Financial Accounting, 6Ce (Harrison)

,Financial Accounting, 6Ce (Harrison)
Chapter 2 Recording Business Transactions

2.1 Describe common types of accounts

1) Interest payable, income tax payable and salary payable are all examples of:
A) accrued liabilities
B) prepaid expenses
C) expenses of future periods
D) retained earnings
Answer: A
Diff: 1 Type: MC
L.O.: 2-1
CPA COMPETENCIES: Chapter 2
1.3.1 Prepares financial statements

2) A record of all the changes in a particular asset during a period of time is found in a(n):
A) transaction
B) trial balance
C) prior period's balance sheet
D) account
Answer: D
Diff: 1 Type: MC
L.O.: 2-1
CPA COMPETENCIES: Chapter 2
1.3.1 Prepares financial statements

3) An accounts receivable represents the promise of the business to pay a debt.
Answer: FALSE
Diff: 2 Type: TF
L.O.: 2-1
CPA COMPETENCIES: Chapter 2
1.3.1 Prepares financial statements

4) Prepaid rent is an expense because the payment provides a future benefit of the company.
Answer: FALSE
Diff: 2 Type: TF
L.O.: 2-1
CPA COMPETENCIES: Chapter 2
1.3.1 Prepares financial statements

5) Assets include cash, land, and accounts payable.
Answer: FALSE
Diff: 2 Type: TF
L.O.: 2-1
CPA COMPETENCIES: Chapter 2
1.3.1 Prepares financial statements

,6) Explain the following terms in your own words and give an example of each for Humpty's Equipment
Inc.
a. asset
b. liability
c. shareholders' equity
d. dividend
e. revenue
f. expense
Answer:
a. Assets are resources stemming from past transactions expected to provide economic benefits in the
future by contributing to earning revenues. Humpty uses a significant amount of machinery and
equipment to manufacture its products.
b. A liability is an obligation to provide goods or services in the future due to a past transaction. Some
examples are accounts payables and loans. Humpty borrows money (loan) from several sources
including PEI business development Inc.
c. Shareholders' equity is direct or indirect investment in an entity by its owners. Examples are common
shares and preferred shares. Humpty issues common shares and they trade on the Toronto Stock
Exchange under the symbol SNX.
d. Dividends are amounts paid to the owners from the earnings of the firm. Examples are common share
dividends and preferred dividends. As of January 2014, Humpty did not declare dividends.
e. Revenues are economic benefits earned by providing goods or services to customers. Examples are
sales and fees earned.
f. Expenses are costs incurred to earn revenue. Examples include cost of goods sold and wages.
Diff: 1 Type: ES
L.O.: 2-1
CPA COMPETENCIES: Chapter 2
1.3.1 Prepares financial statements

, 7) Define and provide an example of each of the following.

Account Definition Example
Asset



Revenue



Liability




Answer:
Definition Example (Only one example is
Account needed.) Answers include:
Asset Economic resources that provide a Cash, Accounts Receivable,
future benefit for a business. Inventory, Prepaid Expenses,
Investments, Buildings
Revenue The increase in stockholders' equity Sales Revenue, Legal Service
from delivery of goods or services to Revenue, Rental Revenue,
customers Interest Revenue
Debts owed by the business. Accounts Payable, Notes
Liability Payable, Accrued Liabilities
Diff: 2 Type: ES
L.O.: 2-1
CPA COMPETENCIES: Chapter 2
1.3.1 Prepares financial statements

8) List the types of accounts that appear on the income statement. List the types of accounts that appear
on the balance sheet.
Answer: The income statement contains accounts classified as revenues and expenses. The balance sheet
contains accounts classified as assets, liabilities, and owners' equity.
Diff: 2 Type: ES
L.O.: 2-1
CPA COMPETENCIES: Chapter 2
1.3.1 Prepares financial statements