I. Multiple-Choice Questions

I.
Multiple-Choice Questions
1. Which of the following is not a step in the accounting process?
a. Identification. c. Recording. b. Economic entity. d. Communication.
2. Which of the following statements about users of accounting information is incorrect?
a. Management is an internal user. b. Taxing authorities are external users.
c. Present creditors are external users. d. Regulatory authorities are internal users
3. Which of the following events is not recorded in the accounting records?
a. Equipment is purchased on account. b. An employee is terminated.
c. A cash investment is made into the business. d. The owner withdraws cash for personal use.
4. During 2020, ABC Company’s assets decreased $50,000 and its liabilities decreased $50,000.
Its owner’s equity
therefore:
a. increased $50,000. C. decreased $100,000. B. decreased $50,000. D. did not change.
5. Payment of an account payable affects the components of the accounting equation in the
following way.
a. Decreases owner’s equity and decreases liabilities. b. Increases assets and decreases
liabilities.
c. Decreases assets and increases owner’s equity. d. Decreases assets and decreases
liabilities.
6. Which of the following statements is false?
a. A statement of cash flows summarizes information about the cash inflows (receipts) and
outflows (payments) for a specific
period of time.
b. A balance sheet reports the assets, liabilities, and owner’s equity at a specific date.
c. An income statement presents the revenues, expenses, changes in owner’s equity, and
resulting net income or net
loss for a specific period of time.
d. An owner’s equity statement summarizes the changes in owner’s equity for a specific period
of time.
7. Which of the following statements about an account is true?
a. The right side of an account is the debit, or increase, side.
b. An account is an individual accounting record of increases and decreases in specific asset,
liability, and owner’s equity items.
c. There are separate accounts for specific assets and liabilities but only one account for owner’s
equity items.
d. The left side of an account is the credit, or decrease, side
Accounts that normally have debit balances are:
a. assets, expenses, and revenues. b. assets, expenses, and owner’s capital.
c. assets, liabilities, and owner’s drawings. d. assets, owner’s drawings, and expenses.
BY TOYIB AHMED (INSTRACTOR ACCOUNTING AND FINANCE) 1|Page

8. A ledger:
a. contains only asset and liability accounts. b. should show accounts in alphabetical order.
c. is a collection of the entire group of accounts maintained by a company. d. is a book of
original entry.
9. Posting:
a. normally occurs before journalizing. b. transfers ledger transaction data to the journal. c. is
an optional step in the recording process. d. transfers journal entries to ledger accounts.
10. Which of the following statements about the accrual basis
of accounting is false?
a. Events that change a company’s financial statements are recorded in the periods in which the
events occur.
b. Revenue is recognized in the period in which services are performed.
c. This basis is in accordance with generally accepted accounting principles.
d. Revenue is recorded only when cash is received, and expense is recorded only when cash is
paid.
11. Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they are incurred.
b. revenues are recorded in the period in which services are performed.
c. balance sheet and income statement accounts have correct balances at the end of an accounting
period.
d. All the responses above are correct.
4. ABC Company began operations on April 1. At April 30, the trial balance shows the following
balances for selected accounts.
$
Prepaid Insurance
3,600
Equipment
28,000
Notes Payable 20,000
Unearned Service Revenue 4,200
Service Revenue
Analysis reveals the following additional 1,800
data.
1. Prepaid insurance is the cost of a 2-year insurance policy, effective April 1.
2. Depreciation on the equipment is $500 per month.
3. The note payable is dated April 1. It is a 6-month, 12% note.
4. Seven customers paid for the company’s 6-month lawn service package of $600 beginning in
April. The company performed services for these customers in April.
5. Lawn services performed for other customers but not recorded at April 30 totaled $1,500.
Instructions
prepare the adjusting entries for the month of April. Show computations.

II. - Practice Brief Exercises
1. At the beginning of the year, ABC Company had total assets of $900,000 and total liabilities
of $440,000. Answer the following questions.
a. If total assets decreased $100,000 during the year and total liabilities increased $80,000 during
the year, what is the amount of owner’s equity at the end of the year?
b. During the year, total liabilities decreased $100,000 and owner’s equity increased $200,000.
What is the amount of total assets at the end of the year?
2. Determine the effect on assets, liabilities, and owner’s equity of the following three
transactions.
a. Performed accounting services for clients for cash.
b. Borrowed cash from a bank on a note payable.
C.Joan Robinson opens her own law office on July 1, 2020. During the first month of
operations, the following transactions occurred.
1. Joan invested $11,000 in cash in the law practice.
2. Paid $800 for July rent on office space.
3. Purchased 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 and wages $500, utilities $300, and advertising $100.
8. Joan withdrew $1,000 cash for personal use.
Instructions
A. prepare a tabular summary of the transactions.
B. prepare the income statement, owner’s equity statement, and balance sheet at July 31, 2020,
for Joan Robinson
3. Presented below is information related to Hammond Real Estate Agency.
Oct. 1 Lia Berge begins business as a real estate agent with a cash investment of $30,000.
2 Paid rent, $700, on office space.
3 Purchases office equipment for $2,800, on account.
6 Sells a house and lot for Hal Smith; bills Hal Smith $4,400 for realty services performed.
27 Pays $1,100 on the balance related to the transaction of October 3.
30 Receives bill for October utilities, $130 (not paid at this time).
Instructions
journalize the transactions. (You may omit explanations) and Prepare a trial balance at July31,
2020

III.The following characteristics, assumptions, principles, or constraint guide the FASB when
it creates accounting standards.
Relevance Expense recognition principle
Faithful representation Time period assumption
Comparability Going concern assumption
Consistency Historical cost principle
Monetary unit assumption Full disclosure principle
Economic entity assumption Materiality
Match each item above with a description below.
1. ________ Ability to easily evaluate one company’s results relative to another’s.
2. ________ Requirement that a company will continue to operate for the foreseeable future.
3. ________ the judgment concerning whether an item’s size is large enough to matter to
decision makers.
4. ________ the reporting of all information that would make a difference to financial statement
users.
5. ________ the practice of preparing financial statements at regular intervals.
6. ________ the quality of information that indicates the information makes a difference in a
decision.
7. ________ a belief that items should be reported on the balance sheet at the price that was paid
to acquire them.
8. ________ a company’s use of the same accounting principles and methods from year to year.
9. ________ tracing accounting events to particular companies.
10. ________ the desire to minimize bias in financial statements.
11. ________ reporting only those things that can be measured in monetary units.
12. ________ Dictates that efforts (expenses) be recognized in the period in which a company
generates results (revenues).

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