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Accounting 201: Chapters 1 & 2

Profit is the difference between:

A) Assets and liabilities

B) The incoming cash and outgoing cash

C) The assets purchased with cash invested by stockholders and the cash spent to operate the business

D) The amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services

D) The amounts received from customers for goods or services and the amounts paid for the inputs used to provide the goods or services
Financial reports are used by:
A) Management
B) Creditors
C) Investors
D) All are correct
D) All are correct
All of the following are general-purpose financial statements EXCEPT:
A) Balance sheet
B) Income statement
C) Retained earnings statement
D) Cash budget
D) Cash budget
Which of the following is a manufacturing business?
A) Amazon.com
B) Wal-mart
C) Ford Motors
D) Delta Airlines
C) Ford Motors
Which of the following BEST describes accounting?

A) Records economic data but does not communicate the data to users according to any specific rules

B) Is an information system that provides reports to users regarding economic activities and condition of a business

C) Is of no use by individuals outside of the business

D) Is used only for filling out tax returns and for financial statements for various type of governmental reporting requirements

B) Is an information system that provides reports to users regarding economic activities and condition of a business
Due to various fraudulent business practices and accounting cover-ups in the early 2,000’s, Congress enacted the Sarbanes-Oxley Act of 2002. The act was responsible for establishing a new oversight board for public accountants called the:

A) Generally Accepted Accounting Practices for Public Accountants Board

B) Public Company Accounting Oversight Board

C) Congressional Accounting Oversight Board

D) None of these

B) Public Company Accounting Oversight Board
Which of the following is the BEST description of accounting’s role in business?

A) Accounting provides stockholders with information regarding the market value of the company’s stocks

B) Accounting provides information to managers to operate the business and to other users to make decisions regarding the economic condition of the company

C) Accounting provides creditors and banks with information regarding the credit risk rating of the company

D) Accounting is not responsible for providing any form of information to users. That is the role of the Information Systems Department

B) Accounting provides information to managers to operate the business and to other users to make decisions regarding the economic condition of the company
Which of the following is NOT a role of accounting in business?

A) To provide reports to users about the economic activities and conditions of a business

B) To personally guarantee loans of the business

C) To provide information to other users to determine the economic performance and condition of the business

D) To assess the various informational needs of users and design its accounting system to meet those needs

B) To personally guarantee loans of the business
Which of the following are guidelines for behaving ethically?

I. Identify the consequences of a decision and its effect on others

II. Consider your obligations and responsibilities to those affected by the decision

III. Identify your decision based on personal standards of honesty and fairness

A) I and II
B) II and III
C) I and III
D) I, II, and III

A) I and II
An entity that is organized according to state or federal statues and in which ownership is divided into shares of stock is a:

A) Proprietorship
B) Corporation
C) Partnership
D) Government unit

B) Corporation
Most businesses in the US are:
A) Proprietorship
B) Partnerships
C) Corporations
D) Separate Entities
A) Proprietorship
The initials GAAP stand for:
A) General Accounting Procedures
B) Generally Accepted Plans
C) Generally Accepted Accounting Principles
D) Generally Accepted Accounting Practices
C) Generally Accepted Accounting Principles
Within the US, the dominant body in the primary development of accounting principles is the:

A) American Institute of Certified Public Accountants (AICPA)

B) American Accounting Association (AAA)

C) Financial Accounting Standards Board (FASB)

D) Institute of Management Accountants (IMA)

C) Financial Accounting Standards Board (FASB)
The objectivity concept requires that:

A) Business transactions must be consistent with the objectives of the entity

B) The Financial Accounting Standards Board must be fair and unbiased in its deliberations over new accounting standards

C) Accounting principles must meet the objectives of the Security and Exchange Commission

D) Amounts recorded in the financial statements must be based on independently verifiable evidence

D) Amounts recorded in the financial statements must be based on independently verifiable evidence
Equipment with an estimated market value of $55,000 is offered for sale at $75,000. The equipment is acquired for $20,000 in cash and a note payable of $40,000 due in 30 days. The amount used in the buyer’s accounting records to record this acquisition is:
A) $55,000
B) $60,000
C) $20,000
D) $75,000
B) $60,000
Which of the following concepts relates to separating the reporting of business and personal economic transactions?

A) Cost concept
B) Unit of measure concept
C) Business entity concept
D) Objectivity concept

C) Business entity concept
Which of the following is NOT true of accounting principles?

A) Financial accountants follow generally accepted accounting principles (GAAP)

B) Following GAAP allows accounting information users to compare one company to another

C) A new accounting principle can be adopted with stockholders approval

D) The Financial Accounting Standards Board (FASB) has primary responsibility for developing accounting principles

C) A new accounting principle can be adopted with stockholders approval
Revenues are reported when

A) A contract is signed
B) Cash is received from the customer
C) Work is begun on the job
D) Work is completed on the job

B) Cash is received from the customer
Expenses are recorded when

A) Cash is paid for services rendered
B) A bill is received in advance of services rendered
C) Assets are used in the process of earning revenue
D) None of these

A) Cash is paid for services rendered
The asset created by a business when it makes a sale on account is termed:

A) Accounts payable
B) Prepaid expenses
C) Unearned revenue
D) Accounts receivable

D) Accounts receivable
The debt created by a business when it makes a purchase on account is referred to as an:
A) Account payable
B) Account receivable
C) Asset
D) Expense payable
A) Account payable
Land, originally purchased for $20,000, is sold for $75,000 in cash. What is the effect of the sale on the accounting equation?

A) Assets increase $75,000; stockholder’s equity increases $75,000

B) Assets increase $55,000; stockholder’s equity increases $55,000

C) Assets increase $75,000; liabilities decrease $20,000; stockholders’ equity increases $55,000

D) Assets increase $20,000; no change for liabilities;

B) Assets increase $55,000; stockholder’s equity increases $55,000
Gomez Service Company paid its first installment on a note payable in the amount of $2,000. How will this transaction affect the accounting equation?

A) Increase Liabilities (Notes Payable) and decrease Assets (Cash)

B) Decrease Assets (Cash) and decrease Stockholder’s Equity (Note Payable Expense)

C) Decrease Assets (Cash) and decrease Assets (Notes Receivable)

D) Decrease Assets (Cash) and decrease Liabilities (Notes Payable)

D) Decrease Assets (Cash) and decrease Liabilities (Notes Payable)
Ramos Repair Company paid $750 in dividends to stockholders. How does this transaction affect Ramos Repair Company’s accounting equation?

A) Increase Assets (Accounts Receivable) and decrease Assets (Cash)

B) Decrease Assets (Cash) and decrease Stockholder’s Equity (Dividends)

C) Decrease Assets (Cash) and decrease Liabilities (Accounts Payable)

D) Increase Assets (Cash) and decrease Stockholder’s Equity (Dividends)

B) Decrease Assets (Cash) and decrease Stockholder’s Equity (Dividends)
Which of the following is NOT a business transaction?

A) Erin Adams receives stock in exchange for depositing $15,000 in a bank account in the name of Erin’s Lawn Service

B) Erin’s Lawn Service provided services to customers earning fees of $600

C) Erin Adams purchased hedge trimmers for her lawn service, agreeing to pay the supplier next month

D) Erin Adams pays her monthly personal credit card bill

D) Erin Adams pays her monthly personal credit card bill
The financial statement that presents a summary of the revenues and expenses of a business for a specific period of time, such as a month or year, is called a(n):

A) Prior period statement
B) Retained earnings statement
C) Income statement
D) Balance sheet

C) Income statement
Revenue should be recognized when:

A) Cash is received
B) The service is performed
C) The customer places and order
D) The customer charges an order

B) The service is performed
Which of the following accounts is a stockholders’ equity account?

A) Cash
B) Accounts payable
C) Prepaid insurance
D) Dividends

D) Dividends
The debit side of an account:

A) Depends on whether the account is an asset, liability or stockholder’s equity item

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

D) Is the left side of the account
Which statement(s) concerning cash is (are) true?

A) Cash will always have more debits than credits
B) Cash will never have a credit balance
C) Cash is increased by debiting
D) All of the above

C) Cash is increased by debiting
The balance of the account is determined by:

A) Adding all of the debits to all of the credits
B) Always subtracting the debits from the credits
C) Always subtracting the credits from the debits
D) Adding all of the debits, adding all of the credits, and then subtracting the smaller sum from the larger sum

D) Adding all of the debits, adding all of the credits, and then subtracting the smaller sum from the larger sum
On the chart of accounts, the balance sheet accounts are normally listed in the following order:

A) Liabilities, assets, stockholders’ equity
B) Assets, liabilities, stockholders’ equity
C) Stockholders’ equity, assets, liabilities
D) Assets, stockholders’ equity, liabilities

Of the following, which is true about assets?

A) Assets include physical items and intangibles that have value

B) Assets include only physical items of value

C) Assets are owned solely by the stockholders of the company

D) Assets are the result of selling products or services to customers?

A) Assets include physical items and intangibles that have value
Which of the following is NOT considered to be a liability?

A) Wages payable
B) Accounts receivable
C) Unearned revenues
D) Accounts payable

B) Accounts receivable
Retained earnings will be reduced by all of the following EXCEPT:

A) Revenues
B) Expenses
C) Dividends
D) All of these

A) Revenues
Expenses can result from:

A) Paying dividends
B) Consuming services
C) Using up liabilities
D) All of these

B) Consuming services
The chart of accounts is designed to:

A) Alphabetize the accounts to make reading easier for its financial statement users

B) Analyze the accounts and organize them in order of dollar amount to simplify the accounting information for users

C) Summarize the transactions and determine their ending balances

D) Meet the information needs of a company and other financial statement users

D) Meet the information needs of a company and other financial statement users
Which of the following types of accounts have a normal credit balance?

A) Assets and liabilities
B) Liabilities and expenses
C) Revenues and liabilities
D) Capital stock and dividends

C) Revenues and liabilities
Which one of the statements below is NOT a purpose for the journal?

A) To show increases and decreases in accounts
B) To show a chronological order by date
C) To show a complete transaction in one place
D) to locate errors

A) To show increases and decreases in accounts
Which of the following describes the classification and normal balance of the fees earned account?

A) An asset with a credit balance
B) A liability with a credit balance
C) An expense with a debit balance
D) A revenue with a credit balance

D) A revenue with a credit balance
The classification and normal balance of the dividends account is:
A) An expense with a credit balance
B) An expense with a debit balance
C) A liability with a credit balance
D) A stockholders’ equity item with a debit balance
D) A stockholders’ equity item with a debit balance
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
D) Assets, expenses
Which of the following entries records the payment of an account payable?

A) debit Cash; credit Accounts Payable
B) debit Accounts Receivable; credit Cash
C) debit Cash; credit Supplies Expense
D) debit Accounts Payable; credit cash

D) debit Accounts Payable; credit cash
Cash was paid by Ari’s Alarm Service to creditors on account. Which of the following entries for Ari’s Alarm Service records this transaction?

A) Cash, debit; Retained Earnings, credit
B) Accounts Payable, debit; Cash, credit
C) Accounts Receivable, debit; Cash, credit
D) Accounts Payable, debit; Account Receivable, credit

B) Accounts Payable, debit; Cash, credit
The process of initially recording a business transaction is called:

A) Trial balancing
B) Posting
C) Journalizing
D) Balancing

C) Journalizing
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

C) Office Supplies, debit; Accounts Payable, credit
Which of the following stockholder equity accounts follow the same debit and credit rules as liabilities?

A) Capital Stock only
B) Dividends only
C) Retained Earnings and Capital Stock
D) Retained Earnings, Capital Stock, and Dividends

C) Retained Earnings and Capital Stock
The process of transferring the debits and credits from the journal entries to the ledger accounts is called:

A) Sliding
B) Transposing
C) Journalizing
D) Posting

D) Posting
Of the following, which will determine if the accounting equation is in balance?

A) Journal entry
B) Income statement
C) Trial balance
D) Account reconciliation

C) Trial balance
An over payment error was discovered in computing and paying the wages of a Jamison Tree Trimming employee. When Jamison receives cash from the employee for the amount of the over payment, which of the following entries will Jamison make?

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

A) Cash, debit; Wages Expense, credit
Which of the following is NOT a short cut in finding errors on the trial balance?

A) Determine the difference between debits and credits and look for the amount

B) Determine the amount and change any account to make the trial balance correct

C) Determine the difference between debits and credits, divide the amount by 2, look for the amount

D) Determine the difference between debits and credits, divide the amount by 9. if it divides evenly, look for a transposition or slide error

B) Determine the amount and change any account to make the trial balance correct

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