ACC 201 chapter 2 Transaction Analysis (Financial Accounting, 10e (Harrison/Horngren/Thomas), Western Kentucky University

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Financial Accounting, 10e (Harrison/Horngren/Thomas) Chapter 2 Transaction Analysis 2.1 Learning Objective 2-1 1) A transaction is any event that has a financial impact on the business and that ... can be measured reliably. Answer: TRUE Diff: 1 2) Which of the following is NOT a business transaction? A) A company buys goods on account. B) A company sells land for cash. C) A company fired 10 percent of the employees due to lackluster sales. D) A company borrows money from the bank. Answer: C 2.2 Learning Objective 2-2 1) The account is the basic summary device used in accounting. Answer: TRUE 2) An accounts receivable usually specifies an interest rate. Answer: FALSE 3) Assets include cash, land, and accounts payable. Answer: FALSE 4) Prepaid expenses are an asset. Answer: TRUE 5) A record of all the changes in a particular asset during a period of time is found in a(n): A) transaction. B) trial balance. C) prior period's balance sheet. D) account. Answer: D 6) All of the following accounts would be considered assets EXCEPT for: A) Cash. B) Retained Earnings. C) Prepaid Expenses. D) Notes Receivable. Answer: B 7) Which account includes bank account balances in multiple checking accounts? A) Accounts Receivable B) Notes Receivable C) Cash D) Prepaid Expenses Answer: C 8) Which of the following is a CORRECT statement? A) Shareholders' equity is also called Proprietorship Equity. B) A proprietorship has more than one capital account. C) A partnership has a separate owner's equity account for each partner. D) Retained earnings is the owner's investment in the corporation. Answer: C 9) Notes payable, accounts payable, taxes payable and salaries payable are all examples of: A) liabilities. B) revenues. C) expenses. D) assets. Answer: A 10) Which transaction increases stockholders' equity? A) sale of common stock B) declared dividends C) Total expenses for the period exceed total revenues for the period. D) payment of operating expenses Answer: A 11) Which transaction decreases stockholders' equity? A) sale of common stock B) purchase of equipment with cash C) Total revenues for the period exceed total expenses for the period. D) Total expenses for the period exceed total revenues for the period. Answer: D 12) Which transaction decreases stockholders' equity? A) purchase inventory on account B) provided services on account C) provided services and received cash from the customer immediately D) Employees worked one week and were paid at the end of the week. Answer: D 2.3 Learning Objective 2-3 1) If a company declares and pays a dividend to its stockholders, both cash and expenses will decrease. Answer: FALSE 2) Generally companies will prepare financial statements: A) after every transaction. B) only when both the balance sheet and income statement are affected. C) at the end of the accounting period. D) at the close of every business day. Answer: C 3) When services are performed on account: A) cash is increased. B) revenue will not be recorded until the cash is received from the customer. C) accounts receivable is increased. D) accounts payable is increased. Answer: C 4) A company received cash in exchange for issuing stock. This transaction increased assets and: A) increased expenses. B) increased revenues. C) increased liabilities. D) increased stockholders' equity. Answer: D 5) When a business purchases land with a note payable: A) both assets and stockholders' equity are increased. B) assets are decreased and stockholder's equity is increased. C) both assets and liabilities are increased. D) assets are increased and liabilities are decreased. Answer: C 6) The debt created by a business when it makes a purchase of inventory on account is a(n): A) revenue. B) account receivable. C) note payable. D) account payable. Answer: D 7) Which of the following transactions will increase Stockholders' Equity? A) The company pays a dividend to its shareholders. B) The company issues common stock to new shareholders. C) The company purchases equipment. D) The company makes a payment on account. Answer: B 8) Which of the following transactions will increase one asset and decrease another asset? A) The purchase of office supplies on account. B) The performance of services on account. C) The purchase of equipment for cash. D) The performance of services for cash. Answer: C 9) A company performed services for a customer for cash. This transaction increased assets and: A) decreased stockholders' equity. B) increased liabilities. C) increased expenses. D) increased revenues. Answer: D 10) A company receives an utility bill and immediately pays it. With this transaction: A) stockholders' equity is decreased. B) expenses are decreased. C) assets are increased. D) liabilities are increased. Answer: A 11) Company Z sells land for the same amount it paid for it three years ago. When the company records this transaction: A) assets and stockholders' equity are increased. B) one asset is increased and another asset is decreased. C) one liability is increased and another liability is decreased. D) assets are increased and liabilities are decreased. Answer: B 12) When a company borrows money from the bank, which type of account(s) is(are) increased? A) asset account only B) Retained Earnings only C) liability account only D) asset and liability accounts Answer: D 13) A company performs services for a client on account. When the company receives the cash from the customer one month later: A) a revenue account is increased. B) a liability account is decreased. C) there is no change in total assets. D) an expense account is decreased. Answer: C 14) When a company borrows cash from the bank: A) total assets remain the same. B) liabilities are increased. C) retained earnings is decreased. D) total liabilities remain the same. Answer: B 15) When a company pays an amount it owes a creditor: A) assets are decreased and net income is decreased. B) assets are decreased and liabilities are increased. C) liabilities are decreased and net income is increased. D) assets are decreased and liabilities are decreased. Answer: D 16) Muddle Company performs a service for one of its customers and immediately collects the cash. This transaction will: A) have no effect on liabilities. B) decrease net income. C) decrease Retained Earnings. D) increase Accounts Receivable. Answer: A 17) Purchasing supplies on account would: A) increase total assets and decrease total liabilities. B) increase total liabilities and decrease total assets. C) increase total assets and increase total liabilities. D) increase total liabilities and increase stockholders' equity. Answer: C 18) Paying a repair bill as soon as it was received would: A) increase expenses. B) increase liabilities. C) increase owners' equity. D) decrease revenues. Answer: A 19) If a company buys inventory on account: A) cash would decrease. B) accounts payable would increase. C) net income would increase. D) common stock would decrease. Answer: B 20) Receiving a payment from a customer on account: A) increases stockholders' equity. B) has no effect on total assets. C) decreases stockholders' equity. D) decreases liabilities. Answer: B 21) Which of the following transactions would decrease an asset and decrease stockholders' equity? A) The payment of an account payable B) The performance of a service for a client on account C) The borrowing of money from the bank for thirty days D) The declaration and payment of a dividend to the shareholders Answer: D 22) Performing services on account: A) decreases both assets and liabilities. B) increases assets and decreases stockholders' equity. C) decreases revenues and decreases stockholders' equity. D) increases both net income and stockholders' equity. Answer: D 23) To compute the ending balance of Retained Earnings: A) the beginning balance in Retained Earnings will be negative for a new business. B) net loss for the period is subtracted from the beginning balance of Retained Earnings. C) Dividends are added to the beginning balance of Retained Earnings. D) common stock sold during the period is added to the beginning balance of Retained Earnings. Answer: B 24) To compute ending Retained Earnings on the Statement of Retained Earnings: A) net loss is added to the beginning Retained Earnings and declared dividends are subtracted from the beginning Retained Earnings. B) net income and dividends are both added to beginning Retained Earnings. C) net loss and dividends are both added to beginning Retained Earnings. D) net income is added to the beginning Retained Earnings. Answer: D 25) When preparing the financial statements with a spreadsheet obtained from transaction analysis: A) assets, liabilities, and revenues are reported on the balance sheet. B) the balance sheet reports the beginning balance of retained earnings. C) assets, liabilities, and stockholders' equity are reported on the balance sheet. D) assets, liabilities, and dividends are reported on the balance sheet. Answer: C 26) Lori Nichols opened an engineering office and titled the business Engineering Enterprises P.C. During its first month of operations, it completed the following transactions: I. Lori invested $30,000 in the business, which in turn issued common stock to her. II. The business purchased equipment on account for $6,000. II. The business provided engineering services on account, $10,000. III. The business paid salaries to the receptionist, $1,000. IV. The business received cash from a customer as payment on account $6,000. V. The business borrowed $8,000 from the bank, issuing a note payable. At the end of the month, Cash would equal: A) $30,000. B) $37,000. C) $43,000. D) $61,000. Answer: C Explanation: C) Investment $30,000 - Salaries Paid $1,000 + Customer Collection $6,000 + Cash from Loan $8,000 = $43,000 27) Linda Keller opened an engineering office and titled the business Engineering Enterprises P.C. During its first month of operations, it completed the following transactions: I. Linda invested $30,000 in the business, which in turn issued common stock to her. II. The business purchased equipment on account for $60,000. II. The business provided engineering services on account, $10,000. III. The business paid salaries to the receptionist, $2,000. IV. The business received cash from a customer as payment on account $6,000. V. The business borrowed $8,000 from the bank, issuing a note payable. At the end of the month, total liabilities would be: A) $8,000. B) $60,000. C) $68,000. D) $70,000. Answer: C Explanation: C) Accounts Payable $60,000 + Note Payable $8,000 = $68,000 28) A company completed the following transactions during the month of October: I. Purchased office supplies on account, $4,000. II. Provided services for cash, $20,000. III. Provided services on account, $32,000. IV. Collected cash from a customer on account $27,000. V. Paid the monthly rent of $3,000. What was the company's total revenue for the month? A) $20,000 B) $32,000 C) $52,000 D) $79,000 Answer: C Explanation: C) $20,000 + $32,000 = $52,000 29) A company completed the following transactions during the month of October: I. Purchased office supplies on account, $4,000. II. Provided services for cash, $20,000. III. Provided services on account, $12,000. IV. Collected cash from a customer on account $7,000. V. Paid the monthly rent of $13,000. What was the company's net income for the month? A) $12,000 B) $19,000 C) $32,000 D) $45,000 Answer: B Explanation: B) Service Revenue $20,000 + Service Revenue $12,000 - Rent Expense $13,000 = $19,000 30) A company had credit sales of $30,000 and cash sales of $20,000 during the month of May. Also during May, the company paid wages of $21,000 and utilities of $8,000. It also received payments from customers on account totaling $4,000. What was the company's net income for the month? A) $20,000 B) $21,000 C) $50,000 D) $79,000 Answer: B Explanation: B) Sales Revenue $30,000 + Sales Revenue $20,000 - Wage Expense $21,000 - Utilities Expense $8,000 = $21,000 31) A company had credit sales of $30,000 and cash sales of $10,000 during the month of May. Also during May, the company paid wages of $12,000 and utilities of $1,800. It also received payments from customers on account totaling $4,000. At the beginning of May, the company had a cash balance of $25,000. What is the company's Cash balance at the end of May? A) $21,200 B) $25,200 C) $35,000 D) $39,000 Answer: B Explanation: B) Beginning Balance Cash $25,000 + Cash Sales $10,000 - Wages paid $12,000 - Utilities paid $1,800 + Cash Collected from Customers $4,000 = $25,200 32) Jenkins Company began business in June when stockholders invested $80,000 in the business, which in turn issued its common stock to them. Jenkins Company then purchased a building for $40,000 cash and inventory for $20,000 cash, performed services for clients for $10,000 cash, purchased supplies for $5,000 cash, and paid utilities of $2,000 cash. What is the amount of Cash at the end of June? A) $20,000 B) $23,000 C) $30,000 D) $43,000 Answer: B Explanation: B) Issue Stock $80,000 - Buy Building $40,000 - Buy Inventory $20,000 + Service Revenue $10,000 - Supplies paid $5,000 - Utilities paid $2,000 = $23,000 33) A company received $30,000 cash and issued common stock in exchange. In transaction analysis, how does this transaction affect the accounting equation? A) Add $30,000 to Cash account and add $30,000 to Retained Earnings account. B) Add $30,000 to Cash account and add $30,000 to Revenue account. C) Add $30,000 to Dividends account and subtract $30,000 to Retained Earnings account. D) Add $30,000 to Cash account and add $30,000 to Common Stock account. Answer: D 34) A company purchased supplies of $1,000 on account. In transaction analysis, how does this transaction affect the accounting equation? A) Add $1,000 to Supplies account and add $1,000 to Notes Payable account. B) Add $1,000 to Supplies account and subtract $1,000 from Cash account. C) Add $1,000 to Supplies Expense account and add $1,000 to Notes Payable account. D) Add $1,000 to Supplies account and add $1,000 to Accounts Payable account. Answer: D 35) A company performed tax services for a client on account. The amount billed to the client was $5,000. In transaction analysis, how does this transaction affect the accounting equation? A) Add $5,000 to Cash account and add $5,000 to Service Revenue account. B) Add $5,000 to Cash account and add $5,000 to Retained Earnings account. C) Add $5,000 to Accounts Receivable account and add $5,000 to Retained Earnings account. D) Add $5,000 to Accounts Payable account and add $5,000 to Service Revenue account. Answer: C 36) On May 1, a company provided legal services for a new client. The lawyer asked for $1,000 and the client paid with a check on May 1 before leaving the office. In transaction analysis, how does this transaction affect the accounting equation? A) Add $1,000 to Cash and add $1,000 to Service Revenue account. B) Add $1,000 to Cash account and add $1,000 to Retained Earnings account. C) Add $1,000 to Cash account and subtract $1,000 from Accounts Receivable account. D) Add $1,000 to Cash account and subtract $1,000 from Accounts Payable account. Answer: B 37) A company paid $2,500 for supplies purchased earlier in the month on account. In transaction analysis, how does this transaction affect the accounting equation? A) Add $2,500 to Supplies account and add $2,500 to Supplies Expense account. B) Add $2,500 to Supplies Expense account and subtract $2,500 from Cash account. C) Add $2,500 to Supplies Expense account and add $2,500 to Cash account. D) Subtract $2,500 from Accounts Payable account and subtract $2,500 from Cash account. Answer: D 38) On August 15, a customer paid $3,000 for services provided a month earlier. The customer was billed on August 1. In transaction analysis, how does this transaction affect the accounting equation? A) Add $3,000 to Cash account and add $3,000 to Service Revenue account. B) Add $3,000 to Cash account and add $3,000 to Retained Earnings account. C) Add $3,000 to Cash account and subtract $3,000 from Accounts Receivable account. D) Add $3,000 to Accounts Payable account and add $3,000 to Cash account. Answer: C 39) A company received a utility bill for $500 and decided to pay it next month due to a shortage of cash. In transaction analysis, how does this transaction affect the accounting equation? A) Add $500 to Utilities Expense account and add $500 to Cash account. B) Subtract $500 from Cash account and add $500 to Accounts Payable account. C) Add $500 to Accounts Receivable account and subtract $500 from Retained Earnings account. D) Add $500 to Accounts Payable account and subtract $500 from Retained Earnings account. Answer: D 40) A company went to the bank and borrowed $10,000 on a long-term note. In transaction analysis, how does this transaction affect the accounting equation? A) Add $10,000 to Cash account and add $10,000 to Accounts Payable account. B) Add $10,000 to Cash account and add $10,000 to Notes Payable account. C) Add $10,000 to Cash account and add $10,000 to Retained Earnings account. D) Add $10,000 to Accounts Receivable account and add $10,000 to Accounts Payable account. Answer: B 41) A receptionist worked one month and was paid $2,000 at the end of the month. In transaction analysis, how does this transaction affect the accounting equation? A) Add $2,000 to Cash account and add $2,000 to Accounts Payable account. B) Add $2,000 to Accounts Receivable account and subtract $2,000 from Cash account. C) Add $2,000 to Salary Expense and subtract $2,000 from Retained Earnings account. D) Subtract $2,000 from Cash account and subtract $2,000 from Retained Earnings account. Answer: D 42) A company declared and paid dividends of $500. In transaction analysis, how does this transaction affect the accounting equation? A) Add $500 to Revenue account and add $500 to Cash account. B) Add $500 to Dividends account and add $500 to Accounts Receivable account. C) Subtract $500 from Retained Earnings account and subtract $500 from Cash account. D) Add $500 to Dividend Expense account and subtract $500 from Cash account. Answer: C 43) In transaction analysis, revenues and expenses that arise in different transactions are recorded in the column of the accounting equation. A) Cash B) Common Stock C) Dividends D) Retained Earnings Answer: D 44) In transaction analysis, the declaration and payment of dividends is recorded in the and columns of the accounting equation. A) Dividends, Cash B) Expenses, Accounts Receivable C) Expenses, Accounts Payable D) Retained Earnings, Cash Answer: D 45) We have used transaction analysis and the accounting equation to record several transactions for a company. The transactions are now recorded on a multi-column spreadsheet of the assets, liabilities and stockholders' equity of the company. If you wanted to prepare an income statement with this spreadsheet, which column would you use? A) Cash column B) Accounts Payable column C) Dividends column D) Retained Earnings column Answer: D 46) We have used transaction analysis and the accounting equation to record several transactions for a company. The transactions are now recorded on a multi-column spreadsheet of the assets, liabilities, and stockholders' equity of the company. If you wanted to prepare a statement of cash flows with this spreadsheet, which column would you use? A) Cash column B) Accounts Receivable column C) Retained Earnings column D) Revenue column Answer: A 47) We have used transaction analysis and the accounting equation to record several transactions for a company. The transactions are now recorded on a multi-column spreadsheet of the assets, liabilities and stockholders' equity of the company. If you wanted to prepare a balance sheet with this spreadsheet, which column(s) would you use? A) final balances of asset columns only B) final balances of liability columns only C) final balances of stockholders' equity columns only D) all of the above Answer: D 48) A multiple-step income statement reports different types of income that include: A) sales revenue and service revenue. B) income tax expense, utilities expense, rent expense. C) gross profit, operating income and net income. D) cost of goods sold and operating expenses. Answer: C 49) Beckowsik Company began business in June and completed the following transactions: A) Received $50,000 cash and issued common stock to the stockholders. B) Purchased supplies for $5,000 on account. C) Paid utilities bill of $2,000 for the month. D) Performed services for a customer and billed the customer $6,000. E) Received $3,000 from the customer on account. F) Paid for the supplies purchased on account. G) Purchased equipment for $10,000 on account. H) Declared and paid dividends of $2,200. Required: 1. Record the effects of the above transactions on the accounting equation. 2. Prove the accounting equation using the final balances in the accounts. Answer: 1. Trans. Cash Accts. Rec. Supplies Equip- ment Accts. Pay. Common Stock Retained Earnings A +50,000 +50,000 B +5,000 +5,000 C (2,000) (2,000) Utilities Expense D + 6,000 +6,000 Service Revenue E +3,000 (3,000) F (5,000) (5,000) G +10,000 +10,000 H (2,200) (2,200) Dividends Totals 43,800 3,000 5,000 10,000 10,000 50,000 1,800 2. Accounting Equation: Cash $43,800 + Accounts Receivable $3,000 + Supplies $5,000 + Equipment $10,000 =Accounts Payable $10,000 + Common Stock $50,000 + Retained Earnings $1,800 = $61,800 50) Indicate whether the account is an asset (A), liability (L), stockholders' equity (SE), revenue (R) or expense (E) account. Also indicate if the account would appear on the Balance Sheet (BS), Income Statement (IS), Statement of Cash Flows(CF) or the Statement of Retained Earnings (SRE). ACCOUNT TYPE OF ACCOUNT FINANCIAL STATEMENT 1. Equipment 2. Common Stock 3. Accounts Payable 4. Service Revenue 5. Salary Expense 6. Inventory 7. Accounts Receivable 8. Retained Earnings 9. Notes Payable 10. Prepaid Insurance 11. Dividends 12. Cash Answer: ACCOUNT TYPE OF ACCOUNT FINANCIAL STATEMENT 1. Equipment A BS 2. Common Stock SE BS 3. Accounts Payable L BS 4. Service Revenue R IS 5. Salary Expense E IS 6. Inventory A BS 7. Accounts Receivable A BS 8. Retained Earnings SE BS, SRE 9. Notes Payable L BS 10. Prepaid Insurance A BS 11. Dividends SE SRE, CF 12. Cash A BS, CF Diff: 2 2.4 Learning Objective 2-4 1) The double-entry system of accounting records the dual effects of transactions on the entity. Answer: TRUE 2) At the end of the period, the difference between the total credits and the total debits is the balance in the account. Answer: TRUE 3) The left hand side of a T account is the debit side and the right hand side is the credit side. Answer: TRUE 4) An account with a normal debit balance is most often an asset or revenue account. Answer: FALSE 5) Accounts receivable is increased with a credit. Answer: FALSE 6) Assets, revenues, and dividends are all increased by debits. Answer: FALSE 7) Common Stock and Retained Earnings are increased by debits. Answer: FALSE 8) If the sum of the credits to an account exceed the sum of the debits to the account, the account will have a credit balance. Answer: TRUE 9) The left side of a T-account is always the: A) increase side. B) decrease side. C) debit side. D) credit side. Answer: C 10) An important rule to remember when working with T accounts is: A) when you debit an account, you are entering an amount of the right-hand side on the T account. B) an increase to accounts payable will be recorded as a debit. C) to credit an account means to enter an amount on the right-hand side of the T account. D) the debit side of a T account is on the right-hand side of the T account for assets and expenses. Answer: C 11) Which of the following statements about the rules of debits and credits is CORRECT? A) An asset is increased by a credit. B) Dividends are decreased by debits. C) A liability is increased by a debit. D) Revenue is increased by a credit. Answer: D 12) Decreases in stockholders' equity that result from the cost of operating the business are: A) assets. B) revenues. C) expenses. D) liabilities. Answer: C 13) An important rule of debits and credits is: A) credits increase a revenue account. B) debits decrease an asset account C) revenues are increased by a debit. D) expenses are increased by a credit. Answer: A 14) Which accounts are increased by debits? A) Cash and Accounts Payable B) Salaries Expense and Common Stock. C) Accounts Receivable and Utilities Expense D) Accounts Payable and Service Revenue Answer: C 15) Company A received cash and issued stock to a new stockholder. In recording this transaction: A) Cash would be debited. B) Common Stock would be debited. C) Cash would be credited. D) Retained Earnings would be credited. Answer: A 16) Complete the following chart indicating if the account is increased with a debit or a credit. ACCOUNT INCREASED WITH A: Accounts Receivable Accounts Payable Common Stock Dividends Service Revenue Interest Expense Interest Revenue Note Payable Retained Earnings Inventory Short-term Investments Answer: ACCOUNT INCREASED WITH A: Accounts Receivable Debit Accounts Payable Credit Common Stock Credit Dividends Debit Service Revenue Credit Interest Expense Debit Interest Revenue Credit Note Payable Credit Retained Earnings Credit Inventory Debit Short-term Investments Debit [Show More]

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