Chapter 2

Question 1

T of F : A financial statements, heading list the 3W’s: who – the name of the organization, what – the name of the statement, and where – the organization’s address.

Answer 1

False.

Question 2

T or F: Revenues increase equity.

Answer 2

True.

Question 3

T or F: A company that finances a relatively large portion of its assets with equity is said to have higher financial leverage.

Answer 3

False.

Question 4

T or F: Items such as sales receipts, checks, purchase orders, bills from suppliers, payroll records, and bank statements are examples of source documents.

Answer 4

True.

Question 5

T or F: A balanced trial balance is proof that no errors were made in journaling transactions, posting to ledger, and preparing the trial balance.

Answer 5

False.

Question 6

T or F: Owner investments decrease equity.

Answer 6

False.

Question 7

A tour that represents a ledger account and is used to show the effects of transactions is called a:

Answer 7

T-account.

Question 8

At the end of the current year, James company reported total liabilities of $302,000 in total equity of $102,000. The companies debt ratio was:

Answer 8

74.8%

Debt ratio = total liabilities/total assets
$302,000/$404,000 =0.748 = 74.8%

Total assets = total liabilities + total equity

Total assets = $302,000 + $102,000 =$404,000

Question 9

At the beginning of the current year, Snell Company’s total assets were $248,000 and its total liabilities were $174,200. During the year, the company reported total revenues of $93,000, total expenses of $76,000 and owner withdrawals of $5,000. There were no other changes in owner’s capital during the year and total assets at the end of the year were $260,000. The company’s debt ratio at the end of the current year is:

Answer 9

Debt Ratio = Total Liabilities/Total Assets

Debt Ratio = $174,200**/$260,000; Debt Ratio = 0.67 = 67%

*Beginning Total Assets = Beginning Total Liabilities + Beginning Total Equity

$248,000 = $174,200 + Beginning Total Equity; Beginning Total Equity = $73,800

**Ending Total Assets = Ending Total Liabilities + Ending Total Equity

$260,000 = Ending Total Liabilities + (Beginning Equity + Revenues − Expenses − Withdrawals)

$260,000 = Ending Total Liabilities + ($73,800 + $93,000 − $76,000 − $5,000)

$260,000 = Ending Total Liabilities + $85,800; Ending Total Liabilities = $174,200

Question 10

GreenLawn Company provides landscaping services to clients. On May 1, a customer paid GreenLawn $60,000 for 6-months services in advance. GreenLawn’s general journal entry to record this transaction will include a:

Answer 10

Credit to Unearned Revenue for $60,000.

Question 11

Unearned revenues are:

Answer 11

Liabilities recorded when customers pay in advance for products or services.

Question 12

Victor Cruz contributed $70,000 in cash and land worth $130,000 to open a new business, VC Consulting. Which of the following general journal entries will VC Consulting make to record this transaction?

Answer 12

Debit Cash $70,000; Debit Land $130,000; Credit Cruz, Capital, $200,000.

Question 13

$290 credit to Supplies was credited to Revenue by mistake. By what amounts are the accounts under- or overstated as a result of this error?

Answer 13

Supplies, overstated $290; Revenue, overstated $290.

Question 14

A complete record of each transaction in one place from which transaction amounts are posted to the ledger is a(n):

Answer 14

Journal.

Question 15

First Rentals purchased office supplies on credit. The general journal entry made by First Rentals will include a:

Answer 15

Credit to accounts payable.

Question 16

Unearned revenues are:

Answer 16

Transferred to revenue when products and services are delivered.

Question 17

The credit purchase of a new oven for $5,900 was posted to Kitchen Equipment as a $5,900 debit and to Accounts Payable as a $5,900 debit. What effect would this error have on the trial balance?

Answer 17

The total of the Debit column of the trial balance will exceed the total of the Credit column by $11,800.

Question 18

The following transactions occurred during July:

Received $1,100 cash for services provided to a customer during July.

Received $6,000 cash investment from Bob Johnson, the owner of the business.

Received $950 from a customer in partial payment of his account receivable which arose from sales in June.

Provided services to a customer on credit, $575.

Borrowed $8,000 from the bank by signing a promissory note.

Received $1,450 cash from a customer for services to be performed next year.

What was the amount of revenue for July?

Answer 18

$1,675.

Revenues = $1,100 (from #1) + $575 (from #4) = $1,675

Question 19

Identify the account below that is classified as a liability in a company’s chart of accounts:

Answer 19

Unearned Revenue.