Chapter 3 1 Analyze The Effect Business Transactions The Basic

Document Type
Test Prep
Book Title
Financial Accounting-- Binder Ready Version: Tools for Business Decision Making 8th Edition
Authors
Donald E. Kieso, Jerry J. Weygandt, Paul D. Kimmel
FOR INSTRUCTOR USE ONLY
CHAPTER 3
THE ACCOUNTING INFORMATION SYSTEM
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVE AND BLOOM’S TAXONOMY
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Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
3-2
Brief Exercises
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AN
SUMMARY OF LEARNING OBJECTIVES BY QUESTION TYPE
Learning Objective 1
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The Accounting Information System
FOR INSTRUCTOR USE ONLY
3-3
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Learning Objective 4
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Learning Objective 5
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Note: TF = True-False C = Completion
MC = Multiple Choice Ex = Exercise
Ma = Matching SA = Short Answer Essay
CHAPTER LEARNING OBJECTIVES
1. Analyze the effect of business transactions on the basic accounting equation. Each
business transaction must have a dual effect on the accounting equation. For example, if an
individual asset is increased, there must be a corresponding (a) decrease in another asset, or
(b) increase in a specific liability, or (c) increase in stockholders’ equity.
2. Explain how accounts, debits, and credits are used to record business transactions.
An account is an individual accounting record of increases and decreases in specific asset,
liability, and stockholders’ equity items.
The terms debit and credit are synonymous with left and right. Assets, dividends, and
expenses are increased by debits and decreased by credits. Liabilities, common stock,
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
3-4
retained earnings, and revenues are increased by credits and decreased by debits.
The Accounting Information System
3-5
3. Indicate how a journal is used in the recording process. The basic steps in the recording
process are (a) analyze each transaction in terms of its effect on the accounts, (b) enter the
transaction information in a journal, and (c) transfer the journal information to the appropriate
accounts in the ledger.
The initial accounting record of a transaction is entered in a journal before the data are
entered in the accounts. A journal (a) discloses in one place the complete effect of a
transaction, (b) provides a chronological record of transactions, and (c) prevents or locates
errors because the debit and credit amounts for each entry can be readily compared.
4. Explain how a ledger and posting help in the recording process. The entire group of
accounts maintained by a company is referred to collectively as a ledger. The ledger provides
the balance in each of the accounts as well as keeps track of changes in these balances.
Posting is the procedure of transferring journal entries to the ledger accounts. This phase of
the recording process accumulates the effects of journalized transactions in the individual
accounts.
5. Prepare a trial balance. A trial balance is a list of accounts and their balances at a given
time. The primary purpose of the trial balance is to prove the mathematical equality of debits
and credits after posting. A trial balance also uncovers errors in journalizing and posting and
is useful in preparing financial statements.
TRUE-FALSE STATEMENTS
1. Economic events that require recording in the financial statements are called accounting
transactions.
2. Revenue increases stockholders’ equity and should be recorded whenever cash is
received from customers.
3. Collection on an account receivable will increase both cash and accounts receivable.
4. The payment of a liability decreases both cash and accounts payable.
5. If total assets are increased, there must be a corresponding increase in liabilities or a
decrease in stockholders’ equity.
6. A new account is opened for each transaction entered into by a business firm.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-6
7. The recording process becomes more efficient and informative if all transactions are
recorded in one account.
8. An account consists of two parts: (1) a left or debit side and (2) a right or credit side.
9. For a T account, an account balance is the difference in total dollars between total debit
amounts and total credit amounts.
10. An account is often referred to as a T-account because of the way it is constructed.
11. A debit to an account always indicates an increase in that account.
12. If a revenue account is credited, the revenue account is increased.
13. The normal balance of all accounts is a debit.
14. Debit and credit can be interpreted to mean “bad” and “good”, respectively.
15. A credit means that an account has been increased.
16. A decrease in a liability account is recorded by a debit.
17. An increase in an asset is recorded by a debit.
18. The double-entry system of accounting refers to the placement of a double line at the end
of a column of figures.
19. A credit balance in a liability account indicates that an error in recording has occurred.
20. The normal balance of an asset is a credit.
The Accounting Information System
3-7
21. The normal balance of the dividend account is a credit.
22. Assets are decreased with a credit.
23. A debit means that an account has been decreased.
24. A decrease in a liability is recorded by a debit.
25. An increase in an asset is recorded by a debit.
26. Liabilities are increased with debits and decreased with credits.
27. The dividends account is a subdivision of the retained earnings account and appears as
an expense on the income statement.
28. Revenues are a subdivision of stockholders’ equity.
29. Under the double-entry system, revenues must always equal expenses.
30. Transactions are entered in the ledger first and then they are analyzed in terms of their
effect on the accounts.
31. Source documents can provide evidence that a transaction has occurred.
32. Each transaction must be analyzed in terms of its effect on the accounts before it can be
recorded in a journal.
33. Transactions are entered in the ledger accounts and then transferred to journals.
34. All business transactions must be entered first in the general ledger.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
FOR INSTRUCTOR USE ONLY
3-8
IMA: FSA
The Accounting Information System
3-9
35. Transactions are recorded in alphabetical order in a journal.
36. The journal is a chronological record of all transactions.
37. A journal is an accounting record in which transactions are initially recorded.
38. The complete effect of a transaction on the accounts is disclosed in the journal.
39. The account titles used in journalizing transactions need not be identical to the account
titles in the ledger.
40. The chart of accounts is a special ledger used in accounting systems.
41. A general ledger should be arranged in financial statement order beginning with the
balance sheet accounts.
42. The entire group of accounts maintained by a company is referred to collectively as the
journal.
43. Prepaid expenses are assets.
44. Salaries and wages payable is a type of expense.
45. Dividends are classified as an expense.
46. Unearned Service Revenue is classified as a liability on the balance sheet.
47. Posting is the process of proving the equality of debits and credits in the trial balance.
48. Entering transactions into the journal is called posting.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-10
49. A trial balance is prepared at the beginning of an accounting period.
50. A trial balance does not prove that all transactions have been recorded or that the ledger
is correct.
51. In a trial balance, all debits are listed before all credits.
52. When the columns of the trial balance equal each other, it means that no errors have
occurred in the recording and posting the transactions.
53. Operating activities are the types of activities the company performs to generate profits.
54. Financing activities include the purchase or sale of long-lived assets or the purchase or
sale of investment securities.
Answers to True-False Statements
MULTIPLE CHOICE QUESTIONS
55. If total liabilities decreased by $4,000, then
a. stockholders’ equity must have decreased by $4,000.
b. assets must have decreased by $4,000, or stockholders’ equity must have increased
by $4,000.
c. assets and stockholders’ equity each increased by $2,000.
d. assets must have increased by $4,000.
The Accounting Information System
3-11
56. Collection of a $600 Accounts Receivable
a. increases an asset $600; decreases an asset $600.
b. increases an asset $600; decreases a liability $600.
c. decreases a liability $600; increases stockholders’ equity $600.
d. decreases an asset $600; decreases a liability $600.
57. If an individual asset is increased, then
a. there could be an equal decrease in a specific liability.
b. there could be an equal decrease in stockholders’ equity.
c. there could be an equal decrease in another asset.
d. None of these answer choices are correct.
58. If services are rendered on account, then
a. assets will decrease.
b. liabilities will increase.
c. stockholders’ equity will increase.
d. liabilities will decrease.
59. If services are rendered for cash, then
a. assets will increase.
b. liabilities will increase.
c. stockholders’ equity will decrease.
d. liabilities will decrease.
60. If expenses are paid in cash, then
a. assets will increase.
b. liabilities will decrease.
c. stockholders’ equity will increase.
d. assets will decrease.
61. An investment by the stockholders in a business increases
a. assets and stockholders’ equity.
b. assets and liabilities.
c. liabilities and stockholders’ equity.
d. assets only.
62. The purchase of an asset for cash
a. increases assets and stockholders’ equity.
b. increases assets and liabilities.
c. decreases assets and increases liabilities.
d. leaves total assets unchanged.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-12
63. The purchase of an asset on credit
a. increases assets and stockholders’ equity.
b. increases assets and liabilities.
c. decreases assets and increases liabilities.
d. leaves total assets unchanged.
64. The payment of a liability
a. decreases assets and stockholders’ equity.
b. increases assets and decreases liabilities.
c. decreases assets and increases liabilities.
d. decreases assets and liabilities.
65. The sale of an asset on credit for what it cost
a. increases assets and liabilities.
b. decreases assets and liabilities.
c. leaves total assets unchanged.
d. decreases assets and increases liabilities.
66. When collection is made on Accounts Receivable,
a. total assets will remain the same.
b. stockholders equity will increase.
c. total assets will increase.
d. total assets will decrease.
67. A revenue generally
a. increases assets and liabilities.
b. increases assets and stockholders’ equity.
c. increases assets and decreases stockholders’ equity.
d. leaves total assets unchanged.
68. A paid dividend
a. decreases assets and stockholders’ equity.
b. increases assets and stockholders’ equity.
c. increases assets and decreases stockholders’ equity.
d. decreases assets and increases stockholders’ equity.
69. Receiving payment of a portion of an accounts receivable will
a. not affect total assets.
b. increase liabilities.
c. increase stockholders’ equity.
d. decrease net income.
The Accounting Information System
3-13
70. An expense
a. decreases assets and liabilities.
b. decreases stockholders’ equity.
c. leaves stockholders’ equity unchanged.
d. is basically the same as a liability.
71. Which of the following items has no effect on retained earnings?
a. Expense
b. Dividends
c. Land purchase
d. Revenue
72. If a company buys a $700 machine on credit, this transaction will affect the
a. income statement and retained earnings statement only.
b. income statement only.
c. income statement, retained earnings statement, and balance sheet.
d. balance sheet only.
73. A payment of a portion of an accounts payable will
a. not affect total assets.
b. increase liabilities.
c. not affect stockholders’ equity.
d. decrease net income.
74. Powers Corporation received a cash advance of $500 from a customer. As a result of this
event,
a. assets increased by $500.
b. equity increased by $500.
c. liabilities decreased by $500.
d. Both assets and equity increased by $500.
75. Courtney Company purchased equipment for $1,800 cash. As a result of this event,
a. equity decreased by $1,800.
b. assets increased by $1,800.
c. total assets remained unchanged.
d. Both assets and equity decreased by $1,800.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-14
76. Comstock Company provided consulting services and billed the client $2,500. As a result
of this event
a. assets remained unchanged.
b. assets increased by $2,500.
c. equity increased by $2,500
d. Both assets and equity increased by $2,500.
77. Budke Corporation paid dividends of $5,000. As a result of this event, the
a. Dividends account was increased by $5,000.
b. Dividends account was decreased by $5,000.
c. Cash account was increased by $5,000.
d. Cash was increased and the Dividends account was decreased by $5,000.
78. If a company pays dividends of $10,000,
a. stockholders' equity will be reduced by $10,000.
b. net income will be reduced by $10,000.
c. retained earnings will be reduced by $10,000.
d. Both retained earnings and stockholders' equity will be reduced by $10,000.
79. If a company issues common stock for $40,000 and uses $30,000 of the cash to purchase
a truck,
a. assets will be increased by $10,000.
b. equity will be reduced by $40,000.
c. assets will be increased by $40,000.
d. assets will be unchanged.
80. Are advanced receipts from customers treated as revenue at the time of receipt? Why or
why not?
a. Yes, they are treated as revenue at the time of receipt because the company has
access to the cash.
b. No, the amount of revenue cannot be adequately determined until the company
completes the work.
c. Yes, The intent of the company is to perform the work and the customer is confident
that the services will be completed.
d. No, revenue cannot be recognized until the work is performed.
81. The receipt of cash in advance from a customer
a. increases assets and stockholders' equity.
b. increases assets and decreases stockholders' equity.
c. increases assets and liabilities.
d. none of these answer choices are correct.
The Accounting Information System
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82. On March 1, 2017, Freeze Company hires a new employee who will start to work on
March 6. The employee will be paid on the last day of each month. Should a journal entry
be made on March 6? Why or why not?
a. Yes, the company is now obligated to pay the employee, thus that event must be
recorded.
b. No, hiring an employee is an important event; however it is not an economic event that
should be recorded.
c. Yes, failure to record the event would cause the financial statements to be misleading.
d. No, the financial position of the company has been changed, however, the dollar
amount of the transaction is not yet known.
83. Howard Company had a transaction that caused a $5,000 increase in both assets and
total liabilities. This transaction could have been a(n)
a. purchase of office equipment for $12,000, paying $7,000 cash and issuing a note
payable for the balance.
b. investment of $5,000 cash in the business by the stockholders.
c. purchase of office equipment for $5,000 cash.
d. repayment of a $5,000 bank loan.
84. Jamal Company began the year with $126,000 in its Common Stock account and a debit
balance in Retained Earnings of $54,000. During the year, the company earned net
income of $27,000 and declared and paid $9,000 of dividends. In addition, the company
sold additional common stock amounting to $33,000. Based on this information, what
should the transaction analysis show for the ending total of all stockholders' equity
accounts?
a. $231,000
b. $249,000
c. $123,000
d. $165,000
85. Crawford Company started the year with $60,000 in its Common Stock account and a
credit balance in Retained Earnings of $44,000. During the year, the company earned net
income of $48,000 and declared and paid $20,000 of dividends. In addition, the company
sold additional common stock amounting to $28,000. As a result, the amount of its
retained earnings at the end of the year would be
a. $160,000.
b. $72,000.
c. $132,000.
d. $100,000.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-16
86. All of the following are characteristics of every accounting information system except it is
a system
a. that collects transaction data.
b. that processes transaction data.
c. that communicates financial information to decision makers.
d. of data storage hardware for the chart of accounts.
87. The left side of an account is
a. blank.
b. a description of the account.
c. the debit side.
d. the balance of the account.
88. Which one of the following is not a part of an account?
a. Credit side
b. Trial balance
c. Debit side
d. Title
89. An account is a part of the financial information system and is described by each one of
the following except
a. an account has a debit and credit side.
b. an account is a source document.
c. an account consists of three parts.
d. an account has a title.
90. The right side of an account
a. is the correct side.
b. reflects all transactions for the accounting period.
c. shows all the balances of the accounts in the system.
d. is the credit side.
91. An account consists of
a. a title, a debit balance, and a credit balance.
b. a title, a left side, and a debit balance.
c. a title, a debit side, and a credit side.
d. a title, a right side, and a debit balance.
The Accounting Information System
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92. A T-account is
a. a way of depicting the basic form of an account.
b. a special account used instead of a journal.
c. a special account used instead of a trial balance.
d. used for accounts that have both a debit and credit balance.
93. Which statement about an account is true?
a. In its simplest form, an account consists of two parts.
b. An account is an individual accounting record of increases and decreases in specific
asset, liability, and stockholders’ equity items.
c. There are separate account for specific assets and liabilities but only one account for
stockholders’ equity items.
d. The left side of an account is the credit or decrease side.
94. In its simplest form, an account consists of all of the following except
a. right (credit) side.
b. account title.
c. left side.
d. explanation column.
95. A debit to an asset account indicates a(n)
a. error.
b. credit was made to a liability account.
c. decrease in the asset.
d. increase in the asset.
96. Debits
a. increase both assets and liabilities.
b. decrease both assets and liabilities.
c. increase assets and decrease liabilities.
d. decrease assets and increase liabilities.
97. The normal balance of any account is the
a. left side.
b. right side.
c. side which increases that account.
d. side which decreases that account.
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-18
98. The double-entry system requires that each transaction must be recorded
a. in at least two different accounts.
b. in two sets of books.
c. in a journal and in a ledger.
d. first as a revenue and then as an expense.
99. A credit is not the normal balance for which account listed below?
a. Common Stock account
b. Revenue account
c. Liability account
d. Dividends account
100. The classification and normal balance of the Dividends account is
a. revenue with a credit balance.
b. an expense with a debit balance.
c. a liability with a credit balance.
d. stockholders’ equity with a debit balance.
101. Which of the following describes the classification and normal balance of the Retained
Earnings account?
a. Asset, debit
b. Stockholders’ equity, credit
c. Revenues, credit
d. Expense, debit
102. Which of the following describes the classification and normal balance of the Unearned
Rent Revenue account?
a. Asset, debit
b. Liability, credit
c. Revenues, credit
d. Expense, debit
103. A revenue account
a. is increased by debits.
b. is decreased by credits.
c. has a normal balance of a debit.
d. is increased by credits.
The Accounting Information System
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104. Which one of the following represents the expanded basic accounting equation?
a. Assets = Liabilities + Common Stock + Dividends Revenue Expenses
b. Assets + Dividends + Expenses = Liabilities + Common Stock + Revenues
c. Assets Liabilities Dividends = Common Stock + Revenues Expenses
d. Assets = Revenues + Expenses Liabilities
105. Which of the following correctly identifies normal balances of accounts?
a. Assets Debit
Liabilities Credit
Common Stock Credit
Revenues Debit
Expenses Credit
b. Assets Debit
Liabilities Credit
Common Stock Credit
Revenues Credit
Expenses Credit
c. Assets Credit
Liabilities Debit
Common Stock Debit
Revenues Credit
Expenses Debit
d. Assets Debit
Liabilities Credit
Common Stock Credit
Revenues Credit
Expenses Debit
106. Which accounts normally have debit balances?
a. Assets, expenses, and revenues
b. Assets, expense, and retained earnings
c. Assets, liabilities, and dividends
d. Assets, expenses, and dividends
107. Which accounts normally have credit balances?
a. Revenues, liabilities, and dividends
b. Revenues, liabilities, and assets
c. Revenues, liabilities, and retained earnings
d. Revenues, liabilities, and expenses
Test Bank for Financial Accounting: Tools for Business Decision Making, Eighth Edition
3-20
108. The best interpretation of the word “credit” is the
a. offset side of an account.
b. increase side of an account.
c. right side of an account.
d. decrease side of an account.
109. In recording an accounting transaction in a double-entry system
a. the number of debit accounts must equal the number of credit accounts.
b. there must always be entries made on both sides of the accounting equation.
c. the amount of the debits must equal the amount of the credits.
d. there must only be two accounts affected by any transaction.
110. A debit is not the normal balance for which account listed below?
a. Dividends
b. Cash
c. Accounts Receivable
d. Service Revenue
111. An accountant has debited an asset account for $1,000 and credited a liability account for
$500. What can be done to complete the recording of the transaction?
a. Nothing further must be done.
b. Debit a stockholders’ equity account for $500.
c. Debit another asset account for $500.
d. Credit a different asset account for $500.
112. An accountant has debited an asset account for $800 and credited a liability account for
$700. Which of the following would be an incorrect way to complete the recording of the
transaction?
a. Credit an asset account for $100.
b. Credit another liability account for $100.
c. Credit a stockholders’ equity account for $100.
d. Debit a stockholders’ equity account for $100.
113. An accountant has debited an asset account for $900 and credited a liability account for
$600. What can be done to complete the recording of the transaction?
a Debit a stockholders’ equity account for $300.
b. Debit another asset account for $300.
c. Credit a different asset account for $300.
d. Nothing further must be done.

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