Chapter 2: Transaction Analysis

Question 1

Transaction

Answer 1

Is any event that has a financial impact on the business and can be measured reliably

Question 2

Cash

Answer 2

Means money and any medium of exchange including bank account balances, paper currency, coins, certificates of deposit, and checks

Question 3

Accounts Receivable

Answer 3

Many companies sell goods and services and receives a promise for future collections of cash

Question 4

Notes Receivable

Answer 4

Is similar to accounts receivable but a note receivable is more binding because the customer signed the note

Question 5

Inventory

Answer 5

Often times the most important asset. Other titles may be merchandise and merchandise inventory

Question 6

Prepaid expenses

Answer 6

Companies pay certain expenses in advance such as insurance and rent. Is an asset because the payment provides a future benefit

Question 7

Land

Answer 7

Shows the cost of land a company uses in its operations

Question 8

Buildings

Answer 8

Cost of office buildings, manufacturing plants, and others

Question 9

Equipment, Furniture, and Fixtures

Answer 9

There are separate asset accounts for each type of equipment including manufacturing equipment and office equipment

Question 10

Accounts Payable

Answer 10

A company’s promise to pay a debt arising from a credit purchase of inventory or from a utility bill

Question 11

Notes Payable

Answer 11

Includes amounts a company must pay because they signed notes to pay a future amount

Question 12

Accrued Liabilities

Answer 12

Is a liability for an expense that has not yet been paid.

Question 13

Examples of Accrued Liabilities

Answer 13

Interest payable, income tax payable, salary payable

Question 14

Common Stock

Answer 14

Shows the owners investment in a corporation. All corporations have common stock

Question 15

Retained Earnings

Answer 15

Shows the amount of cumulative net income earned over a company’s lifetime minus net losses and dividends

Question 16

Dividends

Answer 16

Are optional and are declared by the board of directors. When declared it represents a decrease in retained earnings

Question 17

Revenues

Answer 17

This increase in stockholder’s equity from delivering goods or services to customers.

Question 18

Examples of Revenue

Answer 18

Sales revenue, service revenue, interest revenue

Question 19

Expenses

Answer 19

The cost of operating a business. Decreases stockholder’s equity. A business records a separate account for each type of expense

Question 20

T-Account

Answer 20

Way of keeping track of debits and credits

Question 21

Debit

Answer 21

The left side of the account

Question 22

Credit

Answer 22

The right side of the account

Question 23

Normal Balance of Assets

Answer 23

Debit

Question 24

Normal Balance of Liabilities

Answer 24

Credit

Question 25

Normal Balance of Stockholder's Equity

Answer 25

Credit

Question 26

Normal Balance of Common Stock

Answer 26

Credit

Question 27

Normal Balance of Retained Earnings

Answer 27

Credit

Question 28

Normal Balance of Dividends

Answer 28

Debit

Question 29

Normal Balance of Revenues

Answer 29

Credit

Question 30

Normal Balance of Expenses

Answer 30

Debit

Question 31

Journal

Answer 31

Accountants use a chronological record of transactions also known as the book of original entry

Question 32

First Step of the Journalizing Process

Answer 32

Specify each account affected by the transaction and classify each account by type

Question 33

Second Step of Journalizing Process

Answer 33

Determine whether each account is increased or decreased by the transaction. Use the rules of debit and credit to increase or decrease each account

Question 34

Third Step of Journalizing Process

Answer 34

Record the transaction in the journal, including a brief explanation

Question 35

Ledger

Answer 35

Is a grouping of all the t-accounts with their balances

Question 36

Posting

Answer 36

Entering a transaction by copying data into the ledger

Question 37

Trial Balance

Answer 37

Lists all accounts with their balances. Assets first, then liabilities, and stockholder's equity. Shows whether total debits equal total credits

Question 38

What is the purpose of the trial balance?

Answer 38

Facilitates the preparation of financial statements

Question 39

First Step of Correcting Accounting Errors

Answer 39

Search the records for a missing account. Trace each account back and forth from the journal to the ledger. A transaction may have been recorded incorrectly

Question 40

Second step of correcting accounting errors

Answer 40

Divide out the balance amount by 2. A misassigned transaction doubles the error

Question 41

Third step of correcting accounting errors

Answer 41

Divide the balance amount by 9. If the result is an integer it may either be a slide or a transposition

Question 42

Slide

Answer 42

Writing $400 as $40. The accounts would be out of balance by $360. Divide by 9 and scan trial balance for similar number

Question 43

Transposition

Answer 43

Writing $1200 as $2100. The accounts would be out of balance by $900. Divide by 9 and scan the trial balance for a similar number

Question 44

Chart of Accounts

Answer 44

A list to organize all their accounts and account numbers

Question 45

What type of transaction would increase one asset and decrease another?

Answer 45

Buying land with cash

Question 46

What type of transaction would decrease an asset and decrease owner's equity?

Answer 46

Payment of dividends to owners

Question 47

What type of transaction would decrease an asset and decrease a liability?

Answer 47

Paying a liability

Question 48

What type of transaction would increase an asset and increase owner's equity?

Answer 48

Issuing stock

Question 49

What type of transaction would increase an asset and increase a liability?

Answer 49

Borrowing money

Question 50

Record Journal Entry. Borrowed $31,000 from the bank signing a note payable

Answer 50

Debit cash for $31,000 and credit notes payable for $31,000

Question 51

Record Journal Entry. Performed service for clients on account totaling $8,900.

Answer 51

Debit Accounts Receivable for $8,900 and credit service revenue for $8,900.

Question 52

Record journal entry. Received $5,600 cash on account from clients.

Answer 52

Debit cash for $5,600 and credited accounts receivable for $5,600

Question 53

Record journal entry. Received utility bill of $900, an account payable in April.

Answer 53

Debit utilities expense for $900 and credit accounts payable for $900

Question 54

Record journal entry. Paid monthly salary of $2,600 to employee.

Answer 54

Debit salary expense for $2,600 and credit cash for $2,600

Question 55

Record 2 separate journal entries. Purchased $1700 of supplies on account. Paid $425 on account

Answer 55

1. Debit supplies for $1700 and credit accounts payable for $1700. 2. Debit accounts payable for $425 and credit cash for $425.

Question 56

Record 2 journal entries. Expect to collect $4700 next month. Collect $3000.

Answer 56

1. Debit accounts receivable for $4700 and credit service revenue for $4700. 2. Debit cash $3000 and credit accounts receivable for $3000

Question 57

What is the impact on accounts when a company receives cash on account?

Answer 57

No effect because one asset is increased and another asset is decreased

Question 58

What is the impact on accounts when a CEO purchases a tv using personal funds?

Answer 58

No effect because personal assets were used

Question 59

What is the impact on accounts when a company sells land and receives cash for the sale?

Answer 59

No effect because one asset is increased and another one is decreased

Question 60

What is the impact on accounts when cash is borrowed from the bank?

Answer 60

This transaction increases cash and increases notes payable

Question 61

What is the impact on accounts when cash is used to purchase land?

Answer 61

No effect because one asset is increased and another one is decreased

Question 62

What is the impact on accounts when cash is received for issuing stock?

Answer 62

Cash is increased and stockholder's equity is also increased

Question 63

What is the impact on accounts when cash is paid for accounts payable?

Answer 63

Cash is decreased and accounts payable is also decreased

Question 64

What is the impact on accounts when equipment is sold?

Answer 64

No effect because one asset increases and another one decreases

Question 65

What is the impact on accounts when inventory is purchased?

Answer 65

No effect because one asset is increased and another asset is decreased

Question 66

What is the impact on accounts when dividends are paid?

Answer 66

Assets are decreased and stockholder's equity is decreased

Question 67

Record journal entry. Issued stock for $39,000

Answer 67

Debit cash for $39,000 and credit common stock for $39,000

Question 68

Record journal entry. Purchased land for $29,000

Answer 68

Debit land for $29,000 and credit cash for $29,000

Question 69

Record journal entry. Purchased supplies on account for $1700

Answer 69

Debit supplies for $1700 and credit accounts payable for $1700

Question 70

Record journal entry. Earned $7600 in service revenue earning half in cash immediately

Answer 70

Debit cash for $3800 and accounts receivable for $3800 and credit service revenue for $7600

Question 71

Record journal entry. A company incurred month end expenses of salary expense of $1300, rent expense of $700, and utilities expense of $600.

Answer 71

Debit salary expense, rent expense, and utilities expense for a total of $2500 and credit cash for $2500

Question 72

Record journal entry. Sold supplies to another company for $700

Answer 72

Debit cash for $700 and credit supplies for $700

Question 73

Record journal entry. Borrowed cash from bank for $12,000

Answer 73

Debit cash for $12,000 and credit notes payable for $12,000

Question 74

Record journal entry. Paid $800 cash to pay off accounts payable

Answer 74

Debit accounts payable for $800 and credit cash for $800