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Chapter 3: Analyzing and Recording Transactions

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Chapter 3: Analyzing and Recording Transactions

36 problems · 0 figures

Multiple Choice 3.1 §3.1 source ↗

That a business may only report activities on financial statements that are specifically related to company operations, not those activities that affect the owner personally, is known as which of the following?
  1. a.
    separate entity concept
  2. b.
    monetary measurement concept
  3. c.
    going concern assumption
  4. d.
    time period assumption

Answer

A. separate entity concept

Multiple Choice 3.3 §3.1 source ↗

The system of using a monetary unit, such as the US dollar, to value the transaction is known as which of the following?
  1. a.
    separate entity concept
  2. b.
    monetary measurement concept
  3. c.
    going concern assumption
  4. d.
    time period assumption

Answer

B. monetary measurement concept

Multiple Choice 3.5 §3.1 source ↗

The independent, nonprofit organization that sets financial accounting and reporting standards for both public- and private-sector businesses that use generally accepted accounting principles (GAAP) in the United States is which of the following?
  1. a.
    Financial Accounting Standards Board (FASB)
  2. b.
    generally accepted accounting principles (GAAP)
  3. c.
    Securities and Exchange Commission (SEC)
  4. d.
    conceptual framework

Answer

A. Financial Accounting Standards Board (FASB)

Multiple Choice 3.7 §3.1 source ↗

These are used by the FASB, and it is a set of concepts that guide financial reporting.
  1. a.
    Financial Accounting Standards Board (FASB)
  2. b.
    generally accepted accounting principles (GAAP)
  3. c.
    Securities and Exchange Commission (SEC)
  4. d.
    conceptual framework

Answer

D. conceptual framework

Multiple Choice 3.9 §3.1 source ↗

Which of the following is the principle that a company must recognize revenue in the period in which it is earned; it is not considered earned until a product or service has been provided?
  1. a.
    revenue recognition principle
  2. b.
    expense recognition (matching) principle
  3. c.
    cost principle
  4. d.
    full disclosure principle

Answer

A. revenue recognition principle

Multiple Choice 3.11 §3.1 source ↗

Also known as the historical cost principle, ________ states that everything the company owns or controls (assets) must be recorded at their value at the date of acquisition.
  1. a.
    revenue recognition principle
  2. b.
    expense recognition (matching) principle
  3. c.
    cost principle
  4. d.
    full disclosure principle

Answer

C. cost principle

Multiple Choice 3.13 §3.2 source ↗

Which of the following does not accurately represent the accounting equation?
  1. a.
    Assets – Liabilities = Stockholders’ Equity
  2. b.
    Assets – Stockholders’ Equity = Liabilities
  3. c.
    Assets = Liabilities + Stockholders’ Equity
  4. d.
    Assets + Liabilities = Stockholders’ Equity

Answer

D. Assets + Liabilities = Stockholders’ Equity

Multiple Choice 3.15 §3.2 source ↗

Which of these accounts is an asset?
  1. a.
    Common Stock
  2. b.
    Supplies
  3. c.
    Accounts Payable
  4. d.
    Fees Earned

Answer

B. Supplies

Multiple Choice 3.17 §3.2 source ↗

If equity equals $100,000, which of the following is true?
  1. a.
    Assets exceed liabilities by $100,000.
  2. b.
    Liabilities exceed equity by $100,000.
  3. c.
    Assets + liabilities equal $100,000.
  4. d.
    None of the above is true.

Answer

A. Assets exceed liabilities by $100,000.

Multiple Choice 3.19 §3.3 source ↗

The step-by-step process to record business activities and events to keep financial records up to date is ________.
  1. a.
    day-to-day cycle
  2. b.
    accounting cycle
  3. c.
    general ledger
  4. d.
    journal

Answer

B. accounting cycle

Multiple Choice 3.21 §3.3 source ↗

________ takes all transactions from the journal during a period and moves the information to a general ledger (ledger).
  1. a.
    Hitching
  2. b.
    Posting
  3. c.
    Vetting
  4. d.
    Laxing

Answer

B. Posting

Multiple Choice 3.23 §3.4 source ↗

A company purchased a building twenty years ago for $150,000. The building currently has an appraised market value of $235,000. The company reports the building on its balance sheet at $235,000. What concept or principle has been violated?
  1. a.
    separate entity concept
  2. b.
    recognition principle
  3. c.
    monetary measurement concept
  4. d.
    cost principle

Answer

D. cost principle

Multiple Choice 3.25 §3.4 source ↗

What is the impact on the accounting equation when a payment of account payable is made?
  1. a.
    both sides increase
  2. b.
    both sides decrease
  3. c.
    only the Asset side changes
  4. d.
    neither side changes

Answer

B. both sides decrease

Multiple Choice 3.27 §3.4 source ↗

What is the impact on the accounting equation when a sale occurs?
  1. a.
    both sides increase
  2. b.
    both sides decrease
  3. c.
    only the Asset side changes
  4. d.
    neither side changes

Answer

A. both sides increase

Multiple Choice 3.29 §3.5 source ↗

Which of the following accounts is increased by a debit?
  1. a.
    Common Stock
  2. b.
    Accounts Payable
  3. c.
    Supplies
  4. d.
    Service Revenue

Answer

C. Supplies

Multiple Choice 3.31 §3.5 source ↗

Which of the following pairs increase with credit entries?
  1. a.
    supplies and retained earnings
  2. b.
    rent expense and unearned revenue
  3. c.
    prepaid rent and common stock
  4. d.
    unearned service revenue and accounts payable

Answer

D. unearned service revenue and accounts payable

Multiple Choice 3.33 §3.5 source ↗

Which of the following accounts will normally have a debit balance?
  1. a.
    Common Stock
  2. b.
    Fees Earned
  3. c.
    Supplies
  4. d.
    Accounts Payable

Answer

C. Supplies

Multiple Choice 3.35 §3.5 source ↗

Unearned service revenue occurs when which of the following occurs?
  1. a.
    company receives cash from a customer before performing the service
  2. b.
    company pays cash before receiving a service from a supplier
  3. c.
    company pays cash after receiving a service from a supplier
  4. d.
    company receives cash from a customer after performing a service

Answer

A. company receives cash from a customer before performing the service

Multiple Choice 3.37 §3.5 source ↗

Which of these transactions requires a debit entry to Cash?
  1. a.
    paid balance due to suppliers
  2. b.
    sold merchandise on account
  3. c.
    collected balance due from customers
  4. d.
    purchased supplies for cash

Answer

C. collected balance due from customers

Multiple Choice 3.39 §3.5 source ↗

Which of these accounts commonly requires both debit and credit entries?
  1. a.
    Sales Revenue
  2. b.
    Utilities Expense
  3. c.
    Accounts Receivable
  4. d.
    Common Stock

Answer

C. Accounts Receivable

Multiple Choice 3.41 §3.5 source ↗

Which of the following financial statements should be prepared first?
  1. a.
    Balance Sheet
  2. b.
    Income Statement
  3. c.
    Retained Earnings Statement
  4. d.
    Statement of Cash Flows

Answer

B. Income Statement

Question 3.1 §3.1 source ↗

Explain what conservatism means, and give an example in your own words.

Answer

Conservatism means that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount. For the example, answers will vary. Sample answer: When I am budgeting for revenue in our household, I estimate what amount we will be paid, and I always round slightly down and with the expenses round up slightly so that there is a little leftover.

Question 3.3 §3.2 source ↗

How do revenues and expenses affect the accounting equation?

Answer

Assets = Liabilities + Equity; Revenues increase equity, while expenses decrease equity.

Question 3.5 §3.3 source ↗

Which is the “book of original entry”?

Answer

The general journal.

Question 3.7 §3.4 source ↗

What is the effect on the accounting equation when a business pays the balance due on accounts payable?

Answer

Decreasing cash decreases assets; decreasing accounts payable decreases liabilities. Assets (decrease) = Liabilities (decrease) + Equity (no change).

Question 3.9 §3.4 source ↗

Why does the combined total of the company’s liabilities and equity always equal the total of the company’s assets?

Answer

The combined total of liabilities and equity equals the total of assets because there is a claim against every asset that the company owns. Creditors have claims against some of the company’s assets, in the amount of the liabilities owed to them; owners (stockholders) have claims against all the rest of the company’s assets. Equity is the total of assets minus liabilities, which is sometimes referred to as net assets.

Question 3.11 §3.5 source ↗

Will an accounts receivable balance increase with a debit or a credit entry? How do you know?

Answer

The total in accounts receivable will increase with a debit. We know this because accounts receivable is an asset account, and asset balances increase with debit entries.

Question 3.13 §3.5 source ↗

What is a journal?

Answer

A journal is a chronological listing of all of the recordable transactions that have occurred in a company.

Question 3.15 §3.5 source ↗

What does the term recognize mean?

Answer

Recognize means to make a journal entry.

Question 3.17 §3.5 source ↗

What is the general ledger?

Answer

It is a comprehensive listing for all accounts a company has and their balances.

Question 3.19 §3.5 source ↗

What is a T-account? When would we use T-accounts?

Answer

T-accounts represent the changes made to the general ledger. They are used as an illustrative tool when planning or discussing the effects a particular transaction will have on the accounting records. T-accounts are used in academic and business situations, as they are easier to sketch out than general journals.

Question 3.21 §3.5 source ↗

What is a prepaid account? What type of account is it?

Answer

A prepaid account is an account that shows the balance of money we have paid in advance of an expense being incurred. Prepaid accounts are assets.

Question 3.23 §3.5 source ↗

Explain what a T-account is and what purpose it serves.

Answer

A T-account is a visual depiction of the activity in an account. Entries made on the left side of the T-account represent debits, while entries on the right side represent credits. The ending account balance is the total net combined debits and credits for that account.

Question 3.25 §3.5 source ↗

What types of accounts are increased with a debit?

Answer

Asset accounts, dividend accounts, and expense accounts are increased with a debit. (Also, contra-liability accounts, contra-equity accounts, and contra-revenue accounts are increased with a debit.)

Question 3.27 §3.5 source ↗

What does an account’s “normal balance” indicate?

Answer

Normal balance refers to the expected ending balance for an account, based on the way that the account balance increases (either debit or credit.)

Question 3.29 §3.5 source ↗

Answer the following questions about the trial balance: What is the purpose of it? What is the primary usefulness of it?

Answer

The purpose of the trial balance is to recap the account balances, to ensure that debits equal credits. The trial balance is used to prepare the financial statements, in this order: Income Statement, Retained Earnings Statement, and Balance Sheet.

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Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.