Question 1

Dividends are declared and paid to the company's stockholders. What effect does this transaction have on the company's accounting equation?

Accepted Answer

Dividends are a distribution of profits to stockholders, and retained earnings are decreased as a result. The other choices do not correctly reflect the impact of a dividend payment.

Question 2

A company's current ratio is 1.5, what is the effect of obtaining land by issuing shares of stock?

Accepted Answer

Obtaining land by issuing shares of stock would not have an immediate impact on the current ratio, as it only affects the asset and equity sides of the balance sheet. However, depending on how the land is used or how much it costs, it could ultimately affect the current ratio in the future.

Question 3

Services are provided for customers who pay for their services immediately. What effect does this transaction have on the accounting equation?

Accepted Answer

When customers pay for services immediately, the company's cash (an asset) increases, and the revenue generated increases retained earnings (part of equity), thus affecting the accounting equation by increasing assets and retained earnings.

Question 4

The chronological record in which transactions are initially recorded in the order in which they occur is called a(n)

Accepted Answer

The journal is where transactions are initially recorded in chronological order. T-accounts are used to show the balances of individual accounts after transactions have been recorded. The Chart of Accounts is a list of all accounts used by a company. A Trial Balance is a list of all accounts and their balances at a specific point in time, after transactions have been recorded.

Question 5

A list of all active accounts and their balances at a particular date, which is used to prove the equality of debits and credits, is a

Accepted Answer

A list of all active accounts and their balances at a particular date, which is used to prove the equality of debits and credits, is a Trial Balance. Choice A, Chart of Accounts, is a list of all accounts used by a company. Choice B, General Ledger, is a book or computer program that contains a company's accounts and transactions. Choice C, Journal, is a book or computer program that records a company's transactions in chronological order.

Question 6

When a firm borrows money, one effect on the accounting equation is a(n)

Accepted Answer

Borrowing money results in an increase in assets as cash or other resources are received, while liabilities increase by the amount borrowed. Contributed capital is not affected by borrowing money. Therefore, the best choice is B, increase in assets.

Question 7

A consulting firm provided services last month and billed its client. This month, the company received payment from the customer. What impact does this month's transaction have on the firm's working capital?

Accepted Answer

Receiving payment from the customer impacts the firm's cash and accounts receivable. Cash increases while accounts receivable decreases by the same amount, leaving the working capital (current assets minus current liabilities) unchanged.

Question 8

Which of the following statements regarding a company's operating activities is true?

Accepted Answer

Expenses are costs incurred by a company's operating activities and decrease the company's net income. Since stockholders' equity is calculated as assets minus liabilities, a decrease in net income will result in a decrease in stockholders' equity.

Question 9

The process of transferring amounts from the book of original entry into specific account records is referred to as

Accepted Answer

Posting is the process of transferring the amounts from the book of original entry (i.e. journal) into specific account records (i.e. ledger) to reflect the changes in each account's balance. Journalizing is the recording of transactions in the journal. Analyzing involves breaking down and examining each transaction to determine its effect on various accounts. Classifying refers to grouping transactions into categories for financial reporting purposes.

Question 10

A company's current ratio is 2.00. If the company makes a payment on account, what is the effect on the current ratio?

Accepted Answer

The answer of A company's current ratio is 2.00. If...

Question 11

Which of the following transactions does not affect total assets?

Accepted Answer

The answer of Which of the following transactions does not...

Question 12

Which of the following statements best describes the effects of recognizing revenue earned by a business entity?

Accepted Answer

Recognizing revenue earned by a business entity will increase either the cash account (if it's a cash sale) or accounts receivable (if it's a credit sale), both of which are assets. This increase in assets will also lead to an increase in stockholders' equity through the retained earnings account. Therefore, assets and stockholders' equity will increase when either cash or credit sales are made.

Question 13

Payment is made for the telephone bill which was recorded previously. What effect does this transaction have on the accounting equation?

Accepted Answer

When the payment is made for the telephone bill, the cash (asset) decreases and the accounts payable (liability) also decreases. Therefore, this transaction has the effect of decreasing both assets and liabilities, which is represented in the accounting equation as: Assets = Liabilities + Equity.

Question 14

A company purchased equipment for $150,000 cash. What is the effect on total assets?

Accepted Answer

The purchase of equipment for cash results in an increase in equipment (an asset) and a decrease in cash (also an asset), leaving total assets unchanged.

Question 15

The two-column record used to accumulate monetary increases and decreases for individual assets, liabilities, stockholders' equity, revenue, expense, and dividends items is a(n)

Accepted Answer

The two-column record described in the question is a T-account. A chart of accounts is a list of all the accounts maintained by a company. A trial balance is a list of all the accounts and their balances at a specific point in time. Posting is the process of transferring transaction information from the journal to the appropriate accounts in the ledger.

Question 16

A list of all asset, liability, stockholders' equity, revenue, expense, and dividend accounts which are used by the company is called a(n)

Accepted Answer

A Chart of Accounts is a comprehensive list of all the accounts used by a company to record its financial transactions. It includes all asset, liability, stockholders' equity, revenue, expense, and dividend accounts. The General Ledger is a record of all the financial transactions of a company and is made up of all the accounts listed in the Chart of Accounts. The General Journal is used for recording transactions that cannot be recorded in any other journal or transactions that require adjustment. A Trial Balance is a list of all the accounts in the General Ledger and their balances to ensure that debits equal credits.

Question 17

Which of the following best describes one effect of recognizing expenses incurred by a business entity?

Accepted Answer

Recognizing expenses will decrease the amount of net income, which in turn will decrease the amount of retained earnings.

Question 18

Which of the following transactions affects total liabilities?

Accepted Answer

Payment made on a bank loan reduces the total liabilities of a company as it decreases the amount owed to the bank. The other transactions do not directly affect total liabilities - purchasing equipment for cash, providing services for credit, and issuing common stock affect other areas of the balance sheet.

Question 19

The telephone bill for the current period is received and recorded, but payment will be made later. What effect does this transaction have on the accounting equation?

Accepted Answer

Recording the telephone bill as an expense increases the liabilities (accounts payable) and decreases retained earnings. As the payment is not made yet, there is no effect on assets.

Question 20

Payment is made for machinery purchases previously on credit. What effect does this transaction have on the accounting equation?

Accepted Answer

This transaction involves the payment of previously acquired machinery that was bought on credit, which means that there is a decrease in liabilities (due to the reduction in the outstanding amount owed) and a decrease in assets (due to the outflow of cash to pay for the machinery). Therefore, the accounting equation is affected by a decrease in both assets and liabilities.

Quiz 2: The Accounting Information System