System Problem | Test Bank - Financial Statements 10e

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Student name:__________

FILL IN THE BLANK. Write the word or phrase that best completes each statement or answers the question.
1) _____________ and ______________ are the starting points of financial statements.

2) The third step in the process to go from transactions and events to financial statements is to record relevant transactions and events in a ______________.

3) The fourth step in the process to go from transactions and events to financial statements is to post journal entries to the ___________________.

4) _________________ identify and describe transactions and events entering the accounting system.

5) Revenues and expenses are two types of ____________________ accounts.

6) Sales receipts, checks, purchase orders, and bank statements are examples of ____________________ used in the accounting system.

7) In a seller’s accounting records, ___________________ are promises of payment from customers to the seller.

8) Unearned revenue is classified as a(an) _______________ on a business’s balance sheet.

9) The four types of equity accounts are ________________, __________________, ______________________, and ______________________.

10) A _______________ is a list of all ledger accounts and their identification numbers.

11) A record of increases and decreases in a specific asset, liability, equity, revenue, or expense is called a(n) ___________________.

12) _____________________________ requires that for each transaction at least two accounts are involved, with at least one debit and one credit. It also means that total amounts debited must equal total amounts credited for each transaction.

13) The _____________________ is the difference between total debits and total credits for an account, including any beginning balance.

14) Assets would be increased with a _______________ entry and liabilities would be increased with a______________ entry.

15) Funky Music purchased $25,000 of equipment for cash. The asset account, Equipment, is _______________ for $25,000 and the Cash account is _______________ for $25,000.

16) Jackson Brown Footwear had total liabilities of $127.5 million and total assets of $375 million. Its debt ratio was _______________.

17) _______________ is the process of transferring journal entry information to the ledger.

18) A ____________ gives a complete record of each transaction in one place, and it shows debits and credits for each transaction.

19) _____________________ is a liability that is recorded when customers pay in advance for products or services.

20) Posting is the transfer of information from the _______________ to the _____________.

21) You increase the Service Revenue account on the ___________side of its account.

22) You decrease the Accounts Payable account on the ___________side of its account.

SHORT ANSWER. Write the word or phrase that best completes each statement or answers the question.
23) List the steps in processing transactions.

24) Describe what source documents are and the purpose they serve in a business.

25) What are the three broad groups of accounts shown on an unclassified balance sheet and define each group?

26) Explain the difference between a general ledger and a chart of accounts.

27) Explain debits and credits and their role in the accounting system of a business.

28) Explain the debt ratio and its use in analyzing a company’s financial condition.

29) Explain the recording and posting processes.

30) What is a trial balance? What is its purpose?

31) Describe the link between a business’s income statement, the statement of retained earnings, and the balance sheet.

ESSAY. Write your answer in the space provided or on a separate sheet of paper.
32) Miley Block is a building consultant. Shown below are (a) several accounts in her ledger with each account preceded by an identification number, and (b) several transactions completed by Block. Indicate the accounts debited and credited when recording each transaction by placing the proper account identification numbers to the right of each transaction.

1. Accounts Payable
2. Accounts Receivable
3. Cash
4. Consulting Fees Earned
5. Office Supplies
6. Office Supplies Expense
7. Telephone Expense
8. Unearned Revenue
9. Common Stock
10. Dividends
11. Insurance Expense
12. Prepaid Insurance

33) Drew Castle is an insurance appraiser. Shown below are (a) several accounts in his ledger with each account preceded by an identification number, and (b) several transactions completed by Castle. Indicate the accounts debited and credited when recording each transaction by placing the proper account identification numbers to the right of each transaction.

1. Accounts Payable
2. Accounts Receivable
3. Appraisal Fees Earned
4. Cash
5. Insurance Expense
6. Office Equipment
7. Office Supplies
8. Office Supplies Expense
9. Prepaid Insurance
10. Salaries Expense
11. Telephone Expense
12. Unearned Appraisal Fees
13. Common Stock
14. Dividends

34) Identify by marking an X in the appropriate column, whether each of the following items would likely serve as a source document. The first one is done as an example.

35) Indicate whether a debit or credit entry would be required to record the following changes in each account.

a. To decrease Cash.
b. To increase Common Stock.
c. To decrease Accounts Payable.
d. To increase Salaries Expense.
e. To decrease Supplies.
f. To increase Revenue.
g. To decrease Accounts Receivable.
h. To increase Dividends.

36) Using the following list of accounts, enter the type of account and its normal balance into the table below. The first item is filled in as an example:

37) Rowdy Bolton began Bolton Office Services in October and during that month completed these transactions:

a. Invested $10,000 cash and $15,000 of computer equipment in the business in exchange for common stock.
b. Paid $500 cash for an insurance premium covering the next 12 months.
c. Completed office services for a customer and collected $1,000 cash.
d. Paid $200 cash for office supplies.
e. Paid $2,000 for October’s rent.

Prepare journal entries to record the above transactions. Explanations are unnecessary.

38) JBL Company sends a $2,500 bill to a customer for services it provided during the month. Set up the necessary T-accounts below and show how this transaction would be recorded directly in those accounts.

39) NBC made a $2,500 payment on account, to satisfy a previously recorded account payable. Set up the necessary T-accounts below and show how this transaction would be recorded directly in those accounts.

40) A company paid $100 in cash dividends. Set up the necessary T-accounts below and show how this transaction would be recorded directly in those accounts.

41) On December 3, the XFL Company paid $1,400 cash in salaries to employees. Prepare the general journal entry to record this transaction.

42) On February 5, Kirkland Company purchased equipment that cost $35,000. The firm paid $5,000 cash and signed a note payable for $30,000. Show the general journal entry to record this transaction.

43) Jarrod Automotive, owned and operated by Jarrod Johnson, began business in September of the current year. Jarrod, a mechanic, had no experience with recording business transactions. As a result, Jarrod entered all of September’s transactions directly into the ledger accounts. When he tried to locate a particular entry, he found it confusing and time consuming. He has hired you to improve his accounting procedures. The accounts in his General Ledger follow:

Prepare the general journal entries, in chronological order (a) through (e), from the T-account entries shown. Include a brief description of the probable nature of each transaction.

44) Sarah’s Paralegal Services completed these transactions in February:

a. Purchased office supplies on account, $300.
b. Completed work for a client on credit, $500.
c. Paid cash for the office supplies purchased in (a).
d. Completed work for a client and received $800 cash.
e. Received $500 cash for the work described in (b).
f. Received $1,000 in advance from a client for services to be performed in March.

Prepare journal entries to record the above transactions. Explanations are not necessary.

45) Larry Matt completed these transactions during December of the current year:

Prepare general journal entries to record these transactions.

46) Mary Sunny, the sole stockholder, began business as Sunny Law Firm on November 1. Record the following November transactions by making entries directly to the T-accounts provided. Next, prepare a trial balance as of November 30.

a) Mary invested $15,000 cash and a law library valued at $6,000 in exchange for common stock.
b) Purchased $7,500 of office equipment from John Bronx on credit.
c) Completed legal work for a client and received $1,500 cash in full payment.
d) Paid John Bronx $3,500 cash in partial payment of the amount owed from transaction b.
e) Completed $4,000 of legal work for a client on credit.
f) Paid $2,000 in cash dividends.
g) Received $2,500 cash as partial payment for the legal work completed for the client in (e).
h) Paid $2,500 cash for the secretary’s salary.

47) Jerry’s Shop had the following assets and liabilities at the beginning and end of the current year:

If there were no stockholder investments or dividends paid during the year, what was the amount of net income earned by Jerry’s Shop?

48) Victor Services had the following assets and liabilities at the beginning and end of the current year:

If $12,000 of common stock was issued during the year, but no dividends were paid during the year, what was the amount of net income earned by Victor Services?

49) Archer Company had the following assets and liabilities at the beginning and end of the current year:

If $12,000 of common stock was issued during the year, and the business paid $5,000 in dividends during the year, what was the amount of net income earned by Archer Company?

50) A company had total assets of $350,000, total liabilities of $101,500, and total equity of $248,500. Calculate the company’s debt ratio.

51) Jackson Advertising Company had assets of $475,000; liabilities of $275,500; and equity of $199,500. Calculate its debt ratio.

52) Rosenow Farms receives $50,000 cash from owner Don Rosenow in exchange for common stock. What is the overall effect on total assets for this company as a result of this transaction?

53) Given each of the following errors, indicate on the table below the amount by which the trial balance will be out of balance and which trial balance column (debit or credit) will have the larger total as a result of the error.

a. $100 debit to Cash was debited to the Cash account twice.
b. $1,900 credit to Sales was posted as a $190 credit.
c. $5,000 debit to Office Equipment was debited to Office Supplies.
d. $625 debit to Prepaid Insurance was posted as a $62.50 debit.
e. $520 credit to Accounts Payable was not posted.

54) After preparing an (unadjusted) trial balance at year-end, R. Chang of Chang Window Company discovered the following errors:

1. Cash payment of the $225 telephone bill for December was recorded twice.
2. Cash payment of a note payable was recorded as a debit to Cash and a debit to Notes Payable for $1,000.
3. A $900 cash dividend was recorded to the correct accounts as $90.
4. An additional investment of $5,000 cash by a stockholder was recorded as a debit to Common Stock and a credit to Cash.
5. A credit purchase of office equipment for $1,800 was recorded as a debit to the Office Equipment account with no offsetting credit entry.

Using the form below, indicate whether the error would cause the trial balance to be out of balance by placing an X in either the yes or no column.

55) The balances for the accounts of Milo’s Management Company for the year ended December 31 are shown below. Each account shown had a normal balance.

Calculate the correct balance for Cash and prepare a trial balance.

56) At year-end, Henry Laundry Service noted the following errors in its trial balance:

1. It understated the total debits to the Cash account by $500 when computing the account balance.
2. A credit sale for $311 was recorded as a credit to the revenue account, but the offsetting debit was not posted.
3. A cash payment to a creditor for $2,600 was never recorded.
4. The $680 balance of the Prepaid Insurance account was listed in the credit column of the trial balance.
5. A $24,900 van purchase was recorded as a $24,090 debit to Equipment and a $24,090 credit to Notes Payable.
6. A purchase of office supplies for $150 was recorded as a debit to Office Equipment. The offsetting credit entry was correct.
7. An additional investment of $4,000 by stockholders was recorded as a debit to Common Stock and as a credit to Cash.
8. The cash payment of the $510 utility bill for December was recorded (but not paid) twice.
9. The revenue account balance of $79,817 was listed on the trial balance as $97,817.
10. A $1,000 cash dividend was recorded as a $100 debit to Dividends and $100 credit to cash.

Using the form below, indicate whether each error would cause the trial balance to be out of balance, the amount of any imbalance, and whether a correcting journal entry is required.

57) The following trial balance is prepared from the general ledger of HG’s Auto Maintenance.

Because the trial balance did not balance, you decided to examine the accounting records. You found that the following errors had been made:

1. A purchase of supplies on account for $245 was posted as a debit to Supplies and as a debit to Accounts Payable.
2. An investment of $500 cash by a stockholder was debited to Common Stock and credited to Cash.
3. In computing the balance of the Accounts Receivable account, a debit of $600 was omitted from the computation.
4. One debit of $300 to the Dividends account was posted as a credit.
5. Office equipment purchased for $800 was posted to the Shop Equipment account.
6. One entire entry was not posted to the general ledger. The transaction involved the receipt of $125 cash for repair services performed for cash.

Prepare a corrected trial balance for the HG’s Auto Maintenance as of October 31.

58) Figgaro Company began operations on August 1. The Company’s accounts and their balances, as of the end of August, are included below. All accounts have normal balances:

a. Calculate net income.
b. Determine the amount of retained earnings to be shown on the August 31 balance sheet.

59) Sally’s Salon began operations on January 1 of the current year with an investment by Sally of $21,155 in exchange for common stock. Based on the following trial balance prepare an income statement, statement of retained earnings, and a balance sheet. There were no additional common stock issuances during the year.

60) George Butler, the sole stockholder, opened a business that provides day tugboat tours to tourists along the Mississippi River. Prepare journal entries to record the following transactions.

61) Based on the following trial balance for Barry’s Automotive Shop, prepare an income statement, statement of retained earnings, and a balance sheet. There were no additional stock issuances during the year.

62) For each of the accounts in the following table (1) identify the type of account as an asset, liability, equity, revenue, or expense, and (2) identify the normal balance of the account.

63) For each of the following accounts, identify whether a debit or credit yields the indicated change

64) Indicate on which financial statement each of the following items appears. Use I for income statement, E for statement of retained earnings and B for balance sheet.

65) Jason Hope opened a hotel. Prepare journal entries to record the following transactions. Use the following partial chart of accounts: Cash; Supplies; Prepaid Insurance; Land; Building; Accounts Payable; Unearned Rental Revenue; Note Payable; Common Stock; Dividends; Room Rental Revenue; Event Revenue; Salaries Expense; Catering Expense; Maintenance Expense; and Event Expense.

66) For each of the following accounts, (1) identify the account as an asset, liability, equity, revenue, or expense, and (2) indicate the normal balance of the account.

67) On November 3, Forbes Company provided auditing and tax services of $5,000 to a client. The client is billed for these services. Show the journal entry for Forbes Company to record this transaction.

Answer Key

Test name: John Wild Ch02 Problem Material

1) [Business transactions, Events]

2) journal

3) ledger

4) Source documents

5) equity

6) source documents

7) Accounts receivable

8) liability

9) [common stock, dividends, revenues, expenses]

10) chart of accounts

11) account

12) Double-entry accounting

13) account balance

14) [debit, credit]

15) [debited, credited]

16) 34%

17) Posting

18) journal

19) Unearned revenue

20) [journal, ledger]

21) right or credit

22) left or debit

23) Business transactions and events are the starting point. The process to go from transactions and events to financial statements includes (1) Identify each transaction and event from source documents, (2) Analyze each transaction and event using the accounting equations, (3) Record relevant transactions and events in a journal, (4) Post journal information to the ledger accounts, and (5) Prepare and analyze the trial balance and financial statements.

24) Source documents are used to identify and describe transactions and events entering the accounting system. They provide objective and reliable evidence about transactions and events and their amounts. Examples of source documents include sales receipts checks, purchase orders, bills from suppliers, payroll records, and bank statements. They can be in hard copy or electronic form.

25) Accounts are classified into three broad groups: assets, liabilities and equity accounts. Assets are resources owned or controlled by a company. Liabilities are obligations to transfer assets or provide products or services to others. Equity is the owners’ claim on a company’s assets.

26) A ledger is a record of all accounts used by a company and their balances. The chart of accounts is a list of all of ledger accounts a company uses and has an identification number assigned to each account. A chart of accounts does not include account balances.

27) Debit refers to the left side of an account and credit refers to the right side of an account. Debits and credits are part of the double-entry accounting system. This system is based on the concept that all transactions and events affect at least two accounts. The double entry system is organized around the accounting equation which states that assets = liabilities + equity. Assets, expenses, and the dividends account all have normal debit balances. Liabilities, revenues, and the common stock account all have normal credit balances.

28) The debt ratio is calculated by dividing total liabilities by total assets. It reveals the percentage of the company’s assets that are financed by creditors. The higher the ratio, the more risk a company has in trying to repay the debt and interest.

29) Information from business transactions and events is recorded in the journal in the form of journal entries. The journal entries include the date, the account titles, and debit and credit amounts. Journal entries may also include a further description of the transaction. During the posting process, the debit and credit amounts recorded in the journal are transferred to the individual accounts in the ledger.

30) The trial balance is a list of all ledger accounts and their balances at a point in time. The trial balance is not a financial statement, but rather a tool that can be used to check the equality of debits and credits in the ledger. If the total debits and credits are not equal, it indicates an error in the accounting records. However, even if debits do equal credits, it does not guarantee that no errors were made in recording and posting transactions.

31) The income statement shows the amount of net income the company has earned. That net income is carried over to the statement of retained earnings. The net income is added to the beginning retained earnings balance, and dividends are subtracted to determine the ending retained earnings balance. The ending retained earnings balance is then reported on the balance sheet.

32)

33)

34)

35) a. Credit<br>b. Credit<br>c. Debit<br>d. Debit<br>e. Credit<br>f. Credit<br>g. Credit<br>h. Debit

36)

37)