Financial Accounting – Spring 2024

Review questions on Chapters 1 and 2

1. ……………..provides information for external decision makers, such as owners,
Investors, Creditors to whom the business owes money, Taxing authorities to whom the
business owes taxes or customers.
a) financial accounting b) managerial accounting c) cost accounting d) none of these

2. …………..provides information to internal decision-makers like board of directots,

managers and employees.
a) Financial Accounting B) managerial accounting c) cost accounting d) none of these

3. A chart of accounts for a business firm

a) is a graph.
b) indicates the amount of profit or loss for the period.
c) lists the accounts and account numbers that identify their location in the ledger.
d) shows the balance of each account in the general ledger.

4. Which of the following are most likely to be users of managerial accounting information?
a) Potential investors b) Creditors c) Customers d) Company managers

5. Which of the following are likely to be users of financial accounting information?

a) taxing authorities b) creditors c) potential external investors d) all of the above

6. The economic entity assumption requires that the activities

a. of different entities can be combined if all the entities are corporations.
b. must be reported to the Securities and Exchange Commission.
c. of a sole proprietorship cannot be distinguished from the personal economic events of its
owners.
d. of an entity be kept separate from the activities of its owner.

7. Which of the following concepts (or principles) require an assumption that the entity will
remain in operation for the foreseeable future?
a) entity concept b) faithful representation principle
c) going-concern concept d) cost principle

8. Which of the following concepts (or principles) would require that an item be recorded
at the amount actually paid rather than at the estimated market value?
a) going-concern concet b) entity concept
c) cost principle d) stable monetary unit concept

9. Lindsey Smith decided to start her own CPA practice as a professional corporation,
Smith CPA PC. Her corporation purchased an office building for $35, 000 which her real
estate agent said was worth $50,000 in the current market. The corporation records the
building as a $50,000 asset because Lindsey believes that is the real value of the building.
Which of the following concepts or principles of accounting is being violated?
a) cost principle b) entity concept c) stable monetary unit concept d) going-concern concept

10. Which of the following is the CORRECT accounting equation?

A) Assets + Liabilities = Owners' equity B) Assets = Liabilities + Owners' equity
C) Assets + Revenue = Owners' equity D) Assets + Revenue = Liabilities + Expenses

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11. Assets are $150,000 and total liabilities are $90,000. Total owners' equity will be:
A) $180,000. B) $300,000. C) $240,000. D) $60,000.

12. Assets are $270,000 and owner's equity is $90,000. Liabilities will be:
A) $60,000. B) $360,000. C) $270,000. D) $180,000.

13. The Dulce Company has five plants nationwide that cost a total of $200 million. The
current fair value of the plants is $600 million. The plants will be recorded and reported
as assets at
a. $200 million. b. $600 million. c. $400 million. d. $800 million.

14. A basic assumption of accounting that requires activities of an entity be kept separate
from the activities of its owner is referred to as the
a. stand alone concept. b. monetary unit assumption.
c. corporate form of ownership. d. economic entity assumption.

15. Sam Ryo is the proprietor (owner) of Sam's, a retailer of golf apparel. When recording
the financial transactions of Sam's, Sam does not record an entry for a car he purchased
for personal use. Sam took out a personal loan to pay for the car. What accounting
concept guides Sam's behavior in this situation?
a. Pay back concept b. Economic entity assumption
c. Cash basis concept d.Monetary unit assumption

16. The common characteristic possessed by all assets is

a. long life. b. great monetary value. c.tangible nature. d.future economic benefit.

17. Capital is
a. an owner's permanent investment in the business.
b. equal to liabilities minus owner's equity.
c. equal to assets minus owner's equity.
d. equal to liabilities plus drawings.

18. Owner's equity is increased by

a. drawings. b. revenues. c. expenses. d. liabilities.

19. Owner's equity is decreased by

a. assets. b. revenues. c. expenses. d. liabilities.

20. ABC Company had net income of L.E. 20,000 for the year ending Dec, 2023. Its beginning
and ending total assets were L.E. 60,000 and L.E. 80,000, respectively, what is ABC’s
return on assets (ROA)
A) 30% B) 28.57% C) 20 % D) none of these

21. If services are rendered for credit, then

a. assets will decrease.
c. owner's equity will increase.
22. If expenses are paid in cash, then
a. assets will increase.
c. owner's equity will increase.
b. liabilities will increase.
d. liabilities will decrease.
b. liabilities will decrease.
d. assets will decrease.

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23. If an owner makes a withdrawal of cash from a proprietorship, then

a. there has been a violation of accounting principles.
b. owner's equity will increase.
c. owner's equity will decrease.
d. there will be a new liability showing the owner owes money to the business.

24. ABC Company had net income of L.E. 20,000 for the year ending Dec, 2023. Its beginning
and ending total assets were L.E. 60,000 and L.E. 80,000, respectively, what is ABC’s
return on assets (ROA)
A) 30% B) 28.57% C) 20 % D) none of these

25. Big Bite Diner received a bill of $800 from the Blackstone Wine Advertising Agency. The
owner, K. T. Lang, is postponing payment of the bill until a later date. The effect on
specific items in the basic accounting equation is
a. a decrease in Cash and an increase in Accounts Payable.
b. a decrease in Cash and an increase in Owner’s Capital.
c. an increase in Accounts Payable and a decrease in Owner’s Capital.
d. a decrease in Accounts Payable and an increase in Owner’s Capital.

26. Mellon Company purchases $1,500 of equipment from Office Equipment Inc. for cash.
The effect on the components of the basic accounting equation of Mellon Company is
a. an increase in assets and liabilities. b. a decrease in assets and liabilities.
c. no change in total assets. d. an increase in assets and a decrease in liabilities.

27. U.S. standards are referred to as

a. IFRS. b. GAAP. c. IASB. d. FASB.

28. The right side of an account

a. is the correct side. b. reflects all transactions for the accounting period.
c. shows all the balances of the accounts in the system. d. is the credit side.

29. An account consists of

a. a title, a debit balance, and a credit balance. b. a title, a left side, and a debit balance.
c. a title, a debit side, and a credit side. d. a title, a right side, and a debit balance.

30. A T-account is
a. a way of depicting the basic form of an account.
b. what the computer uses to organize bytes of information.
c. a special account used instead of a trial balance.
d. used for accounts that have both a debit and credit balance.

31. Credits
a. decrease both assets and liabilities. b. decrease assets and increase liabilities.
c. increase both assets and liabilities. d. increase assets and decrease liabilities.

32. The normal balance of any account is the

a. left side. b. right side.
c. side which increases that account. d. side which decreases that account.

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33. The normal balance of expenses, drawings and assets is……. while the normal balance of
revenues, retained earnings, liabilities and capital is…….
a. debit, decrease b. credit, incresae c. credit, debit d. debit, credit

34. While the balance sheet shows………, Income statement shows……

a. performance, liquidity b. financial position, risk
c. risk, performance d. financial position, profitability

35. The double-entry system requires that each transaction must be recorded
a. in at least two different accounts. b. in two sets of books.
c. in a journal and in a ledger. d. first as a revenue and then as an expense.

36. The best interpretation of the word credit is the

a. offset side of an account. b. increase side of an account.
c. right side of an account. d. decrease side of an account.

37. On January 14, Maxine Industries purchased supplies of $900 on account. The entry to
record the purchase will include
a. a debit to Supplies and a credit to Accounts Payable.
b. a debit to Supplies Expense and a credit to Accounts Receivable.
c. a debit to Supplies and a credit to Cash.
d. a debit to Accounts Receivable and a credit to Supplies.

38. On July 7, 2016, Rancho Realty Co. performed cash services of $1,900. The entry to
record this transaction would include
a. a debit to Service Revenue of $1,900. b. a credit to Accounts Receivable of $1,900.
c. a debit to Cash of $1,900. d. a credit to Accounts Payable of $1,900.

39. The final step in the recording process is to

a. analyze each transaction. b. enter the transaction in a journal.
c. prepare a trial balance. d. transfer journal information to ledger accounts.

40. The usual sequence of steps in the transaction recording process is:
a. journal analyze ledger. b. analyze journal ledger.
c. journal ledger analyze. d. ledger journal analyze.

41. In recording business transactions, evidence that an accounting transaction has taken
place is obtained from
a. business documents. b. the Internal Revenue Service.
c. the public relations department. d. the SEC.

42. A journal provides

a. the balances for each account.
b. information about a transaction in several different places.
c. a list of all accounts used in the business.
d. a chronological record of transactions.

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43. When three or more accounts are required in one journal entry, the entry is referred to as
a
a. compound entry. b. triple entry. c. multiple entry. d. simple entry.

44. When two accounts are required in one journal entry, the entry is referred to as a
a. balanced entry. b. simple entry. c. posting. d. nominal entry.

45. The entire group of accounts maintained by a company is called the

a. chart of accounts. b. general journal. c.general ledger. d.trial balance.

46. A chart of accounts usually starts with

a. asset accounts. b. expense accounts. c. liability accounts. d.revenue accounts.

47. The procedure of transferring journal entries to the ledger accounts is called
a. journalizing. b. analyzing. c. reporting. d.posting.

48. Posting
a. should be performed in account number order.
b. accumulates the effects of journalized transactions in the individual accounts.
c. involves transferring all debits and credits on a journal page to the trial balance.
d. is accomplished by examining ledger accounts and seeing which ones need updating.

49. A trial balance is a listing of

a. transactions in a journal. b. the chart of accounts.
c. general ledger accounts and balances. d. the totals from the journal pages.

50. Which of the following rules is incorrect?

a. Credits decrease the owner’s drawings account.
b. Debits increase the owner’s capital account.
c. Credits increase revenue accounts.
d. Debits decrease liability accounts.

51. Which of the following statements is false?

a. Revenues increase owner’s equity.
b. Revenues have normal credit balances.
c. Revenues are a positive factor in the computation of net income.
d. Revenues are increased by debits.

52. Haselhof Company purchases equipment for $2,400 and supplies for $700 from Behrman
Co. for $3,100 cash. The entry for this transaction will include a
a. debit to Equipment $2,400 and a debit to Supplies Expense $700 for Behrman.
b. credit to Cash for Behrman.
c. credit to Accounts Payable for Haselhof.
d. debit to Equipment $2,400 and a debit to Supplies $700 for Haselhof.

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53. Sara Bernheat withdraws $700 cash from her business for personal use. The entry for
this transaction will include a debit of $700 to
a. Owner’s Drawings. b. Owner’s Capital.
c. Owner’s Salaries Expense. d. Salaries and Wages Expense.

54. ABC Company paid its monthly rent. The effect of this transaction on the accounting
equation is:
A Increase in assets, B Decrease in assets, C Decrease in D Decrease in
increase in liabilities decrease in liabilities assets, decrease in assets, increase in
owners’ equity owner’s equity

55. ABC Company purchased building on credit. The effect of this transaction on the
accounting equation is:
A No effect B Increase in assets, C Increase in assets, D Increase in assets,
decrease in liabilities increase in owners’ increase in
equity liabilities

56. ABC Company paid $100 accounts payable. The effect of this transaction on the
accounting equation is:
A Decrease in assets by B Increase in assets by C Decrease in assets D No effect
$100, decrease in $100, increase in by $100, decrease
liabilities by $100 liabilities by $100 in owners’ equity
by $100

57. Sara (Owner) invested $500 cash in the business. The effect of this transaction on the
accounting equation is:
A Increase in assets by B Increase in assets by C No effect D Decrease in assets by
$500, increase in $500, increase in $500, increase in
liabilities by $500 owners’ equity by $500 owners’ equity by $500

58. ABC Company purchased supplies for $150 cash. The effect of this transaction on the
total assets is:
A No effect B Increase by $150 C Decrease by $150 D Increase by $200

59. Which of the following accounts would be increased with a credit?

A Cash B Prepaid insurance C Accounts Payable D Owner’s Drawings

60. Which of the following rules is incorrect?

A Debits decrease B Debits increase the C Debits increase the D Debits increase the
liability owner’s capital assets owner’s drawings
accounts. account. accounts. accounts.

61. XYZ Company paid $50 cash for 12-month insurance policy. The journal entry to record
this transaction is:
A Prepaid insurance 50 B Insurance expense 50 C Cash 50 D None
Cash 50 Cash 50 Prepaid insurance 50 of
these

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62. XYZ Company borrowed $20 from a bank. The business signed a note payable to the
bank. The journal entry to record this transaction is:
A Cash 20 B Cash 20 C Notes payable 20 D None
of
Accounts payable 20 Notes payable 20 Cash 20
these

63. Sara (Owner) withdrew $80 cash from her business for personal use. The entry for this
transaction will include a debit of $80 to:
A Owner’s Drawings B Owner’s Capital C Cash D None of these

64. XYZ Company purchased $70 equipment on account. The journal entry to record this
transaction is:
A Equipment 70 B Equipment 70 C Account payable 70 D None
of
Account payable 70 Cash 70 Equipment 70 these

65. XYZ Company performed services for client on account $60. The journal entry to record
this transaction is:
A Cash 60 B Revenue 60 C Accounts receivable 60 D
None
Unearned Revenues 60 Cash 60 Revenue 60 of
these

66. ABC Company paid $15 cash for salaries. The journal entry to record this transaction is:
A Cash 5 B Salaries expense 15 C Salaries expense 15 D No
entry
Salaries expense 15 Cash 15 Salaries payable 15

67. On April 1, ABC Company received $50 cash in advance from a customer for services
that are expected to be completed by July 31. The journal entry to record this transaction
is:
A Cash 50 B Cash 50 C Unearned revenue 50 D None of
Unearned revenue 50 Revenue 50 Cash 50 these

68. ABC Company received $60 for services previously performed on account. The journal
entry is:
A Cash 60 B Cash 60 C Accounts receivable 60 D None
of
Revenue 60 Accounts receivable 60 Revenue 60 these

69. Prepaid expenses are:

A Expenses B Payment in C Incurred but not D Incurred and
recorded in the advance for yet paid or already paid or
income statement. services to be used recorded. recorded.
by the company.

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70. ABC Company distributes L.E. 10,000 cash dividends to shareholders. This transaction
results in….
A) No change in the accounting equation. B) Both assets and equity decrease.
C) Both assets and liabilities decrease. D) Both assets and equity increases.

71. ABC Company paid L.E. 500 on Note payable. This transaction results in….
A) assets decrease by 500 and equity increases by 500 B) assets and liabilities decrease by 500
C) assets increase by 500 and equity decreases by 500 D) assets and liabilities increase by 500

72. ABC Co. purchased Equipment for L.E. 7,000 on Jan.1, which is later sold for L.E. 7000
in cash. This transaction results in….
A) assets and equity increase by L.E.7,000 B) assets and liabilities increase by L.E 7,000
C) assets increase by 7,000; equity decrease by $7,000 D) total assets remain the same

73. ABC Co. started its operations on Jan. 1, 2024, and had the following transactions:
Paid L.E. 5,000 for advertising expenses; paid L.E. 4,000 to settle a liability for supplies purchases in the
previous month; provided services to its customers for L.E. 15,000 on account; collected cash on account
L.E. 12,000. The effect of these transactions on the Cash account is …….
A) 18,000 increase B) 9,000 decrease C) 3,000 increase D) None of these.

Cases.

Q1. The following information relates to Molly Mae Co. for the year 2016.

Advertising expense $6,500 Retained earnings Jan1, 1,2016 14,000

Cash $20,000 Common Stock $ 50,000
Dividends 5,700 Rent expense 8,500
Service revenue 58,500 Utilities expense 1,500
Salaries and wages expense 29,000 Supplies 10,000
Equipment 20,000 Account Receivable 10,000
Land 40,000 Account Payable 15,000
Note Payable 13,700

Instructions: After analyzing the data, prepare an income statement, retained earnings statement
and balance sheet for the year ending December 31, 2016

MOLLY MAE CO.

Income Statement
For the Year Ended December 31, 2016

Revenues
Service revenue $58,500
Expenses
Salaries and wages expense $29,000
Rent expense 8,500
Advertising expense 6,500
Utilities expense 1,500
Total expenses 45,500
Net income $13,000

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MOLLY MAE CO.

Retained Earnings’ Statement
For the Year Ended December 31, 2016

Retained earnings Jan1, 1,2016 14,000

Add: Net income 13,000
Less: Dividends (5,700)
Retained earnings, December 31 $21,300
MOLLY MAE CO.
Balance sheet
On December 31, 2016

Assets Liabilities
Cash $ 20,000 Accounts payable $15,000
Account Receivable 10,000 Note payable 13,700
Supplies 10,000 Total Liabilities 28,700
Equipment 20,000 Stockholders’ equity
Land 40,000 Common stock 50,000
Retained Earnings ending 21,300
Total Stockholders’ equity 71,300
Total assets $100,000 Total liabilities and Stockholders’ equity $100,000

Question no. one: Journalize the following business transactions and post them to the general ledger.
1. The owner invests $35,000 in cash in starting a real estate office operating as a sole proprietorship.
2. Purchased $400 of office supplies on credit.
3. Purchased office equipment for $8,000, paying $2,000 in cash and signed a 30-day, $6,000, note payable.
4. Real estate commissions billed to clients amount to $4,000.
5. Paid $1500 cash in advance for the coming 3-months’ rent.
6. Paid $200 cash on account for office supplies purchased in transaction 2.
7. Received a bill for $600 for advertising for the current month.
8. Paid $2,200 cash for the current month's office salaries.
9. Derby withdrew $1,200 from the business for living expenses.
10. Received a check (cash) for $3,000 from a client in payment on account for commissions billed in
transaction 4.
11. Received $ 6,000 cash in advance for consulting services to be performed in the next 2-months.
1. Cash........................................................................................... 35,000
Capital............................................................... 35,000

2. Office Supplies ........................................................................... 400

Accounts Payable.............................................................. 400

3. Office Equipment........................................................................ 8,000

Cash .................................................................................. 2,000
Notes Payable ................................................................... 6,000

4. Accounts Receivable.................................................................. 4,000

Service Revenue.................................... 4,000

5. Prepaid Rent ............................................................................. 1500

Cash .................................................................................. 1500

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6. Accounts Payable ...................................................................... 200

Cash .................................................................................. 200

7. Advertising Expense .................................................................. 600

Accounts Payable.............................................................. 600

8. Office Salaries Expense ............................................................. 2,200

Cash .................................................................................. 2,200

9. Drawing ..................................................................... 1,200

Cash .................................................................................. 1,200

10. Cash........................................................................................... 3,000

Accounts Receivable ......................................................... 3,000

11. Cash ........................................................................................... 6,000

6,000
Unearned Revenue.........................................................
Examples of MCQ:
1. The journal entry to record transaction no.1 will include a….
a) Debit to drawings for $ 35,000 and credit to cash for $ 35,000
b) Debit to cash for $ 35,000 and credit to capital for $ 35,000.
c) Debit to cash for $ 35,000 and credit to account payable for $ 35,000.
d) None of these
2. The journal entry to record transaction no.8 will include a….
a) Debit to cash for $2,200 b) Credit to cash for $2,200 c) credit to salaries expense d) None of these
3. The final balance of cash is …..(36900)

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