Response to the following multiple choice questions:
Part. 1
1. XYZ Company deposited $15,000 in a bank account in return for issuing shares in the corporation. This transaction would affect which two financial statement elements?
Assets and stockholders' equity
Assets and liabilities
Liabilities and stockholders' equity
None of these choices
2. If a $20,000 purchase of equipment for cash is INCORRECTLY recorded as an increase to equipment and as an increase to cash, at the end of the period, assets will:
exceed liabilities and stockholders' equity by $10,000.
equal liabilities and stockholders' equity.
exceed liabilities and stockholders' equity by $20,000.
exceed liabilities and stockholders' equity by $40,000.
3. A business pays cash to settle its phone bill. How would this be recorded?
Decrease assets (cash) and decrease retained earnings (phone expense).
Increase assets (cash) and decrease retained earnings (phone expense).
Decrease assets (cash) and increase retained earnings (phone expense).
Increase assets (cash) and increase retained earnings (phone expense).
4. A utility bill was received on October 31, 2011, for services received during October 2011. The bill was paid in November 2011. Under the accrual basis of accounting, when would the utility expense be recorded?
In October
When it was paid
In November
Not recorded at all
5. The payment of $10,000 for expenses was recorded by Spears Co. as an increase in cash of $10,000, and a decrease in retained earnings of $10,000. What is the effect of this error on the accounting equation?
Total assets will exceed total liabilities and stockholders' equity by $20,000.
Total assets will exceed total liabilities and stockholders' equity by $10,000.
Total assets will be less than total liabilities and stockholders' equity by $20,000.
The error will not affect the accounting equation.
6. For EFG Co., the transaction "Purchase of store equipment with cash" would __________.
increase total assets
decrease total assets
have no effect on total assets
increase expenses
7. Which of the following would result in no net change in assets?
Stock issued for cash.
Expenses paid with cash.
Cash collected for fees earned.
Equipment purchased for cash.
8. A to Z Corporation engaged in the following transaction: "Issued a $30,000 note payable to borrow cash from the bank." On the Statement of Cash Flows, the transaction would be classified as __________.
Cash Flows from Operating Activities
Cash Flows from Investing Activities
Cash Flows from Financing Activities
This transaction would not appear on the Statement of Cash Flows.
9. Payment of cash dividends are recorded as:
a decrease in cash and an increase in expenses.
a decrease in cash and a decrease in retained earnings.
an increase in dividend expense and a decrease in cash.
a decrease in cash and a decrease in capital stock.
10. The income statement for August indicates net income of $50,000. The corporation also paid $10,000 in dividends during the same period. If there was a $20,000 beginning balance in stockholders' equity, what is the ending balance in stockholders' equity?
$40,000
$70,000
$10,000
$60,000
Part. 2
1. For EFG Co., the transaction "Payment of interest expense" would
increase total assets.
decrease total assets.
have no effect on total assets.
increase stockholders' equity.
2. Johnson, Inc. paid rent expense of $3,500 for the month of October. How are the accounts affected due to this transaction?
Increase in cash $3,500 and increase in retained earnings $3,500
Increase in cash $3,500 and decrease in retained earnings $3,500
Decrease in cash $3,500 and decrease in retained earnings $3,500
Decrease in cash $3,500 and increase in retained earnings $3,500
3. The basic financial statements do NOT include the
income statement.
tax return
balance sheet.
statement of cash flows.
4. For EFG Co., the transaction "Purchase of store equipment with cash" would
increase total assets.
decrease total assets.
have no effect on total assets.
decrease stockholders' equity.
5. For EFG Co., the transaction "Payment of dividends" would
increase total assets.
decrease total assets.
have no effect on total assets.
increase stockholders' equity.
6. Receiving cash for fees earned affects which financial statement elements?
Assets only
Stockholders' equity only
Assets and stockholders' equity
Assets and liabilities
7. Which of the following accounts is a stockholders' equity account?
Cash
Capital Stock
Prepaid Insurance
Accounts Payable
8. Rush Corporation borrowed $25,000 from the bank. Which of the following accurately shows the effects of the transaction?
Increase cash $25,000 and decrease notes payable $25,000
Increase cash $25,000 and increase notes payable $25,000
Decrease cash $25,000 and decrease notes payable $25,000
Decrease cash $25,000 and increase notes payable $25,000
9. The payment of a liability
decreases assets and stockholders' equity.
increases assets and decreases liabilities.
decreases assets and increases liabilities.
decreases assets and decreases liabilities.
10. Stockholders' Equity will be reduced by all of the following accounts EXCEPT:
Revenues
Expenses
Dividends
All of the above reduce Stockholders' Equity.
Part. 3
Indicate the effect of each transaction during the month of October 2011 using the given accounting equation.
a. Opened a business bank account for Jones, Inc., with an initial deposit of $45,000 in exchange for capital stock.
b. Paid rent on the office building for the month, $2,000.
c. Received cash for fees earned of $5,000.
d. Purchased equipment, $7,000.
e. Paid salaries for the month, $1,000.
Assets = Liabilities + Stockholders' Equity
Cash Equipment Notes Payable Capital Stock Retained Earnings
1. For transaction A, what is the effect of the transaction on the accounting equation?
Cash is increased $45,000, Capital Stock is increased $45,000
Cash is increased $45,000, Retained Earnings is increased $45,000
Note Payable is increased $45,000, Retained Earnings is increased $45,000
Cash is increased $45,000, Note Payable is increased $45,000
2. For transaction B, what is the effect of the transaction on the accounting equation?
Cash is decreased $2,000, Note Payable is decreased $2,000
Cash is decreased $2,000, Retained Earnings is decreased $2,000
Note Payable is decreased $2,000, Retained Earnings is decreased $2,000
Cash is decreased $2,000, Note Payable is increased $2,000
3. For transaction C, what is the effect of the transaction on the accounting equation?
Cash is increased $5,000, Retained Earnings is decreased $5,000
Cash is increased $5,000, Capital Stock increased $5,000
Cash is increased $5,000, Note Payable is decreased $5,000
Cash is increased $5,000, Retained Earnings is increased $5,000
4. For transaction D, what is the effect of the transaction on the accounting equation?
Cash is increased $7,000, Equipment is increased $7,000
Cash is decreased $7,000, Equipment is increased $7,000
Cash is decreased $7,000, Retained Earnings is increased $7,000
Cash is increased $7,000, Equipment is decreased $7,000
5. For transaction E, what is the effect of the transaction on the accounting equation?
Cash is decreased $1,000, Note Payable is decreased $1,000
Cash is decreased $1,000, Capital Stock is decreased $1,000
Cash is decreased $1,000, Retained Earnings is decreased $1,000
Cash is increased $1,000, Retained Earnings is increased $1,000