Tb03 - Test bank chapter 3 PDF

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CHAPTER 3 THE ACCOUNTING INFORMATION SYSTEM SUMMARY OF QUESTION TYPES BY STUDY OBJECTIVES AND LEVEL OF DIFFICULTY Item SO LOD 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11.

1 1 1 1 1 1 1 1 2 2 2

E E M M M M E E E E E

52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71.

1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2 2 2

E M M E M E E E E E E E M M E E M E E E

149. 150. 151. 152. 153.

1 1 1 1 1,2

E E E E E

Item SO LOD Item SO LOD Item SO LOD Item SO LOD True-False Statements 12. 2 M 23. 2 M 34. 3 E 45. 4 M 13. 2 E 24. 2 E 35. 3 E 46. 4 E 14. 2 E 25. 2 E 36. 3 E 47. 5 M 15. 2 E 26. 3 E 37. 3 E 48. 5 E 16. 2 E 27. 3 E 38. 4 E 49. 5 E 17. 2 E 28. 3 E 39. 4 E 50. 5 M 18. 2 E 29. 3 E 40. 4 M 51. 5 M 2 3 4 19. E 30. E 41. E 20. 2 E 31. 3 E 42. 4 E 21. 2 E 32. 3 E 43. 4 M 22. 2 E 33. 3 E 44. 4 M Multiple Choice Questions 72. 2 E 92. 2 M 112. 3 E 132. 4 E 73. 2 E 93. 2 E 113. 3 E 133. 4 M 74. 2 E 94. 2 E 114. 3 M 134. 4 E 75. 2 E 95. 2 E 115. 3 M 135. 4 E 76. 2 E 96. 2 E 116. 3 E 136. 4 M 77. 2 M 97. 2 E 117. 3 E 137. 4 M 78. 2 E 98. 2 E 118. 3 M 138. 4 E 79. 2 M 99. 2 E 119. 3 M 139. 4 E 80. 2 M 100. 2 M 120. 3 M 140. 5 E 81. 2 E 101. 2 M 121. 3 M 141. 5 M 82. 2 H 102. 2 E 122. 3 M 142. 5 M 83. 2 E 103. 2 M 123. 4 E 143. 5 M 84. 2 M 104. 2 E 124. 4 E 144. 5 M 85. 2 E 105. 3 E 125. 4 E 145. 5 E 86. 2 M 106. 3 E 126. 4 E 146. 5 H 87. 2 M 107. 3 E 127. 4 E 147. 5 M 88. 2 M 108. 3 E 128. 4 E 148. 5 M 89. 2 E 109. 3 E 129. 4 E 90. 2 E 110. 3 M 130. 4 E 91. 2 M 111. 3 M 131. 4 M Exercises 154. 2 E 159. 2 M 164. 3 E 169. 5 H 155. 2 E 160. 2 M 165. 3,5 M 170. 5 E 156. 2 E 161. 2,3 M 166. 4,5 M 171. 5 E 157. 2 E 162. 2,4 E 167. 5 E 158. 2 E 163. 3 M 168. 5 H Matching

172. 2–5 E,M 173. 174. Note:

2 E 175. 2 M 2 E 176. 3 E E = Easy M = Medium

Short-Answer Essay 177. 5 M 178. 5 M H = Hard

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Item Type Item

Type

Item

Type

Item

Type

Item Type

Item

Type

MC MC MC MC MC

149. 150. 151. 152. 153.

Ex Ex Ex Ex Ex

MC MC MC MC MC MC MC MC MC MC

102. 103. 104. 153. 154. 155. 156. 157. 158. 159.

MC MC MC Ex Ex Ex Ex Ex Ex Ex

MC MC MC MC MC MC

161. 163. 164. 165. 172. 176.

Ex Ex Ex Ex Ma SAE

1. 2. 3. 4. 5.

TF TF TF TF TF

6. 7. 8. 52. 53.

TF TF TF MC MC

54. 55. 56. 57. 58.

MC MC MC MC MC

9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

TF TF TF TF TF TF TF TF TF TF

19. 20. 21. 22. 23. 24. 25. 69. 70. 71.

TF TF TF TF TF TF TF MC MC MC

72. 73. 74. 75. 76. 77. 78. 79. 80. 81.

MC MC MC MC MC MC MC MC MC MC

26. 27. 28. 29. 30. 31.

TF TF TF TF TF TF

32. 33. 34. 35. 36. 37.

TF TF TF TF TF TF

105. 106. 107. 108. 109. 110.

MC MC MC MC MC MC

Study Objective 1 59. MC 64. 60. MC 65. 61. MC 66. 62. MC 67. 63. MC 68. Study Objective 2 82. MC 92. 83. MC 93. 84. MC 94. 85. MC 95. 86. MC 96. 87. MC 97. 88. MC 98. 89. MC 99. 90. MC 100. 91. MC 101. Study Objective 3 111. MC 117. 112. MC 118. 113. MC 119. 114. MC 120. 115. MC 121. 116. MC 122.

38. 39. 40. 41. 42.

TF TF TF TF TF

43. 44. 45. 46. 123.

TF TF TF TF MC

124. 125. 126. 127. 128.

MC MC MC MC MC

Study Objective 4 129. MC 134. 130. MC 135. 131. MC 136. 132. MC 137. 133. MC 138.

MC MC MC MC MC

139. 162. 166. 172.

MC Ex Ex Ma

MC MC MC MC

Study Objective 5 147. MC 167. 148. MC 168. 165. Ex 169. 166. Ex 170.

Ex Ex Ex Ex

171. 172. 177. 178.

Ex Ma SAE SAE

47. 48. 49. 50.

TF TF TF TF

51. 140. 141. 142.

TF MC MC MC

143. 144. 145. 146.

Item

Type

160. 161. 162. 172. 173. 174. 175.

Ex Ex Ex Ma SAE SAE SAE

SUMMARY OF STUDY OBJECTIVES BY QUESTION TYPE Note: TF = True-False MC = Multiple Choice

Ma = Matching Ex = Exercise

SAE = Short-Answer Essay

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The Accounting Information System

CHAPTER STUDY OBJECTIVES 1. Analyze the effects of transactions on the accounting equation. Each business transaction has a dual effect on the accounting equation: assets = liabilities + shareholders’ equity. For example, if an individual asset is increased, there must be a corresponding decrease in another asset, or an increase in a specific liability, or an increase in shareholders’ equity. 2. Define debits and credits and explain how they are used to record transactions. The terms debit and credit mean the same thing as left and right, respectively. Assets, dividends, and expenses are increased by debits and decreased by credits. The normal balance of these accounts is a debit balance (the increase side). Liabilities, common shares, retained earnings, and revenues are increased by credits and decreased by debits. The normal balance of these accounts is a credit balance (the increase side). 3.

Journalize transactions. The initial record of a transaction is entered in a general journal. The journal discloses in one place the complete effect of a transaction, provides a chronological record of transactions, and helps prevent or locate errors because the debit and credit amounts for each entry can be readily compared.

4.

Post transactions. Posting is the process of transferring journal entries from the general journal to the general ledger. This accumulates the effects of the journalized transactions in the individual ledger accounts.

5.

Prepare a trial balance. A trial balance is a list of accounts and their balances at a specific time. The main purpose of the trial balance is to prove the mathematical equality of debits and credits after posting. A trial balance also can help uncover errors in journalizing and posting and is useful in preparing financial statements.

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TRUE-FALSE STATEMENTS 1. Economic events that require recording in the accounting records are called accounting transactions. 2. Revenue is only recorded when cash is received. 3. Collection of an account receivable will increase total assets. 4. Cash received from a customer in advance of work being performed or goods provided is recorded as revenue. 5. If total assets are increased, there must be a corresponding increase in liabilities or an increase in shareholders’ equity. 6. An increase in the Dividends account will result in an increase in the Retained Earnings account. 7. Prepaid expenses are recorded as liabilities. 8. The payment of an account payable decreases total assets. 9. In its simplest form, a T account consists of three parts: (1) its title, (2) a left or credit side and (3) a right or debit side. 10. An individual accounting record for a specific asset, liability or shareholders’ equity item is called an account. 11. A debit increases an account and a credit decreases an account. 12. If a revenue account is credited, this must increase shareholders’ equity. 13. The normal balance of a liability account is a debit. 14. Debit and credit can be interpreted to mean “bad” and “good,” respectively. 15. A credit means that an account has been increased. Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

The Accounting Information System

16. A decrease in a liability account is recorded by a debit. 17. An increase in an asset is recorded by a debit. 18. The double-entry system of accounting refers to the placement of a double line at the end of a column of figures. 19. The double-entry accounting system records the dual effect of each transaction. 20. The normal balance of an asset is a credit. 21. The normal balance of the Dividends account is a debit. 22. Assets are decreased with a credit. 23. An expense account is a subdivision of the retained earnings account and decreases shareholders’ equity. 24. Revenues are a subdivision of shareholders’ equity. 25. Under the double-entry system, revenues must always equal expenses. 26. The first step in the recording process is entering the transaction into the general journal. 27. Source documents can provide evidence that a transaction has occurred. 28. Each transaction must be analyzed in terms of its effect on the accounts before it can be recorded in a journal. 29. A simple journal entry affects two or more accounts. 30. A journal lists all the accounts maintained by a business. 31. The journal is a chronological record of all transactions.

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32. A journal is an accounting record in which transactions are initially recorded. 33. The complete effect of a transaction on the accounts is disclosed in the journal. 34. The account titles used in journalizing transactions need not be identical to the account titles in the ledger. 35. Entering transactions into the journal is called posting. 36. The account to be credited is entered first in a journal entry. 37. A compound journal entry affects more than two accounts. 38. Transactions are entered in the general ledger and then transferred to the general journal. 39. All transactions must be entered first in the general ledger. 40. The chart of accounts is a special ledger used in accounting systems. 41. A general ledger should be arranged in financial statement order beginning with the statement of financial position accounts. 42. The chart of accounts is the framework for the accounting database. 43. Prepaid expenses are reported as assets on the statement of financial position. 44. Unearned revenues are classified as assets on the statement of financial position. 45. Posting is the process of proving the equality of debits and credits in the trial balance. 46. A list of accounts and their account numbers is called the chart of accounts. 47. A trial balance lists all the debit balances first, then all the credit balances. 48. A trial balance can still balance even if an entry is posted to the wrong account. Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

The Accounting Information System

49. The main purpose of the trial balance is to check that debits equal credits. 50. If a journal entry is posted twice, this will be discovered by preparing a trial balance. 51. The retained earnings on the trial balance prepared immediately after posting represents the retained earnings at the beginning of the period.

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ANSWERS TO TRUE-FALSE STATEMENTS Item 1. 2. 3. 4. 5. 6. 7. 8. 9.

Ans. T F F F T F F T F

Item 10. 11. 12. 13. 14. 15. 16. 17. 18.

Ans. T F T F F F T T F

Item 19. 20. 21. 22. 23. 24. 25. 26. 27.

Ans. T F T T T T F F T

Item 28. 29. 30. 31. 32. 33. 34. 35. 36.

Ans. T F F T T T F F F

Item 37. 38. 39. 40. 41. 42. 43. 44. 45.

Ans. T F F F T T T F F

Item 46. 47. 48. 49. 50. 51.

Ans. T F T T F T

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The Accounting Information System

MULTIPLE CHOICE QUESTIONS 52. Shareholders’ equity is increased by (a) dividends. (b) revenues. (c) expenses (d) liabilities. 53. If total liabilities increased by $15,000, then (a) assets must have increased by $15,000. (b) only shareholders’ equity must have increased by $15,000. (c) assets must have increased by $15,000, or shareholders’ equity must have decreased by $15,000. (d) assets and shareholders’ equity must have both decreased by $15,000. 54. Collection of a $1,500 accounts receivable (a) increases an asset $1,500; decreases a liability $1,500. (b) decreases a liability $1,500; increases shareholders’ equity $1,500. (c) decreases an asset $1,500; decreases a liability $1,500. (d) has no effect on total assets. 55. If an individual asset is increased, then (a) there could be an equal decrease in a specific liability. (b) there could be an equal decrease in shareholders’ equity. (c) there could be an equal decrease in another asset. (d) none of these is possible. 56. If services are performed on credit, then (a) assets will decrease. (b) liabilities will increase. (c) shareholders’ equity will increase. (d) liabilities will decrease. 57. If expenses are paid in cash, then (a) assets will increase. (b) liabilities will decrease. (c) shareholders’ equity will increase. (d) assets will decrease. 58. Accounting systems should record (a) all economic events. (b) events that result in a change in assets, liabilities, or shareholders’ equity items. (c) only events that involve cash. (d) only events that include revenues, expenses, and cash. Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

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59. An investment by the shareholders in a company increases (a) assets and shareholders’ equity. (b) assets and liabilities. (c) liabilities and shareholders’ equity. (d) assets only. 60. The purchase of an asset for cash (a) increases assets and shareholders’ equity. (b) increases assets and liabilities. (c) decreases assets and increases liabilities. (d) has no effect on total assets. 61. The purchase of an asset on credit (a) increases assets and shareholders’ equity. (b) increases assets and liabilities. (c) decreases assets and increases liabilities. (d) has no effect on total assets. 62. The payment of a liability (a) decreases assets and shareholders’ equity. (b) increases assets and decreases liabilities. (c) decreases assets and increases liabilities. (d) decreases assets and liabilities. 63. Recording revenue (a) increases assets and liabilities. (b) increases assets and shareholders’ equity. (c) increases assets and decreases shareholders’ equity. (d) has no effect on total assets. 64. A paid dividend (a) decreases assets and shareholders’ equity. (b) increases assets and shareholders’ equity. (c) increases assets and decreases shareholders’ equity. (d) decreases assets and increases shareholders’ equity. 65. An expense (a) decreases assets and liabilities. (b) decreases shareholders’ equity. (c) has no effect on shareholders’ equity. (d) increases assets and decreases shareholder’ equity. 66. Which of the following items has no effect on retained earnings? (a) expenses Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

The Accounting Information System

(b) dividends (c) revenues (d) hiring a new employee 67. A paid income tax instalment (a) increases assets and shareholders’ equity. (b) decreases assets and shareholders’ equity. (c) increases assets and decreases shareholders’ equity. (d) decreases assets and increases shareholders’ equity. 68. A payment of a portion of accounts payable will (a) not affect total assets. (b) increase liabilities. (c) not affect shareholders’ equity. (d) decrease profit. 69. The left side of a T account is the (a) credit side. (b) debit side. (c) description of the account. (d) balance of the account. 70. An individual accounting record of increases and decreases in a specific asset, liability, or shareholders’ equity item is called a(n) (a) single entry accounting system. (b) accounting transaction. (c) account. (d) normal balance. 71. The equality of debits and credits is the basis for (a) the double-entry accounting system. (b) the single-entry accounting system. (c) the T account. (d) all accounting systems. 72. The right side of an account is (a) always used to record increases. (b) the credit side. (c) the debit side. (d) always used to record decreases. 73. A T account consists of (a) a title, a debit balance, and a credit balance. (b) a title, a left side, and a debit balance. (c) a title, a debit side, and a credit side. Copyright © 2014 John Wiley & Sons Canada, Ltd. Unauthorized copying, distribution, or transmission of this page is prohibited

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(d) a title, a right side, and a debit balance. 74. A T account is (a) a way of illustrating the basic form of an account. (b) a special account used to record only debits. (c) a special account used to record only credits. (d) the actual account form used in real accounting systems. 75. A credit to an asset account indicates a(n) (a) error. (b) credit was made to a liability account. (c) decrease in the asset. (d) increase in the asset. 76. The normal balance of any account is the (a) left side. (b) right side. (c) side which increases the account. (d) side which decreases the account. 77. The double-entry system requires that each transaction must be recorded (a) in at least two different accounts. (b) in a T account. (c) first as a revenue and then as an expense. (d) twice. 78. A credit is not the normal balance for (a) common shares. (b) revenues. (c) liabilities. (d) cash. 79. The classification and normal balance of an expense account is (a) revenue, credit. (b) asset, debit. (c) liability, credit. (d) shareholders’ equity, debit. 80. The classification and normal balance of the retained earnings account is (a) asset, debit. (b) shareholders’ equity, credit. (c) revenues, credit. (d) liability, debit.

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The Accounting Information System

81. The classification and normal balance of the unearned revenue account is (a) asset, debit. (b) liability, credit. (c) revenues, credit. (d) shareholders’ equity, credit. 82. Which one of the following represents the expanded basic accounting equation? (a) Assets = Liabilities + Common Shares + Retained Earnings + Revenues – Expenses – Dividends. (b) Assets + Liabilities = Dividends + Expenses + Common Shares + Revenues. (c) Assets – Liabilities – Dividends = Common Shares + Revenues – Expenses. (d) Assets = Revenues + Expenses – Liabilities. 83. The best interpretation of the word credit is the (a) left side of an account. (b) increase side of a...