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Chapter 2: The Balance Sheet
Test Bank—Fundamentals of Financial Accounting, 5e 1
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
TRUE/FALSE
[QUESTION]
- A transaction is an exchange or event that directly affects the assets, liabilities, or
stockholders' equity of a company.
Answer: True
Difficulty: 1 Easy
LO: 02-01
Topic: Transactions and Other Activities
Blooms: Remember
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Reporting
Feedback: A transaction is an event or activity that has a direct and measurable financial effect on the assets, liabilities, or stockholders’ equity of a business.
[QUESTION]
- General Motors (GM) signs a new labor agreement that its workers will receive a 5% wage
increase next year. This transaction affects GM's financial statements in the current year.
Answer: False
Difficulty: 2 Medium
LO: 02-01
Topic: Transactions and Other Activities
Blooms: Understand
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Reporting
Feedback: A promise to pay has been exchanged for a promise to work next year. This activity is not a transaction because no assets or services were exchanged at the time the new labor agreement is signed. This event does not GM’s financial statements in the current year.
[QUESTION]
- If total assets increase, then either total liabilities or total stockholders' equity must also
increase.
Answer: True
Difficulty: 1 Easy
LO: 02-02
Topic: Step 1: Analyze Transactions
Blooms: Understand
AACSB: Analytic
Fundamentals of Financial Accounting 5th Edition Phillips Test Bank Visit TestBankDeal.com to get complete for all chapters
Chapter 2: The Balance Sheet
Test Bank—Fundamentals of Financial Accounting, 5e 2
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
AICPA BB: Resource Management
AICPA FN: Reporting
Feedback: The accounting equation (Assets = Liabilities + Stockholders’ Equity) must balance. If one side of the equation increases, the other side must increase.
[QUESTION]
- A company signed an agreement to rent store space from another company. This is an
example of a transaction that should be recorded.
Answer: False
Difficulty: 1 Easy
LO: 02-01
Topic: Transactions and Other Activities
Blooms: Understand
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Reporting
Feedback: This activity is not a transaction because no assets or services were exchanged at the time the agreement was signed. This is not a transaction.
[QUESTION]
- A business is obliged to repay both debt and equity financing.
Answer: False
Difficulty: 2 Medium
LO: 02-01
Topic: Building a Balance Sheet from Business Activities
Blooms: Remember
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Reporting
Feedback: There is no requirement to pay back equity contributions to stockholders. There is a legal requirement to pay back debt financing to creditors.
[QUESTION]
- You are pleasantly surprised to discover that a popular actress appears on The Tonight
Show wearing your company's jeans. Later, your company's sales increase by $500,000 as a result. When the actress appeared on TV, you would have recorded an asset because the TV appearance was expected to bring future economic benefits to your company.
Answer: False
Difficulty: 3 Hard
LO: 02-01
Chapter 2: The Balance Sheet
Test Bank—Fundamentals of Financial Accounting, 5e 3
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Topic: Building a Balance Sheet from Business Activities
Blooms: Evaluate
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Reporting
Feedback: This activity is not a transaction because no assets or services were exchanged at the time the actress appeared on television. No asset would be recorded. In addition, recall that an asset is an economic resource presently controlled by the company; it has measurable value and is expected to benefit the company by producing cash inflows or reducing cash outflows in the future. This situation does not meet the definition of an asset.
[QUESTION]
- If a company uses $100 million of its cash to pay off debt, its stockholders' equity will
increase $100 million.
Answer: False
Difficulty: 2 Medium
LO: 02-02
Topic: Step 1: Analyze Transactions
Blooms: Understand
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Reporting
Feedback: Assets and liabilities would each decrease by $100 million; there is no impact on stockholders' equity.
[QUESTION]
- Company X issues $40 million in new stock for cash. This does not affect stockholders'
equity because as new shares are sold, the value of existing shares falls.
Answer: False
Difficulty: 2 Medium
LO: 02-02
Topic: Step 1: Analyze Transactions
Blooms: Understand
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Reporting
Feedback: When new stock is issued for cash, the company has more cash and common stock.Assets and stockholders' equity both increase.
[QUESTION]
Chapter 2: The Balance Sheet
Test Bank—Fundamentals of Financial Accounting, 5e 4
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
- The analyze-record-summarize process is applied to daily transactions, to month-end
adjustments, and as part of the year-end closing process.
Answer: True
Difficulty: Medium
LO: 02-02
Topic: Steps 2 and 3: Record and Summarize
Blooms: Remember
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Reporting
Feedback: The three-step analyze-record-summarize process is applied to daily transactions, as well as adjustments at the end of each month, before preparing a trial balance and the financial statements.
[QUESTION]
- The list of account names and reference numbers that the company will use when
accounting for transactions is called the chart of accounts.
Answer: True
Difficulty: 1 Easy
LO: 02-02
Topic: Step 1: Analyze Transactions
Blooms: Remember
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Reporting
Feedback: The chart of accounts is a summary of all account names (and corresponding account numbers) used to record financial results in the accounting system.
[QUESTION]
- A debit may increase or decrease an account, depending on the type of account.
Answer: True
Difficulty: 2 Medium
LO: 02-03
Topic: The Debit/Credit Framework
Blooms: Understand
AACSB: Analytic
AICPA BB: Resource Management
AICPA FN: Reporting
Feedback: Whether a debit or credit increases or decreases an account depends upon the type of account. Debits increase assets, expenses, and dividends, but decrease liabilities, revenues,
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