and paid, the Dividends account is debited and Cash is credited.
29. Liabilities are established with debits and eliminated with credits.
30. Generally, before Accounts Receivable is debited, it is credited.
31. Generally, before Accounts Payable is debited, it is credited.
32. When payment is received for services not yet rendered, no entry is recorded until that service has
been rendered.
33. When revenue has been earned, no entry is recorded until the related cash has been collected.
34. A contract is an example of a source document.
35. A basic storage unit for accounting data is the account.
36. In a trial balance, all debits are listed before all credits.
37. A trial balance is normally prepared at the end of the day.
38. When the columns of the trial balance equal each other, it means that no errors have occurred in
recording and posting the transactions.
39. A transposition error will cause the trial balance to be out of balance by an amount that is evenly
divisible by 9.
40. Recording an account with a debit balance as a credit, or vice versa, will cause the trial balance to be
out of balance by an amount that is evenly divisible by 2.
41. The amount of profit would always be equal to the ending cash balance.
42. One can obtain a clear picture of a company’s liquidity by referring to its income statement.
43. One can obtain a clear picture of a company’s liquidity by referring to its statement of cash flows.
44. Revenue should be recorded when it has been earned, not when the related cash has been collected.
45. Expenses should be recorded when they are paid, not when they have been incurred.
46. A net income of $10,000 means that the business received $10,000 more in cash from its customers
than it spent to run the business.
47. Accounts Receivable and Accounts Payable are used when there is a time delay between a transaction
and its related cash flow.
48. The journal is a chronological record of all transactions.
49. Entering transactions into the journal is called posting.
50. In a journal entry, assets are always recorded before liabilities.
51. In a journal entry, credits are always indented.
52. In a journal entry, the Post. Ref. column is left blank until the entry has been posted.
53. It is sometimes correct for a compound entry’s debit totals and credit totals to be unequal.
54. The ledger account form has a Balance column.
55. One might see “J2” correctly placed in the Post. Ref. column of the journal.
56. Despite the advantages of a computer accounting information system, posting still must be done
57. Journal entries are typically posted only at the end of the year.
58. In a financial report, a double line is placed below the final total(s).
59. Another name for the ledger is the book of original entry.
60. The chart of accounts makes finding accounts in the ledger easier.
61. All companies use the same standard set of accounts.
62. The accounts in a chart of accounts are normally listed in alphabetical order.
63. The numbering scheme of a chart of accounts should contain no gaps.
64. Wages payable is a type of expense.
65. Dividends are classified as an expense.
66. Unearned revenues are classified as liabilities on the balance sheet.
67. Another word for expense is debt.
68. Office supplies are classified as an expense.
69. The Land and Building accounts may be combined into one account.
70. Investments by stockholders are recorded in the Common Stock account, not in the Retained Earnings
account.
MULTIPLE CHOICE
1. When a business records revenue before it has been earned, it has violated the measurement issue of
a.
recognition.
b.
evaluation.
c.
classification.
d.
valuation.
2. When a business reports an asset at an inflated dollar amount, it has violated the measurement issue of
a.
recognition.
b.
valuation.
c.
classification.
d.
realization.
3. When a business erroneously records expenses as assets, it has violated the measurement issue of
a.
communication.
b.
classification.
c.
valuation.
d.
recognition.
4. Which of the following is a business event that is not considered a recordable transaction?
a.
A company receives a product previously ordered.
b.
A company pays an employee for work performed.
c.
A customer inquires about the availability of a service.
d.
A customer purchases a service.
5. Which of the following is a business event that is considered a recordable transaction?
a.
A company hires a new employee.
b.
A customer purchases merchandise.
c.
A company orders a product from a supplier.
d.
An employee sends a purchase requisition to the purchasing department.
6. A purchase is recognized in the accounting records when
a.
payment is made for the item purchased.
b.
the purchase requisition is sent to the purchasing department.
c.
title transfers from the seller to the buyer.
d.
the buyer receives the seller’s bill.
7. Which of the following is not a measurement issue in accounting?
a.
When to record a business transaction
b.
How to classify the items of a business transaction
c.
What value to place on a business transaction
d.
Where to record a business transaction
8. Which of the following is an illustration of the classification issue?
a.
At what amount should an old machine be shown on the balance sheet?
b.
At what point should the purchase of art supplies be recorded?
c.
Should tools be recorded as an asset or as an expense?
d.
At what point should a bill be paid for the purchase of an item?
9. The issue of deciding when to record a transaction is solved by
a.
properly classifying the transaction.
b.
deciding on a point of recognition.
c.
assigning historical cost to the transaction.
d.
analyzing the intent of management.
10. Which of the following is not a measurement issue in accounting?
a.
Valuation
b.
Recognition
c.
Evaluation
d.
Classification
11. The cost principle relates most closely to the
a.
recognition point.
b.
recognition issue.
c.
valuation issue.
d.
classification issue.
12. Which of the following business events is not a transaction?
a.
Signing a contract
b.
Paying wages
c.
Receiving goods
d.
Purchasing a service
13. If Accounts Receivable has debit postings of $29,000, credit postings of $22,000, and a normal ending
balance of $24,000, which of the following was its beginning balance?
a.
$31,000 Dr.
b.
$17,000 Dr.
c.
$17,000 Cr.
d.
$31,000 Cr.
14. To determine the balance of a particular account, one should refer to the
a.
source documents.
b.
chart of accounts.
c.
book of original entry.
d.
ledger.
15. Which of the following accounts is increased with a debit?
a.
Common Stock
b.
Rent Payable
c.
Legal Fees Earned
d.
Dividends
16. Which of the following accounts is increased with a credit?
a.
Supplies
b.
Fees Earned
c.
Supplies Expense
d.
Dividends
17. If Accounts Payable has debit postings of $17,000, credit postings of $14,000, and a normal ending
balance of $6,000, what was its beginning balance?
a.
$9,000 Cr.
b.
$3,000 Cr.
c.
$9,000 Dr.
d.
$3,000 Dr.
18. Which pair of accounts follows the rules of debit and credit in the same manner?
a.
Revenue from Services and Equipment
b.
Prepaid Rent and Advertising Expense
c.
Repair Expense and Notes Payable
d.
Common Stock and Rent Expense
19. Which pair of accounts follows the rules of debit and credit in the opposite manner?
a.
Prepaid Insurance and Dividends
b.
Advertising Expense and Land
c.
Dividends and Medical Fees Earned
d.
Interest Payable and Common Stock
20. Which of the following accounts has a normal credit balance?
a.
Dividends
b.
Automotive Equipment
c.
Advertising Fees Earned
d.
Interest Expense
21. Which of the following accounts has a normal debit balance?
a.
Dividends
b.
Common Stock
c.
Unearned Fees
d.
Retained Earnings
22. Which of the following accounts has a normal debit balance?
a.
Art Fees Earned
b.
Notes Payable
c.
Prepaid Insurance
d.
Unearned Art Fees
23. Which of the following accounts has a normal credit balance?
a.
Accounts Receivable
b.
Common Stock
c.
Wages Expense
d.
Dividends
24. Which of the following accounts has a normal debit balance?
a.
Wages Payable
b.
Fees Earned
c.
Rent Expense
d.
Common Stock
25. Which of the following accounts is decreased with a debit?
a.
Notes Payable
b.
Cash
c.
Interest Expense
d.
Dividends
26. Which of the following accounts is decreased with a credit?
a.
Advertising Fees Earned
b.
Insurance Expense
c.
Common Stock
d.
Unearned Revenue
27. When collection is made on Accounts Receivable,
a.
stockholders’ equity increases.
b.
total assets decrease.
c.
total assets remain the same.
d.
total assets increase.
28. If office equipment is sold at cost in exchange for a promissory note,
a.
total liabilities increase.
b.
total liabilities and stockholders’ equity decrease.
c.
total assets decrease.
d.
total assets remain the same.
29. The declaration and payment of a dividend will
a.
decrease net income.
b.
increase liabilities.
c.
not affect total assets.
d.
decrease stockholders’ equity.
30. Payment on a portion of Accounts Payable will
a.
not affect stockholders’ equity.
b.
decrease net income.
c.
increase total liabilities.
d.
not affect total assets.
31. A transaction in which six months’ rent is paid in advance results in which of the following journal
entries?
a.
Prepaid Rent – Debit; Cash – Credit
b.
Rent Receivable – Debit; Cash – Credit
c.
Rent Revenue – Debit; Cash – Credit
d.
Rent Expense– Debit; Cash – Credit
32. Which of the following events does not require a journal entry?
a.
Purchase of a one-year insurance policy
b.
Agreement to perform a service at a future date
c.
Performance of a service agreed to at a past date
d.
Payment for a service performed previously
33. Which of the following events does not result in the recording of an expense?
a.
Payment of a dividend
b.
Purchase of gasoline for fill-up of a company car
c.
Receipt of a bill from the telephone company
d.
Payment of wages
34. A company that receives money in advance of performing a service. What is the journal entry for the
transaction?
a.
Unearned Revenue – Debit; Accounts Payable – Credit
b.
Cash – Debit; Unearned Revenue – Credit
c.
Cash – Debit; Prepaid Fees – Credit
d.
Cash – Debit; Accounts Receivable. – Credit
35. When a company has performed a service but has not yet received payment, what is the required
journal entry to be recorded?
a.
Accounts Receivable – Debit; Revenue from Services – Credit
b.
Revenue from Services – Debit; Accounts Payable – Credit
c.
No entry is required until the cash is received.
d.
Revenue from Services – Debit; Accounts Receivable – Credit
36. When a company receives an electric bill but does not pay it right away, what is the required journal
entry to be recorded?
a.
Utilities Expense – Debit; Accounts Receivable – Credit
b.
No entry is required until the bill is paid.
c.
Utilities Expense – Debit; Accounts Payable – Credit
d.
Accounts Payable – Debit; Utilities Expense – Credit
37. When a magazine company receives advance payment for a subscription, what is the required journal
entry to be recorded?
a.
Cash – Debit; Unearned Subscriptions Revenue – Credit
b.
Prepaid Subscriptions – Debit; Cash – Credit
c.
Cash – Debit; Subscriptions Revenue – Credit
d.
Unearned Subscriptions Revenue – Debit; Cash – Credit
38. When a service has been performed, but no cash has been received, which of the following statements
is true?
a.
The entry would include a debit to Accounts Receivable.
b.
No journal entry would be made.
c.
The entry would include a debit to Accounts Payable.
d.
The entry would include a credit to Unearned Revenue.
39. Which of the following transactions decreases both assets and stockholders’ equity?
a.
Declaration and payment of a dividend
b.
Advance payment made for insurance
c.
Receipt of a phone bill, to be paid at a later time
d.
Payment of a liability
40. A $4,000 machine is purchased by paying $1,000 cash and issuing a promissory note for the
remainder. The journal entry should include a
a.
credit to Machinery.
b.
credit to Notes Payable.
c.
credit to Notes Receivable.
d.
debit to Cash.
41. All of the following are examples of source documents except
a.
checks.
b.
invoices.
c.
journals.
d.
receipts.
42. Which of the following transactions increases both assets and stockholders’ equity?
a.
Payment received from a credit customer
b.
Received a bank loan
c.
Rendered a service, payment not yet received
d.
Declared and paid a dividend
43. Which of the following accounts will not affect stockholders’ equity?
a.
Advertising Expense
b.
Dividends
c.
Land
d.
Sales
44. A dividend will reduce which of the following accounts?
a.
Dividends
b.
Retained Earnings
c.
Common Stock
d.
Accounts Payable
45. Which of the following does not affect retained earnings?
a.
Declaration and payment of dividends
b.
Earning of revenues
c.
Investments by stockholders
d.
Incurring of expenses
46. A $70 credit item is accidentally posted as a debit. The trial balance column totals will therefore differ
by
a.
$0.
b.
$35.
c.
$70.
d.
$140.
47. Which of the following gives the correct sequence of accounting procedures?
a.
Financial statements, trial balance, ledger, journal
b.
Financial statements, journal, ledger, trial balance
c.
Journal, ledger, trial balance, financial statements
d.
Ledger, trial balance, journal, financial statements
48. Here is the trial balance for McLeary Corporation:
McLeary Corporation
Trial Balance
January 31, 2010
Cash
$3,000
Accounts Receivable
2,000
Art Supplies
3,000
Office Supplies
5,000
Prepaid Rent
7,000
Prepaid Insurance
5,000
Art Equipment
5,000
Office Equipment
3,000
Accounts Payable
$10,000
Common Stock
5,000
Retained Earnings
5,000
Dividends
?
Advertising Fees Earned
?
Wages Expense
?
Utilities Expense
5,000
Telephone Expense
3,000
________
$ A
$
B
If the balance of the Dividends account were $36,000 and the balance of the Wages Expense account
were $5,000, what would be the amount of B?
a.
$48,000
b.
$61,000
c.
$82,000
d.
$62,000
49. Here is the trial balance for McLeary Corporation:
McLeary Corporation
Trial Balance
January 31, 2010
Cash
$3,000
Accounts Receivable
2,000
Art Supplies
3,000
Office Supplies
5,000
Prepaid Rent
7,000
Prepaid Insurance
5,000
Art Equipment
5,000
Office Equipment
3,000
Accounts Payable
$10,000
Common Stock
5,000
Retained Earnings
5,000
Dividends
?
Advertising Fees Earned
?
Wages Expense
?
Utilities Expense
5,000
Telephone Expense
3,000
________
$ A
$
B
If the trial balance showed a balance of $7,000 in the Dividends account and a balance of $11,000 in
the Wages Expense account, what would be the amount of Advertising Fees Earned for the period?
a.
$49,000
b.
$39,000
c.
$54,000
d.
$24,000
50. Here is the trial balance for McLeary Corporation:
McLeary Corporation
Trial Balance
January 31, 2010
Cash
$5,500
Accounts Receivable
2,000
Art Supplies
3,000
Office Supplies
5,000
Prepaid Rent
7,000
Prepaid Insurance
5,000
Art Equipment
5,000
Office Equipment
3,000
Accounts Payable
$10,000
Common Stock
5,000
Retained Earnings
5,000
Dividends
?
Advertising Fees Earned
?
Wages Expense
?
Utilities Expense
5,000
Telephone Expense
3,000
________
$ A
$ B
On the trial balance, total assets equal
a.
$45,500.
b.
$43,500.
c.
$35,500.
d.
$25,500.
51. Here is the trial balance for McLeary Corporation:
McLeary Corporation
Trial Balance
January 31, 2010
Cash
Accounts Receivable
Art Supplies
Office Supplies
Prepaid Rent
Prepaid Insurance
Art Equipment
Office Equipment
Accounts Payable
$10,000
Common Stock
5,000
Retained Earnings
5,000
Dividends
Advertising Fees Earned
?
Wages Expense
Utilities Expense
Telephone Expense
________
$ B
If the trial balance showed a balance of $8,000 in the Wages Expense account and a balance of
$34,000 in the Advertising Fees Earned account, what would be the amount of A?
a.
$54,000
b.
$44,000
c.
$59,000
d.
$49,000
52. Here is the trial balance for McLeary Corporation:
McLeary Corporation
Trial Balance
January 31, 2010
Cash
$3,000
Accounts Receivable
2,000
Art Supplies
3,000
Office Supplies
5,000
Prepaid Rent
7,000
Prepaid Insurance
5,000
Art Equipment
5,000
Office Equipment
3,000
Accounts Payable
$10,000
Common Stock
5,000
Retained Earnings
5,000
Dividends
?
Advertising Fees Earned
?
Wages Expense
?
Utilities Expense
5,000
Telephone Expense
3,000
________
$ A
$ B
If the trial balance showed a balance of $4,000 in the Wages Expense account and a balance of
$30,000 in the Advertising Fees Earned account, what would be the amount of Dividends?
a.
$25,000
b.
$14,000
c.
$5,000