If an asset increases, there must be a corresponding decrease in another asset, an increase in a liability, or an increase in equity.
Correct Answer
True
The accounting equation (Assets = Liabilities + Equity) must always remain in balance. An increase in one asset must be offset by a decrease in another asset, an increase in a liability, or an increase in equity to maintain this balance.
Question 2
The accounting equation, Assets = Liabilities + Owner's Equity, must always remain in balance, but total debits do not always equal total credits.
Correct Answer
False
While the accounting equation must always remain in balance, it is also fundamental to the double-entry system that total debits must always equal total credits for every transaction.
Question 3
The purchase of equipment for cash will increase one asset account and decrease another asset account, leaving total assets unchanged.
Correct Answer
True
When equipment is purchased for cash, the asset account 'Equipment' increases, and the asset account 'Cash' decreases by the same amount, resulting in no change to total assets.
Question 4
When a company pays a cash dividend to shareholders, both assets and owner's equity increase.
Correct Answer
False
When a company pays a cash dividend, the asset account 'Cash' decreases, and the 'Dividends' account (which reduces owner's equity) increases, thereby decreasing total owner's equity.
Question 5
A debit increases asset accounts and expense accounts.
Correct Answer
True
In the double-entry accounting system, debits increase accounts on the left side of the accounting equation (Assets) and accounts that reduce equity (Expenses and Drawings).
Question 6
To decrease a liability account, a credit entry is made.
Correct Answer
False
Liability accounts normally have a credit balance. To decrease a liability account, a debit entry is made.
Question 7
The normal balance of a revenue account is a credit.
Correct Answer
True
Revenue accounts increase owner's equity, and owner's equity accounts normally have a credit balance; therefore, revenue accounts normally have a credit balance.
Question 8
Drawing accounts normally have a credit balance because they reduce owner's equity.
Correct Answer
False
Drawing accounts reduce owner's equity, similar to expenses. Therefore, drawing accounts normally have a debit balance.
Question 9
Every journal entry must have at least one debit and at least one credit, and the total debits must equal the total credits.
Correct Answer
True
This is a core principle of double-entry accounting, ensuring that the accounting equation remains in balance after every transaction.
Question 10
When a company receives cash for services to be performed in the future, the journal entry includes a debit to Cash and a credit to Service Revenue.
Correct Answer
False
When cash is received for services to be performed in the future, the company has not yet earned the revenue. The correct journal entry includes a debit to Cash and a credit to Unearned Revenue (a liability account).
Question 11
A journal entry recording the payment of an account payable would include a debit to Accounts Payable and a credit to Cash.
Correct Answer
True
Paying an account payable reduces a liability (Accounts Payable, which is debited) and reduces an asset (Cash, which is credited).
Question 12
A journal entry to record the purchase of supplies on account would involve a debit to Accounts Payable and a credit to Supplies.
Correct Answer
False
Purchasing supplies on account increases the asset 'Supplies' (debited) and increases the liability 'Accounts Payable' (credited).
Question 13
The income statement reports revenues and expenses for a specific period of time.
Correct Answer
True
The income statement, also known as the profit and loss statement, summarizes a company's financial performance over a defined period, such as a month, quarter, or year.
Question 14
The Balance Sheet shows the financial position of a company over a period of time, similar to the Income Statement.
Correct Answer
False
The Balance Sheet presents a company's financial position (assets, liabilities, and equity) at a specific point in time, not over a period of time.
Question 15
Retained Earnings at the end of a period is calculated by taking beginning Retained Earnings, adding net income, and subtracting dividends.
Correct Answer
True
This formula correctly describes the calculation for the ending balance of Retained Earnings, reflecting the impact of profitability and distributions to owners.
Question 16
The Statement of Cash Flows is typically prepared before the Income Statement because cash is a crucial component of financial health.
Correct Answer
False
Financial statements are generally prepared in a specific order: Income Statement first, followed by the Statement of Owner's Equity (or Retained Earnings), then the Balance Sheet, and finally the Statement of Cash Flows, as information from earlier statements is often needed for later ones.
Question 17
The balance sheet presents a company's assets, liabilities, and equity at a specific point in time.
Correct Answer
True
The balance sheet provides a snapshot of a company's financial health on a particular date.
Question 18
Depreciation expense appears on the balance sheet as a reduction to the asset's book value.
Correct Answer
False
Depreciation expense is reported on the income statement. Accumulated Depreciation, a contra-asset account, appears on the balance sheet and is subtracted from the cost of the related asset to arrive at its book value.
Question 19
Under the accrual basis of accounting, revenues are recognized when earned, regardless of when cash is received.
Correct Answer
True
This statement defines the revenue recognition principle under the accrual basis, where revenue is recorded when the service is performed or goods are delivered, irrespective of cash flow.
Question 20
The cash basis of accounting is generally required by Generally Accepted Accounting Principles (GAAP) for external financial reporting.
Correct Answer
False
Generally Accepted Accounting Principles (GAAP) generally require the accrual basis of accounting for external financial reporting because it provides a more complete picture of a company's financial performance.
Question 21
An adjusting entry to record accrued salaries will increase Salaries Expense and increase Salaries Payable.
Correct Answer
True
Accrued salaries represent expenses incurred but not yet paid. The adjusting entry debits (increases) Salaries Expense and credits (increases) Salaries Payable (a liability).
Question 22
If a company uses the cash basis of accounting, it will record an expense when it receives an invoice for services, even if it hasn't paid yet.
Correct Answer
False
Under the cash basis of accounting, expenses are recorded only when cash is actually paid, not when an invoice is received or when the expense is incurred.