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Chapter 2 Review of the Accounting Process
True/False Questions
- Owners’ equity can be expressed as assets minus liabilities.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 02-01
Topic Area: The basic model –Accounting equation
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Debits increase asset accounts and decrease liability accounts.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 02-01
Topic Area: The basic model –Account relationships
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Balance sheet accounts are referred to as temporary accounts because their balances are always changing.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 02-01
Topic Area: The basic model– Account relationships
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- After an unadjusted trial balance is prepared, the next step in the accounting processing cycle is the preparation of financial statements.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 02-01
Topic Area: Accounting processing cycle
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Adjusting journal entries are recorded at the end of any period when financial statements are prepared.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 02-04
Topic Area: Adjusting entries
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Accruals occur when the cash flow precedes either revenue or expense recognition.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 02-04
Topic Area: Adjusting entries – Identifytypes
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- The adjusted trial balance contains only permanent accounts.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 02-05
Topic Area: Prepare an adjusted trial balance
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- The income statement summarizes the operating activity of a firm at a particular point in time.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 02-06
Topic Area: Preparing the financial statements
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
- The balance sheet can be considered a change or flow statement.
Answer: False
Level of Learning: 1 Easy
Learning Objective: 02-06
Topic Area: Preparing the financial statements
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
- The statement of cash flows summarizes transactions that caused cash to change during a reporting period.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 02-06
Topic Area: Preparing the financial statements
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
- The statement of shareholders’ equity discloses the changes in the temporary shareholders’ equity accounts.
Answer: False
Level of Learning: 2 Medium
Learning Objective: 02-06
Topic Area: Preparing the financial statements
Blooms: Remember
AACSB: Reflective thinking
AICPA: FN Measurement
- The post-closing trial balance contains only permanent accounts.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 02-07
Topic Area: Closing process
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- The closing process brings all temporary accounts to a zero balance and updates the balance in the retained earnings account.
Answer: True
Level of Learning: 1 Easy
Learning Objective: 02-07
Topic Area: Closing process
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- A reversing entry at the beginning of a period for salaries would include a debit to salaries expense.
Answer: False
Level of Learning: 2 Medium
Learning Objective: Appendix 2B
Topic Area: Reversing entries
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- The sale of merchandise on account would be recorded in a sales journal.
Answer: True
Level of Learning: 1 Easy
Learning Objective: Appendix 2C
Topic Area: Subsidiary ledgers and special journals
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- The payment of cash to a supplier would be recorded in a purchases journal.
Answer: False
Level of Learning: 1 Easy
Learning Objective: Appendix 2C
Topic Area: Subsidiary ledgers and special journals
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
Multiple Choice Questions
- The accounting equation can be stated as:
- A + L – OE = 0.
- A – L + OE = 0.
- -A + L – OE = 0.
- A – L – OE = 0.
Answer: d
Level of Learning: 2 Medium Learning Objective: 02-01
Topic Area: The basic model – Accounting equation
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Examples of external transactions include all of the following except:
- Paying employee salaries.
- Purchasing equipment.
- Depreciating equipment.
- Collecting a receivable.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 02-01
Topic Area: The basic model
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Examples of internal transactions include all of the following except:
- Writing off an uncollectible account.
- Recording the expiration of prepaid insurance.
- Recording unpaid salaries.
- Paying salaries to company employees.
Answer: d
Level of Learning: 2 Medium
Learning Objective: 02-01
Topic Area: The basic model
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- XYZ Corporation receives $100,000 from investors for issuing them shares of its stock.
XYZ’s journal entry to record this transaction would include a:
- Debit to investments.
- Credit to retained earnings.
- Credit to capital stock.
- Credit to revenue.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 02-02
Topic Area: Record transactions in the general journal
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
- Incurring an expense for advertising on account would be recorded by:
- Debiting liabilities.
- Crediting assets.
- Debiting an expense.
- Debiting assets.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 02-02
Topic Area: Record transactions in the general journal
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
- A sale on account would be recorded by:
- Debiting revenue.
- Crediting assets.
- Crediting liabilities.
- Debiting assets.
Answer: d
Level of Learning: 2 Medium
Learning Objective: 02-02
Topic Area: Record transactions in the general journal
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
- Mary Parker Co. invested $15,000 in ABC Corporation and received capital stock in exchange. Mary Parker Co.’s journal entry to record this transaction would include a:
- Debit to investments.
- Credit to retained earnings.
- Credit to capital stock.
- Debit to expense.
Answer: a
Level of Learning: 2 Medium
Learning Objective: 02-02
Topic Area: Record transactions in the general journal
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
- Hughes Aircraft sold a four-passenger airplane for $380,000, receiving a $50,000 down payment and a 12% note for the balance. The journal entry to record this sale would include a: Credit to cash.
- Debit to cash discount.
- Debit to note receivable.
- Credit to note receivable.
Answer: c
Level of Learning: 3 Hard
Learning Objective: 02-02
Topic Area: Record transactions in the general journal
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
- Somerset Leasing received $12,000 for 24 months’ rent in advance. How should Somerset record this transaction?
- Prepaid rent 12,000 Rent expense 12,000
- Cash 12,000
Deferred revenue 12,000 c. Interest expense 12,000 Interest payable 12,000 d. Salaries expense 12,000 Salaries payable 12,000
Answer: b
Level of Learning: 2 Medium
Learning Objective: 02-02
Topic Area: Record transactions in the general journal
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
- Davis Hardware Company uses a perpetual inventory system. How should Davis record the sale of merchandise, costing $620, and sold on account for $960?
- Inventory 620
Accounts receivable 620
Sales 960
Revenue from sales 960 b. Accounts receivable 960 Sales revenue 960
Cost of goods sold 620 Inventory 620 c. Inventory 620 Gain on sale 340
Sales revenue 960 d. Accounts receivable 960 Sales revenues 620
Gain on sale 340
Answer: b
Level of Learning: 3 Hard
Learning Objective: 02-02
Topic Area: Record transactions in the general journal
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
- Ace Bonding Company purchased merchandise inventory on account. The inventory costs $2,000 and is expected to sell for $3,000. How should Ace record the purchase?
- Inventory 2,000
Accounts payable 2,000 b. Cost of goods sold 2,000 Deferred revenue 1,000 Sales in advance 3,000 c. Cost of goods sold 2,000 Inventory payable 2,000 d. Cost of goods sold 2,000
Profit 1,000
Sales payable 3,000
Answer: a
Level of Learning: 3 Hard
Learning Objective: 02-02
Topic Area: Record transactions in the general journal
Blooms: Apply
AACSB: Analytic
AICPA: FN Measurement
- Which of the following accounts has a normal debit balance?
- Accounts payable.
- Accrued taxes.
- Accumulated depreciation.
- Advertising expense.
Answer: d
Level of Learning: 1 Easy
Learning Objective: 02-01
Learning Objective: 02-05
Topic Area: The basic model – Account relationships
Topic Area: Prepare an adjusted trial balance
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- An example of a contra account is:
- Depreciation expense.
- Accounts receivable.
- Sales revenue.
- Accumulated depreciation.
Answer: d
Level of Learning: 1 Easy
Learning Objective: 02-04
Topic Area: Adjusting entries – Identifytypes
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Making insurance payments in advance is an example of:
- An accrued receivable transaction.
- An accrued liability transaction.
- A deferred revenue transaction.
- A prepaid expense transaction.
Answer: d
Level of Learning: 1 Easy
Learning Objective: 02-04
Topic Area: Adjusting entries– Identifytypes
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Recording revenue that is earned, but not yet collected, is an example of:
- A prepaid expense transaction.
- A deferred revenue transaction.
- An accrued liability transaction.
- An accrued receivable transaction.
Answer: d
Level of Learning: 1 Easy
Learning Objective: 02-04
Topic Area: Adjusting entries – Identify types
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- When a magazine company collects cash for selling a subscription, it is an example of:
- An accrued liability transaction.
- An accrued receivable transaction.
- A prepaid expense transaction.
- A deferred revenue transaction.
Answer: d
Level of Learning: 1 Easy
Learning Objective: 02-04
Topic Area: Record transactions in the general journal
Blooms: Understand
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- On December 31, 2015, Coolwear, Inc. had a balance in its prepaid insurance account of $48,400. During 2016, $86,000 was paid for insurance. At the end of 2016, after adjusting entries were recorded, the balance in the prepaid insurance account was 42,000. Insurance expense for 2016 would be:
- $ 6,400.
- $134,400.
- $ 86,000.
- $ 92,400.
Answer: d
Level of Learning: 2 Medium
Learning Objective: 02-05
Learning Objective: 02-08
Topic area: Adjusting entries – Record and post
Topic Area: Conversion from cash basis to accrual basis
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
Feedback: Insurance expense = $48,400 + 86,000 – 42,000= $92,400
- Adjusting entries are primarily needed for:
- Cash basis accounting.
- Accrual accounting.
- Current value accounting.
- Manual accounting systems.
Answer: b
Level of Learning: 1 Easy
Learning Objective: 02-04
Topic Area: Adjusting entries
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Prepayments occur when:
- Cash flow precedes expense recognition.
- Sales are delayed pending credit approval.
- Customers are unable to pay the full amount due when goods are delivered.
- Manufactured goods await quality control inspections.
Answer: a
Level of Learning: 2 Medium Learning Objective: 02-04
Topic Area: Adjusting Entries – Identify types
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- Accruals occur when cash flows:
- Occur before expense recognition.
- Occur after revenue or expense recognition.
- Are uncertain.
- May be substituted for goods or services.
Answer: b
Level of Learning: 2 Medium
Learning Objective: 02-04
Topic Area: Adjusting entries– Identifytypes
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- On December 31, 2016, the end of Larry’s Used Cars’ first year of operations, the accounts receivable was $53,600. The company estimates that $1,200 of the year-end receivables will not be collected. Accounts receivable in the 2016 balance sheet will be valued at:
- $53,600.
- $54,800.
- $52,400.
- $ 1,200.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 02-04
Learning Objective: 02-05
Topic Area: Adjusting entries– Identifytypes
Topic area: Adjusting entries– Record and post
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
Feedback: Accounts receivable = $53,600 – 1,200 = $52,400
- Cal Farms reported supplies expense of $2,000,000 this year. The supplies account decreased by $200,000 during the year to an ending balance of $400,000. What was the cost of supplies the Cal Farms purchased during the year?
- $1,600,000.
- $1,800,000.
- $2,200,000.
- $2,400,000.
Answer: b
Level of Learning: 2 Medium
Learning Objective: 02-05
Learning Objective: 02-08
Topic Area: Adjusting entries – Record and post
Topic area: Conversion from cash basis to accrual basis
Blooms: Analyze
AACSB: Analytic AICPA: FN Measurement Feedback:
Supplies
Bal.
|
600,000? |
2,000,000 |
Bal. | 400,000 |
Supplies purchases: $400,000 + 2,000,000 – 600,000 = $1,800,000
- Which of the following is not an adjusting entry?
- Prepaid rent
Rent expense
- Cash
Deferred revenue
- Interest expense
Interest payable
- Salaries expense Salaries payable
Answer: b
Level of Learning: 2 Medium
Learning Objective: 02-05
Topic Area: Adjusting entries – Record and post
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
- The adjusting entry required when amounts previously recorded as deferred revenues are recognized includes:
- A debit to a liability.
- A debit to an asset.
- A credit to a liability.
- A credit to an asset.
Answer: a
Level of Learning: 2 Medium
Learning Objective: 02-05
Topic Area: Adjusting entries – Identify types
Blooms: Analyze
AACSB: Analytic
AICPA: BB Critical Thinking
- Which of the following accounts has a normal credit balance?
- Salary expense.
- Accrued income taxes payable.
- Prepaid rent.
Answer: b
Level of Learning: 1 Easy
Learning Objective: 02-01
Learning Objective: 02-05
Topic Area: The basic model – Account relationships
Topic Area: Prepare an adjusted trial balance
Blooms: Remember
AACSB: Reflective thinking
AICPA: BB Critical Thinking
- When a tenant makes an end-of-period adjusting entry credit to the “Prepaid rent” account:
- (S)he usually debits cash.
- (S)he usually debits an expense account.
- (S)he debits a liability account.
- (S)he) credits an owners’ equity account.
Answer: b
Level of Learning: 2 Medium
Learning Objective: 02-05
Topic Area: Adjusting entries – Record and post
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
- When a business makes an end-of-period adjusting entry with a debit to supplies expense, the usual credit entry is made to:
- Accounts payable.
- Retained earnings.
Answer: b
Level of Learning: 1 Easy
Learning Objective: 02-05
Topic Area: Adjusting entries – Record and post
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
- The adjusting entry required to record accrued expenses includes:
- A credit to cash.
- A debit to an asset.
- A credit to an asset.
- A credit to liability.
Answer: d
Level of Learning: 1 Medium
Learning Objective: 02-05
Topic Area: Adjusting entries – Record and post
Blooms: Analyze
AACSB: Analytic
AICPA: FN Measurement
- Carolina Mills purchased $270,000 in supplies this year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. What was supplies expense for Carolina Mills during the year?
- $300,000.
- $280,000.
- $260,000.
- $240,000.
Answer: c
Level of Learning: 2 Medium
Learning Objective: 02-05
Learning Objective: 02-08
Topic Area: Adjusting entries – Record and post
Topic area: Conversion from cash basis to accrual basis
Blooms: Analyze
AACSB: Analytic AICPA: FN Measurement