Deck 2: Accounting System and Financial Statements

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

True

Question 4

Cash paid to stockholders by the business of a corporation and used for personal expenses, should be treated as an expense of the business.

Question 5

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

Question 6

Source documents identify and describe business transactions and are the basis for accounting entries.

Question 7

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

Question 8

Dividends paid to the stockholders are a business expense.

Question 9

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

Question 10

Debits increase asset and expense accounts.

Question 11

Crediting an expense account decreases it.

Question 12

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

Question 13

Increases in liability accounts are recorded as debits.

Question 14

Credits always increase account balances.

Question 15

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

Question 16

A revenue account normally has a debit balance.

Question 17

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

Question 18

The first step to get from transactions and events to financial statements is to identify each transaction from source documents.

Question 19

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

Question 20

Unearned revenues are classified as liabilities.

Question 21

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

Question 22

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 23

Booth Industries has liabilities of $105 million and total assets of $350 million. Its debt ratio is 40.0%.
Debt Ratio = Total Liabilities/Total Assets
Debt Ratio = $105 million/$350 million = 30%

Question 24

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

Question 25

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

Question 26

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

Question 27

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 28

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

Question 29

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 30

A dividend normally has a debit balance.

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

A debit entry is always an increase in the account.

Question 36

Debit means increase and credit means decrease for all accounts.

Question 37

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

Question 38

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

Question 39

Asset accounts are normally 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

Dividends are reported on a business's income statement.

Question 42

The accounting process to get from transactions and events to financial statements begins with:

A)Identifying business transactions and events from source documents.
B)Record relevant transactions and events in a journal.
C)Analyze transactions and events using the accounting equation.
D)Presentation of financial information to decision-makers.
E)Preparation and analysis of the trial balance and financial statements.

Question 43

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

Question 44

The journal is known as a book of original entry.

Question 45

If common stock account had a $10,000 credit balance at the beginning of the period, and during the period, the stockholders invest an additional $5,000, the balance in the common stock account listed on the trial balance will be equal to a debit balance of $5,000.
$10,000cr + $5,000cr = $15,000 credit balance

Question 46

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

Question 47

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

Question 48

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 49

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 common stock and dividends, followed by revenues and expenses.

Question 50

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

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

Question 51

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

Question 52

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

Question 53

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

Question 54

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

Question 55

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

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

All of the following statements regarding a sales invoice are true except:

A)A sales invoice is a type of source document.
B)A sales invoice is used by sellers to record the sale and for control.
C)A sales invoice is used by buyers to record purchases and monitor purchasing activity.
D)A sales invoice gives rise to an entry in the accounting process.
E)A sales invoice does not provide objective evidence about a transaction.

Question 58

The financial statement that summarizes the changes in retained earnings is called the balance sheet.

Question 59

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 60

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

Question 61

Identify the account below that is classified as a liability in a company's chart of accounts.

A)Cash
B)Unearned Revenue
C)Salaries Expense
D)Accounts Receivable
E)Supplies

Question 62

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 63

Identify the account below that is classified as an asset account.

A)Unearned Revenue
B)Accounts Payable
C)Supplies
D)Common Stock
E)Service Revenue

Question 64

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 stockholders equity.

Question 65

Identify the statement below that is incorrect.

A)The normal balance of accounts receivable is a debit.
B)The normal balance of dividends is a debit.
C)The normal balance of unearned revenues is a credit.
D)The normal balance of an expense account is a credit.
E)The normal balance of the common stock account is a credit.

Question 66

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 67

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

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

Question 68

A company's formal 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 69

A debit is used to record an increase in all of the following accounts except:

A)Supplies
B)Cash
C)Accounts Payable
D)Dividends
E)Prepaid Insurance

Question 70

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 prepared internally to ensure accuracy.
E)include the chart of accounts.

Question 71

A business's 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 72

A debit:

A)Always increases an account.
B)Is the right-hand side of a T-account.
C)Always decreases an account.
D)Is the left-hand side of a T-account.
E)Is not need to record a transaction.

Question 73

A credit is used to record an increase in all of the following accounts except:

A)Accounts Payable
B)Service Revenue
C)Unearned Revenue
D)Wages Expense
E)Common Stock

Question 74

The right side of a T-account is a(n):

A)Debit.
B)Increase.
C)Credit.
D)Decrease.
E)Account balance.

Question 75

Identify the account below that is classified as an asset in a company's chart of accounts.

A)Accounts Receivable
B)Accounts Payable
C)Common Stock
D)Unearned Revenue
E)Service Revenue

Question 76

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

A)A revenue account.
B)The dividends account.
C)The common stock account.
D)An expense account.
E)A liability account.

Question 77

Prepaid expenses are generally:

A)Payments made for products and services that do not ever expire.
B)Classified as liabilities on the balance sheet.
C)Decreases in equity.
D)Assets that represent prepayments of future expenses.
E)Promises of payments by customers.

Question 78

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

A)Dividends account.
B)Common stock account.
C)Revenue account.
D)Expense account.
E)Liability account.

Question 79

The numbering system used in a company's chart of accounts:

A)Is the same for all companies.
B)Is determined by generally accepted accounting principles.
C)Depends on the source documents used in the accounting process.
D)Typically begins with balance sheet accounts.
E)Typically begins with income statement accounts.

Question 80

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 accounts a company uses with an assigned identification number.
E)A record containing all accounts and their balances used by the company.