REVIEW QUESTIONS - © McGraw-Hill Education 2016 Solutions Manual,...

Chapter 2 - The Accounting Cycle: During the Period

© McGraw-Hill Education 2016 Solutions Manual, Chapter 2 2-1 Chapter 2

The Accounting Cycle: During the Period

REVIEW QUESTIONS

Question 2-1 (LO 2-1) External transactions are transactions between the company and a separate economic entity.Internal transactions do not include an exchange with a separate economic entity. Purchasing supplies from a local vendor is classified as an external transaction.Question 2-2 (LO 2-1)

• Use source documents to identify accounts affected by external transactions.
• Analyze the impact of the transaction on the accounting equation.
• Assess whether the transaction results in a debit or a credit to the account

balance.

• Record the transaction in the journal using debits and credits.
• Post the transaction to the T-accounts in the general ledger.
• Prepare a trial balance.

Question 2-3 (LO 2-2) Dual effect refers to each transaction having an effect on at least two accounts of the accounting equation such that the accounting equation will always be in balance. If an economic event increases (decreases) one side of the equation, then it also increases (decreases) the other side of the equation by the same amount, or, it increases one account and decreases another account on the same side of the equation.Question 2-4 (LO 2-2) Assets = Liabilities + Stockholders’ equity (a) Increase = Increase + No change (b) Decrease = No change + Decrease (c) Increase = No change + Increase (d) No change* = No change + No change

• One asset (equipment) increases while another asset (cash) decreases.

Question 2-5 (LO 2-2) Jerry is not correct. While it is possible for a transaction to increase one account and decrease another, dual effect simply indicates that at least two accounts will always be affected. However, the accounting equation must always remain in balance. It is not possible for one side of the equation to increase while the other side decreases.Financial Accounting 4th Edition Spiceland Solutions Manual Visit TestBankDeal.com to get complete for all chapters

Chapter 2 - The Accounting Cycle: During the Period

© The McGraw-Hill Companies, Inc., 2014 2-2 Financial Accounting, 3e

Answers to Review Questions (continued) Question 2-6 (LO 2-3) Accounts Normal balance Assets Debit Liabilities Credit Stockholders’ equity Credit Revenues Credit Expenses Debit Question 2-7 (LO 2-3) Jenny is not correct. Any account can be debited or credited. Since an asset has a normal debit balance, it would be debited when it increases and credited when it decreases. Similarly, since a liability has a normal credit balance, it would be credited when it increases and debited when it decreases.Question 2-8 (LO 2-3) Accounts Increase (a) Cash Debit (b) Salaries payable Credit (c) Utilities expense Debit (d) Service revenue Credit

Question 2-9 (LO 2-3) Accounts Decrease* (a) Cash Credit (b) Salaries payable Debit (c) Utilities expense Credit (d) Service revenue Debit

• Answers are opposite of those in Question 2-8

Chapter 2 - The Accounting Cycle: During the Period

© McGraw-Hill Education 2016 Solutions Manual, Chapter 2 2-3 Answers to Review Questions (continued) Question 2-10 (LO 2-3) These statements are consistent. Retained earnings has three components – revenues, expenses, and dividends. Changing the balance of any of these components changes the balance of retained earnings. Retained earnings increases with a credit and decreases with a debit. Since expenses reduce retained earnings, an increase to an expense decreases retained earnings.Question 2-11 (LO 2-4) A journal provides a chronological record of all transactions affecting a firm. A journal entry is used to describe the format for recording a transaction.Question 2-12 (LO 2-4)

Question 2-13 (LO 2-4) In each journal entry, the sum of all amounts debited equals the sum of all amounts credited.Question 2-14 (LO 2-4)

(a) Debit Credit Cash 1,200 Service Revenue 1,200 (Receive cash from providing services)

(b) Debit Credit Rent Expense 500 Cash 500 (Pay rent for the current month)

(c) Debit Credit Building 10,000 Notes Payable 10,000 (Purchase building with note payable)

Date Debit Credit Account Name . . . . . . . . . . . . . . . . . . . . . . Amount Account Name . . . . . . . . . . . . . . . Amount (Description of transaction)

Chapter 2 - The Accounting Cycle: During the Period

© The McGraw-Hill Companies, Inc., 2014 2-4 Financial Accounting, 3e Answers to Review Questions (continued) Question 2-15 (LO 2-4) (a) Purchase supplies by paying cash of $20,000.(b) Provide services to customer on account for $30,000.(c) Pay cash on accounts payable of $10,000.Question 2-16 (LO 2-5) A T-account is an informal means to show the balance in an account. The left side is referred to as a debit and the right side is referred to as a credit.Question 2-17 (LO 2-5) Posting is the process of transferring the debit and credit information from the journal to individual accounts in the general ledger.

(a) Supplies Cash

20,000 20,000

(b) Accounts Receivable

Service Revenue

30,000 30,000

(c) Accounts Payable Cash

10,000 10,000

Question 2-18 (LO 2-6) The general ledger is the collection of all accounts used to record the company’s transactions. A chart of accounts is a listing of all account names.Question 2-19 (LO 2-6) A trial balance is a list of all accounts and their balances at a particular date. Balance refers to the fact that the sum of the accounts with debit balances should equal the sum of the accounts with credit balances.Question 2-20 (LO 2-6) Not necessarily. While total debits equaling total credits is a good indication that all accounts have been appropriately accounted for, the accounts could contain offsetting errors. For example, if one account with a debit (credit) balance is understated by the same amount that another account with a debit (credit) balance is overstated, the trial balance will show equal debit and credit totals.