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Chapter 2 Review of the Accounting Process

True/False Questions

 

1. 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

 

 

2. 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

 

 

3. 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

 

 

4. 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

 

 

5. 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

 

 

6. 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

 

 

7. 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

 

 

8. 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

 

 

9. 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

 

 

 

10. 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

 

 

11. 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

 

 

12. 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

 

 

13. 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

 

 

14. 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

 

 

15. 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

 

 

16. 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

 

17. The accounting equation can be stated as:
    1. A + L – OE = 0.
    2. A – L + OE = 0.
    3. -A + L – OE = 0.
    4. 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

 

 

18. Examples of external transactions include all of the following except:
    1. Paying employee salaries.
    2. Purchasing equipment.
    3. Depreciating equipment.
    4. 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

 

 

19. Examples of internal transactions include all of the following except:
    1. Writing off an uncollectible account.
    2. Recording the expiration of prepaid insurance.
    3. Recording unpaid salaries.
    4. 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

 

 

20. 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:

1. Debit to investments.
2. Credit to retained earnings.
3. Credit to capital stock.
4. 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

 

 

21. Incurring an expense for advertising on account would be recorded by:
    1. Debiting liabilities.
    2. Crediting assets.
    3. Debiting an expense.
    4. 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

 

 

22. A sale on account would be recorded by:
    1. Debiting revenue.
    2. Crediting assets.
    3. Crediting liabilities.
    4. 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

 

 

23. 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:
    1. Debit to investments.
    2. Credit to retained earnings.
    3. Credit to capital stock.
    4. 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

 

 

24. 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.
    1. Debit to cash discount.
    2. Debit to note receivable.
    3. 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

 

 

 

 

 

25. Somerset Leasing received $12,000 for 24 months’ rent in advance. How should Somerset record this transaction?

 

1. Prepaid rent 12,000                   Rent expense                      12,000
2. 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

 

 

26. Davis Hardware Company uses a perpetual inventory system. How should Davis record the sale of merchandise, costing $620, and sold on account for $960?

 

1. 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

 

 

 

 

27. 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?

 

1. 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

 

 

28. Which of the following accounts has a normal debit balance?
    1. Accounts payable.
    2. Accrued taxes.
    3. Accumulated depreciation.
    4. 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

 

 

29. An example of a contra account is:
    1. Depreciation expense.
    2. Accounts receivable.
    3. Sales revenue.
    4. 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

 

 

30. Making insurance payments in advance is an example of:
    1. An accrued receivable transaction.
    2. An accrued liability transaction.
    3. A deferred revenue transaction.
    4. 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

 

 

31. Recording revenue that is earned, but not yet collected, is an example of:
    1. A prepaid expense transaction.
    2. A deferred revenue transaction.
    3. An accrued liability transaction.
    4. 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

 

 

32. When a magazine company collects cash for selling a subscription, it is an example of:
    1. An accrued liability transaction.
    2. An accrued receivable transaction.
    3. A prepaid expense transaction.
    4. 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

 

 

33. 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:
    400. $ 6,400.
    401. $134,400.
    402. $ 86,000.
    403. $ 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

 

 

34. Adjusting entries are primarily needed for:
    1. Cash basis accounting.
    2. Accrual accounting.
    3. Current value accounting.
    4. 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

 

 

35. Prepayments occur when:
    1. Cash flow precedes expense recognition.
    2. Sales are delayed pending credit approval.
    3. Customers are unable to pay the full amount due when goods are delivered.
    4. 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

 

 

36. Accruals occur when cash flows:
    1. Occur before expense recognition.
    2. Occur after revenue or expense recognition.
    3. Are uncertain.
    4. 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

 

 

37. 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:
    600. $53,600.
    601. $54,800.
    602. $52,400.
    603. $ 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

 

 

38. 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. $1,600,000.
    2. $1,800,000.
    3. $2,200,000.
    4. $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

 

39. Which of the following is not an adjusting entry?

1. Prepaid rent

Rent expense

1. Cash

Deferred revenue

1. Interest expense

Interest payable

1. 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

 

 

40. The adjusting entry required when amounts previously recorded as deferred revenues are recognized includes:
41. A debit to a liability.
42. A debit to an asset.
43. A credit to a liability.
44. 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

 

 

41. Which of the following accounts has a normal credit balance?
    1. Salary expense.
    2. Accrued income taxes payable.
    4. 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

 

 

42. When a tenant makes an end-of-period adjusting entry credit to the “Prepaid rent” account:
    1. (S)he usually debits cash.
    2. (S)he usually debits an expense account.
    3. (S)he debits a liability account.
    4. (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

 

 

43. When a business makes an end-of-period adjusting entry with a debit to supplies expense, the usual credit entry is made to:

1. Accounts payable.
4. 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

 

 

44. The adjusting entry required to record accrued expenses includes:
45. A credit to cash.
46. A debit to an asset.
47. A credit to an asset.
48. 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

 

 

 

 

 

 

 

 

45. 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?
46. $300,000.
47. $280,000.
48. $260,000.
49. $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