Deck 2: Financial Statements and the Accounting System

Question 1

Source documents identify and describe transactions and events entering the accounting process.

Answer 1

True

Question 2

A customer's promise to pay on credit is classified as an account payable by the seller.

Answer 2

False

Question 3

Expenses always decrease equity.

Answer 3

True

Question 4

Dividends paid to stockholders are a business expense.

Question 5

An unclassified balance sheet broadly groups accounts into assets,liabilities,and equity

Question 6

An account's balance is the difference between the total debits and total credits for the account,including any beginning balance.

Question 7

Items such as sales tickets,bank statements,checks,and purchase orders are examples of a business's source documents.

Question 8

The first step in the processing of a transaction is to analyze the transaction and source documents.

Question 9

Preparation of a trial balance is the first step in processing a financial transaction.

Question 10

Dividends always decrease equity.

Question 11

The right side of an account is called the debit side.

Question 12

Stockholder investments always decrease equity.

Question 13

When a company provides services for which cash will not be received until some future date,the company should record the amount billed as accounts receivable.

Question 14

Unearned revenue is a liability that is settled in the future when a company delivers its products or services.

Question 15

Revenues always increase equity.

Question 16

An account is a record of increases and decreases in a specific asset,liability,equity,revenue,or expense item.

Question 17

In a double-entry accounting system,the total dollar amount debited must always equal the total dollar amount credited.

Question 18

Dividends distributed to stockholders should be treated as an expense of the business.

Question 19

Unearned revenues are classified as liabilities.

Question 20

A company's chart of accounts is a list of all the accounts used and includes an identification number assigned to each account.

Question 21

A transaction that credits an asset account and credits a liability account must also affect one or more other accounts.

Question 22

Debit means increase and credit means decrease for all accounts.

Question 23

Debits increase asset and expense accounts.

Question 24

If insurance coverage for the next two years is paid for in advance,the amount of the payment is debited to an asset account called Prepaid Insurance.

Question 25

The dividends account normally has a debit balance.

Question 26

The higher a company's debt ratio,the lower the risk of a company not being able to meet its obligations.

Question 27

A debit entry is always an increase in the account.

Question 28

If a company provides services to a customer on credit,the company providing the service should credit Accounts Receivable.

Question 29

The debt ratio is calculated by dividing total assets by total liabilities.

Question 30

A transaction that decreases a liability and increases an asset must also affect one or more other accounts.

Question 31

Increases in liability accounts are recorded as debits.

Question 32

When a company bills a customer for $700 for services rendered,the journal entry to record this transaction will include a $700 debit to Services Revenue.

Question 33

A revenue account normally has a debit balance.

Question 34

Credits always increase account balances.

Question 35

The debt ratio helps to assess the risk a company has of failing to pay its debts and is helpful to both its owners and creditors.

Question 36

Asset accounts are decreased by debits.

Question 37

Crediting an expense account decreases it.

Question 38

The purchase of supplies on credit should be recorded with a debit to Supplies and a credit to Accounts Payable.

Question 39

If a company purchases equipment paying cash,the journal entry to record this transaction will include a debit to Cash.

Question 40

Asset accounts normally have debit balances and revenue accounts normally have credit balances.

Question 41

A general journal gives a complete record of each transaction in one place,and shows the debits and credits for each transaction.

Question 42

The financial statement that summarizes the changes in the retained earnings account is called the balance sheet.

Question 43

The detail of individual revenue and expense accounts is reported on the statement of retained earnings.

Question 44

At a given point in time,a business's trial balance is a list of all of its general ledger accounts and their balances.

Question 45

If a company is highly leveraged,this means that it has relatively high risk of not being able to repay its debt.

Question 46

The ordering of accounts in a trial balance typically follows their identification number from the chart of accounts,that is,assets first,then liabilities,then common stock and dividends,followed by revenues and expenses.

Question 47

Posting is the transfer of journal entry information to the ledger.

Question 48

Transactions are recorded first in the ledger and then transferred to the journal.

Question 49

The journal is known as a book of original entry.

Question 50

A journal entry that affects no more than two accounts is called a compound entry.

Question 51

While companies can use various journals,every company uses a general journal.

Question 52

An income statement is also called an earnings statement,a statement of operations or a profit and loss statement.

Question 53

A trial balance is not a financial statement; it is a mechanism for checking equality of debits and credits in the ledger.

Question 54

Booth Industries has liabilities of $105 million and total assets of $350 million.Its debt ratio is 40.0%.

Question 55

Dividends are not reported on a business's income statement.

Question 56

A company that finances a relatively large portion of its assets with liabilities is said to have a high degree of financial leverage.

Question 57

A balanced trial balance is proof that no errors were made in journalizing transactions,posting to the ledger,and preparing the trial balance.

Question 58

The heading on every financial statement lists the three W's−Who (the name of the business); What (the name of the statement); and Where (the organization's address).

Question 59

The income statement,statement of retained earnings,and statement of cash flows report financial performance over a period of time.

Question 60

If the common stock account had a $10,000 credit balance at the beginning of the period,and during the period,stockholders invest an additional $5,000,the balance in the common stock account listed on the trial balance will be equal to a debit balance of $5,000.

Question 61

The amount of net income is added on the statement of retained earnings.

Question 62

The balance sheet reports the financial position of a company at a point in time.

Question 63

A company's list of accounts and the identification numbers assigned to each account is called a:

A)Source document.
B)Journal.
C)Trial balance.
D)Chart of accounts.
E)General Journal.

Question 64

Identify the statement below that is correct.

A)When a future expense is paid in advance,the payment is normally recorded in a liability account called Prepaid Expense.
B)Promises of future payment by the customer are called accounts receivable.
C)Increases and decreases in cash are always recorded in the common stock account.
D)An account called Land is commonly used to record increases and decreases in both the land and buildings owned by a business.
E)Accrued liabilities include accounts receivable.

Question 65

The record of all accounts and their balances used by a business is called a:

A)Journal.
B)Book of original entry.
C)General Journal.
D)Balance column journal.
E)Ledger (or General Ledger).

Question 66

The accounting process begins with:

A)Analysis of business transactions and source documents.
B)Preparing financial statements and other reports.
C)Summarizing the recorded effect of business transactions.
D)Presentation of financial information to decision-makers.
E)Preparation of the trial balance.

Question 67

A business's record of the increases and decreases in a specific asset,liability,equity,revenue,or expense is known as a(n):

A)Journal.
B)Posting.
C)Trial balance.
D)Account.
E)Chart of accounts.

Question 68

A business's source documents:

A)Include the ledger.
B)Provide objective evidence that a transaction has taken place.
C)Must be in electronic form.
D)Are prepared internally to ensure accuracy.
E)Include the chart of accounts.

Question 69

A company's formal promise to pay (in the form of a promissory note)a future amount is a(n):

A)Unearned revenue.
B)Prepaid expense.
C)Credit account.
D)Note payable.
E)Account receivable.

Question 70

An account used to record stockholders' investments in a business is called a(n):

A)Dividends account.
B)Common stock account.
C)Revenue account.
D)Expense account.
E)Liability account.

Question 71

Unearned revenues refer to a(n):

A)Asset that will be used over time.
B)Expense incurred because a customer has paid in advance.
C)Liability that is settled in the future when a company delivers its products or services.
D)Increase in revenues as a result of delivering products or services to a customer.
E)Decrease in an asset.

Question 72

A business's source documents may include all of the following except:

A)Sales tickets.
B)Ledgers.
C)Checks.
D)Purchase orders.
E)Bank statements.

Question 73

Which of the following statements is not true:

A)Accounts receivable are held by a seller.
B)Accounts receivable arise from credit sales.
C)Accounts receivable are increased by customer payments.
D)Accounts receivable are classified as assets.
E)Accounts receivable are increased by billings to customers.

Question 74

Neither U.S.GAAP nor IFRS require the use of accrual basis accounting.

Question 75

Identify the account used by businesses to record the transfer of assets from a business to its stockholders:

A)A revenue account.
B)The dividends account.
C)The common stock account.
D)An expense account.
E)A liability account.

Question 76

Unearned revenues are generally:

A)Revenues that have been earned and received in cash.
B)Revenues that have been earned but not yet collected in cash.
C)Liabilities created when a customer pays in advance for products or services before the goods or services are delivered.
D)Recorded as an asset in the accounting records.
E)Increases to common stock.

Question 77

Prepaid accounts (also called prepaid expenses)are generally:

A)Payments made for products and services that never expire.
B)Classified as liabilities on the balance sheet.
C)Decreases in equity.
D)Assets from prepayments of future expenses.
E)Promises of payments by customers.

Question 78

A company's ledger is:

A)A record containing increases and decreases in a specific asset,liability,equity,revenue,or expense item.
B)A journal in which transactions are first recorded.
C)A collection of documents that describe transactions and events entering the accounting process.
D)A list of all accounts a company uses with an assigned identification number.
E)A record containing all accounts and their balances used by the company.

Question 79

An income statement reports the revenues earned less the expenses incurred by a business over a period of time.

Question 80

The same four basic financial statements are prepared by both U.S.GAAP and IFRS.