Question 1

It is possible for a transaction to change the makeup of assets,but to not affect assets in total.

Accepted Answer

This is true because a transaction may involve exchanging one asset for another or splitting an asset into multiple assets, but the total value of assets remains the same.

Question 2

By keeping a running total of the effects of transactions,the accounting equation provides a framework for summarizing the effects of a series of transactions.

Accepted Answer

The accounting equation, Assets = Liabilities + Equity, is designed to keep a running total of the effects of transactions and provide a framework for summarizing those effects.

Question 3

A transaction can affect at most two elements of the accounting equation.

Accepted Answer

A transaction can affect more than two elements of the accounting equation, as it can involve multiple accounts and impact assets, liabilities, and equity simultaneously.

Question 4

The basic elements of a financial accounting system include a framework for preparing financial statements.

Accepted Answer

A financial accounting system includes a framework for preparing financial statements, which typically include the income statement, balance sheet, and statement of cash flows. Other elements of a financial accounting system may include processes for recording transactions, maintaining financial records, and preparing reports for internal and external stakeholders.

Question 5

Miscellaneous expenses are expenses that have an undetermined amount to be paid.

Accepted Answer

Miscellaneous expenses are not defined by having an undetermined amount to be paid, but rather by being too irregular, infrequent, or minor to be categorized under a specific expense category.

Question 6

When an account receivable is collected in cash,the total assets of the business increase.

Accepted Answer

When an account receivable is collected in cash, one asset (cash) increases while another asset (accounts receivable) decreases by the same amount, leaving total assets unchanged.

Question 7

Equality of the accounting equation means that no errors have occurred.

Accepted Answer

Equality of the accounting equation simply means that assets are equal to liabilities plus equity. It does not necessarily guarantee the absence of errors in the accounting records. Errors can still occur, such as incorrect classification of transactions, recording incorrect amounts, or omitting transactions altogether. Thus, the equality of the accounting equation should be used as a tool to check for errors, but it does not provide a complete assurance that errors have not occurred.

Question 8

The accounting equation is expressed as follows: Assets = Liabilities + Stockholders' Equity.

Accepted Answer

The accounting equation is expressed as Assets = Liabilities + Equity or Assets = Liabilities + Stockholders' Equity.

Question 9

Dividends are an example of an expense.

Accepted Answer

Dividends are distributions of a company's profits to its shareholders and are not considered as expenses.

Question 10

Retained earnings will be increased by the amount in the dividend account.

Accepted Answer

Retained earnings represent the portion of net income that is kept by the company for future use, while dividends represent the portion of net income that is distributed to shareholders. Therefore, retained earnings will not be increased by the amount in the dividend account, but rather decreased by the amount distributed as dividends.

Question 11

A business receives $10,000 cash for a sale of merchandise and records this receipt of cash as an increase in accounts receivable by mistake.The accounting equation is still in balance.

Accepted Answer

The accounting equation remains in balance because both sides of the equation are affected equally. An increase in assets (cash) is offset by an incorrect increase in another asset (accounts receivable), keeping the equation balanced.

Question 12

Fees earned and received in cash will increase cash flows from operating activity as well as retained earnings.

Accepted Answer

Fees earned and received in cash are considered operating cash inflows and therefore increase cash flows from operating activity on the statement of cash flows. Additionally, since fees earned increase a company's revenue, they will also increase retained earnings on the statement of changes in equity.

Question 13

The accounting equation can be expressed as: Assets - Liabilities = Revenues.

Accepted Answer

The accounting equation is Assets = Liabilities + Equity (or Owner's Equity), which represents the fundamental relationship of a company's balance sheet. Revenues are not included in the accounting equation.

Question 14

Revenues decrease stockholders' equity.

Accepted Answer

Revenues increase stockholders' equity because they contribute to net income, which is part of retained earnings, a component of stockholders' equity.

Question 15

When capital stock is issued by a corporation for cash,both the income statement and the balance sheet are affected.

Accepted Answer

Issuing capital stock for cash affects the balance sheet by increasing both cash and equity, but it does not affect the income statement as it is not a revenue or expense transaction.

Question 16

Any given transaction must affect at least two different parts of the accounting equation.

Accepted Answer

The answer of Any given transaction must affect at least...

Question 17

The payment of utilities expense in cash would affect the operating activities in the statement of cash flows and the income statement but not the balance sheet.

Accepted Answer

Paying utilities expense in cash affects the operating activities section of the statement of cash flows and the income statement (as an expense), and it also decreases cash in the assets section of the balance sheet, thus affecting the balance sheet.

Question 18

The two sides of the accounting equation do not have to be equal.

Accepted Answer

The two sides of the accounting equation must always be equal. This is the foundation of double-entry accounting. If one side of the equation increases, the other side must also increase in order to maintain balance.

Question 19

The effect of every transaction is an increase or a decrease in one or more of the accounting equation elements.

Accepted Answer

The accounting equation is Assets = Liabilities + Equity. Every transaction affects at least one of these elements, resulting in an increase or decrease in one or more of them. Therefore, the statement is true.

Question 20

When a notes payable account is paid in cash,the stockholders' equity in the business increases.

Accepted Answer

When a notes payable account is paid in cash, it decreases both the notes payable account (a liability) and the cash account (an asset). There is no effect on stockholders' equity.

Quiz 2: Basic Accounting Concepts