Question 1

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

Accepted Answer

The answer of If a company purchases equipment paying cash,...

Question 2

A dividend normally has a debit balance.

Accepted Answer

The answer of A dividend normally has a debit balance....

Question 3

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

Accepted Answer

This is because every transaction in accounting must utilize the basic accounting equation of Assets = Liabilities + Equity. If a liability is decreased and an asset is increased, this must be balanced out by an increase in either equity or another asset account.

Question 4

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

Accepted Answer

High leverage means the company has a high amount of debt compared to equity, which increases the risk of not being able to meet debt obligations, especially if there is a downturn in the economy or the company's operations.

Question 5

Debit means increase and credit means decrease for all accounts.

Accepted Answer

This is not correct, as debit and credit have different meanings depending on the type of account. For example, for assets accounts, debit means increase and credit means decrease, while for liabilities accounts, credit means increase and debit means decrease. The basic principle of debit and credit is to record transactions accurately and maintain the accounting equation (Assets = Liabilities + Equity).

Question 6

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

Accepted Answer

This statement is true. Asset accounts, such as cash or inventory, typically have debit balances because they represent items of value owned by the company. Revenue accounts, such as sales or service revenue, typically have credit balances because they represent income earned by the company.

Question 7

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

Accepted Answer

This is because financial leverage is the use of borrowed funds to acquire assets, which increases the potential return on investment but also increases the potential risk of loss. Therefore, a company that uses a larger amount of debt to finance its assets has a higher degree of financial leverage.

Question 8

A debit entry is always an increase in the account.

Accepted Answer

A debit entry can either increase or decrease the account balance depending on the type of account. For example, in an asset account, a debit entry will increase the balance, while in a liability account, a debit entry will decrease the balance.

Question 9

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.

Accepted Answer

The answer of When a company bills a customer for...

Question 10

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

Accepted Answer

Debt Ratio = Total Liabilities/Total Assets
Debt Ratio = $105 million/$350 million = 30%

Question 11

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

Accepted Answer

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

Question 12

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

Accepted Answer

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

Question 13

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

Accepted Answer

This is because a credit to an asset account increases its balance, while a credit to a liability account decreases its balance. Therefore, there must be a corresponding debit to at least one other account to balance the transaction.

Question 14

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.

Accepted Answer

Prepaid Insurance is an asset account that is debited when insurance coverage is paid for in advance.

Question 15

Asset accounts are normally decreased by debits.

Accepted Answer

Asset accounts are normally increased by debits, not decreased.

Question 16

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

Accepted Answer

This statement is false. A higher debt ratio indicates that a company has a greater amount of debt in relation to its assets and equity. This can increase the risk of the company defaulting on its debt obligations, leading to financial instability and potentially bankruptcy.

Question 17

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

Accepted Answer

When supplies are purchased on credit, the Supplies account should be debited to reflect the increase in assets. At the same time, Accounts Payable should be credited to reflect the liability that the company owes to the supplier of the supplies.

Question 18

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

Accepted Answer

Posting involves taking the information recorded in a journal entry and transferring it to the appropriate account in the general ledger. This allows for easier tracking and analysis of financial transactions.

Question 19

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.

Accepted Answer

The debt ratio measures how much of a company's assets are financed by debt and is used by both owners and creditors to evaluate the company's ability to meet its financial obligations. A high debt ratio indicates a greater risk of defaulting on payments, while a low ratio suggests a lower risk.

Question 20

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

Accepted Answer

A compound entry affects more than two accounts.

Quiz 2: Analyzing for Business Transactions