124 3 The Accounting Information System

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PRACTICE MULTIPLE-CHOICE QUESTIONS
(LO 1) 1. The effects on the basic accounting equation of per- (c) Assets, liabilities, and dividends.
forming services for cash are to: (d) Assets, dividends, and expenses.
(a) increase assets and decrease stockholders’ equity. 9. Paying an account payable with cash affects the com- (LO 2)
(b) increase assets and increase stockholders’ equity. ponents of the accounting equation in the following
(c) increase assets and increase liabilities. way:
(d) increase liabilities and increase stockholders’ (a) Decreases stockholders’ equity and decreases
equity. liabilities.
(LO 1) 2. Genesis Company buys a $900 machine on credit. (b) Increases assets and decreases liabilities.
This transaction will affect the: (c) Decreases assets and increases stockholders’
(a) income statement only. equity.
(b) balance sheet only. (d) Decreases assets and decreases liabilities.
(c) income statement and retained earnings state- 10. Which is not part of the recording process? (LO 3)
ment only. (a) Analyzing transactions.
(d) income statement, retained earnings statement, (b) Preparing an income statement.
and balance sheet. (c) Entering transactions in a journal.
(LO 1) 3. Which of the following events is not recorded in the (d) Posting journal entries.
accounting records? 11. Which of these statements about a journal is false? (LO 3)
(a) Equipment is purchased on account. (a) It contains only revenue and expense accounts.
(b) An employee is terminated. (b) It provides a chronological record of transactions.
(c) A cash investment is made into the business. (c) It helps to locate errors because the debit and
(d) Company pays dividend to stockholders. credit amounts for each entry can be readily
(LO 1) 4. During 2017, Gibson Company assets decreased compared.
$50,000 and its liabilities decreased $90,000. Its (d) It discloses in one place the complete effect of a
stockholders’ equity therefore: transaction.
(a) increased $40,000. 12. A ledger: (LO 4)
(b) decreased $140,000. (a) contains only asset and liability accounts.
(c) decreased $40,000. (b) should show accounts in alphabetical order.
(d) increased $140,000. (c) is a collection of the entire group of accounts
(LO 2) 5. Which statement about an account is true? maintained by a company.
(a) In its simplest form, an account consists of two (d) provides a chronological record of transactions.
parts. 13. Posting: (LO 4)
(b) An account is an individual accounting record of (a) normally occurs before journalizing.
increases and decreases in specific asset, liability, (b) transfers ledger transaction data to the journal.
and stockholders’ equity items. (c) is an optional step in the recording process.
(c) There are separate accounts for specific assets (d) transfers journal entries to ledger accounts.
and liabilities but only one account for stock- 14. A trial balance: (LO 5)
holders’ equity items. (a) is a list of accounts with their balances at a given
(d) The left side of an account is the credit, or decrease, time.
side. (b) proves that proper account titles were used.
(LO 2) 6. Debits: (c) will not balance if a correct journal entry is posted
(a) increase both assets and liabilities. twice.
(b) decrease both assets and liabilities. (d) proves
p that all transactions have been recorded.
(c) increase assets and decrease liabilities. 15. A trial balance will not balance if: (LO 5)
(d) decrease assets and increase liabilities. (a) a correct journal entry is posted twice.
(LO 2) 7. A revenue account: (b) the purchase of supplies on account is debited to
(a) is increased by debits. Supplies and credited to Cash.
(b) is decreased by credits. (c) a $100 cash dividend is debited to Dividends for
(c) has a normal balance of a debit. $1,000 and credited to Cash for $100.
(d) is increased by credits. (d) a $450 payment on account is debited to
(LO 2) 8. Which accounts normally have debit balances? Accounts Payable for $45 and credited to Cash
(a) Assets, expenses, and revenues. for $45.
(b) Assets, expenses, and retained earnings.

SOLUTIONS
1. (b) When services are performed for cash, assets are increased and stockholders’ equity is increased. The other choices
are therefore incorrect.
2. (b) When equipment is purchased on credit, assets are increased and liabilities are increased. These are both balance
sheet accounts. The other choices are incorrect because neither the income statement nor the retained earnings state-
ment is affected.
 Practice Exercises 125

3. (b) Termination of an employee is not a recordable event in the accounting records. The other choices all represent
events that are recorded.
4. (a) Since assets decreased by $50,000 and liabilities decreased by $90,000, stockholders’ equity has to increase by
$40,000 to keep the accounting equation balanced. The other choices are therefore incorrect.
5. (b) An account is an individual accounting record of increases and decreases in specific asset, liability, and stockhold-
ers’ equity items. The other choices are incorrect because (a) in its simplest form, an account consists of three parts: a
title and debit and credit side; (c) there are specific accounts for different types of stockholders’ equity, such as Com-
mon Stock, Retained Earnings, and Dividends; and (d) the left side of an account is the debit side.
6. (c) Debits increase assets and decrease liabilities. The other choices are therefore incorrect.
7. (d) Revenues are increased by credits. Revenues have a normal credit balance. The other choices are therefore
incorrect.
8. (d) Assets, dividends, and expenses have normal debit balances. The other choices are incorrect because (a) revenues
have a normal credit balance, (b) retained earnings has a normal credit balance, and (c) liabilities have a normal credit
balance.
9. (d) When paying an account payable with cash, the asset cash decreases. Accounts payable, a liability, decreases as
well. The other choices are therefore incorrect.
10. (b) Preparing an income statement is not part of the recording process. Choices (a) analyzing transactions, (c) entering
transactions in a journal, and (d) posting transactions are all steps in the recording process.
11. (a) A journal contains entries affecting all accounts, not just revenue and expense accounts. The other choices are true
statements.
12. (c) A ledger is a collection of the entire group of accounts maintained by a company. The other choices are therefore
incorrect.
13. (d) Posting transfers journal entries to ledger accounts. The other choices are incorrect because posting (a) occurs
after journalizing, (b) transfers the information contained in journal entries to the ledger, and (c) is a required step in
the recording process. If posting is not done, the ledger accounts will not reflect changes in the accounts resulting from
transactions.
14. (a) A trial balance is a list of accounts with their balances at a given time. The other choices are incorrect because
(b) it does not confirm that proper account titles were used; (c) if a journal entry is posted twice, the trial balance will
still balance; and (d) a trial balance does not prove that all transactions have been recorded.
15. (c) The entry will cause the trial balance to be out of balance. The other choices are incorrect because although these
entries are incorrect, they will still allow the trial balance to balance.
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PRACTICE EXERCISES
1. Legal Services Inc. was incorporated on July 1, 2017. During the first month of opera- Prepare a tabular presentation.
tions, the following transactions occurred. (LO 1)
1. Stockholders invested $10,000 in cash in exchange for common stock of Legal
Services Inc.
2. Paid $800 for July rent on office space.
3. Purchased office equipment on account $3,000.
4. Performed legal services for clients for cash $1,500.
5. Borrowed $700 cash from a bank on a note payable.
6. Performed legal services for client on account $2,000.
7. Paid monthly expenses: salaries $500, utilities $300, and advertising $100.

INSTRUCTIONS
Prepare a tabular summary of the transactions.