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Answers to Exam Questions

Conceptual Questions

1. What are the key components of the accounting equation?

Assets = Liabilities + Shareholders Equity

2. Explain the difference between external and internal economic events.

External economic events involve transactions with external parties (e.g., sales, purchases, loans).

Internal economic events occur within the company (e.g., depreciation, inventory adjustments).

3. Define the double-entry accounting system and its significance.

The double-entry system records each transaction with at least two accounts: a debit and a credit to maintain the balance of the accounting equation.

Significance: Ensures accuracy, prevents fraud, and maintains financial integrity.

4. What is the purpose of a general ledger?

The general ledger is a record of all accounts used by a company. It organizes financial data, tracks transactions, and provides the basis for preparing financial statements.

5. Describe the role of T-accounts in the accounting process.

T-accounts visually represent changes in an account, with debits recorded on the left and credits on the right. They help analyze transactions and understand how they affect financial statements.

6. Differentiate between temporary and permanent accounts.

Temporary accounts (revenues, expenses, dividends) close at the end of each accounting period and reset to zero.

Permanent accounts (assets, liabilities, equity) carry their balances into the next period.

7. What are the steps in the accounting processing cycle?

1. Identify and analyze transactions

2. Record transactions in the journal

3. Post to the general ledger

4. Prepare an unadjusted trial balance

5. Record adjusting entries

6. Prepare an adjusted trial balance

7. Prepare financial statements

8. Record closing entries

9. Prepare a post-closing trial balance

8. Explain the differences between the perpetual and periodic inventory systems.

Perpetual system: Updates inventory continuously as transactions occur.

Periodic system: Updates inventory at the end of an accounting period using a physical count.

9. How does an investment by an owner affect the accounting equation?

Increases assets (cash) and shareholders equity (common stock or capital contribution).

10. A company borrows $50,000 from a bank. Show the impact on the accounting equation.

Assets (Cash) +$50,000

Liabilities (Loan Payable) +$50,000

11. Record the journal entry for the purchase of supplies on account for $5,000.

Debit Supplies $5,000

Credit Accounts Payable $5,000

12. What is the adjusting entry for depreciation if equipment costing $12,000 has a useful life of five years?

Annual depreciation expense = $12,000/5 = $2,400

Debit Depreciation Expense $2,400

Credit Accumulated Depreciation $2,400

213. A company received $2,000 in advance for services to be provided. What adjusting entry is needed at the end of the month?

Debit Unearned Revenue $2,000

Credit Service Revenue $2,000

14. If a company incurs $3,000 in salaries but will pay employees next month, what adjusting entry is required?

Debit Salaries Expense $3,000

Credit Salaries Payable $3,000

15. Which of the following is a temporary account?

Salaries Expense

16. When a company performs services on account, which accounts are affected?

Accounts Receivable and Revenue

17. What is the correct journal entry for a business paying off $4,000 of accounts payable?

Debit Accounts Payable, Credit Cash

18. Which financial statement presents a companys financial position at a specific point in time?

Balance Sheet

19. A company has $100,000 in assets, $40,000 in liabilities, and retained earnings of $50,000. How much is the common stock?

$10,000

20. If a company earns $20,000 in revenue and has $8,000 in expenses, what is the net income?

$12,000

21. If a company has a beginning retained earnings balance of $10,000, earns $5,000 in net income, and pays $2,000 in dividends, what is the ending retained earnings balance?

$13,000