Accounting Information for Business Decisions 2nd Edition by Billie Cunningham - Test Bank

Chapter 5 – Recording, Storing and Reporting Accounting Information

COMPLETION

1.An ________________ is a means by which a business identifies, measures, records and retains accounting information about its activities so that it can report this information in its financial statements.

ANS: accounting system

PTS: 1 DIF: Easy TOP: Accounts

2.A business uses ________________ to record and retain monetary information from its transactions.

ANS: accounts

PTS: 1 DIF: Easy TOP: Accounts

3.A _______________ is the entire set of accounts that a business uses.

ANS: general ledger

PTS: 1 DIF: Easy TOP: Accounts

4.The balance of an __________ is the difference between the number of debit and credit entries.

ANS: account

PTS: 1 DIF: Easy TOP: Accounts

5.The left side of the T account is called the _________ side and the right side is called the ______ side.

ANS: debit; credit

PTS: 1 DIF: Easy TOP: Debits and credits

6.Each account accumulates __________ about how much it has increased or decreased as a result of various transactions.

ANS: information

PTS: 1 DIF: Easy TOP: Recording rules

7.When the business earns revenue, the ultimate effect of the revenue increase is to increase the ________ __________.

ANS: owner’s equity

PTS: 1 DIF: Easy TOP: Recording rules

8.Asset accounts are increased by __________ entries and decreased by ________ entries.

ANS: debit; credit

PTS: 1 DIF: Easy TOP: Recording rules

9.Liability accounts are ___________ by credit entries and ___________ by debit entries.

ANS: increased; decreased

PTS: 1 DIF: Easy TOP: Recording rules

10.The __________________ rule states that in the recording of a transaction, the total amount of the debit entries must equal the total amount of the credit entries for the transaction.

ANS: double entry

PTS: 1 DIF: Easy TOP: Recording rules

11.The ________________ is the accounting period in which a business records, retains and reports the monetary information from its transactions.

ANS: accounting cycle

PTS: 1 DIF: Easy TOP: Accounting cycle

12.A business uses information from source documents to record each transaction in a ________________.

ANS: journal

PTS: 1 DIF: Easy TOP: Recording (journalising) transactions

13.A general journal includes information about each transaction including the _______ of the transaction, the _________ to be debited and credited, the amounts of ______ and _______ entries and an explanation of each transaction.

ANS: date; accounts; debit; credit

PTS: 1 DIF: Difficult TOP: Recording (journalising) transactions

14.______________ is the process of recording a transaction in the business’ general journal.

ANS: Journalising

PTS: 1 DIF: Moderate TOP: Recording (journalising) transactions

15.______________ is the process of transferring the debit and credit information for each journal entry to the accounts in a business’ general ledger.

ANS: Posting

PTS: 1 DIF: Moderate TOP: Posting from journals to the accounts

16.A chart of accounts is a numbering system designed to organise a business’ accounts efficiently and to reduce____________ in the _____________ and ________________ process.

ANS: errors; recording; accumulating

PTS: 1 DIF: Moderate TOP: Account numbers and chart of accounts

17.The balance in the Accounts Payable control account must always equal the total of all the accounts in the ____________ _____________ ________________ ___________ or file.

ANS: accounts payable subsidiary ledger

PTS: 1 DIF: Moderate TOP: Ledgers – general and subsidiary

18.A ____________ _____________ is a schedule that lists the titles of all the accounts in a business’ general ledger as well as the debit or credit balance of each account.

ANS: trial balance

PTS: 1 DIF: Moderate TOP: Trial balance

19.Adjusting entries are journal entries that a business makes at the end of its accounting period to bring the business’ ____________ and _____________ account balances up to date and to show the correct ending balances in its __________ and ___________ accounts.

ANS: revenue: expense; asset; liability

PTS: 1 DIF: Moderate TOP: Preparing adjusting entries

20.An ____________ _____________ is an expense that a business has incurred during the accounting period but that it has not paid or recorded.

ANS: accrued expense

PTS: 1 DIF: Moderate TOP: Accrued items

TRUE/FALSE

1.If A Ltd pays B Ltd $340 for inventory purchased three weeks earlier, the liability account is decreased by this amount to recognise the $340 paid .

ANS: T PTS: 1 DIF: Easy TOP: Recording (journalising) transactions

2.Posting is the process of transferring the debit and credit information for each journal entry to the accounts in a business general ledger.

ANS: T PTS: 1 DIF: Moderate TOP: Posting from journals to the accounts

3.A chart of accounts is a numbering system designed to organise a business account efficiently and to reduce errors in the recording and accumulating process.

ANS: T PTS: 1 DIF: Moderate TOP: Account numbers and chart of accounts

4.A business with a manual accounting system usually posts at the end of each year.

ANS: F PTS: 1 DIF: Easy TOP: Key procedures in posting

5.The general ledger is the most important ledger because balances of accounts contained within it are used to draw up the Trial Balance.

ANS: T PTS: 1 DIF: Moderate TOP: Ledgers – general and subsidiary

6.The accounts receivable account tells us how much is owed in total by debtors, but it does not tell us which debtors owe which amounts.

ANS: T PTS: 1 DIF: Difficult TOP: Ledgers – general and subsidiary

7.A trial balance is a schedule that lists the titles of all the accounts in a business general ledger, the debit or credit balance of each account and the totals of the debit and credit columns to ensure it balances.

ANS: T PTS: 1 DIF: Moderate TOP: Trial balance

8.The total amount of the debit entries is normally different to the amount of the credit entries in both the general journal and the general ledger accounts. A source document serves as evidence that a transaction has occurred.

ANS: F PTS: 1 DIF: Easy TOP: Trial balance

9.Adjusting entries are journal entries that a business makes at the end of its accounting period to bring the business revenue and expense account balances up-to-date and to show the correct ending balances in its asset and liability accounts.

ANS: T PTS: 1 DIF: Moderate TOP: Preparing adjusting entries

10.A prepaid item is an economic resource for which a business has paid cash and expects to use in its operating activities in the near future.

ANS:T PTS:1DIF: EasyTOP: Apportionment of prepaid items and unearned revenues

11.A business records the apportionment of the cost of each prepaid item between an expense and an asset in an adjusting entry in its general journal.

ANS: T PTS: 1 DIF: Easy TOP: Apportionment of prepaid

12Unearned revenue is an obligation of a business to provide goods or services in the future and results from an advance receipt of cash.

ANS: T PTS: 1 DIF: Easy TOP: Apportionment of prepaid

13.Accrued revenue is revenue that a business has earned during the accounting period but has not collected or recorded.

ANS: T PTS: 1 DIF: Easy TOP: Apportionment of prepaid

14.Some adjusting entries involve estimated amounts because they are based on expected future events.

ANS: T PTS: 1 DIF: Easy TOP: Estimated items

15.A business may opt to record credit sales very aggressively by stretching its interpretation of GAAP.

ANS: T PTS: 1 DIF: Moderate TOP: Business issues and values

16.A general journal does not include the date, and the accounts to be debited and credited on the transaction.

ANS: F PTS: 1 DIF: Easy TOP: Recording (journalising) transactions

17.The major steps involved in the accounting cycle include recording the transaction in the general journal, posting the journal entries, preparing the financial statements and recording and posting closing entries.

ANS: T PTS: 1 DIF: Easy TOP: Accounting cycle

18.Debit amounts are always inserted on the left of the account and the credit amount is always inserted on the right side of the account.

ANS: T PTS: 1 DIF: Easy TOP: Debits and credits

19.The adjusting entry for depreciation is debit (increase) to the contra-asset account Accumulated Depreciation and a credit (decreases) to the expense account Depreciation Expense.

ANS: F PTS: 1 DIF: Easy TOP: Estimated Items

MULTIPLE CHOICE

1.Which of the following best describes a general ledger?

a. A detailed record of all cash received and paid.

b. It is the entire set of accounts that a business uses.

c. A document that summarises all of the account balances.

d. A list of all assets and liabilities.

ANS: B PTS: 1 DIF: Easy TOP: Accounts

2.Which of the following are characteristics of a T account?

a. There is a left-hand side.

b. There is a right-hand side.

c. At the end of a period the account balances.

d. All of the above.

ANS: D PTS: 1 DIF: Easy TOP: Debits and credits

3.Asset accounts

a. Are increased by debit entries and decreased by credit entries.

b. Are decreased by debit entries and increased by credit entries.

c. Are increased by both debit entries and credit entries.

d. None of the above.

ANS: A PTS: 1 DIF: Moderate TOP: Recording rules

4.Liability accounts

a. Normally have a debit balance.

b. Normally have a credit balance.

c. Can have both a debit or credit balance.

d. None of the above.

ANS: B PTS: 1 DIF: Moderate TOP: Recording rules

5.Which of the following best describes the double entry rule?

a. There can only be two entries for each transaction.

b. There must be both an increase and a decrease for an asset account for each transaction.

c. One entry must affect owner’s equity.

d. The total amount of the debit entries must equal the total amount of the credit entries.

ANS: D PTS: 1 DIF: Moderate TOP: Recording rules

6.Which of the following is not a step in the accounting cycle?

a. Recording the transactions in the general journal.

b. Counting the number of accounts in the general ledger.

c. Recording adjusting entries.

d. Recording closing entries.

ANS: B PTS: 1 DIF: Easy TOP: Accounting cycle

7.Which of the following is not part of the information contained in a general journal?

a. The name of the person that prepared the journal.

b. The date of the transaction.

c. The accounts to be debited and credited.

d. The amounts of the debit and credit entries.

ANS: A PTS: 1 DIF: Easy TOP: Recording (journalising) transactions

8.The journal entry to record the owner’s investment of $20 000 cash in to their business is:

a. Asset account (cash at bank) increases (debit) by $20 000 and a liability (loan) increases (credit) by $20 000.

b. Liability (loan) increases (debit) by $20 ,000 and owner’s equity increases (credit) by $20 000.

c. Asset (cash at bank) increases (debit) by $20,000 and owner’s equity increases (credit) by $20 000.

d. Liability (loan) decreases (debit) by $20,000 and owner’s equity increases (credit) by $20,000.

ANS: C PTS: 1 DIF: Difficult TOP: Journal entries

9.In accounting ‘posting’ refers to:

a. Sending of invoices to customers.

b. Opening of the mail on a daily basis.

c. Despatching of inventory items by courier to customers.

d. The process of transferring the debit and credit information for each journal entry to the accounts in a business’ general ledger.

ANS: D PTS: 1 DIF: Easy TOP: Posting from journals to the accounts

10.A trial balance is:

a. A schedule that lists the debit or credit balances of each account.

b. A list of errors in the general ledger.

c. A list of customers and the amounts that they owe.

d. A list of suppliers and the amounts that are owed.

ANS: A PTS: 1 DIF: Easy TOP: Trial balance

11.What is the purpose of adjusting entries?

a. To balance the trial balance.

b. To bring the business’ revenue and expense account balances up to date and to show the correct ending balances in its asset and liability accounts.

c. To close of all the general ledger accounts at the end of a period in preparation for the next period.

d. None of the above.

ANS: B PTS: 1 DIF: Moderate TOP: Preparing adjusting entries

12.What of the following are examples of prepaid items?

a. Supplies.

b. Rent paid for one year in advance.

c. Insurance paid for one year in advance.

d. All of the above.

ANS: D PTS: 1 DIF: Moderate TOP: Apportionment of prepaid items and unearned revenues

13.Suppose that a customer pays a deposit for work to be done next year. The business will increase an asset account (cash at bank) and will:

a. Increase owner’s equity (revenue).

b. Decrease an asset (accounts receivable).

c. Increase a liability (unearned revenue).

d. None of the above.

ANS: C PTS: 1 DIF: Moderate TOP: Apportionment of prepaid items and unearned revenues

14.Which of the following is an example of an estimated item?

a. The value of an invoice sent to a customer.

b. The amount of depreciation on equipment.

c. The value of an invoice received from a supplier.

d. The amount paid for petrol for the company motor vehicle.

ANS: B PTS: 1 DIF: Moderate TOP: Estimated items

15.Which of the following financial statements is normally prepared first?

a. Income statement.

b. Balance sheet.

c. Statement of changes in equity.

d. Statement of cash flows.

ANS: A PTS: 1 DIF: Moderate TOP: Preparing the financial statements

16.An income statement is the financial statement that summarises the result of a business’ earnings activities, that is:

a. Cash in, cash out and cash balance.

b. Assets, liabilities and owner’s equity.

c. Inventory in, inventory out and inventory balance.

d. Revenues, expenses and net income.

ANS: D PTS: 1 DIF: Moderate TOP: Income statement

17.Which of the following is not normally shown in the statement of changes in equity?

a. Changes in the cash balance during the period.

b. Additional investments by the owner in the business.

c. The business’ net income.

d. Owner withdrawals during the period.

ANS: A PTS: 1 DIF: Easy TOP: Statement of changes in owner’s equity

18.A balance sheet shows which of the following:

a. The financial performance of a business.

b. The financial position of a business.

c. Both the financial performance and financial position of a business.

d. None of the above.

ANS: B PTS: 1 DIF: Easy TOP: Balance sheet

19.Who makes the decision to pay dividends to a company’s owners?

a. The company’s owners (shareholders).

b. The company’s chief executive officer (CEO).

c. The board of directors.

d. The taxation authorities.

ANS: C PTS: 1 DIF: Easy TOP: Distribution to owners

20.The owner’s equity of a company is called shareholders’ equity and consists of at least two parts:

a. Owner’s equity and reserves.

b. Contributed capital and current earnings.

c. Reserves and retained earnings.

d. Contributed capital and retained earnings.

ANS: D PTS: 1 DIF: Moderate TOP: Modifications for companies

SHORT ANSWER

1.Briefly explain the purpose of general ledger accounts and provide some examples of these accounts.

ANS:

A general ledger account is an account or record used to sort and store balance sheet and income statement transactions. Examples of general ledger accounts include the asset accounts such as Cash, Accounts Receivable, Inventory, Investments, Land, and Equipment. Examples of the general ledger liability accounts include Notes Payable, Accounts Payable, Accrued Expenses Payable, and Customer Deposits. Examples of income statement accounts found in the general ledger include Sales, Service Fee Revenues, Salaries Expense, Rent Expense, Advertising Expense, Interest Expense, and Loss on Disposal of Assets.

Some general ledger accounts are summary records which are referred to as control accounts. The detail that supports each of the control accounts will be found outside of the general ledger in what is known as a subsidiary ledger. For example, Accounts Receivable could be a control account in the general ledger, and there will be a subsidiary ledger which contains each customer’s credit activity. The general ledger accounts Inventory, Equipment, and Accounts Payable could also be control accounts and for each there will be a subsidiary ledger containing the supporting detail.

PTS: 1 DIF: Easy TOP: Accounts

2.Describe the steps in the accounting cycle.

ANS:

There are five steps to the accounting cycle:

1. Recording the transactions in the general journal

2. Posting the journal entries to the accounts in the general ledger

3. Recording adjusting entries

4. Preparing the financial statements

5. Recording closing entries.

PTS: 1 DIF: Moderate TOP: Accounting cycle

3.Outline the purpose of a chart of accounts.

ANS:

The chart of accounts is a listing of all accounts used in the general ledger, usually sorted in order by account number. The accounts are usually numeric, but can also be alphabetic or alphanumeric. The account numbering system is used by the accounting software to aggregate information into an entity’s financial statements.

Accounts are usually listed in order of their appearance in the financial statements, starting with the balance sheet and continuing with the income statement. Thus, the chart of accounts begins with cash, proceeds through liabilities and shareholders’ equity, and then continues with accounts for revenues and then expenses. Many organisations structure their chart of accounts so that expense information is separately compiled by department; thus, the sales department, engineering department, and accounting department all have the same set of expense accounts.

PTS: 1 DIF: Easy TOP: Account numbers and chart of accounts

4.Explain the use of subsidiary ledgers.

ANS:

A subsidiary ledger contains the details to support a general ledger control account. For instance, the subsidiary ledger for accounts receivable contains all of the information on each of the credit sales to customers, each customer’s remittance, return of merchandise, discounts, and so on. With these details in the subsidiary ledger, the Accounts Receivable account in the general ledger can be a control account. As a control account, it will simply report the aggregate amounts of the accounts receivable activity.

By having the details of the accounts receivable activity in a subsidiary ledger, a company can better control its financial information. For example, the credit manager and others in the credit department of a company will have access to any and all of the credit sales information through the subsidiary ledger without having access to any other account in the company’s general ledger.

PTS: 1 DIF: Easy TOP: Ledgers – general and subsidiary

5.Describe the use and contents of a trial balance.

ANS:

The trial balance is a report run at the end of an accounting period, listing the ending balance in each account. The report is primarily used to ensure that the total of all debits equals the total of all credits, which means that there are no unbalanced journal entries in the accounting system that would make it impossible to generate accurate financial statements.

Even when the debit and credit totals equal each other, it does not mean that there are no errors in the accounts listed in the trial balance. For example, a debit could have been entered in the wrong account, which means that the debit total is correct, though one underlying account balance is too low and another balance is too high. For example, an accounts payable clerk records a $100 supplier invoice with a debit to supplies expense and a $100 credit to the accounts payable liability account. The debit should have been to the utilities expense account, but the trial balance will still show that the total amount of debits equals the total amount of credits.

PTS: 1 DIF: Easy TOP: Trial balance

6.Explain an accrued expense.

ANS:

An accrued expense is an expense that a business has incurred during the accounting period but that it has not paid or recorded. A common type of accrued expense is unpaid employees salaries, unpaid interest, taxes and utility bills. To match all expenses against revenues and to report all the liabilities at the end of the period, a business makes an adjusting entry to record each accrued expense.

PTS: 1 DIF: Moderate TOP: Accrued items

7.Explain the order in which a business prepares it financial statements.

ANS:

A business prepares its financial statements for the accounting period after it completes the adjusted trial balance. It prepares the income statement first because the amount of net income or net loss affects the owner’s capital account on the balance sheet. A sole proprietorship prepares the statement of changes in owner’s equity, it then prepares the balance sheet and lastly the cash flow statement.

PTS: 1 DIF: Difficult TOP: Preparing the financial statements

8.What is the income statement?

ANS:

An income statement is the financial statement that summarises the results of business earnings activities for its accounting period. The main features of the income statement are the revenue, expenses and net income.

PTS: 1 DIF: Easy TOP: Income statement

9.Explain the statement of changes in owner’s equity statement.

ANS:

A statement of changes in owner’s equity is a schedule that shows the impact on owner’s equity of any additional investments by the owner in the business, the business net income, and owner withdrawals during the accounting period. A business presents this statement as a supporting schedule to the owner’s capital account balance listed on the balance sheet.

PTS: 1 DIF: Moderate TOP: Statement of changes in owner’s equity

10.List and describe the three elements of a balance sheet.

ANS:

The balance sheet presents the financial position of an entity at a given date. It is comprised of the following three elements:

• Assets: Something a business owns or controls (e.g. cash, inventory, plant and machinery, etc)

• Liabilities: Something a business owes to someone (e.g. creditors, bank loans, etc)

• Equity: What the business owes to its owners. This represents the amount of capital that remains in the business after its assets are used to pay off its outstanding liabilities. Equity therefore represents the difference between the assets and liabilities.

PTS: 1 DIF: Moderate TOP: Balance sheet

PROBLEM

1.Bruce Li commenced his concrete polishing business on 1 July 2014, trading as Li Concrete Polishing. The transactions for his first month of business are given below. Bruce Li records the payments for insurance as a prepayment (Prepaid Insurance) and records the corresponding expenses on balance date.

GST should be ignored

July 1 Bruce Li commenced business with a cash deposit of $3000.

2 Paid insurance for July, August and September by electronic transfer, $690.

6 Purchased equipment for $4600, on account. Paid a deposit of $900.

7 Paid wages of $380 and recorded PAYE of $95.

9 Wrote cheque for drawings, $300.

11 Invoiced customer for concrete polishing services, $1380.

12 Took out bank loan for $4000.

14 Performed polishing services for cash, $575.

21 Received partial payment from credit customer $1100.

23 Purchased petrol on account, $115.

30 Made partial payment on equipment purchased on account on 6 July, $200.

Further information as at 31 July 2014:

• Mobile telephone phone expenses of $400 were owing for July. An invoice had not been received on balance date.

• The depreciation expense for the equipment for July is determined to be $270.

• Insurance prepaid for August and September is $400.

• Services performed but not invoiced amounted to $700.

Prepare all of the journal entries for the above noted transactions (narrations are not required).

ANS:

Date Account DR CR

July 1Cash at Bank3000

    Capital3000

2Prepaid Insurance690

    Cash at Bank690

6Equipment4600

    Accounts Payable4600

Accounts Payable900

    Cash at Bank900

6Equipment4600

Accdounts payable3700

Cash at bank900

7Wages475

    Cash at Bank380

    PAYE Payable95

9Drawings300

    Cash at Bank300

11Accounts Receivable1380

    Polishing Services1380

12Cash at Bank4000

    Bank Loan4000

14Bank575

    Polishing Services575

21Bank1100

    Accounts Receivable1100

23Petrol Expense115

    Accounts Payable115

30Accounts Payable200

    Cash at Bank200

31Telephone Expenses400

    Accrued Expenses400

31Depreciation Expense – Equipment270

    Accumulated Depreciation – Equipment270

31Insurance Expense290

    Prepaid Insurance290

31Accrued Income700

    Polishing Services700

PTS: 1 DIF: Difficult TOP: Journal entries

2.MJay’s Accounting Ltd is a small accounting services business which commenced business on 1 January 2014.

During the first month of operations, these events and transactions occurred:

Jan. 2 Shareholders invested $88 000 cash in exchange for shares in the company.

Bought computer equipment, $9000, and a company car, $45 000, for cash.

3Paid Insurance of $2760 for the year of 2014.

  4 Purchased $1800 of supplies on account from Newmarket Stationery Ltd.

  7 Paid office rent of $3450 for January, February and March.

  11 Invoiced the clients $5750 for services provided.

  12 Received $4600 cash in advance on a management consulting engagement.

  17 Received cash of $1620 for services completed for Bryce’s Boatbuilding. (These services were not included in the 11 January transaction.)

  30 Paid receptionist $2250 salary for the month.

  30

30 Paid $720 as partial payment for amount owing to Newmarket Stationery Ltd.

Paid bank charges for $100.

Prepare all of the journal entries for the above noted transactions. Note: narrations are not required and GST should be ignored.

ANS:

Date

2014 Account titles Debit Credit

Jan 2 Cash at Bank88 000

    Share Capital88 000

2Computer Equipment9000

Motor Vehicles45 000

    Cash at Bank54 000

3Prepaid Insurance2760

    Cash at Bank2760

4Supplies on Hand1800

    Accounts Payable1800

7Prepaid Rent 3450

    Cash at Bank3450

11Accounts Receivable5750

    Service Revenue 5750

12Cash at Bank4600

    Revenue Received in Advance4600

17Cash at Bank1620

    Service Revenue1620

30Salaries Expense2250

    Cash at Bank2250

30Accounts Payable720

    Cash at Bank720

30Bank Charges100

    Cash at Bank100

PTS: 1 DIF: Difficult TOP: Journal entries