Question 1

Star Homes Company just recorded a transaction in its books.If this transaction increased the total liabilities by $10,000,then ________.

Accepted Answer

In accounting, the fundamental principle of the balance sheet is the accounting equation, which states that Assets = Liabilities + Equity. Thus, if one side of the equation increases, the other side must also increase to keep the equation balanced. In this case, if the transaction increased the total liabilities by $10,000, then assets must increase, or equity must decrease by $10,000 to maintain the balance of the equation. Choice A correctly reflects this principle.

Question 2

Venus,Inc.paid $5,000 on accounts payable.How does this transaction affect the accounting equation of Venus?

Accepted Answer

When Venus, Inc. paid $5,000 on accounts payable, its liabilities decreased by $5,000 as the company settled its debt with the creditor. As a result, the accounting equation will be affected by decreasing both assets and liabilities by $5,000. This is because assets will decrease as a result of using them to settle the payable, while liabilities decrease as the payable is settled. Therefore, option B is the correct answer.

Question 3

Wallace Repair Company incurred $1,500 as a labor expense and promised to pay the labor agency within 30 days.Which of the following will decrease as a result of this transaction?

Accepted Answer

The labor expense will decrease the owner's equity because expenses reduce net income, which in turn reduces retained earnings, a component of owner's equity.

Question 4

Merchant Company provides plumbing services.Transactions of Merchant during the first year of operations are given below.
A.The owner,Carol Merchant,contributed $10,000 cash to form the business.
B.Paid $1,200 cash for equipment to be used for plumbing repairs.
C.Borrowed $11,000 from a local bank and deposited the money in the checking account.
D.Paid $400 rent for the year.
E.Purchased $400 of office supplies by cash.
F.Completed a plumbing repair project for a local lawyer and received $3,300 cash.
Calculate the amount of total liabilities at the end of the first year.

Accepted Answer

A)Borrowings from bank = $11,000

Question 5

Ace,Inc.had the following transactions during June:
Performed services for $4,000 on account;received cash on account,$8,000;paid $900 for repair expense;paid $1,800 to a supplier that it owed from the previous month.What is the combined effect on Cash of the June transactions?

Accepted Answer

A)Cash = $8,000 - $900 - $1,800 = $5,300 increase

Question 6

Zetom Company receives a bill from one of its suppliers for services received and will pay the supplier next month.How does the receipt of the bill from the supplier affect the accounting equation of Zetom?

Accepted Answer

When Zetom receives a bill from its supplier, it incurs a liability to pay for the services received. This means that liabilities increase. At the same time, there is no change in assets because the services have already been received and recorded as expenses. As a result, equity decreases by the same amount as the increase in liabilities to maintain the accounting equation. Therefore, the correct answer is B, liabilities increase and equity decreases.

Question 7

Bliss Company settles a liability by making a payment in cash.How does paying this liability affect the accounting equation of the business?

Accepted Answer

When a liability is settled by paying cash, both assets (cash) and liabilities decrease.

Question 8

Myers Landscaping Company performs lawn mowing services for its customers.Payments for the current month's services are expected to be received next month.How does this transaction affect the accounting equation of Myers Landscaping?

Accepted Answer

The transaction represents an increase in revenue (equity) for Myers Landscaping, and therefore, assets and equity increase. There is no change in liabilities.

Question 9

Crusoe Waterworks Company provides plumbing services.Transactions of Crusoe Waterworks during the first year of operations are given below.
A.The owner,Robin Crusoe,invested $5,000 cash in the company.The cash was deposited in the business checking account.
B.Paid $4,000 cash for equipment to be used for plumbing repairs.
C.Borrowed $26,000 from a local bank and deposited the money in the checking account.
D.Paid $700 rent for the year.
E.Purchased $1,500 of office supplies on account.
F.Completed a plumbing repair project for a local lawyer and received $3,400 cash.
Calculate the amount of total owner's equity after recording the transactions.Assume office supplies of $1,500 are left at the end of the year.

Accepted Answer

A) 11ea8a42_4eeb_4ec2_8b44_3f15f4471d16_TB5024_00 Expenses
Stockholders' Equity = $5,000 + $3,400 - $700 = $7,700

Question 10

Accord Company purchased land for $120,000 by making a cash payment of $38,000 and promising to pay the remaining amount in a later accounting period.What is the net effect of this transaction on Accord's accounting equation?

Accepted Answer

The land purchase increases assets by $120,000. The cash payment decreases assets by $38,000, and the promise to pay later increases liabilities by $82,000. Thus, assets and liabilities both increase by $82,000.

Question 11

Murphy Company had originally purchased land for $35,000.It later sold it for $35,000 in cash.Which of the following is true of the effect of the sale of land on the accounting equation?

Accepted Answer

The sale of land for the same amount that it was purchased for has no impact on the accounting equation. The assets (land) decrease by $35,000, but the cash received increases by the same amount, resulting in no net change to the total assets. Similarly, there is no impact on liabilities or equity since there was no gain or loss on the sale.

Question 12

Fitch Supply Services received $1,000 cash from a customer;the amount was owed to the business from the previous month.What is the effect of this transaction on the accounting equation?

Accepted Answer

The transaction involves receiving cash for an amount that was previously owed, which decreases Accounts Receivable and increases Cash.

Question 13

________ represents a short-term liability created by purchasing "on account."

Accepted Answer

Accounts payable represents a short-term liability created by purchasing goods or services on credit, meaning the business has bought something but has not yet paid for it. Accounts receivable represents money that is owed to the business, notes payable represents a long-term liability where the business has borrowed money and expenses represent costs incurred by the business.

Question 14

Glendale Company had the following transactions in August:
Earned $5,000 of revenues on account;collected $2,000 from a customer for services provided last month;incurred $500 of repair expense and paid cash;paid $300 for rent that it owed from the previous month.
What is the net income in August?

Accepted Answer

D)Net income = Revenue - Expenses = $5,000 - $500 = $4,500.

Question 15

Which of the following can be an effect of a transaction that increased an asset of a business for the accounting equation to balance?

Accepted Answer

According to the accounting equation, Assets = Liabilities + Equity. Increasing an asset without any corresponding increase in liabilities or equity would cause the equation to become imbalanced. Therefore, there must be a corresponding decrease in another asset to maintain the equation's balance.

Question 16

Reliable Waterworks provides plumbing services.Transactions of Reliable Waterworks during the first year of operations are given below.
A.The owner,Steve Sharon,contributed $11,000 cash to form the business.
B.Paid $1,400 for equipment to be used for plumbing repairs.
C.Borrowed $15,000 from a local bank and deposited the money in the checking account.
D.Paid $100 in rent for the year.
E.Paid $400 for plumbing supplies to be used on various jobs next year.
F.Completed a plumbing repair for a law firm and received $3,200.
Calculate the amount of total assets at the end of the first year.Assume the plumbing supplies of $3,200 are left at the end of the year.

Accepted Answer

D)
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Question 17

Homeward Supply Services received $1,000 cash from a customer;the amount was owed to the business from the previous month.Which of the following accounts will decrease as a result of this transaction?

Accepted Answer

Accounts Receivable will decrease because the business received payment from the customer, who owed them money.

Question 18

Exchange Company collected $14,000 from one of its customers,the amount owed from the previous month.How does this affect the accounting equation for Exchange?

Accepted Answer

The collection of $14,000 from a customer increases cash (an asset) by $14,000 and decreases accounts receivable (another asset) by $14,000, resulting in no net change in total assets.

Question 19

________ represent the right to receive cash in the future from customers for goods sold or for services performed.

Accepted Answer

Accounts Receivable represent the right to receive cash in the future from customers for goods sold or for services performed. This is an asset account and is recorded on the balance sheet. Accounts Payable, Equity, and Expenses are not related to the right to receive cash from customers.

Question 20

Marsh Supply Services paid $350 cash to a materials supplier,the amount owed from the previous month.Which of the following accounts decreases?

Accepted Answer

Accounts Payable is a liability account which represents the amount that a business owes to its vendors or suppliers. When Marsh Supply Services pays $350 cash to a materials supplier, the amount owed from the previous month, the Accounts Payable account gets decreased. Therefore, the correct answer is B. Accounts Receivable is an asset account which represents the amount that customers owe to a business for goods or services sold on credit. Owner's Capital is an equity account which represents the owner's investment in the business. Office Supplies is an asset account which represents the cost of supplies purchased for office or administrative use.

Quiz 1: Accounting and the Business Environment