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Chapter 2
1. A balance sheet format reports that assets equal liabilities plus stockholders’
equity.
True False
2. Liability accounts are reported on the income statement as they represent goods or services consumed or
used.
True False
3. A primary objective of accounting is to disclose the fair market value of assets on the balance sheet so
investors and creditors know their current value.
True False
4. Under the separate entity assumption, it is assumed that a business will continue to operate into the
foreseeable future.
True False
5. The historical cost principle measures assets and liabilities at the historical cash-equivalent amounts.
True False
6. Liabilities are listed on the balance sheet in the order of their maturity, meaning how soon they are due
to be paid.
True False
7. An “account” is a standardized format used to accumulate the effects of transactions on each financial
statement item.
True False
8. The payment of a liability in cash will decrease stockholders’ equity.
True False
9. The purchase of equipment for cash has no effect on total assets.
True False
10. The duality of effects means that every transaction must affect both sides of the accounting equation.
True False
11. When a business borrows money from a bank, both the left and right sides of the accounting equation
increase.
True False 1
12. It is not possible for the left side of the accounting equation to both increase and decrease as a result of
the same transaction.
True False
13. A T-account shows total debits of $26,000 and total credits of $20,000; therefore, it has a $6,000 debit
balance.
True False
14. Debits always increase and credits always decrease an account.
True False
15. The chart of accounts of a company is the complete listing of all accounts and accounts numbers.
True False
16. If you want to know the balance of the supplies account, that information would be found in the general
ledger.
True False
17. The normal balance for an asset account is a debit and the normal balance for a liability account is a
credit.
True False
18. The financial leverage ratio is computed by dividing average total assets by average stockholders’
equity. True False
19. When a company borrows money from a bank, it leads to a cash inflow from an investing activity.
True False
20. When a loan is repaid to the bank it leads to an inflow of cash from a financing activity.
True False
21. Which of the following statements about stockholders’ equity is not correct?
A. Stockholders’ equity is the shareholders’ residual interest in the company resulting from the difference
in assets and liabilities.
B. Stockholders’ equity accounts are increased with credits.
C. Stockholders’ equity results only from contributions of the owners.
D. The purchase of land for cash has no effect on stockholders’ equity.
22. All liabilities appear on the
A. Balance sheet.
B. Income statement.
C. Statement of stockholders’ equity.
D. Statement of cash flows.
2
23. Morgan Company owes Regan Company $1,000, Morgan would reflect this on its
A. statement of cash flows.
B. income statement.
C. balance sheet.
D. statement of stockholders’ equity.
24. The assumption that a business can continue to remain in operation into the future is the
A. historical cost principle.
B. unit-of-measure assumption.
C. continuity assumption.
D. separate-entity assumption.
25. Assets are defined as
A. resources with possible future economic benefits owed by an entity as a result of past
transactions.
B. resources with probable future economic benefits owned by an entity as a result of past transactions.
C. resources with probable future economic benefits owned by an entity as a result of future
transactions.
D. resources with possible future economic benefits owed by an entity as a result of future transactions.
26. The assumption that the assets and liabilities of the business are accounted for on the books of the
company but not included in the records of the owner is the
A. unit-of-measure assumption.
B. continuity assumption.
C. historical cost principle.
D. separate entity assumption.
27. Liabilities are defined as
A. possible debts or obligations of an entity as a result of future transactions which will be paid with
assets
or services.
B. possible debts or obligations of an entity as a result of past transactions which will be paid with assets
or services.
C. probable debts or obligations of an entity as a result of future transactions which will be paid with
assets or services.
D. probable debts or obligations of an entity as a result of past transactions which will be paid with
assets or services.
28. Stockholders’ equity is
A. probable debts or obligations of an entity as a result of past transactions which will be paid with
assets or services.
B. assets minus liabilities.
C. probable future economic benefits owned by an entity as a result of past transactions.
D. the financing provided by the creditors of a business.
29. Chad Jones is the sole owner and manager of Jones Glass Repair Shop. In 2009, Jones purchases a truck
for $30,000 to be used in the business. Which of the following fundamentals requires Jones to record the
truck at the price paid to buy it?
A. Separate-entity assumption.
B. Revenue principle.
C. Full disclosure.
D. Historical cost principle.
3
30. On a balance sheet, assets are listed in the order of
A. dollar amount (largest first).
B. date of acquisition (earliest first).
C. ease of conversion to cash.
D. importance to the operation of the business.
Chapter
2
1
. A balance sheet format reports that assets equal liabilities plus stockholders’
equity.
True False
2. Liability accounts are reported on the income statement as they represent goods or services consumed or
used.
True False
3
. A primary objective of accounting is to disclose the fair market value of assets on the balance sheet so
investors and creditors know their current value.
True False
4
. Under the separate entity assumption, it is assumed that a business will continue to operate into the
foreseeable future.
True False
5
. The historical cost principle measures assets and liabilities at the historical cash-equivalent amounts.
True False
6
. Liabilities are listed on the balance sheet in the order of their maturity, meaning how soon they are due
to be paid.
True False
7
. An “account” is a standardized format used to accumulate the effects of transactions on each financial
statement item.
True False
8
. The payment of a liability in cash will decrease stockholders’ equity.
True False
9
. The purchase of equipment for cash has no effect on total assets.
True False
10. The duality of effects means that every transaction must affect both sides of the
accounting equation.
True False
11. When a business borrows money from a bank, both the left and right sides of the accounting equation
increase.
True False
1
12. It is not possible for the left side of the accounting equation to both increase and decrease as a result of
the same transaction.
True False
13. A T-account shows total debits of $26,000 and total credits of $20,000; therefore, it has a $6,000 debit
balance.
True False
14. Debits always increase and credits always decrease an account.
True False
15. The chart of accounts of a company is the complete listing of all accounts and accounts numbers.
True False
16. If you want to know the balance of the supplies account, that information would be found in the general
ledger.
True False
17. The normal balance for an asset account is a debit and the normal balance for a liability account is a
credit.
True False
18. The financial leverage ratio is computed by dividing average total assets by average stockholders’
equity.
True False
19. When a company borrows money from a bank, it leads to a cash inflow from an investing activity.
True False
20. When a loan is repaid to the bank it leads to an inflow of cash from a financing activity.
True False
21. Which of the following statements about stockholders’ equity is not
correct?
A.
Stockholders’ equity is the shareholders’ residual interest in the company resulting from the difference
in assets and liabilities.
B.
Stockholders’ equity accounts are increased with credits.
C.
Stockholders’ equity results only from contributions of the owners.
D.
The purchase of land for cash has no effect on stockholders’ equity.
22. All liabilities appear on the
A. Balance sheet.
B. Income
statement.
C. Statement of stockholders’ equity.
D. Statement of cash flows.
2
23. Morgan Company owes Regan Company $1,000, Morgan would reflect this on its
A. statement of cash flows.
B. income statement.
C. balance sheet.
D. statement of stockholders’ equity.
24. The assumption that a business can continue to remain in operation into the future is the
A. historical cost principle.
B. unit-of-measure assumption.
C. continuity assumption.
D. separate-entity assumption.
25. Assets are defined as
A. resources with possible future economic benefits owed by an entity as a result of past
transactions.
B. resources with probable future economic benefits owned by an entity as a result of past transactions.
C. resources with probable future economic benefits owned by an entity as a result of future
transactions.
D. resources with possible future economic benefits owed by an entity as a result of future transactions.
26. The assumption that the assets and liabilities of the business are accounted for on the books of the
company but not included in the records of the owner is the
A. unit-of-measure assumption.
B. continuity assumption.
C. historical cost principle.
D. separate entity assumption.
27. Liabilities are defined as
A. possible debts or obligations of an entity as a result of future transactions which will be paid with
assets
or services.
B. possible debts or obligations of an entity as a result of past transactions which will be paid with assets
or services.
C. probable debts or obligations of an entity as a result of future transactions which will be paid with
assets or services.
D. probable debts or obligations of an entity as a result of past transactions which will be paid with
assets or services.
28. Stockholders’ equity is
A. probable debts or obligations of an entity as a result of past transactions which will be paid with
assets or services.
B. assets minus liabilities.
C. probable future economic benefits owned by an entity as a result of past transactions.
D. the financing provided by the creditors of a business.
29. Chad Jones is the sole owner and manager of Jones Glass Repair Shop. In 2009, Jones purchases a truck
for $30,000 to be used in the business. Which of the following fundamentals requires Jones to record the
truck at the price paid to buy it?
A. Separate-entity assumption.
B. Revenue principle.
C. Full disclosure.
D. Historical cost principle.
3
30. On a balance sheet, assets are listed in the order of
A. dollar amount (largest first).
B. date of acquisition (earliest first).
C. ease of conversion to cash.
D. importance to the operation of the business.
31. In what order would the assets of Mertz Company be listed on their balance sheet?
A. Cash, Accounts Receivable, Inventory, Plant and Equipment
B. Cash, Inventory, Accounts Receivable, Plant and Equipment
C. Cash, Accounts Receivable, Marketable Securities, Inventory
D. None of these are in correct order
32. We would report changes in stockholders’ equity caused by operating activities
A. in an asset account.
B. in a contributed capital account.
C. in a liability account.
D. in the retained earnings account.
33. Which of the following events will cause retained earnings to increase?
A. Dividends declared by the Board of Directors.
B. Net income reported for the period.
C. Net loss reported for the period.
D. Issuance of stock in the business
34. Which of the following transactions would cause retained earnings to increase?
A. Collection of a customer’s account.
B. Loan from a bank.
C. Sale of service to a customer.
D. Wage costs owed to employees.
35. The primary objective of financial accounting is to
A. provide information about a business to internal parties.
B. provide information about a business’ future business strategies.
C. provide useful economic information about a business to help external parties make sound financial
decisions.
D. provide predictions of future stock price.
36. Which of the following would not be considered a current liability?
A. Accounts Payable
B. Prepaid Expenses
C. Taxes Payable
D. Utilities Payable
37. Which of the following would not be considered a current asset?
A. Inventories
B. Prepaid Expenses
C. Land
D. Accounts Receivable
4
38. “Accounts Payable” refers to
A. an amount owed to a business.
B. an amount a business owes to a third party.
C. the bottom line on the income statement.
D. the total cash paid by a business during the year.
39. Which of the following is not a liability?
A. Accounts payable
.
B. Retained earnings.
C. Notes payable.
D. Unearned Revenue.
40. Which of the following liability accounts is usually not satisfied by payment of cash?
A. Accounts payable
B. Unearned revenues
C. Taxes payable
D. All of these are satisfied by paying cash
41. An example of an external exchange would be
A. the purchase of inventory on credit from a supplier.
B. cash received from a credit customer.
C. cash paid for wages to employees.
D. all answers show external exchanges.
42. Michael Corporation received $200,000 cash invested by its owners. The effect on the accounting
equation was
A. assets and liabilities each increased by $200,000.
B. assets and revenues each increased by $200,000.
C. stockholders’ equity and revenues each increased by $200,000.
D. stockholders’ equity and assets each increased by $200,000.
43. WindNet Corporation purchased factory equipment for $38,000 cash. Which of the following statements
regarding this purchase is incorrect?
A. The net income for Mika will be reduced by the $38,000 expense of the factory equipment.
B. The total amount of assets on Mika’s balance sheet will not change.
C. The total liabilities will not change.
D. The amount of the stockholders’ equity on Mika’s balance sheet will not change.
44. Which of the following direct effects on the accounting equation is not possible as a result of transaction
analysis?
A. Increase a liability and decrease an asset.
B. Increase stockholders’ equity and increase an asset.
C. Increase an asset and decrease an asset.
D. Decrease stockholders’ equity and decrease an asset.
45. Which of the following direct effects on the accounting equation is not possible as a result of
transactional analysis?
A. An increase in an asset and a decrease in another asset.
B. A decrease in a liability and an increase in an asset.
C. A decrease in stockholders’ equity and a decrease in an asset.
D. An increase in an asset and an increase in stockholders’ equity.
5
46. Assume a company’s January 1, 2009, financial position was: Assets, $150,000 and Liabilities, $60,000.
During January 2009, the company completed the following transactions: (A) paid on a note payable
$10,000 (no interest was paid); (B) collected an accounts receivable, $9,000; (C) paid an accounts
payable, $5,000; and (D) purchased a truck, $5,000 cash, and a $20,000 note payable from a bank. The
company’s January 31, 2009 financial position is
A.
B.
C.
D.
47. The purchase of equipment with a note payable would
A. increase cash.
B. decrease cash.
C. increase a liability.
D. decrease a liability.
48. The purchase of supplies for cash would
A. not change total assets.
B. increase total assets.
C. increase liabilities.
D. decrease liabilities.
49. Payment of a liability would
A. decrease stockholders’ equity.
B. decrease assets.
C. not affect assets.
D. increase stockholders’ equity.
50. The collection of an account receivable from a customer would
A. increase liabilities.
B. decrease liabilities.
C. not affect liabilities.
D. decrease stockholders’ equity.
51. The Mariah Company has an $80,000 debit in its assets, a $36,000 credit in its liabilities, and a $12,000
credit in retained earnings. What is the balance in the contributed capital account?
A. $44,000 credit.
B. $32,000 credit.
C. $48,000 credit
D. $44,000 debit.
52. The duality (or duality of effects) concept states
A. there is more than one way of looking at any situation.
B. every transaction has good and bad ramifications.
C. there are two entities involved in every transaction.
D. every transaction has at least two effects on the accounting equation.
6
53. Which of the following will not result in recording a transaction?
A. Signing a contract to have an outside cleaning service clean offices nightly.
B. Paying employees their wages.
C. Selling stock to investors.
D. Buying equipment and agreeing to pay a note payable and interest at the end of a year.
54. Which of the following transactions will cause both the left and right side of the accounting equation to
decrease?
A. We collect cash from a customer who owed us money.
B. We pay a supplier for inventory we previously bought on account.
C. We borrow money from the bank.
D. We purchase equipment for cash.
55. When a company buys equipment for $150,000 and pays for one third in cash and the other two thirds is
financed by a note payable, the following are the effects on the accounting equation:
A. cash decreases by $50,000.
B. equipment increases by $100,000.
C. liabilities increase by $150,000.
D. total assets increase by $200,000.
56. The effect on total assets of the purchase of land for cash is
A. an increase in total assets.
B. a decrease in total assets.
C. total assets remain unchanged.
D. an increase in total assets and total liabilities.
57. Which of the following is not one of the three steps in the transaction analysis process?
A. Identify the accounts affected and classify them by type of account.
B. Determine the direction of the effect on each account.
C. Transfer the effects of the transaction to the balance sheet.
D. Verify that the accounting equation remains in balance.
58. Sale of stock to investors for $300,000 cash would
A. increase cash by a debit and increase contributed capital by a credit.
B. increase cash by a credit and increase contributed capital by a debit.
C. increase retained earnings by a debit and increase cash by a credit.
D. increase cash by a debit and increase retained earnings by a credit.
59. Borrowing $100,000 of cash from First National Bank would
A. increase cash by a credit and increase notes payable by a debit.
B. increase notes payable by a debit and increase cash by a debit.
C. increase notes payable by a credit and increase cash by a debit.
D. decrease cash by a debit and decrease notes payable by a credit.
60. Water Corporation was organized on October 1, 2009. Water Corporation issued shares of capital stock
to each of the five owners who paid in a total of $250,000. On the basis of transactional analysis, the
following entry should be recorded.
A. A debit (increase) to cash for $250,000 and a credit (increase) to revenue for $250,000.
B. A credit (decrease) to cash for $250,000 and a debit (increase) to retained earnings for $250,000.
C. A credit (decrease) to cash for $250,000 and a debit (decrease) to contributed capital for $250,000.
D. A debit (increase) to cash for $250,000 and a credit (increase) to contributed capital for $250,000.
7
61. Cadet Company paid an accounts payable of $1,000. This transaction should be recorded as follows on
the payment date.
A.
B.
C.
D.
62. The word credit means
A. an increase to an account.
B. a decrease to an account.
C. an entry to the right side of an account.
D. an entry to the left side of an account.
63. Which of the following is true?
A. Assets increase on their right side because they are on the right side of the accounting equation.
B. Liabilities increase on their right side because they are on the right side of the accounting equation.
C. Stockholders’ equity accounts increase on their left side because they are on the left side of the
accounting equation.
D. The accounting equation only has to be in balance whenever financial statements are being prepared.
64. The accounts payable account has a beginning balance of $12,000 and we purchased $50,000 of
inventory on credit during the month. The ending balance was $10,000. How much did we pay our
creditors during the month?
A. $50,000
B. $52,000
C. $60,000
D. $62,000
65. Which of the following statements concerning the debit-credit feature of the accounting equation is
correct?
A. Debits are entered on the right and credits are entered on the left.
B. A debit entry will decrease a liability account and increase an asset account.
C. Stock sold to investors increases stockholders’ equity and is recorded as a debit.
D. A liability account should be credited upon payment of an account payable.
66. The financial leverage ratio is computed by taking
A. total assets divided by total liabilities.
B. average total assets divided by average stockholders’ equity.
C. average total assets divided by average total liabilities.
D. total assets divided by total stockholders’ equity.
8
67. The usefulness of the financial leverage ratio is that it allows interested parties to assess
A. how the company finances its assets.
B. the relative risk assumed by the company caused by the use of debt financing.
C. whether the company should expand its use of debt to finance assets.
D. All of these are uses of the ratio.
68. When a company has a financial leverage ratio close to 1 to 1,
A. the company is primarily using debt financing for acquisition of its assets.
B. the creditors of the company would be very unlikely to give a loan to the company since debt is high.
C. the return to stockholders is lower than it would be if the ratio was higher.
D. actual earnings are equal to the estimated earnings.
69. The financial leverage ratio for a company was 2.54 in 2003 while its competitor’s ratio was 1.26 for the
same year. The higher ratio for the first company indicates
A. it uses less debt than equity financing to acquire its assets.
B. the competitor finances more of its assets using equity rather than debt.
C. the first company has a lower level of financial risk than its competitor.
D. None of these statements are true.
70. Which of the following transactions would cause cash inflow from a financing activity for Boeing
Corporation?
A. Sold shares of stock in Boeing Corp.
B. Sold shares of Mobil Corporation stock.
C. Sold used equipment, which had been used in the production of aircraft.
D. Both A and C create financing cash inflow.
71. An example of an investing transaction would be
A. purchasing equipment for cash.
B. buying inventory from a supplier on credit.
C. selling stock to investors for cash.
D. All of these are investing transactions.
72. An example of an operating activity would be
A. purchasing equipment for cash.
B. buying inventory from a supplier on credit.
C. selling stock to investors for cash.
D. repaying the principle on a bank loan.
73. Financing activities
A. primarily deal with securing money by bank loans or selling stock to investors.
B. primarily are connected to the income producing activities of the company as reported on the income
statement.
C. primarily deal with buying and building facilities used over many years by the business.
D. primarily deal with selling facilities once used by the business.
9
74. Burger Palace Corporation reports a net cash used for investing activities of $3.4 million and a net cash provided by financing activities of $1.6 million. If cash increased by $1.1 million during the year, what
was the net cash flow provided from operating activities?
A. $0.7 million
B. $2.9 million
C. $3.9 million
D. $6.1 million
75. Which of the following would cause a cash outflow connected to investing activities?
A. Purchased shares of stock in another company.
B. Paid a dividend to our stockholders.
C. Issued more shares of our company’s stock.
D. Cash sales of our company’s products.
76. When a new business is just starting up, it must first
A. generate positive cash flow through successful operations.
B. acquire the assets both long-lived and short-lived so they can operate.
C. acquire financing from issuance of stock and borrowing from creditors.
