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CHAPTER 2 ACCOUNTING NOTES FOR STUDENTS, Lecture notes of Accounting

Abertay UniversityAccounting

CHAPTER 2 ACCOUNTING NOTES FOR STUDENTS

Typology: Lecture notes

2019/2020

Uploaded on 07/09/2020

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Financial Accounting, 9e (Harrison/Horngren/Thomas)
Chapter 2 Transaction Analysis
2.1 Learning Objective 2-1
1) A transaction is any event that has a financial impact on the business that can be
measured reliably.
Answer: TRUE
Diff: 1
LO: 2-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
2) Every transaction has two sides—you give something and you receive something.
Answer: TRUE
Diff: 1
LO: 2-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
3) Which of the following is NOT a business transaction?
A) The company sells goods on account.
B) The company buys land for cash.
C) The company is featured in a magazine article.
D) The company sells stock for cash.
Answer: C
Diff: 2
LO: 2-1
AASCB: Analytical Skills
AICPA Bus Persp: Strategic/Critical Thinking
AICPA Functional: Measurement
4) Transactions:
A) must be recorded for every company event.
B) provide objective information about the financial impact on a company.
C) are recorded only if the amounts are significant to the company.
D) only have one side that needs to be recorded.
Answer: B
Diff: 1
LO: 2-1
AICPA Bus Persp: Legal/Regulatory
AICPA Functional: Measurement
1
Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
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Financial Accounting, 9e (Harrison/Horngren/Thomas)

Chapter 2 Transaction Analysis

2.1 Learning Objective 2-

  1. A transaction is any event that has a financial impact on the business that can be measured reliably. Answer: TRUE Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. Every transaction has two sides—you give something and you receive something. Answer: TRUE Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. Which of the following is NOT a business transaction? A) The company sells goods on account. B) The company buys land for cash. C) The company is featured in a magazine article. D) The company sells stock for cash. Answer: C Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. Transactions: A) must be recorded for every company event. B) provide objective information about the financial impact on a company. C) are recorded only if the amounts are significant to the company. D) only have one side that needs to be recorded. Answer: B Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  1. Any event that has a financial impact on the business and can be measured reliably is a(n): A) expense. B) transaction. C) asset. D) journal. Answer: B Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. Which of the following business events would NOT be recorded in a company's accounting records? A) The company paid a monthly utility bill. B) The company issued 100 shares of common stock. C) The company purchased two acres of land for future plant expansion. D) The company signed a contract to provide services in the next accounting period. Answer: D Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

2.2 Learning Objective 2-

  1. The account is the basic summary device of accounting. Answer: TRUE Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. An accounts receivable usually specifies an interest rate. Answer: FALSE Diff: 2 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. Assets include cash, land, and accounts payable. Answer: FALSE Diff: 2 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

LO: 2-

AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

  1. Which account includes bank account balances? A) Accounts Receivable B) Notes Receivable C) Cash D) Prepaid Expenses Answer: C Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. Which of the following is a correct statement? A) Shareholders' equity is also called Proprietorship Equity. B) A proprietorship has more than one capital account. C) A partnership has a separate owner's equity account for each partner. D) Retained earnings is the owner's investment in the corporation. Answer: C Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  3. Notes payable, accounts payable, taxes payable and salaries payable are all examples of: A) liabilities. B) revenues. C) expenses. D) assets. Answer: A Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

2.3 Learning Objective 2-

  1. If a company declares and pays a dividend to its stockholders, both cash and expenses will decrease. Answer: FALSE Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. The rules for recording accounting transactions include all of the following EXCEPT: A) Every transaction's net amount on the left side of the equation must equal the net amount on the right side of the equation. B) Total assets must always equal total liabilities plus total equity. C) Every transaction affects the financial statements of the business. D) Both sides of the accounting equation must be affected. Answer: D Diff: 3 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  3. Generally companies will prepare financial statements: A) after every transaction. B) only when both the balance sheet and income statement are affected. C) at the end of the accounting period. D) at the close of every business day. Answer: C Diff: 1 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. When services are performed on account: A) cash is increased. B) revenue will not be recorded until the cash is received from the customer. C) accounts receivable is increased. D) accounts payable is increased. Answer: C Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement, Reporting
  1. Which of the following transactions will increase one asset and decrease another asset? A) The purchase of office supplies on account. B) The performance of services on account. C) The purchase of equipment for cash. D) The performance of services for cash. Answer: C Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. A company performed services for a customer for cash. This transaction increased assets and: A) decreased equity. B) increased liabilities. C) increased expenses. D) increased revenues. Answer: D Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  3. When cash is paid for utilities: A) stockholders' equity is decreased. B) expenses are decreased. C) assets are increased. D) liabilities are increased. Answer: A Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. A company paid cash for an amount owed to a creditor. This transaction decreased cash and: A) decreased revenues. B) decreased liabilities. C) decreased expenses. D) increased expenses. Answer: B Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  5. Company Z sells land for the same amount it paid for it three years ago. When the company records this transaction: A) assets and stockholders' equity are increased. B) one asset is increased and another asset is decreased. C) one liability is increased and another liability is decreased. D) assets are increased and liabilities are decreased.

Answer: B Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking, Legal/Regulatory AICPA Functional: Measurement

  1. When a company incurs additional debt, which type of account is increased? A) Expense account B) Retained earnings C) Liability account D) Common Stock account Answer: C Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. A company performs services for a client on account. When the company receives the cash from the customer one month later: A) a revenue account is increased. B) a liability account is decreased. C) an asset account is increased. D) an expense account is decreased. Answer: C Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

LO: 2-

AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

  1. Paying a repair bill as soon as it was received would: A) increase expenses. B) increase liabilities. C) increase owners' equity. D) decrease revenues. Answer: A Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. If a company buys inventory on account: A) cash would decrease. B) accounts payable would increase. C) net income would increase. D) common Stock would decrease. Answer: B Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  3. Receiving a payment from a customer on account: A) increases stockholders' equity. B) has no effect on total assets. C) decreases stockholders' equity. D) decreases liabilities. Answer: B Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. Which of the following transactions would decrease an asset and decrease stockholders' equity? A) The payment of an account payable B) The performance of a service for a client on account C) The borrowing of money from the bank for thirty days D) The declaration and payment of a dividend to the shareholders Answer: D Diff: 3 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  5. An important fact to remember when analyzing the transactions of a company is that: A) the income statement data appears under Common Stock.

B) the balance sheet data includes the ending balances of the asset, liabilities and revenues of the company. C) dividends are added when computing the ending balance of retained earnings. D) the income statement includes revenues and expenses. Answer: D Diff: 3 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

  1. Performing services on account: A) decreases both assets and liabilities. B) increases assets and decreases stockholders' equity. C) decreases revenues and decreases stockholders' equity. D) increases both net income and stockholders' equity. Answer: D Diff: 3 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. To compute the ending balance of retained earnings: A) the beginning balance in retained earnings will be zero for a new business. B) net income for the period is subtracted from the beginning balance. C) dividends are added to the beginning balance. D) common stock sold during the period is added to the beginning balance. Answer: A Diff: 3 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  3. Cash dividends paid to stockholders will: A) increase assets and decrease liabilities. B) increase assets and increase liabilities. C) have no effect on stockholders' equity or revenues. D) decrease assets and decrease stockholders' equity. Answer: D Diff: 3 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. When preparing the financial statements: A) the balance sheet lists the balance of the asset accounts at the end of the period. B) retained earnings is included in common stock. C) data for the statement of cash flows can be found under the retained earnings account. D) data for the income statement is found under the Cash account. Answer: A Diff: 2 LO: 2- AASCB: Analytical Skills

II. The business provided engineering services on account, $10,000. III. The business paid salaries to the receptionist, $1,000. IV. The business received cash from a customer as payment on account $6,000. V. The business borrowed $8,000 from the bank, issuing a note payable. Total liabilities would be: A) $0. B) $6,000. C) $14,000. D) $20,000. Answer: C Explanation: B) 6,000 + 8,000 = 14, Diff: 3 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

  1. A company completed the following transactions during the month of October: I. Purchased office supplies on account, $4,000. II. Provided services for cash, $10,000. III. Provided services on account, $12,000. IV. Collected cash from a customer on account $7,000. V. Paid the monthly rent of $3,000. What was the company's total revenue for the month? A) $10, B) $22, C) $29, D) $36, Answer: B Explanation: B) 10,000 + 12,000 = 22, Diff: 3 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  2. A company completed the following transactions during the month of October: I. Purchased office supplies on account, $4,000. II. Provided services for cash, $10,000. III. Provided services on account, $12,000. IV. Collected cash from a customer on account $7,000. V. Paid the monthly rent of $3,000. What was the company's net income for the month? A) $ B) $10, C) $19, D) $22, Answer: C Explanation: C) 10,000 + 12,000 - 3,000 = 19, Diff: 3 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  1. Sabre Company began business in June and completed the following transactions: A) Received $30,000 cash and issued common stock to the stockholders. B) Purchased supplies for $500, and equipment for $2,000 on account. C) Paid $2,000 monthly rent for office space. D) Performed services for a customer and billed the customer $4,500. E) Paid for the supplies purchased on account, $500. F) Declared and paid dividends of $1,000. REQUIRED:
  1. Record the effects of the following transactions on the accounting equation. After recording the transactions, compute the ending balances of the equation to prove it balances. Answer: Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  1. Record the effects of the following transactions on the accounting equation. After recording the transactions, compute the ending balances of the equation to prove it balances.
  1. A business received $10,000 and issued common stock.
  2. Paid $2,000 monthly rent for office space.
  3. Purchased $3,000 of office equipment, paying cash.
  4. Purchased $500 of office supplies on account.
  5. Recorded $4,000 of revenue, receiving cash.
  6. Performed $1,500 of services on account.
  7. Paid utilities expense of $900.
  8. Collected cash from a customer on account, $1,000.
  9. Borrowed $10,000 from the bank and signed a note payable. Answer: Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  1. The transactions of the Morton Company for the month of November are summarized below: REQUIRED: Answer the following questions about Morton Company:
  1. How much are total assets?
  2. How much does the business expect to collect from customers?
  3. How much does the business owe?
  4. How much net income or net loss did Morton Company have for the month of November? Answer:
  5. Total assets are $18,000. Calculation: 13,200 + 3,800 + 1,
  6. The business expects to collect $3,800 from its customers, the amount of its Accounts Receivable.
  7. The business owes $900, the balance in Accounts Payable.
  8. Morton had net income of $5,100. Calculation: 7,600 - 1,300 - 700 - 500 Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement

2.4 Learning Objective 2-

  1. The double-entry system of accounting records the dual effects on the entity. Answer: TRUE Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. The amount remaining in an account is called its balance. Answer: TRUE Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. Double-entry accounting affects at least three accounts. Answer: FALSE

Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement

  1. The left hand side of a T account is the debit side and the right hand side is the credit side. Answer: TRUE Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  2. The account title appears at the top of the T. Answer: TRUE Diff: 1 LO: 2- AICPA Bus Persp: Legal/Regulatory AICPA Functional: Measurement
  3. An account with a normal debit balance is most often an asset or revenue account. Answer: FALSE Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  4. Accounts payable is increased with a credit. Answer: TRUE Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement
  5. Assets, expenses, and dividends are all increased by debits. Answer: TRUE Diff: 2 LO: 2- AASCB: Analytical Skills AICPA Bus Persp: Strategic/Critical Thinking AICPA Functional: Measurement