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Principles of Accounting

Chapter Two Test (Open Book Test)

Score: _________/170

Directions: Please concisely answer the following questions. You

may type your answers into a word processing or spreadsheet
document, or write your answers on this test.

1. Name the basic summary device of accounting. What letter of the alphabet
does it resemble? Name its two sides. (2 points)

2. Is the following statement true or false? Debit means decrease and credit
means increase. Explain your answer. (2 points)

3. Briefly describe the flow of accounting information. (3 points)

4. To what does the normal balance of an account refer? (2 points)

5. What does posting accomplish? Why is it important? (2 points)

6. Label each of the following transactions as increasing owners equity (+),

decreasing owners equity (-), or as having no effect on owners equity (0).
(8 points)
a. _____ Investment by the owner
b. _____ Revenue transaction
c. _____ Purchase of supplies on credit
d. _____ Expense transaction
e. _____ Cash payment on account
f. _____ Withdrawal by owner
g. _____ Borrowing money on a note payable
h. _____ Sale of service on account

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7. Jack Brown Campus Cleaners launders the shirts of customer Bobby Baylor,
who has a charge account at the cleaners. When Bobby picks up his clothes
and is short of cash, he charges it. Later, when he receives his monthly
statement from the cleaners, Bobby writes a check on Dear Old Dads bank
account and mails the check to Jack Brown (Of course, Bobby pays Dad back
later.) Identify the three entities and describe the transactions that affect
each entity by drawing T-Accounts. (25 points)

8. What is a compound journal entry? (4 points)

9. What is the advantage of analyzing transactions without the use of a

journal? Describe how this journal-less analysis works. (4 points)

Consider the manual accounting process used in Accounting I. Also
consider the Excel program we used. Briefly summarize the similarities
and differences between manual and computer-based accounting systems
in terms of journalizing, posting, and the preparation of financial documents.
(8 points)

When the ABC Company prepared their monthly Income Statement,
Insurance Expense was incorrectly stated. The bookkeeper had credited
Insurance Expense $200 on the 20th of the month instead of debiting the
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account. Explain how that will affect the Income Statement. Be specific. (5

When the XYZ Company prepared their monthly Trial Balance, the
totals were off. List several ways the companys accountant might find the
error. (10 points)

Design a Chart of Accounts for Gwynn Gorrell, Ltd. from the list below.
Categorize the accounts correctly and assign appropriate account numbers.
Be sure to identify in your COA whether accounts belong on the Balance
Sheet or Income Statement. Place that designation within your headings(20
Prepaid Insurance
Accounts Payable ABC Co.
Service Revenue
Rent Expense
Gwynn Gorrell, Drawing
Prepaid Rent
Office Supplies
Salary Expense

Machinery & Equipment

Gwynn Gorrell, Capital
Notes Payable
Interest Income
Notes Receivable
Accounts Receivable XYZ Co.
Sales Revenue

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Read the story below. Consider the ethical issue in this situation.
Using memorandum formatting, state below why you approve or
disapprove of Hunters management of Caritas funds. (20 points)
Caritas, a charitable organization in Encino, California,
has a standing agreement with Encino State Bank. The
agreement allows Caritas to overdraw its cash balance at
the bank when donations are running low. In the past,
Caritas managed funds wisely and rarely used this
privilege. Don Hunter has recently become the president
of Caritas. To expand operations, Hunter acquired office
equipment and spent large amounts for fundraising.
During Hunters presidency, Caritas has maintained a
negative bank balance of approximately $14,000.00.

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John Elfrink stated a new business called Elfrink Enterprises and it
completed the following transactions during its first six months of
operations (65 points):
a. Elfrink invests $50,000 cash and office equipment valued at
$25,000 in the business
b. Paid $200,000 for a building to be used as an office. Elfrink paid
$40,000 down in cash and signed a note payable promising to pay
the balance over the next four years
c. Purchased office supplies for $5,000 in cash
d. Purchased $27,000 of office equipment on credit
e. Performed services and billed the client $5,000 to be received later
f. Paid a local newspaper $800 for an advertisement of the new
g. Performed services for a client and collected $22,000 cash
h. Made a $3,000 cash payment on the equipment purchased in
transaction d
i. Received $4,000 cash from the client described in transaction e
j. Paid $2,000 cash for the office secretarys wages
k. Elfrink withdrew $2,400 cash from the company bank account for
personal living expenses.
1. Journalize the above transactions in the 11-column general journal (10 points)
2. Prepare T- Account Ledgers and post each transaction (10 points)
3. Prepare an Income Statement, Owners Equity Statement, and Balance Sheet (30 points)
4. Prepare a Statement of Cash Flows for the month (10 points)
5. Calculate the Return on Investment and Return on Equities Ratios (4 points)

Hint: You may want to use a template from Chapter One or Chapter Two in-class activities. (Sylvia
Workmans spreadsheet would be a good choice.)
use your notes, old assignments, and activities saved on your H:Drive. You may even
use your textbook. Good Luck.

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