Deck 2: Analyzing and Recording Transactions

Question 1

Owner investments always decrease equity.

Answer 1

False

Question 2

A customer's promise to pay on credit is classified as an account payable by the seller.

Answer 2

False

Question 3

Source documents identify and describe transactions and events entering the accounting process.

Answer 3

True

Question 4

Expenses always decrease equity.

Question 5

The first step in the processing of a transaction is to analyze the transaction and source documents.

Question 6

The right side of an account is called the debit side.

Question 7

"Unearned" accounts are liabilities that must be fulfilled.

Question 8

Unearned revenues are classified as liabilities.

Question 9

A company's chart of accounts is a list of all the accounts used and includes an identification number assigned to each account.

Question 10

Preparation of a trial balance is the first step in processing a financial transaction.

Question 11

An account is a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item.

Question 12

In a double-entry accounting system, the total dollar amount debited must always equal the total dollar amount credited.

Question 13

An account's balance is the difference between the total debits and total credits for the account, including any beginning balance.

Question 14

Withdrawals by the owner are a business expense.

Question 15

Cash withdrawn by the owner of a proprietorship for personal expenses, should be treated as an expense of the business.

Question 16

Owner withdrawals always decrease equity.

Question 17

Items such as sales tickets, bank statements, checks, and purchase orders are examples of a business's source documents.

Question 18

When a company provides services for which cash will not be received until some future date, the company should record the amount billed as accounts receivable.

Question 19

Revenues always increase equity.

Question 20

The purchase of land and buildings will generally be recorded in the same ledger account.

Question 21

If insurance coverage for the next two years is paid for in advance, the amount of the payment is debited to an asset account called Prepaid Insurance.

Question 22

Debit means increase and credit means decrease for all accounts.

Question 23

Increases in liability accounts are recorded as debits.

Question 24

Asset accounts are decreased by debits.

Question 25

Debits increase asset and expense accounts.

Question 26

When a company bills a customer for $700 for services rendered, the journal entry to record this transaction will include a $700 debit to Services Revenue.

Question 27

Crediting an expense account decreases it.

Question 28

A transaction that decreases a liability and increases an asset must also affect one or more other accounts.

Question 29

An owner's withdrawal account normally has a debit balance.

Question 30

A debit entry is always an increase in the account.

Question 31

The purchase of supplies on credit should be recorded with a debit to Supplies and a credit to Accounts Payable.

Question 32

A revenue account normally has a debit balance.

Question 33

The debt ratio is calculated by dividing total assets by total liabilities.

Question 34

If a company provides services to a customer on credit, the company providing the service should credit Accounts Receivable.

Question 35

The higher a company's debt ratio, the lower the risk of a company not being able to meet its obligations.

Question 36

Asset accounts normally have debit balances and revenue accounts normally have credit balances.

Question 37

A transaction that credits an asset account and credits a liability account must also affect one or more other accounts.

Question 38

The debt ratio helps to assess the risk a company has of failing to pay its debts and is helpful to both its owners and creditors.

Question 39

Credits always increase account balances.

Question 40

If a company purchases equipment paying cash, the journal entry to record this transaction will include a debit to Cash.

Question 41

The financial statement that summarizes the changes in an owner's capital account is called the balance sheet.

Question 42

If an owner's capital account had a $10,000 credit balance at the beginning of the period, and during the period, the owner invests an additional $5,000, the balance in the capital account listed on the trial balance will be equal to a debit balance of $5,000.

Question 43

The general journal is known as the book of final entry because financial statements are prepared from it.

Question 44

Transactions are recorded first in the ledger and then transferred to the journal.

Question 45

A journal entry that affects no more than two accounts is called a compound entry.

Question 46

At a given point in time, a business's trial balance is a list of all of its general ledger accounts and their balances.

Question 47

The journal is known as a book of original entry.

Question 48

A general journal gives a complete record of each transaction in one place, and shows the debits and credits for each transaction.

Question 49

A company that finances a relatively large portion of its assets with liabilities is said to have a high degree of financial leverage.

Question 50

The ordering of accounts in a trial balance typically follows their identification number from the chart of accounts, that is, assets first, then liabilities, then owner's capital and withdrawals, followed by revenues and expenses.

Question 51

The heading on every financial statement lists the three W's-Who (the name of the business); What (the name of the statement); and Where (the organization's address).

Question 52

An income statement is also called an earnings statement, a statement of operations or a profit and loss statement.

Question 53

A balanced trial balance is proof that no errors were made in journalizing transactions, posting to the ledger, and preparing the trial balance.

Question 54

The trial balance can serve as a replacement for the balance sheet, since total debits must equal total credits.

Question 55

Owner's withdrawals are not reported on a business's income statement.

Question 56

If cash was incorrectly debited for $100 instead of correctly crediting it for $100, the cash account's balance will be overstated (too high).

Question 57

The detail of individual revenue and expense accounts is reported on the statement of owner's equity.

Question 58

Booth Industries has liabilities of $105 million and total assets of $350 million. Its debt ratio is 40.0%.

Question 59

Posting is the transfer of journal entry information to the ledger.

Question 60

If a company is highly leveraged, this means that it has relatively high risk of not being able to repay its debt.

Question 61

Identify the account used by businesses to record the transfer of assets from a business to its owner for personal use:

A) The owner's withdrawals account.
B) The owner's capital account.
C) A revenue account.
D) An expense account.
E) A liability account.

Question 62

Unearned revenues refer to a(n):

A) Expense incurred because a customer has paid in advance.
B) Increase in revenues as a result of delivering products or services to a customer.
C) Liability that is settled in the future when a company delivers its products or services.
D) Decrease in an asset.
E) Asset that will be used over time.

Question 63

The amount of net income is added on the statement of owner's equity.

Question 64

Unearned revenues are generally:

A) Increases to owners' capital.
B) Recorded as an asset in the accounting records.
C) Liabilities created when a customer pays in advance for products or services before the revenue is earned.
D) Revenues that have been earned but not yet collected in cash.
E) Revenues that have been earned and received in cash.

Question 65

A company's list of accounts and the identification numbers assigned to each account is called a:

A) General Journal.
B) Source document.
C) Trial balance.
D) Chart of accounts.
E) Journal.

Question 66

Which of the following statements is not true:

A) Accounts receivable are increased by customer payments.
B) Accounts receivable are held by a seller.
C) Accounts receivable are classified as assets.
D) Accounts receivable are increased by billings to customers.
E) Accounts receivable arise from credit sales.

Question 67

A company's formal promise to pay (in the form of a promissory note) a future amount is a(n):

A) Account receivable.
B) Unearned revenue.
C) Note payable.
D) Prepaid expense.
E) Credit account.

Question 68

The record of all accounts and their balances used by a business is called a:

A) Balance column journal.
B) Ledger (or General Ledger).
C) General Journal.
D) Book of original entry.
E) Journal.

Question 69

Neither U.S. GAAP nor IFRS require the use of accrual basis accounting.

Question 70

An account used to record the owner's investments in a business is called a(n):

A) Capital account.
B) Expense account.
C) Liability account.
D) Withdrawals account.
E) Revenue account.

Question 71

A company's ledger is:

A) A list of all accounts a company uses with an assigned identification number.
B) A collection of documents that describe transactions and events entering the accounting process.
C) A record containing increases and decreases in a specific asset, liability, equity, revenue, or expense item.
D) A journal in which transactions are first recorded.
E) A record containing all accounts and their balances used by the company.

Question 72

A business's source documents may include all of the following except:

A) Sales tickets.
B) Bank statements.
C) Ledgers.
D) Purchase orders.
E) Checks.

Question 73

A business's record of the increases and decreases in a specific asset, liability, equity, revenue, or expense is known as a(n):

A) Posting.
B) Trial balance.
C) Chart of accounts.
D) Journal.
E) Account.

Question 74

Prepaid accounts (also called prepaid expenses) are generally:

A) Decreases in equity.
B) Payments made for products and services that never expire.
C) Promises of payments by customers.
D) Classified as liabilities on the balance sheet.
E) Assets that represent prepayments of future expenses.

Question 75

The same four basic financial statements are prepared by both U.S. GAAP and IFRS.

Question 76

A business's source documents:

A) Include the chart of accounts.
B) Must be in electronic form.
C) Include the ledger.
D) Are prepared internally to ensure accuracy.
E) Provide objective evidence that a transaction has taken place.

Question 77

The accounting process begins with:

A) Analysis of business transactions and source documents.
B) Presentation of financial information to decision-makers.
C) Summarizing the recorded effect of business transactions.
D) Preparing financial statements and other reports.
E) Preparation of the trial balance.

Question 78

The balance sheet reports the financial position of a company at a point in time.

Question 79

An income statement reports the revenues earned less the expenses incurred by a business over a period of time.

Question 80

Identify the statement below that is correct.

A) When a future expense is paid in advance, the payment is normally recorded in a liability account called Prepaid Expense.
B) An account called Land is commonly used to record increases and decreases in both the land and buildings owned by a business.
C) Promises of future payment by the customer are called accounts receivable.
D) Accrued liabilities include accounts receivable.
E) Increases and decreases in cash are always recorded in the owner's capital account.