Chapter 2—Analyzing Transactions

TRUE/FALSE

1. Accounts are records of increases and decreases in individual financial statement items.
ANS: T

2. A group of related accounts that make up a complete unit is called a ledger.

ANS: T

3. A chart of accounts is a listing of accounts that make up the journal.

ANS: F
4. Prepaid Insurance is an example of a liability.

ANS: F

5. Building is an example of an asset.

ANS: T

6. Notes Payable is an example of an asset.

ANS: F

7. Accounts Payable is an example of a liability.

ANS: T

8. Salaries Expense is an example of a liability.

ANS: F

9. Dividends is a commonly used term for liabilites.

ANS: F

10. Accounts in the ledger are usually maintained in the order in which they appear on the financial
statements.

ANS: T

11. A listing of the accounts in a ledger is a chart of accounts.

ANS: T

12. The right side of the account is referred to as the debit side.
 ANS: F

13. The three parts of a T account are the title, a space for recording increases, and a space for
recording decreases.

ANS: T

14. Because of the equality of debit and credit amounts for each transaction, the accounting system is
known as double-entry accounting.

ANS: T

15. Asset accounts are decreased by credits.

ANS: T

16. Liability accounts are increased by debits.

ANS: F

17. Expense accounts are increased by debits.

ANS: T

18. Revenue accounts are increased by credits.

ANS: T

19. Asset accounts are increased by debits.

ANS: T

20. Liability accounts are decreased by debits.

ANS: T

21. The normal balance of an asset account is a debit.

ANS: T

22. The normal balance of a liability account is a debit.

ANS: F

23. The normal balance of the dividends account is a debit.

ANS: T

24. The normal balance of an expense account is a credit.

 ANS: F

25. The normal balance of revenue accounts is credit.

ANS: T

26. The cash account is increased by a debit.

ANS: T

27. The accounts payable account is increased by a credit.

ANS: T

28. The accounts receivable account is increased by a debit.

ANS: T

29. The supplies account is increased by a debit.

ANS: T

30. The cash account is decreased by a credit.

ANS: T

31. Journalizing is the process of entering amounts in the ledger.

ANS: F

32. The process of transferring the data from the journal to the ledger accounts is posting.

ANS: T

33. The dollar amount of the debits for each transaction is equal to the dollar amount of the credits
for that transaction.

ANS: T

34. The order of the flow of accounting data is (1) recording in journal, (2) recording on trial balance,
(3) posting in ledger.

ANS: F

35. For a year's transactions for a typical small business, the cash account is likely to have both debit
and credit entries.

ANS: T
36. For a month's transactions for a typical medium-sized business, the salary expense account is
likely to have only debit entries.

ANS: T

37. For a month's transactions for a typical medium-sized business, the fees earned account is likely
to have only debit entries.

ANS: F

38. Journalizing a transaction with both the debit and the credit for $69 instead of $96 will cause the
trial balance to be out of balance.

ANS: F

39. A proof of the equality of debits and credits in the ledger at the end of an accounting period is
called a proof balance.

ANS: F

40. The erroneous arrangement of digits, such as writing $45 as $54, is called a transposition.

ANS: T

41. Posting a transaction twice will cause the trial balance totals to be unequal.

ANS: F

42. The erroneous moving of an entire number one or more spaces to the right or left, such as writing
$75 as $750, is called a slide.

ANS: TDIF: 1 OBJ: 06

43. Horizontal analysis is used to compare financial statements from different periods.

ANS: T

44. Horizontal analysis is used to compare financial statements from different companies.

ANS: T

45. Horizontal analysis is good for comparing companies of different sizes for analysis purposes.

ANS: T

46. Horizontal analysis is useful for investors to analyze a company's performance during a period of
time.

ANS: T
47. In horizontal analysis, the base for computing changes is generally the oldest period.

ANS: T
48. Horizontal analysis is not in common usage today.

ANS: F

MULTIPLE CHOICE

1. Accounts:
a. do reflect money amounts
b. are not used by entities that manufacture products
c. are not records of increases and decreases in individual financial statement items
d. are only used by large entities with many transactions

ANS: A
2. A group of related accounts that comprise a complete unit is called a(n):
a. journal
b. liability
c. ledger
d. transaction

ANS: C
3. Which of the following accounts is an asset account?
a. Salaries Expense
b. Dividends
c. Accounts Payable
d. Cash

ANS: D

4. Which of the following accounts is a liability account?

a. Notes Payable
b. Prepaid Insurance
c. Capital Stock
d. Cash

ANS: A
5. Which of the following accounts is a stockholders' equity account?
a. Cash
b. Accounts Payable
c. Prepaid Insurance
d. Capital Stock

ANS: D
6. The gross increases in stockholders' equity attributable to business activities are called:
a. assets
b. liabilities
c. revenues
d. net income

ANS: C
 7. A chart of accounts is:
a. the same as a balance sheet
b. usually a listing of accounts in alphabetical order
c. usually a listing of accounts in financial statement order
d. used in place of a ledger

ANS: C
8. The debit side of an account:
a. depends on whether the account is an asset, liability or stockholders' equity
b. can be either side of the account depending on how the accountant set up the system
c. is the right side of the account
d. is the left side of the account

ANS: D
9. An account is said to have a debit balance if:
a. the amount of the debits exceeds the amount of the credits
b. there are more entries on the debit side than on the credit side
c. its normal balance is debit without regard to the amounts or number of entries on the debit
side
d. the first entry of the accounting period was posted on the debit side

ANS: A
10. A debit may signify a(n):
a. decrease in asset accounts
b. decrease in liability accounts
c. increase in the capital stock account
d. decrease in dividends account

ANS: B
11. Which of the following types of accounts has a normal credit balance?
a. Dividends
b. Assets
c. Expense
d. Liability

ANS: D
12. Which of the following types of accounts has a normal debit balance?
a. Assets and expenses
b. Liability
c. Revenue and expenses
d. Assets and liabilities

ANS: A
13. Which of the following groups of accounts has a normal debit balance?
a. Revenues, Liabilities, Capital Stock
b. Capital Stock, Assets
c. Liability, Expenses
d. Assets, Expenses

ANS: D
14. A credit signifies a decrease in:
a. dividends
b. liabilities
 c. capital stock
d. revenue

ANS: A
15. A credit may signify a(n):
a. decrease in assets
b. decrease in liabilities
c. decrease in capital stock
d. decrease in revenue

ANS: A
16. A debit signifies a decrease in:
a. assets
b. expenses
c. dividends
d. revenue

ANS: D
17. Which of the following applications of the rules of debit and credit is true?
a. decrease Prepaid Insurance with a credit and the normal balance is a credit
b. increase Accounts Payable with a credit and the normal balance is a debit
c. increase Supplies Expense with a debit and the normal balance is a debit
d. decrease Cash with a debit and the normal balance is a credit

ANS: C
18. Which of the following describes the classification and normal balance of the accounts receivable
account?
a. Asset, debit
b. Liability, credit
c. Stockholders' equity, credit
d. Revenue, credit

ANS: A
19. Which of the following describes the classification and normal balance of the capital stock
account?
a. Stockholders' equity, debit
b. Revenue, credit
c. Liability, credit
d. Stockholders' equity, credit

ANS: D
20. Which of the following describes the classification and normal balance of the cash account?
a. Asset, debit
b. Liability, debit
c. Capital Stock, credit
d. Revenue, credit

ANS: A
21. Which of the following describes the classification and normal balance of the fees earned
account?
a. Asset, credit
b. Liability, credit
c. Stockholders' equity, debit
 d. Revenue, credit

ANS: D
22. The classification and normal balance of the accounts payable account is:
a. an asset with a credit balance
b. a liability with a credit balance
c. Stockholders' equity with a credit balance
d. revenue with a credit balance

ANS: B
23. The classification and normal balance of the dividend account is:
a. expense with a credit balance
b. an expense with a debit balance
c. a liability with a credit balance
d. Stockholders' equity with a debit balance

ANS: D
24. The classification and normal balance of the supplies account is a(n):
a. asset with a credit balance
b. asset with a debit balance
c. liability with a credit balance
d. liability with a debit balance

ANS: B
25. The classification and normal balance of the equipment account is:
a. an asset with a credit balance
b. a liability with a credit balance
c. expense with a debit balance
d. an asset with a debit balance

ANS: D
26. The classification and normal balance of the supplies account is an:
a. asset with a debit balance
b. asset with a credit balance
c. expense with a debit balance
d. liability with a credit balance

ANS: A
27. In which of the following types of accounts are increases recorded by debits?
a. Assets, Liabilities
b. Dividends, Liabilities
c. Expenses, Liabilities
d. Assets, Expenses

ANS: D
28. In which of the following types of accounts are increases recorded by credits?
a. Revenue, Liabilities
b. Dividends, Asset
c. Liability, Dividends
d. Expense, Liability

ANS: A
29. In which of the following types of accounts are decreases recorded by debits?
 a. Asset
b. Revenues
c. Expense
d. Dividends

ANS: B
30. In which of the following types of accounts are decreases recorded by credits?
a. Liability
b. Capital Stock
c. Dividends
d. Revenue

ANS: C
31. Which of the following entries records the dividends of cash by the corporation?
a. debit Capital Stock; credit Cash
b. debit Dividends; credit Cash
c. debit Salaries Expense; credit Cash
d. debit Salaries Expense; credit Salaries Payable

ANS: B
32. A credit balance in which of the following accounts would indicate a likely error?
a. Fees Earned
b. Salary Expense
c. Capital Stock
d. Accounts Payable

ANS: B
33. A debit balance in which of the following accounts would indicate a likely error?
a. Salaries Expense
b. Notes Payable
c. Dividends
d. Supplies

ANS: B
34. Which of the following entries records the payment of an account payable?
a. debit Cash; credit Account Payable
b. debit Accounts Receivable; credit Cash
c. debit Cash; credit Expense
d. debit Account Payable; credit Cash

ANS: D
35. Which of the following entries records the stockholders' investment of cash?
a. debit Capital Stock; credit Accounts Receivable
b. debit Cash; credit Capital Stock
c. debit Dividends; credit Cash
d. debit Cash; credit Dividends

ANS: B
36. Which of the following entries records the receipt of a utilities bill from the water company?
a. debit Utilities Expense; credit Utilities Payable
b. debit Utilities Payable; credit Accounts Receivable
c. debit Accounts Payable; credit Cash
d. debit Accounts Payable; credit Utilities Payable
 ANS: A
37. Office supplies were sold by J's Appliance Repair, Inc. at cost to another repair shop, with cash
received. Which of the following entries for Regan records this transaction?
a. Office Supplies, debit; Cash, credit
b. Office Supplies, debit; Accounts Payable, credit
c. Cash, debit; Office Supplies, credit
d. Accounts Payable, debit; Office Supplies, credit

ANS: C
38. Office supplies purchased by J's Appliance Repair on account were returned. Which of the
following entries for Regan records this transaction?
a. Cash, debit; Office Supplies, credit
b. Office Supplies, debit; Accounts Receivable, credit
c. Accounts Payable, debit; Office Supplies, credit
d. Office Supplies, debit; Accounts Payable, credit

ANS: C
39. Cash was paid by J's Appliance Repair, Inc. to creditors on account. Which of the following
entries for J's records this transaction?
a. Cash, debit; J's, Capital Stock, credit
b. Accounts Payable, debit; Cash, credit
c. Accounts Receivable, debit; Cash, credit
d. Accounts Payable, debit; Account Receivable, credit

ANS: B
40. The process of initially recording a business transaction is called:
a. trial balancing
b. posting
c. journalizing
d. balancing

ANS:
41. Which of the following entries records the acquisition of office supplies on account?
a. Office Supplies, debit; Cash, credit
b. Cash, debit; Office Supplies, credit
c. Office Supplies, debit; Accounts Payable, credit
d. Accounts Receivable, debit; Office Supplies, credit

ANS: C
42. Which of the following entries records the acquisition of equipment on account?
a. Equipment, debit; Accounts Payable, credit
b. Equipment, debit; Cash, credit
c. Accounts Payable, debit; Equipment, credit
d. Accounts Payable, debit; Notes Payable, credit

ANS: A
43. Which of the following entries records the payment of rent for the current month?
a. Cash, debit; Rent Expense, credit
b. Rent Expense, debit; Cash, credit
c. Rent Expense, debit; Accounts Receivable, credit
d. Accounts Payable, debit; Rent Expense, credit
 ANS: B
44. Which of the following entries records the receipt of cash from patients on account?
a. Accounts Payable, debit; Fees Earned, credit
b. Accounts Receivable, debit; Fees Earned, credit
c. Accounts Receivable, debit; Cash, credit
d. Cash, debit; Accounts Receivable, credit

ANS: D
45. Which of the following entries records the billing of patients for services performed?
a. Accounts Receivable, debit; Fees Earned, credit
b. Accounts Payable, debit; Cash, credit
c. Fees Earned, debit; Accounts Receivable, credit
d. Fees Earned, debit; Cash, credit

ANS: A
46. Which of the following entries records the collection of cash from cash customers?
a. Fees Earned, debit; Cash, credit
b. Fees Earned, debit; Accounts Receivable, credit
c. Cash, debit; Fees Earned, credit
d. Accounts Receivable, debit; Fees Earned, credit

ANS: C
47. Which of the following entries records the receipt of cash for two months' rent? The cash was
received in advance of providing the service.
a. Prepaid Rent, debit; Rent Revenue, credit.
b. Cash, debit; Unearned Revenue, credit.
c. Cash, debit; Prepaid Rent, credit.
d. Cash, debit; Rent Expense credit.

ANS: B
48. Which of the following entries records the stockholders receiving cash from the company for
personal use?
a. Wage Expense, debit: Cash, credit.
b. Capital Stock, debit; Wages Payable, credit.
c. No entry is necessary since the owner owns the cash and the entire business.
d. Dividends, debit; Cash, credit.

ANS: D
49. The process of rewriting the information from the journal into the ledger is called:
a. sliding
b. transposing
c. journalizing
d. posting

ANS: D
50. Proof that the dollar amount of the debits equals the dollar amount of the credits in the ledger
means:
a. all of the information from the journal was correctly transferred to the ledger
b. all accounts have their correct balances in the ledger
c. only the journal is accurate; the ledger may be incorrect
d. only that the debit dollar amounts equal the credit dollar amounts

ANS: D
51. The verification that the total dollar amount of the debits equals the total dollar amount of the
credits in the ledger is called a(n):
a. ledger
b. trial balance
c. account
d. balance sheet

ANS: B
52. An overpayment error was discovered in computing and paying the wages of a Better Buy, Inc.
employee. When Better Buy, Inc. receives cash from the employee for the amount of the
overpayment, which of the following entries will be made?
a. Cash, debit; Wages Expense, credit
b. Wages Payable, debit; Wages Expense, credit
c. Wages Expense, debit, Cash, credit
d. Cash, debit; Wages Payable, credit

ANS: A
53. If the two totals of a trial balance are not equal, it could be due to the following type of error:
a. failure to record a transaction
b. recording the same erroneous amount for both the debit and the credit parts of a
transaction
c. error in determining the account balances, such as a balance being incorrectly computed
d. recording the same transaction more than once

ANS: C