Deck 16: Accounting for Business Transactions

Question 1

Dividends always decrease equity.

Answer 1

True

Question 2

In a double-entry accounting system, total debits must equal total credits for all entries, and total debit account balances in the ledger must equal total credit account balances.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

Cash dividends paid to stockholders are not reported on the income statement.

Question 6

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 7

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

Question 8

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

Question 9

Unearned revenues are classified as liabilities.

Question 10

Expenses always decrease equity.

Question 11

Dividends are subtracted on the income statement as a business expense.

Question 12

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

Question 13

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

Question 14

The issuance of common stock always decrease equity.

Question 15

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

Question 16

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

Question 17

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

Question 18

Business transactions and events are the starting points of financial statements.

Question 19

Unearned revenue is a liability that is settled in the future when a company delivers its products or services.

Question 20

Revenues always increase equity.

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

Debits increase asset and expense accounts.

Question 24

Credits always increase account balances.

Question 25

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

Question 26

Increases in liability accounts are recorded as debits.

Question 27

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

Question 28

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 29

A revenue account normally has a debit balance.

Question 30

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

Question 31

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

Question 32

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

Question 33

An expense account normally has a credit balance.

Question 34

The Dividends account normally has a debit balance.

Question 35

A debit entry always increases an account.

Question 36

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

Question 37

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

Question 38

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

Question 39

Asset accounts are decreased by debits.

Question 40

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

Question 41

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

Question 42

The general journal is a collection of all accounts and their balances.

Question 43

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 44

If cash was incorrectly debited for $100 instead of correctly debiting accounts receivable for $100, assuming no other errors, the trial balance will balance.

Question 45

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

Question 46

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

Question 47

The detail of individual revenue and expense accounts is reported on the balance sheet.

Question 48

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

Question 49

The financial statement that summarizes how equity changes over the reporting period is called the balance sheet.

Question 50

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

Question 51

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

Question 52

At a given point in time, a trial balance is a list of all ledger accounts and their balances.

Question 53

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

Question 54

Dividends paid to stockholders are not reported on a business's income statement.

Question 55

If the Common stock account had a $10,000 credit balance at the beginning of the period, and during the period, an additional $5,000 of common stock is issued, the balance in the common stock account listed on the trial balance will be equal to a debit balance of $5,000.

Question 56

An income statement reports revenues earned minus expenses incurred over a period of time.

Question 57

A journal entry that affects only two accounts is called a compound entry.

Question 58

Errors made in journalizing transactions, posting to the ledger, and preparing the trial balance can still exist in a balanced trial balance.

Question 59

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

Question 60

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

Question 61

A company's ledger is:

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

Question 62

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

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

Question 63

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

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

Question 64

Identify the account used by businesses to record the transfer of assets from a business to its stockholders:

A) A revenue account.
B) The Dividends account.
C) The Common stock account.
D) An expense account.
E) A liability account.

Question 65

A business's source documents:

A) Include the ledger.
B) Provide objective evidence that a transaction has taken place.
C) Must be in electronic form.
D) Are records of all increases and decreases in specific asset.
E) Include the chart of accounts.

Question 66

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

Question 67

The amount of net income is added on the statement of retained earnings.

Question 68

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

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

Question 69

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

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

Question 70

The accounting process begins with:

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

Question 71

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

Question 72

Which of the following statements is not true:

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

Question 73

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) Promises of future payment by the customer are called accounts receivable.
C) Increases and decreases in cash are always recorded in the common stock account.
D) An account called Land is commonly used to record increases and decreases in both the land and buildings owned by a business.
E) Accrued liabilities include accounts receivable.

Question 74

Prepaid accounts (also called prepaid expenses) are generally:

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

Question 75

Unearned revenues are generally:

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

Question 76

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

Question 77

A credit:

A) Always decreases an account.
B) Is the right-hand side of a T-account.
C) Always increases an account.
D) Is the left-hand side of a T-account.
E) Always increases asset accounts.

Question 78

When cash is received from a stockholder in exchange for common stock, the transaction is recorded by debiting Cash and crediting a(n):

A) Asset account.
B) Equity account.
C) Revenue account.
D) Expense account.
E) Liability account.

Question 79

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

A) Journal.
B) Chart of accounts.
C) General Journal.
D) Balance column journal.
E) Ledger (or General Ledger).

Question 80

Unearned revenues refer to a(n):

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