Chapter 002: Establishing a Business and the Balance Sheet

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True / False Questions

1.Business activities that affect the accounting equation are called transactions.
TrueFalse

2.Borrowing cash from a bank is an example of an internal transaction.
TrueFalse

3.A list of account titles and their numbers is known as a balance sheet.
TrueFalse

4.Accounts with "payable" in the title always represent liabilities.
TrueFalse

5.Accounts with "prepaid" in the title always represent expenses.
TrueFalse

6."Dual Effects" means that every transaction will affect at least two assets, when performing transaction analysis.
TrueFalse

7.Purchasing supplies for cash would result in an increase to at least one asset account.
TrueFalse

8.The first step in the accounting cycle is to record the effects of transactions.
TrueFalse

9.Because assets are shown on the left side of the equal sign in the accounting equation, an increase in assets is shown on the left side of the T-account.
TrueFalse

10.Asset accounts are increased with a credit.
TrueFalse

11.The general ledger is an accounting book where the effect of each transaction is posted to a separate account.
TrueFalse

12.On a classified balance sheet, assets are listed in alphabetical order.
TrueFalse

13.When cash is contributed by an owner for an initial investment, assets increase and revenues increase.
TrueFalse

14.When a company pays rent in advance expenses increase.
TrueFalse

15.If a company purchases supplies on account for $3,000 then assets will increase by $3,000.
TrueFalse

16.An account balance is the difference between the debits and credits in an account during a given period including any beginning balance.
TrueFalse

17.Liabilities accounts generally have a credit balance.
TrueFalse

18.Credit means the right-hand side of the T-account.
TrueFalse

19.Debiting a liability account increase it.
TrueFalse

20.Journal entries provide the current account balance.
TrueFalse

21.Transactions are first recorded in the general ledger.
TrueFalse

22.All balance sheet accounts start the period with the ending balances from the prior period.
TrueFalse

23.Debit accounts include cash, supplies and land.
TrueFalse

24.The general ledger is used to prepare the financial statements.
TrueFalse

25.If total debits equal total credits on the trial balance then there are no errors in the accounts.
TrueFalse

26.Liquidity refers to how soon an asset is expected to be converted to cash.
TrueFalse

27.Assets expected to benefit a business over several years should be included in noncurrent assets on the balance sheet.
TrueFalse

28.Current liabilities include those obligations that a business will pay within one year.
TrueFalse

29.The balance sheet reports what a business is worth.
TrueFalse

30.The cost principle does not allow increases in asset values to be recognized unless the increase is a result of an external transaction.
TrueFalse

Multiple Choice Questions

31.Which of the following does not represent an external transaction?
A.Receipt of cash from an owner for an ownership stake in the business.
B.Payment to a supplier for inventory.
C.Selling goods to customers in exchange for cash.
D.Use of equipment over time in production activities.

32.Liabilities that represent amounts paid to the company in the past by others who expect to receive goods or services from the company in the future will have which word in the title?
A.Prepaid
B.Receivable
C.Unearned
D.Payable

33.All of the following are assets except:
A.Notes Payable.
B.Land.
C.Prepaid Rent.
D.Inventory.

34.Which of the following is an example of a liability account?
A.Unearned Revenue
B.Prepaid Rent
C.Inventory
D.Equipment

35.Which of the following is an internal transaction?
A.Cash contributions are received from a new owner in the business.
B.Supplies are ordered.
C.A company uses equipment in its production process.
D.Sales are made to customer.

36.Ordering supplies is an example of a(n):
A.Internal transaction.
B.External transaction.
C.Human resources transaction.
D.An exchange of promises.

37.A list of all accounts and the unique number assigned to each account is the:
A.Journal.
B.Chart of accounts.
C.Trial balance.
D.General ledger.

38.The chart of accounts is generally organized:
A.Alphabetically.
B.By financial statement element.
C.According to GAAP.
D.The same for all companies.

39.An account with the word "prepaid" in the title is a(n):
A.Asset.
B.Liability.
C.Revenue.
D.Expense.

40.Evidence indicating that a business activity has occurred is known as:
A.Accounts.
B.Source documents.
C.Printed documents.
D.Transaction documents.

41.The process of studying a transaction and its related documents to determine their effect on the business in terms of the accounting equation is known as:
A.Equation analysis.
B.Transaction study.
C.Transaction analysis.
D.Balancing analysis.

42.When a company borrows cash from a bank, which of the following will occur?
A.An increase to cash.
B.A decrease to notes payable.
C.An increase to owners' capital.
D.A decrease to accounts receivable.

43.A company purchases $800 worth of supplies on account. What is one effect on the accounting equation?
A.Increase of $800 to owners' equity.
B.Decrease of $800 to liabilities.
C.Increase of $800 to assets.
D.No effect on the equation since the purchase was on account.

44.Put the following steps, necessary to perform transaction analysis, in the correct order.
I. Verify the accounting equation
II. Identify the accounts affected by name
III. Determine the direction of the effect (+ or -) on each account
IV. Classify the accounts by type of account (A, L, or OE)
A.II, I, IV, and III
B.I, II, III, and IV
C.IV, III, I, and II
D.II, IV, III, and I

45.Zeller Company was recently formed with $20,000 cash contributed by owners. The company then borrowed $10,000 from a bank, and purchased equipment for $5,000 and supplies for $2,500 by paying cash. What is the amount of total assets that should be reported on the balance sheet?
A.$30,000
B.$22,500
C.$37,000
D.$20,000

46."Dual Effects" refers to:
A.Debits must equal credits.
B.Every transaction affects at least two accounts.
C.All transactions affect at least two financial statements.
D.Each side of the accounting equation is affected by every transaction.

47.Source documents include all of the following except:
A.Sales receipts.
B.Checks.
C.Ledgers.
D.Invoices.

48.If a company receives an initial investment from an owner to start a business then which of the following correctly describes the affect on the accounting equation?
A.Cash increases; owner's equity decreases
B.Cash decreases; owner's equity decreases
C.Cash decreases; owner's equity increases
D.Cash increases; owner's equity increases

49.Sues Bookstore paid $2,200 in advance to cover rent for the next two months. Which of the following will occur?
A.Liabilities increase by $2,200.
B.Expenses increase by $2,200.
C.Assets increase by $2,200.
D.No effect on the accounting equation.

50.The accounting cycle begins with:
A.Preparing financial statements and other reports.
B.Recording journal entries in the general journal.
C.Preparing a trial balance.
D.Analyzing business transactions and events.

51.When a company receives cash from the owner to start up a business, which of the following will be part of the journal entry?
A.A debit to owners' capital
B.A credit to cash
C.A credit to notes payable
D.A debit to cash

52.Mendel Co. paid $8,000 cash for a delivery truck to be used in its business. Which of the following is the correct journal entry to record this transaction?
A.Debit cash $2,000; credit delivery truck $8,000.
B.Debit delivery truck $8,000; credit cash $8,000.
C.Debit accounts payable $8,000; credit delivery truck $8,000.
D.Debit delivery truck $8,000; credit accounts receivable $8,000.

53.The effects of each transaction are recorded in chronological order in the:
A.General ledger.
B.Accounting equation.
C.Chart of accounts.
D.General journal.

54.Terms for the left and right side of an account are known as:
A.Increase/Decrease.
B.Debit/Credit.
C.Up/Down.
D.Positive/Negative.

55.Given the following T-account, what will be the balance in the cash account after a payment of $250 (d) for supplies?

A.$875
B.$1,025
C.$150
D.$525

56.Given the following T-account, the entry for transaction (c) could be associated with which of the following?

A.Repaying $9,500 cash to a bank for a loan.
B.Purchase of equipment for $9,500.
C.Selling old equipment no longer needed for $9,500.
D.Purchasing inventory for $9,500.

57.A ______is a list of individual accounts, usually in financial statement order, prepared as a check on the accounting system.
A.Trial balance
B.General ledger
C.Balance sheet
D.Financial statement

58.A ledger is:
A.A chronological record of the effects of transactions on account.
B.A list of all individual accounts in financial statement order with their ending balances.
C.The record used to accumulate the effects of transactions on individual accounts.
D.A collection of documents supporting the transactions entering the accounting process.

59.A debit is:
A.An increase in an account.
B.The right side of a T-account.
C.A decrease in an account.
D.The left side of a T-account.

60.The right side of a T-account is a(n):
A.Decrease.
B.Debit.
C.Credit.
D.Increase.

61.A credit is used to record a(n):
A.Decrease in a liability account.
B.Increase in an asset account.
C.Decrease in an owner's equity account.
D.Increase in a liability account.

62.Which of the following statements is false?
A.The normal balance in accounts receivable is a debit.
B.The normal balance in accounts payable is a credit.
C.The normal balance in owner's equity is a debit.
D.The normal balance in unearned revenue is a credit.

63.All of the following are true regarding journal entries except:
A.Journal entries show the effects of transactions.
B.Journal entries provide account balances.
C.The debited account titles are listed first.
D.Each journal entry should begin with a date.

64.Which one of the following accounts normally has a credit balance?
A.Cash
B.Equipment
C.Unearned revenue
D.Prepaid rent

65.A company pays $2,000 cash on account to a supplier. Which of following is the correct journal entry to record this transaction?
A.Debit accounts payable $2,000; credit cash $2,000.
B.Debit cash $2,000; credit accounts payable $2,000.
C.Debit owner's equity $2,000; credit cash $2,000.
D.Debit supplies $2,000; credit cash $2,000.

66.Which of the following does not represent a limitation of the balance sheet?
A.Because accounting is transaction-based, the balance sheet does not necessarily represent the current value of a business.
B.Some assets are not recorded because they do not arise from business transactions.
C.Adherence to the consistency principle is required.
D.The concept of conservatism should be adhered to in order to not overstate the reported value of assets and not understate the reported value of liabilities.

67.Which of the following is not a current asset?
A.Cash
B.Accounts Receivable
C.Equipment
D.Inventory

68.When faced with uncertainty about the amount at which assets and liabilities should be recorded, accountants should follow which principle, in order to avoid misleading users of financial statements?
A.Continuity
B.Conservatism
C.Consistency
D.Comparability

69.A credit for $156 to accounts payable was accidentally posted as $165. By what amount is the accounts payable in error?
A.Overstated by $156.
B.Understated by $165.
C.Overstated by $9.
D.Understated by $9.

70.The following account balances are available for the Bentley Company as of December 31, 2010:

What are total current assets?
A.$215,000
B.$100,000
C.$153,000
D.$103,000

Essay Questions

71.For each account below indicate whether the account is increased/decreased with a debit or a credit. The first account has been completed as an example.

72.For each of the following accounts provided for the most recent balance sheet of Anderson Inc., complete the following table. Indicate whether the account is classified as a current asset (CA), noncurrent asset (NCA), current liability (CL), noncurrent liability (NCL), or owner's equity (OE). Also indicate whether the normal account balance is a debit or credit. The first question has been completed as an example.

73.The following events occurred for the Nickel Company in its first month of operations:
a. Received $5,000 cash from owners.
b. Borrowed $10,000 from a bank.
c. Purchased building for $50,000; paid $8,000 in cash and signed a mortgage for the remaining balance.
d. Purchased $1,000 of inventory on account.
e. Purchased equipment for $3,000 cash.
For each of the transactions listed above perform transaction analysis using the format provided below. Be sure to indicate the account affected, amount, and direction of the effect on the equation (+ or -). Verify the equation after each transaction to ensure it remains in balance.

74.Cooper Inc. was organized on July 1, 2010. The company is a software developer. The following transactions occurred during the first month of operations for Cooper Inc.

Prepare journal entries in good form for each transaction. Reference each entry with the corresponding letter, indicate which type of account is affected (A, L or OE), and include the direction of the effect (+ or -).

75.The following accounts are available for Tandy Co. for the year ended December 31, 2008.

a. What is the balance in the Owners' Capital account? Please provide supporting calculations.
b. What types of entities could have claims to the assets of Tandy Co.? Explain.
c. Prepare a classified balance sheet in good form for the Tandy Co. for the year ended December 31, 2010.

76.Describe the first three steps in the accounting cycle. Be specific and use examples to support your answer.

77.Describe and discuss the limitations of the balance sheet.

78.Explain the terms debit and credit. How are debits and credits used in the accounting cycle?

79.How are debits and credits used to record transactions in the accounting cycle? Which accounts are increased with a debit and which accounts are increased with a credit?

80.Describe the process of transaction analysis. Why is transaction analysis performed in the accounting cycle? What steps are necessary to perform transaction analysis?

81.Define the terms chart of accounts, general journal, general ledger, and trial balance and discuss how these tools are used in the accounting cycle.

Fill in the Blank Questions

82.Transactions include ______exchanges and ______events.
______

83.A ______is a list of all account titles and their unique account numbers.
______

84.Accounts with "unearned" in the title are always ______.
______

85.______refers to every transaction affecting at least tow accounts.
______

86.______is performed to determine whether a transaction exists.
______

87.______is the left side of the T-account.
______

88.Assets are increased with a ______.
______

89.Accounts payable is increased with a ______.
______

90.______express in debits and credits the effects of transactions on various accounts.
______

91.A simplified version of a ledger is a ______.
______

92.Prior to preparing financial statements a ______should be prepared at the end of each accounting period.
______

93.If a company signs a long-term note then liabilities will ______.
______

94.When an owner contributes cash to start a business assets will ______.
______

95.A company pays cash to purchase supplies. This transaction will cause assets to ______.
______

96.The first step in the accounting cycle is to ______.
______

97.The effect of each transaction is posted to the ______.
______

98.The effect of each transaction is first entered in the general journal in ______order.
______

99.The journal entry to record the purchase of insurance in advance would include a debit to ______.
______

100.The journal entry to pay cash to a supplier on account would include a ______to accounts payable.
______

101.Assets on the balance sheet should be listed in order of ______.
______

102.Prepaid rent would be classified as ______on the balance sheet.
______

103.______are listed in order of maturity on the balance sheet.
______

Matching Questions

104.Match each term with its related definition by entering the appropriate letter in the space provided.

105.Match each accounting assumption or principle with the appropriate definition.

full file at

Chapter 002: Establishing a Business and the Balance Sheet Key

True / False Questions

1.Business activities that affect the accounting equation are called transactions.
TRUE

AACSB: Reflective thinking
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 2-1
Topic: Determine the effects of business activities

2.Borrowing cash from a bank is an example of an internal transaction.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Difficulty: Easy
Learning Objective: 2-1
Topic: Determine the effects of business activities

3.A list of account titles and their numbers is known as a balance sheet.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Difficulty: Medium
Topic: Determine the effects of business activities

4.Accounts with "payable" in the title always represent liabilities.
TRUE

AACSB: Reflective thinking
Bloom's: Knowledge
Difficulty: Easy
Topic: Determine the effects of business activities

5.Accounts with "prepaid" in the title always represent expenses.
FALSE

AACSB: Reflective thinking
Bloom's: Knowledge
Difficulty: Medium
Learning Objective: 2-1
Topic: Determine the effects of business activities

6."Dual Effects" means that every transaction will affect at least two assets, when performing transaction analysis.
FALSE

AACSB: Reflective thinking
Bloom's: Comprehension
Difficulty: Medium
Topic: Determine the effects of business activities