CHAPTER 3: PROCESSING ACCOUNTING INFORMATION
1. Which one of the following statements is true?
a. External events (transactions) involve interactions between an entity and a party outside the entity.
b. Every event or transaction which affects an entity is identified from a source document.
c. All economic events can be reliably measured.
d. The movement of raw material into production is an external event.
2. Which of the following is an internal event (transaction)?
a. Life guard salaries are paid by a swim club.
b. Dividends are distributed to shareholders.
c. Eggs used to make omelets in a restaurant are purchased.
d. Potato chips are transferred from the production line to the packaging area.
3. All of the following are external events (transactions) except for:
a. a department store recognizing losses from shoplifting.
b. a department store running ads in a local newspaper.
c. a department store purchasing merchandise from a clothing manufacturer.
d. a department store selling clothing to customers on credit.
4. Which of the following events (transactions) is an internal event for a business entity?
a. An accountant provides services for clients.
b. An accountant purchases computer equipment to maintain business records and prepare legal documents.
c. Periodically, part of the cost of the computer equipment used by an accountant is assigned to depreciation
expenses.
d. An accountant receives cash payments from clients who were billed for services.
5. All of the following events (transactions) would be identified from standard source documents except for:
a. freight charges for merchandise purchased from suppliers.
b. the amount to be paid to settle a lawsuit for discrimination in hiring employees.
c. wages to be paid to hourly employees.
d. commissions earned by sales employees.
Chapter 3: Processing Accounting Information
6. Which of the following statements is true?
a. Only the effects of internal transactions must be recognized and recorded in the entity’s accounting system.
b. An internal event is a transaction between an entity and its environment.
c. Not all recognizable events are supported by a standard source document.
d. Only the effects of external events must be recognized, measured, and recorded in an entity’s accounting
system.
7. Which of the following would be a case where an event as a transaction is not supported by a source document?
a. a purchase of inventory on credit
b. a cash sale
c. the financial consequences of a fire loss
d. recording payroll
8. Which of the following statements is false?
a. Checks and deposit slips are the main source of documents backing up the bank statement.
b. Retailers use cash register tapes to recognize sales.
c. Stock certificates are evidence of being a creditor of the company.
d. Time cards are used as the source of information to record wages.
9. The purchase of office equipment on credit has what effect on the accounting equation?
a. Assets decrease and stockholders’ equity decreases
b. Liabilities increase and stockholders’ equity decreases
c. Assets increase and liabilities increase
d. Assets decrease and liabilities decrease
10. The payment of employee salaries has what effect on the accounting equation?
a. Assets decrease and stockholders’ equity decreases
b. Liabilities decrease and stockholders’ equity decreases
c. Assets decrease and liabilities increase
d. Assets increase and liabilities decrease
Chapter 3: Processing Accounting Information
11. During May, Aniston, Inc. purchased office supplies for cash. The supplies will be used in June. What effect does
this purchase transaction have on the accounting equation?
a. Assets increase and stockholders’ equity decreases.
b. Assets increase and liabilities increase.
c. Assets decrease and liabilities decrease.
d. There is no effect on the accounting equation as one asset account increases while another asset account
decreases.
12. Blecker Corp. made cash sales to customers. What effect does this transaction have on the accounting equation?
a. Liabilities increase and stockholders’ equity increases.
b. There is no effect on the accounting equation as one asset account increases while another asset account
decreases.
c. Assets increase and liabilities increase.
d. Assets increase and stockholders’ equity increases.
13. Carl and Stefanie each invest $15,000 in a business and are given shares of stock in Thibeau Industries as evidence
of their ownership interests. For this transaction, identify the effect on the accounting equation.
a. Assets increase and liabilities increase.
b. Assets increase and stockholders’ equity increases.
c. Liabilities increase and stockholders’ equity decreases.
d. Liabilities decrease and assets decrease.
14. Land is purchased on credit. For this transaction, identify the effect on the accounting equation.
a. Assets increase and liabilities increase.
b. Assets increase and owners’ equity increases.
c. Liabilities increase and owners’ equity decreases.
d. Liabilities decrease and assets decrease.
15. Services are provided for customers who are sent bills for the amount they owe. For this transaction, identify the
effect on the accounting equation.
a. Assets increase and liabilities increase.
b. Assets increase and stockholders’ equity increases.
c. Liabilities increase and stockholders’ equity decreases.
d. Liabilities decrease and assets decrease.
Chapter 3: Processing Accounting Information
16. Payment is received from customers who were billed earlier for services provided for them. For this transaction,
identify the effect on the accounting equation.
a. Assets increase and liabilities increase.
b. Assets increase and stockholders’ equity increases.
c. Liabilities increase and stockholders’ equity decreases.
d. There is no effect on the accounting equation as one asset account increases while another asset account
decreases.
17. Payment is made for land purchased earlier on credit. For this transaction, identify the effect on the accounting
equation.
a. Assets increase and liabilities increase.
b. Assets increase and stockholders’ equity increases.
c. Liabilities increase and stockholders’ equity decrease.
d. Liabilities decrease and assets decrease.
18. A bill is received for electric service; the charge for the electricity is recorded, but payment will be made later. For
this transaction, identify the effect on the accounting equation.
a. Assets increase and liabilities increase.
b. Assets increase and stockholders’ equity increases.
c. Liabilities increase and stockholders’ equity decreases.
d. Liabilities decrease and assets decrease.
19. Payment is made for an electric bill which was received and recorded earlier. For this transaction, identify the
effect on the accounting equation.
a. Assets increase and liabilities increase.
b. Assets increase and stockholders’ equity increases.
c. Liabilities increase and stockholders’ equity decreases.
d. Liabilities decrease and assets decrease.
20. Services are provided for customers who pay for the services immediately. For this transaction, identify the effect
on the accounting equation.
a. Assets increase and liabilities increase.
b. Assets increase and stockholders’ equity increases.
c. Liabilities increase and stockholders’ equity decreases.
d. Liabilities decrease and assets decrease.
Chapter 3: Processing Accounting Information
21. Owners of Tri-States Industries, Ralph and Maureen, are sent a dividend check from the company. For this
transaction, what is the effect on the accounting equation for Tri-States Industries?
a. Assets decrease and stockholders’ equity decreases.
b. Assets increase and stockholders’ equity increases.
c. Liabilities increase and stockholders’ equity decreases.
d. Liabilities increase and stockholders’ equity decreases.
22. One effect on the accounting equation when a firm borrows money is:
a. Stockholders’ equity decreases.
b. Assets increase.
c. Liabilities decrease.
d. Assets decrease.
23. One effect on the accounting equation when a firm lends money is:
a. stockholders’ equity decreases.
b. liabilities decrease.
c. liabilities increase.
d. total assets remain the same.
24. Which of the following statements best describes the effects of recognizing revenue earned by a business entity?
a. Assets increase only when cash sales are made.
b. Stockholders’ equity increases only when credit sales are made.
c. Assets and stockholders’ equity increase when either cash or credit sales are made.
d. Assets increase, but stockholders’ equity decreases, when either cash or credit sales are made.
25. Which of the following statements best describes one effect of recognizing expenses incurred by a business entity?
a. Assets will increase.
b. Liabilities will decrease.
c. Stockholders’ equity will increase.
d. Stockholders’ equity will decrease.
Chapter 3: Processing Accounting Information
26. Which of the following statements regarding the activities of Forman Corp. is true?
a. Revenues decrease Forman’s stockholders’ equity.
b. Expenses increase Forman’s stockholders’ equity.
c. Expenses decrease Forman’s stockholders’ equity.
d. None of these answer choices is correct.
27. Which of the following transactions does not affect the total assets of Horizon Sailing Corp.?
a. A bill is received for the telephone service used by Horizon Sailing during the past month.
b. Dividends are paid by Horizon Sailing.
c. Customers are billed for sales made on credit by Horizon Sailing.
d. A new computer is purchased on credit by Horizon Sailing.
28. Which of the following transactions affects the liabilities for Gravette, Inc.?
a. Supplies are purchased for cash by Gravette.
b. Gravette places an order for merchandise with a supplier; the merchandise will be shipped to Ernest White in
60 days.
c. The owners of Gravette invest $100,000 in the company.
d. Payment is made on a bank loan which Gravette had obtained 6 months ago.
29. The Holmes Company purchased a building for $75,000 in cash. What is the effect on current assets?
a. Increase in current assets
b. Decrease in current assets
c. No effect on current assets
d. Unable to determine
30. Louisiana Enterprises received payment from its customers for previous sales on credit. What was the impact on its
working capital?
a. Increase in working capital
b. Decrease in working capital
c. No effect on working capital
d. Unable to determine
Chapter 3: Processing Accounting Information
31. Given a current ratio of 5 to 3, what is the effect of paying a supplier within 30 days of the purchase?
a. The current ratio would increase.
b. The current ratio would decrease.
c. The current ratio would remain the same.
d. Unable to determine.
32. Given that Carlson Corp.‘s current ratio is 3 to 2, what is the effect of obtaining a patent from the inventor in
exchange for shares of stock in Carlson Corp.?
a. The current ratio would increase.
b. The current ratio would decrease.
c. The current ratio would remain the same.
d. Unable to determine.
Krenshaw Rentals
Use the five transactions for Krenshaw Rentals described below to answer the question(s) that follow(s).
Oct 1 Krenshaw purchases two new saws on credit at $375 each. The saws are added to
Krenshaw’s rental inventory. Payment is due in 30 days.
8 Krenshaw accepts advance deposits for tool rentals of $75.
15 Krenshaw receives a bill from Farmer’s Electric Company for $150. Payment is due
in 30 days.
20 Customers are charged $750 by Krenshaw for tool rentals. Payment is due from the
customers in 30 days.
31 Krenshaw receives $500 in payments from the customers that were billed for rentals on
October 20.
33. Refer to the transactions for Krenshaw Rentals.
Based on the above transactions, how much is still owed to Krenshaw on October 31 from its customers? a. $ -0-
b. $ 250
c. $ 500
d. $ 750
Chapter 3: Processing Accounting Information
34. If the business has an from a customer, then the customer has an to the business.
a. account receivable; account receivable
b. account payable; account payable
c. account receivable; account payable
d. account payable; account receivable
35. If the landlord has rent , then the tenant has rent .
a. revenue; revenue
b. revenue; expense
c. expense; revenue
d. expense; expense
36. Your bookkeeper is off for the day and you are trying to figure out the last entry she recorded in the journal.
Unfortunately, she only recorded part of the transaction as a decrease of $4,400 in the Accounts Payable account.
It is possible that this partial entry could correspond to:
a. a purchase of equipment costing $4,400 on credit.
b. a payment of $4,400 to a supplier to settle a balance due.
c. a $4,400 sale to a customer.
d. a $4,400 issuance of the company’s capital stock.
37. Which of the following entries causes a decrease in assets and in net income?
a. The entry to record the payment of utilities with cash.
b. The entry to record the payment of rent for three months in advance.
c. The entry to record accrued wages payable.
d. The entry to record revenue earned but not yet received.
38. A list of all asset, liability, stockholders’ equity, revenue, and expense accounts, along with their assigned account
numbers, which are used by a company is a(an):
a. Account.
b. General Journal.
c. General Ledger.
d. Chart of Accounts.
Chapter 3: Processing Accounting Information
39. The following transactions occurred during March, the first month of operations for Canyon Products, Inc..
1. Issued 50,000 shares of capital stock in exchange for $600,000 cash.
2. Purchased land for $400,000, using a $150,000 cash down payment and signing a note payable for the balance.
3. Made a $60,000 cash payment on the note payable from the purchase of land.
4. Purchased equipment on credit from Burton, Inc. for $63,000.
What is the balance in the Cash account at the end of March?
a. $810,000
b. $210,000
c. $600,000
d. $390,000
40. Double-entry accounting is best characterized as:
a. the number of debit entries posted to the ledger equals the number of credit entries.
b. the number of ledger accounts with debit balances is equal to the number with credit balances.
c. every transaction affects both an asset account and either a liability account or a stockholders’ equity
account.
d. the total dollar amount of debit entries posted to the ledger is equal to the dollar amount of the credit entries.
41. The record used to accumulate monetary information for each individual asset, liability, stockholders’ equity,
revenue, and expense item is a(an):
a. Account.
b. General Journal.
c. General Ledger.
d. Chart of Accounts.
42. The system of accounting in which there are at least two accounts affected in every transaction so that the
accounting equation stays in balance is a(an):
a. Double-entry system.
b. Debit.
c. Credit.
d. Journalizing.
Chapter 3: Processing Accounting Information
43. A file or book which contains a record for all accounts used by a company, including the account balance, is called
a:
a. Chart of Accounts.
b. General Journal.
c. General Ledger.
d. Trial Balance.
44. An abbreviated version of an account which is useful for analyzing the effects of business transactions is the:
a. Chart of Accounts.
b. Double-entry system.
c. T Account.
d. Trial Balance.
45. An entry made to the right side of an account is called a:
a. Debit.
b. Credit.
c. Double-entry system.
d. Journal entry.
46. Debit entries are used to:
a. increase asset accounts.
b. decrease expense accounts.
c. increase liability accounts.
d. increase revenue accounts.
47. Credit entries are used to:
a. increase asset accounts.
b. increase liability accounts.
c. decrease revenue accounts.
d. decrease liability accounts.
Chapter 3: Processing Accounting Information
48. Which of the following accounts is increased by a credit entry?
a. Sales Revenue
b. Salary Expense
c. Accounts Receivable
d. Dividends
49. Which of the following accounts is increased by a debit entry?
a. Common Stock (Capital Stock)
b. Equipment
c. Unearned Subscription Revenue
d. Notes Payable
50. All of the following accounts have normal debit balances except:
a. Accounts Receivable.
b. Dividends.
c. Office Supplies Expense.
d. Sales.
51. All of the following accounts have normal credit balances except:
a. Accounts Payable.
b. Common Stock (Capital Stock).
c. Investments.
d. Service Revenue.
52. Which pair of accounts has the same set of rules for debit and credit entries?
a. Common Stock (Capital Stock) and Accounts Payable
b. Salaries Expense and Retained Earnings
c. Cash and Notes Payable
d. Sales Revenue and Accounts Receivable
Chapter 3: Processing Accounting Information
53. Which pair of accounts has the same set of rules for debit and credit entries?
a. Service Revenue and Rent Expense
b. Dividends and Retained Earnings
c. Equipment and Salaries Expense
d. Accounts Receivable and Accounts Payable
Parachute Country Club
Use the selected accounts for Parachute Country Club presented below to answer the following question(s).
CASH ACCOUNTS RECEIVABLE
8/1 Balance
6,000
8/2
1,800
8/7
900
8/3
500
8/5
400
8/7
900
DEPOSITS RECEIVED IN ADVANCE
(A Liability Account)
SALES
8/3
500
8/2
1,800
8/5
400
54. Read the information for Parachute Country Club.
On which date did the country club make a credit sale of club memberships?
a. August 2
b. August 3
c. August 5
d. August 7
55. Read the information on Parachute Country Club.
On which date did the company make cash sales for daily golf and swimming fees?
a. August 2
b. August 3
c. August 5
d. August 7
Chapter 3: Processing Accounting Information
56. Read the information on Parachute Country Club.
On which date did the country club collect an advance deposit?
a. August 2
b. August 3
c. August 5
d. August 7
57. Read the information about Parachute Country Club.
Which of the following describes the transaction which occurred on August 7?
a. Sold club memberships on credit.
b. Cash sales of daily fees.
c. Collected an advance deposit in cash.
d. Received cash payments of accounts receivable.
58. Read the information about Parachute Country Club.
Assuming that there are no other transactions, how much was owed to the club by the membership on August 8th?
a. $1,800
b. $1,300
c. $ 900
d. $ 500
59. A credit means that:
a. the event has an effect on the right side of an account.
b. the event is unfavorable.
c. the event is favorable.
d. the event always decreases the account.
60. The correct term for an entry made to the left side of an account is:
a. Double-entry system.
b. Debit.
c. Credit.
d. Journalizing.
Chapter 3: Processing Accounting Information
61. What type of account is increased with a debit but is a decrease to retained earnings?
a. Liability
b. Asset
c. Revenue
d. Expense
62. Which of the following statements is true?
a. If a debit entry is made to an account in the general journal, the same account will receive a credit entry
when the amount is posted to the general ledger.
b. If all transactions are correctly posted to the general ledger, the sum of the accounts with debit balances
should be equal to the sum of the accounts with credit balances.
c. Posting occurs when numbers in the general ledger accounts are transferred to the general journal.
d. If the sum of the debit balances equals the sum of the credit balances then there were no mistakes made in
the posting process.
63. Which of the following statements is true?
a. An entry in a general ledger account can be traced to the trial balance by referring to the page listed in the
posting reference column of that ledger account.
b. The posting of an amount recorded in the general journal can be verified by referring to the account number
listed in the posting reference column on that line in the general journal.
c. Business transactions are recorded first in the general ledger; then that information is transferred to the
general journal.
d. No explanation is needed for each entry in the general journal.
64. Maryland Vacations has a $2,200 account receivable from the Miami Kiwanis. On March 11, the Kiwanis makes a
partial payment of $1,050 to Maryland. The journal entry made on March 11 by Maryland to record this transaction
includes:
a. an increase in the Cash account of $1,150.
b. an increase in the Accounts Receivable account of $1,150.
c. an increase in the Service Revenue account of $1,050.
d. a decrease in the Accounts Receivable account of $1,050.
Chapter 3: Processing Accounting Information
65. Squidly Products sold and delivered modems to Detail Solutions for $6,600 to be paid by Detail Solutions in
three equal installments over the next three months. The journal entry made by Squidly to record this
transaction will include:
a. a decrease in Cash for $6,600.
b. an increase in Accounts Receivable for $6,600.
c. an increase in Accounts Receivable for $2,200.
d. a decrease in Sales Revenue for $6,600.
66. The purchase of office equipment at a cost of $2,600 with an immediate down payment of $1,200 and
agreement to pay the balance within 60 days is recorded in the accounts by:
a. increasing Office Equipment for $2,600, increasing Accounts Receivable for $1,200, and
increasing Accounts Payable for $1,400.
b. increasing Accounts Receivable for $1,400, increasing Cash for $1,200, and decreasing Office Equipment for
$2,600.
c. increasing Office Equipment for $2,600, decreasing Cash for $1,200, and increasing Accounts Payable for
$1,400.
d. increasing Office Equipment for $2,600, decreasing Cash for $1,200, and decreasing Accounts
Receivable for $1,400.
67. The record in which transactions are initially recorded in chronological order as they occur is a(an):
a. Account.
b. General Journal.
c. General Ledger.
d. Chart of Accounts.
68. The correct term for the process of transferring amounts from a book of original entry to specific assets,
liabilities, revenues, expenses, and stockholders’ equity items is:
a. Double-entry system.
b. Posting.
c. Credit.
d. Journalizing.
Chapter 3: Processing Accounting Information
69. The correct term for the process of recording the economic effects of business transactions in a book of
original entry is:
a. Double-entry system.
b. Debit.
c. Credit.
d. Journalizing.
70. When the amount for a debit entry in a journal is transferred to a specific account in the general ledger, it must
be recorded:
a. as a debit to that account in the general ledger.
b. as a credit to that account in the general ledger.
c. in sum only, without any regard for debit or credit, since the general ledger accounts do not have spaces
for debit and credit entries.
d. cannot be determined without further information.
71. Transactions are recorded in the general journal in:
a. alphabetical order.
b. account number order.
c. chronological order.
d. financial statement order.
Morton & Associates
Use the following five transactions for Morton & Associates, Inc. to answer the question(s).
May 1 Bills are sent to clients for services provided in April in the amount of $800.
9 Techno, Inc. delivers office furniture ($1,060) and office supplies ($160) to Morton
leaving an invoice for $1,220.
15 Payment is made to Techno, Inc. for the furniture and office supplies delivered on May 9.
23 A bill for $430 for electricity for the month of April is received and will be paid on its
due date in June.
31 Salaries of $850 are paid to employees.
Chapter 3: Processing Accounting Information
72. See the transactions to Morton & Associates. The journal entry to record the May 1 transaction will include an
increase of $800 to
a. Accounts Payable
b. Accounts Receivable
c. Cash
d. Prepaid Expenses
73. See the transactions to Morton & Associates. The journal entry to record the May 9 transaction will include an
increase of $1,220 to
a. Accounts Receivable
b. Cash
c. Accounts Payable
d. Administrative Expenses
74. See the transactions to Morton & Associates. The journal entry to record the May 15 transaction will include a
decrease of $1,220 to
a. Accounts Receivable
b. Unearned Revenue
c. Prepaid Expenses
d. Accounts Payable
75. See the transactions to Morton & Associates. The journal entry to record the May 23 transaction will include an
increase of $430 to
a. Accounts Receivable
b. Cash
c. Prepaid Expenses
d. Accounts Payable
76. See the transactions to Morton & Associates. The journal entry to record the May 31 transaction will include a
decrease in
a. Salaries Expense
b. Service Revenue
c. Accounts Receivable
d. Cash
Chapter 3: Processing Accounting Information
77. See the transactions for Morton & Associates. Based only on these transactions, what is the total amount of
expenses that should appear on the income statement for the month of May?
a. $430
b. $850
c. $1,280
d. $1,440
78. A list of all accounts and their balances which is used to prove the equality of debits and credits as of a specific
date is a(an):
a. Account.
b. General Journal.
c. Trial Balance.
d. Chart of Accounts.
79. A trial balance is a(an):
a. optional financial statement used only by accountants.
b. device used to prove the equality of debits and credits in the general ledger.
c. list of accounts and their balances taken from the chart of accounts.
d. financial statement which can be used in place of a balance sheet.
80. If the sum of the debits and credits in a trial balance is not equal, then:
a. there is no concern because the two amounts are not meant to be equal.
b. the chart of accounts also does not balance.
c. it is safe to proceed with the preparation of financial statements.
d. most likely an error was made in posting journal entries to the general ledger or in preparing the trial balance.
81. Which of the following will not cause a trial balance to be out of balance?
a. The balance for an account is incorrectly computed.
b. A debit entry is posted as a credit.
c. A credit entry is posted to the wrong account as a credit.
d. An account is accidentally omitted from the trial balance.
Chapter 3: Processing Accounting Information
Wolfe Inc.
Wolfe Inc. reports these account balances at January 1, 2015:
Retained Earnings
$49,000
Accounts Receivable
20,000
Accounts Payable
24,000
Capital Stock
185,000
Land
153,000
Cash
13,000
Equipment
20,000
Notes Payable
28,000
Buildings
80,000
82. See the account balances for Wolfe Inc.
On January 31, Wolfe collected $12,000 of its accounts receivable and paid $11,000 on its note payable. In Wolfe’s
trial balance prepared on January 1, 2015, the total of the credit column is:
a. $182,000
b. $286,000
c. $196,000
d. $166,000
83. See the account balances for Wolfe Inc.
On January 31, Wolfe collected $12,000 of its accounts receivable and paid $11,000 on its note payable. In Wolfe’s
trial balance prepared on January 31, 2015, the total of the credit column is:
a. $297,000
b. $287,000
c. $286,000
d. $275,000
84. See the account balances for Wolfe Inc.
On January 31, Wolfe collected $12,000 of its accounts receivable and paid $11,000 on its note payable. On
January 31, 2015, the total liabilities are:
a. $0
b. $56,000
c. $41,000
d. $30,000
Chapter 3: Processing Accounting Information
85. Unfortunately, the bookkeeper notices that two transactions for Patio Publications were not reflected in the
balances of the trial balance: one to record $800 of accrued wages and salaries to be paid in the next period, and
the other was the use of $560 of office supplies from the supplies on hand. If the Trial Balance column totals are
$15,380 prior to discovering these mistakes, what are the totals of the Trial Balance columns after the corrections
are made?
a. $15,860
b. $15,140
c. $16,740
d. $16,180
86. An external event involves interaction between an entity and its environment.
a. True
b. False
87. The initial step in the recording process is posting.
a. True
b. False
88. The issuance of stock decreases a company’s assets and increases its stockholders’ equity.
a. True
b. False
89. Payment of a dividend increases both cash and stockholders’ equity of the distributing business.
a. True
b. False
90. Under the cost principle, assets are always carried at their current market value.
a. True
b. False
91. Every accounting transaction affects both the balance sheet and the income statement.
a. True
b. False