File: ch03, Chapter 3: The Accounting Information System

Multiple Choice

1. The effects on the basic accounting equation of performing services for cash are to: a) increase assets and decrease stockholders equity. b) increase assets and increase stockholders equity. c) increase assets and increase liabilities. d) increase liabilities and increase stockholders equity. Ans: b Response A: When services are performed for cash, assets are increased and stockholders equity is increased, not decreased. Response B: Correct! Response C: When services are performed for cash, assets are increased and stockholders equity is increased. Liabilities are not affected. Response D: When services are performed for cash, assets are increased and stockholders equity is increased. Liabilities are not affected.

2. Genesis Company buys a $900 machine on credit. This transaction will affect the: a) income statement only. b) balance sheet only. c) income statement and retained earnings statement only. d) income statement, retained earnings statement, and balance sheet. Ans: b Response A: When equipment is purchased on credit, assets are increased and liabilities are increased. Since assets and liabilities are reported on the balance sheet, this transaction affects only the balance sheet. The income statement is not affected. Response B: Correct! Response C: When equipment is purchased on credit, assets are increased and liabilities are increased. Since assets and liabilities are reported on the balance sheet, this transaction affects only the balance sheet. Neither the income statement nor the retained earnings statement is affected. Response D: When equipment is purchased on credit, assets are increased and liabilities are increased. Since assets and liabilities are reported on the balance sheet, this transaction affects only the balance sheet. Neither the income statement nor the retained earnings statement is affected.

3. Which statement about an account is true? a) In its simplest form, an account consists of two parts. b) An account is an individual accounting record of increases and decreases in specific asset, liability, and stockholders equity items.

c) There are separate accounts for specific assets and liabilities but only one account for stockholders equity items. d) The left side of an account is the credit or decrease side. Ans: b Response A: An account has three parts not two. They are the title, the left or debit side and the right or credit side. Response B: Correct! Response C: In addition to having separate accounts for specific assets and liabilities, there are also separate accounts for each stockholders equity item. Response D: The left side of the account is the debit side, not the credit side.

4. Debits: a) increase both assets and liabilities. b) decrease both assets and liabilities. c) increase assets and decrease liabilities. d) decrease assets and increase liabilities. Ans: c Response A: The first part of this statement is correct, but the second part is wrong. Debits increase assets and decrease liabilities. Response B: The second part of this statement is correct, but the first part is wrong. Debits increase assets and decrease liabilities. Response C: Correct! Response D: This is statement is reversed. Debits increase assets and decrease liabilities.

5. A revenue account: a) is increased by debits. b) is decreased by credits. c) has a normal balance of a debit. d) is increased by credits. Ans: d Response A: This statement has it backwards. Revenues are increased by credits, not debits. Response B: This statement has it backwards. Revenues are decreased by debits, not credits. Response C: Revenue accounts have a normal credit balance, not a normal debit balance. Response D: Correct!

6. Which accounts normally have debit balances? a) Assets, expenses, and revenues. b) Assets, expenses, and retained earnings. c) Assets, liabilities, and dividends. d) Assets, dividends, and expenses.

Ans: d Response A: Assets and expenses have normal debit balances, but revenues have a normal credit balance. Response B: Assets and expenses have normal debit balances, but retained earnings has a normal credit balance. Response C: Assets and dividends have normal debit balances, but liabilities have a normal credit balance. Response D: Correct!

7. Which is not part of the recording process? a) Analyzing transactions. b) Preparing a trial balance. c) Entering transactions in a journal. d) Posting transactions. Ans: b Response A: Analyzing transactions is the first step in the recording process. Response B: Correct! Response C: Entering transactions in the journal is the second step in the recording process. Response D: Posting transactions is the last step in the recording process.

8. Which of these statements about a journal is false? a) It contains only revenue and expense accounts. b) It provides a chronological record of transactions. c) It helps to locate errors because the debit and credit amounts for each entry can be readily compared. d) It discloses in one place the complete effect of a transaction. Ans: a Response A: Correct! Response B: The journal does provide a chronological record of transactions. Response C: This statement about the journal is true. Response D: The journal does disclose the complete effects of a transaction.

9. A ledger: a) contains only asset and liability accounts. b) should show accounts in alphabetical order. c) is a collection of the entire group of accounts maintained by a company. d) provides a chronological record of transactions. Ans: c Response A: The ledger contains all types of accounts, not just asset and liability accounts. Response B: Accounts are listed in the ledger in order of balance sheet accounts and then income statement accounts.

Response C: Correct! Response D: The journal, not the ledger provides a chronological record of transactions.

10. Posting: a) normally occurs before journalizing. b) transfers ledger transaction data to the journal. c) is an optional step in the recording process. d) transfers journal entries to ledger accounts. Ans: d Response A: This statement is backwards. Posting occurs AFTER journalizing. Response B: This statement is backwards. The process of posting transfers the information contained in journal entries to the ledger. Response C: Posting is a required step in the recording process. If it is not done, the ledger accounts will not reflect changes in the accounts resulting from transactions. Response D: Correct!

11. A trial balance: a) is a list of accounts with their balances at a given time. b) proves the mathematical accuracy of journalized transactions. c) will not balance if a correct journal entry is posted twice. d) proves that all transactions have been recorded. Ans: a Response A: Correct! Response B: While the trial balance does prove that debits and credits are equal after posting, it does not prove the mathematical accuracy of journalized transactions. Response C: If a journal entry is posted twice, the trial balance will still balance. Response D: A trial balance does NOT prove that all transactions have been recorded.

12. A trial balance will not balance if: a) a correct journal entry is posted twice. b) the purchase of supplies on account is debited to Supplies and credited to Cash. c) a $100 cash dividend is debited to Dividends for $1,000 and credited to Cash for $100. d) a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45. Ans: c Response A: If a correct journal entry is posted twice, the trial balance will still balance. Response B: If the purchase of supplies on account is debited to Supplies and credited to Cash, the trial balance will still balance. Response C: Correct! Response D: If a $450 payment on account is debited to Accounts Payable for $45 and credited to Cash for $45, the trial balance will still balance.