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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
LO: 2-1
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
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
Diff: 2
LO: 2-1
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
2.2 Learning Objective 2-2
1) The account is the basic summary device used in accounting.
Answer: TRUE
Diff: 1
LO: 2-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
2) An accounts receivable usually specifies an interest rate.
Answer: FALSE
Diff: 2
LO: 2-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
3) Assets include cash, land, and accounts payable.
Answer: FALSE
Diff: 2
LO: 2-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
4) Prepaid expenses are an asset.
Answer: TRUE
Diff: 2
LO: 2-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
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
Diff: 1
LO: 2-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
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
Diff: 2
LO: 2-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
7) Which account includes bank account balances in multiple checking accounts?
A) Accounts Receivable
B) Notes Receivable
C) Cash
D) Prepaid Expenses
Answer: C
Diff: 1
LO: 2-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
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
Diff: 2
LO: 2-2
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
9) Notes payable, accounts payable, taxes payable and salaries payable are all examples of:
A) liabilities.
B) revenues.
C) expenses.
D) assets.
Answer: A
Diff: 1
LO: 2-2
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement, Reporting
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
Diff: 1
LO: 2-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
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
Diff: 1
LO: 2-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 1
LO: 2-2
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 1
LO: 2-3
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Reflective Thinking
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 3
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 3
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 3
LO: 2-3
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
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
Diff: 2
LO: 2-3
AACSB: Reflective Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
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
Diff: 3
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 3
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 3
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 3
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 2
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 3
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
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
Diff: 3
LO: 2-3
AACSB: Analytical Thinking
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement, Reporting
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.