ACC EXAM STUDY GUIDE.docx

1. The primary role of accounting is to determine the amount of taxes a business will be required

to pay to taxing entities.

1. True
2. False

EXPLANATION: The primary role of accounting is not just to determine taxes, but to provide financial information that helps in:

• decision making
• planning
• managing a business.

It includes recording transactions, preparing financial statements, and assessing business performance.

1. All of the following are general-purpose financial statements except a(n)
2. balance sheet
3. income statement
4. statement of stockholders’ equity
5. cash budget

EXPLANATION: General purpose financial statements are used by external users to evaluate a company's financial health. These include:

• Balance sheet (shows financial position)
• Income statement (shows profitability)
• Statement of stockholder equity (shows changes in equity)

A cash budget is a tool used to manage cash flows and it is not part of general-purpose financial statements.

1. Two common areas of accounting that respectively provide information to internal and

external users are

EXPLANATION:

Managerial accounting: Provides info to internal users (managers) for: decision making, planning, and controlling operations.

Financial accounting: Provides info to external users (investors, creditors) for decision making, planning, and controlling operations.

1. forensic accounting and financial accounting
2. managerial accounting and financial accounting
3. managerial accounting and environmental accounting
4. financial accounting and tax accounting systems
5. If the liabilities owed by a business total $300,000 and stockholders' equity is equal to

$300,000, then the assets also total $300,000.

EXPLANATION:

The accounting equation is

Assets = Liabilities + Stockholder's equity

300,000 + 300,000 = 600,000

Assets will total 600,000, not 300,000

1. True
2. False
3. Which of the following are guidelines for behaving ethically?
4. Identify the consequences of a decision and its effect on others.
5. Consider your obligations and responsibilities to those affected by your decision.
6. Identify an ethical decision by using your personal ethical standards of honesty and fairness
7. I and II

EXPLANATION: Ethical behavior involves...

• Identifying the consequences of a decision
• Considering obligations and responsibilities.
• Using personal ethical standards, such as honesty and fairness, to make decisions.

1. II and III
2. I and III
3. I, II, and III
4. To determine the balance in an account, always subtract credits from debits.
5. True

EXPLANATION: The balance of accounts depends on the type of account.

• Assets/expense accounts:
  • DEBIT INCREASE THE BALANCE
  • CREDIT DECREASE THE BALANCE
• Liability/revenue/equity accounts:
  • DEBITS DECREASE THE BALANCE
  • CREDITS INCREASE THE BALANCE.

You cant simply always subtract credits from debits, it depends on the account type.

1. False

This journal entry will…

1. increase Common Stock and decrease Cash
2. increase Cash and decrease Common Stock
3. increase Cash and increase Common Stock
4. decrease Cash and decrease Common Stock

EXPLANATION: This company issued COMMON STOCK and received CASH for it.

• Cash (asset) increases by $22,000 (company receives cash)
• Common Stock (equity) increases by $22,000 (stock issued to investors).

Both accounts increase.

What effects does this journal entry have on the accounts?

1. decrease Accounts Payable and increase Cash
2. increase Accounts Payable and decrease Cash
3. increase Accounts Payable and increase Cash
4. decrease Accounts Payable and decrease Cash

EXPLANATION: This company PAID creditors on ACCOUNT.

• Accounts payable (a liability) decreases because you paid off some debt
• Cash (an asset) decreases because you used cash to pay.

Both accounts decrease in this case.

1. Accounts are records of increases and decreases in individual accounting equation elements.
2. True

EXPLANATION: Accounts track the financial changes in each element of the accounting equation (assets, liabilities, equity, revenues, & expenses).

They record both increases and decreases in individual accounting equation elements.

1. False

1. The normal balance of the dividends account is a debit.
2. True

REMEMBER THIS:
ASSETS = LIABILITIES + STOCKHOLDER’S EQ

DR ↑ CR ↓ = DR ↓ CR ↑ + DR ↓ CR ↑

• Revenue = Credits rise ↑
• Expense = Debits rise ↑
• Dividends = Debits rise ↑

1. False

EXPLANATION:

Normal balance refers to the side of an account (debit or credit) that increases the account's balance:

• Assets have a normal debit balance.
• Liabilities and equity accounts have a normal credit balance.

Dividends work differently because they reduce equity (RETAINED EARNINGS). To reduce equity, you need a debit. Therefore, the dividends account has a normal debit balance.

Journal Entry for Dividends:

When a company declares and pays dividends, the entry looks like this:

• Debit Dividends (this increases the amount of dividends paid, which reduces equity).
• Credit Cash (this decreases cash, which is an asset).

The dividends account reduces retained earnings, which is part of stockholder's equity. Since equity accounts typically have credit balances, and dividends reduce equity, the normal balance for dividends is a debit.

DIVIDENDS ARE NOT CONSIDERED EXPENSES THAT SHOW UP ON INCOME STATEMENT. THEY COME OUT OF RETAINED EARNINGS INSTEAD (COMPANY'S ACCUMULATED PROFITS)

1. The increases in stockholders' equity attributable to selling services or products to customers

EXPLANATION:

Revenues are the amounts a company earns by selling products or services to its customers.

• When a company earns revenue, it increases stockholders' equity because it contributes to the company's profits.
• Expenses decrease stockholder's equity because they represent costs,

are called

1. assets
2. liabilities
3. revenues
4. expenses
5. The payment of cash to a creditor on account has what effect on the accounting equation?
6. increases assets; increases liabilities
7. increases liabilities; decreases stockholders' equity
8. increases assets; decreases assets

EXPLANATION:

When you pay a creditor (someone you owe money to) on account, you are reducing the amount of cash you have (which decreases assets) and reducing the amount of debt you owe (which decreases liabilities)

1. decreases assets; decreases liabilities

13. A purchase of supplies on credit has what effect on the accounting equation?

1. increases assets; increases liabilities
2. increases liabilities; decreases stockholders' equity
3. increases assets; increases stockholders' equity
4. decreases assets; decreases liabilities

EXPLANATION:

When you buy supplies on credit, you're getting supplies (an asset), but not paying for them immediately.

Instead, you now owe a debt (increase in liabilities)

14. Transactions affecting stockholders' equity include

1. stockholder investments and payment of liabilities
2. stockholder investments, dividends, earning of revenues, and incurrence of expenses
3. stockholder investments, earning of revenues, incurrence of expenses, and collection of accounts receivable
4. stockholder dividends, earning of revenues, incurrence of expenses, and purchase of supplies on account

EXPLANATION:

• Stockholder investments (when stockholders put money into the business) increase equity.
• Dividends (payments to stockholders) decrease equity
• Revenues increase equity
• Expenses decrease equity

15. When a business receives an invoice from a creditor, no entry should be made until the

invoice is paid.

EXPLANATION:

When a business receives an invoice (a bill) it creates a liability because the business owes money. This means that the company should record an entry right when the invoice is received, not when it's paid.

The invoice represents a debt that needs to be recorded as Accounts Payable (liability) even if the payment hasn't been made yet.

1. True
2. False

16. A client has a massage and asks the company bookkeeper to mail her the bill. The

bookkeeper should make which entry to journalize the invoice?

1. No entry until the cash is received
2. debit Fees Earned; credit Accounts Receivable
3. debit Cash; credit Fees Earned
4. debit Accounts Receivable; credit Fees Earned

EXPLANATION:
Since the client had a massage but hasn’t paid yet, the company has earned revenue but hasn’t received cash.

• Debit Accounts receivable (because the company is owed money, which increases the asset)
• Credit Fees Earned (because the company has earned revenue)

17. A company depreciates its equipment by $500 per year. The adjusting entry on December 31

is a debit to Depreciation Expense for $500 and a credit to Equipment for $500.

1. True
2. False

EXPLANATION:

18. Which of the following account groups are temporary accounts?

1. Cash, Dividends, Wages Payable
2. Prepaid Insurance, Equipment, Fees Earned
3. Common Stock, Dividends, Retained Earnings
4. Rent Revenue, Fees Earned, Miscellaneous Expense

EXPLANATION: Temporary accounts include revenues, expenses, and dividends. These accounts are closed (reset to zero) at the end of each accounting period because they represent a single period’s activity.

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

In this case, Rent Revenue, Fees Earned, and Misc. Expense are temporary because they relate to income and expenses for the period.

19. The entry to close a debit in the appropriate insurance account at the end of the accounting

period is

1. debit Retained Earnings; credit Prepaid Insurance
2. debit Prepaid Insurance; credit Retained Earnings
3. debit Insurance Expense; credit Retained Earnings
4. debit Retained Earnings; credit Insurance Expense

Use this end-of-period spreadsheet to answer questions 20 - 22 that follow.

Finley Company

End-of-Period Spreadsheet

For the Year Ended December 31

20. The effect of closing revenues and expenses to Retained Earnings will be to

1. increase Retained Earnings by $50,000
2. decrease Retained Earnings by $50,000
3. increase Retained Earnings by $237,000
4. decrease Retained Earnings by $237,000

21. The journal entry to close revenues and expenses would involve

1. debits to the expense accounts and Retained Earnings and a credit to Fees Earned
2. debits to the expense accounts and credits to Retained Earnings and Fees Earned
3. a debit to Fees Earned and credits to the expense accounts and Retained Earnings
4. debits to Fees Earned and Retained Earnings and credits to the expense accounts

22. The entry to close Dividends would be

1. debit Common Stock, $3,000; credit Retained Earnings, $3,000
2. debit Retained Earnings, $3,000; credit Common Stock, $3,000
3. debit Retained Earnings, $3,000; credit Dividends, $3,000
4. debit Dividends, $3,000; credit Retained Earnings, $3,000

23. Which of the following are the correct parts of a T account?

1. title, date, total
2. date, debit side, credit side
3. title, debit side, credit side
4. title, debit side, total

24. Which of the following types of accounts have a normal credit balance?

1. assets and liabilities
2. liabilities and expenses
3. revenues and common stock
4. common stock and dividends

25. The financial statements are prepared from the unadjusted trial balance.

1. True
2. False

26. The balance sheet should be prepared

1. before the income statement and the statement of stockholders' equity
2. before the income statement and after the statement of stockholders' equity
3. after the income statement and the statement of stockholders' equity
4. after the income statement and before the statement of stockholders' equity

27. Assets (such as supplies or prepaid insurance) that are used up or consumed during the

process of earning revenue are called expenses.

1. True
2. False

28. Using accrual accounting, revenues are recorded

1. When cash is received without regard to when the services are performed or products have been delivered to customers
2. When a service has been performed or products have been delivered to customers without regard to when cash is received
3. When cash is received at the time services are performed or products have been delivered to customers
4. Only if cash is received after the services are performed or products have been delivered to customers

29. Using accrual accounting, expenses are recorded and reported only

1. when they are incurred, whether or not cash is paid
2. when they are incurred and paid at the same time
3. if they are paid before they are incurred
4. if they are paid after they are incurred

30. Smokey Company purchases a 1-year insurance policy on July 1 for $3,600. The adjusting

entry on December 31 is

1. debit Insurance Expense, $1,800; credit Prepaid Insurance, $1,800
2. debit Insurance Expense, $1,500; credit Prepaid Insurance, $1,500
3. debit Insurance Expense, $2,100; credit Prepaid Insurance, $2,100
4. debit Prepaid Insurance, $1,800; credit Cash, $1,800