Financial Accounting Problems
1. An example of an asset is:
A. interest income C. accounts payable
B. supplies D. withdrawals by the owner
2. When cash is received on an account receivable:
A. total assets increase C. total assets are unchanged
B. total assets decrease D. cannot be determined
3. A receivable is recorded when a business makes:
A. sales on account C. sales for cash
B. purchases on account D. purchases for cash
4. An investment of equipment by the owner will result in:
A. an increase in both assets and C. an increase in both assets and owner’s
B. an increase in both liabilities and D. no change in assets or owner’s equity
5. If the date on a financial statement is September 30, 2007, then the financial statement must
A. the income statement C. the balance sheet
B. the statement of owner’s equity D. the cash flow statement
6. If the financial statement is dated For the Month Ended September 30, 2007, then the
financial statement could be:
A. the income statement C. the statement of cash flows
B. the statement of owner’s equity D. all of the above
7. Net income equals:
A. assets – liabilities C. revenues + expenses
B. liabilities + owner’s equity D. revenues – expenses
8. If liabilities are $20,000, and owner’s equity is $40,000, what are total assets?
A. $60,000 C. $20,000
1 | P a g e B. $30,000 D. $10,000
9. If the beginning balance in owner’s equity was $20,000, the ending balance is $24,400, net
income for the month was $27,200, and there were no investments by the owner, how much did
the owner withdraw during the month?
A. $4,200 C. $14,800
B. $10,600 D. $22,800
10. On January 1, 2008, Springer Stools had assets of $250,000 and owner’s equity of
$150,000. During the year, assets increased by $50,000 and owner’s equity decreased by
$24,000. What were the liabilities on December 31, 2008?
A. $100,000 C. $74,000
B. $174,000 D. $126,000
1. Vince Ramon operates a recreational aircraft detailing service. During the first month of
operation the following business events occurred:
A. Vince invested $7,500 in the business by depositing into the business bank account.
B. He paid rent of $1,500.
C. He purchased $4,000 of equipment on account.
D. He purchased $760 of supplies for cash.
E. He performed services on account, $1,850.
F. He paid $1,500 on the equipment purchased in C.
G. He received $800 from customers on their accounts.
H. He sold supplies (which cost $85) to a friend for $85.
Prepare an analysis of transactions showing the effects of each event on the accounting
equation. (Hint: You may want to refer to Exhibit 1-9 in your text.)
ASSETS = LIABILITIES + EQUITY
Cash + Receivable Supplies Equipment = Payable Capital
+ + +
2 | P a g e H.
II. Multiple Choice Circle the best answer.
1. An accountant performs services for a client on account. The correct entry for this
A. debit Service Revenue and credit Accounts Payable
B. debit Accounts Receivable and credit Cash
C. debit Accounts Receivable and credit Service Revenue
D. debit Cash and credit Service Revenue
2. An accountant debited Rent Expense $1,600 and credited Cash $1,600 in error. The correct
entry should have been to debit Prepaid Rent for $600 and credit Cash for $600. As a result
of this error:
A. assets are overstated by $1,600 C. the trial balance will not balance
B. expenses are understated by $1,600 D. expenses are overstated by $1,600
3. Cash had total debits for the month of $3,500 and total credits for the month of $2,700. If the
beginning balance in Cash was $2,200, what was the net change in Cash?
A. a decrease of $800 C. an increase of $800
B. an increase of $3,200 D. a decrease of $3,200
4. Accounts Payable had a balance of $4,000 on June 1. During June, $2,750 of equipment was
purchased on account. The June 30 balance was a credit of $3,850. How much were payments on
Accounts Payable during June?
A. $ 1,100 C. $ 2,900
B. $ 2,250 D. $ 4,600
5. Income statement accounts are:
A. assets and liabilities C. revenues and expenses
B. revenues and withdrawals D. assets and withdrawals
6. The posting reference in the ledger tells:
A. the page of the ledger that the account C. whether it is a debit or a credit entry
B. the explanation of the transaction D. the page of the journal where the entry can
3 | P a g e 7. The list of accounts and their account numbers is called the:
A. chart of accounts C. ledger
B. trial balance D. accountant’s reference
8. The revenue earned by lending money is called:
A. advertising expense C. interest revenue
B. loan revenue D. fees earned
9. When the owner of a business withdraws cash, the journal entry should include a:
A. debit to Accounts Payable C. debit to Cash
B. credit to Capital D. debit to Withdrawals
10. When cash was received in payment for services rendered on account, the accountant
debited Cash and credited Service Revenue. As a result there was:
A. an overstatement of Cash and Service Revenue
B. an understatement of assets and overstatement of revenues
C. an overstatement of assets and liabilities
D. an overstatement of assets and an overstatement of revenues
Complete each of the following statements.
1. Put the following in proper sequence by numbering them from 1 to 4.
_____ A. Journal entry
_____ B. Post to ledger
_____ C. Source document
_____ D. Trial balance
2. Indicate whether debits increase or decrease each of the following accounts.
A. Supplies _______ _______
B. Fees Earned _______ _______
C. Prepaid Rent _______ _______
D. Salaries Payable _______ _______
E. Capital _______ _______
F. Accounts Receivable _______ _______
G. Rent Revenue _______ _______
H. Notes Payable _______ _______
I. Withdrawals _______ _______
J. Advertising Expense _______ _______
4 | P a g e 3. Indicate the normal balance for each of the following.
A. Cash _____ _____
B. Notes Payable _____ _____
C. Prepaid Insurance _____ _____
D. Equipment _____ _____
E. Capital _____ _____
F. Accounts Receivable _____ _____
G. Salaries Expense _____ _____
H. Fees Earned _____ _____
I. Supplies _____ _____
J. Withdrawals _____ _____
1. Janice Johnson opened a consulting firm on May 1, 2008. During the first month of operations, the
following business transactions occurred:
May 1 Janice deposited $20,000 cash in the business bank account.
2 Purchased used office equipment for $3,000. She made a $500 cash down
payment and gave the seller a note payable due in 120 days.
3 Paid $1,825 for a month’s rent.
15 Collected $6,000 in cash for services rendered during the first 15 days of May.
17 Withdrew $2,100 to pay the rent on her apartment.
19 Purchased $850 of supplies on account.
19 Paid the phone bill for the month, $269.
21 Received but did not pay the $287 utility bill for May.
25 Paid her secretary a salary of $2,750.
28 Paid for the supplies purchased on May 19.
31 Performed $9,500 in services for the last half of May. Clients paid for $5,000 of
Prepare the journal entries for each of these transactions (omit explanations).
Demonstration Problem #1
The trial balance of Conrad Consulting on June 1, 2008, lists the entity’s assets, liabilities, and
owner’s equity. The business was established by Carmen Conrad.
Account Title Debit Credit
Cash $ 8,000
Accounts Payable $ 5,000
Carmen Conrad, Capital 27,000
During June, the business performed the following transactions:
5 | P a g e a. In anticipation of expanding the business in the near future, Carmen borrowed $75,000
from a local bank. A note payable in the name of the business was signed.
b. A small parcel of land was acquired for $50,000 cash. The land is expected to be used
as the future location of the business.
c. Consulting services were provided for clients. Cash totaling $6,000 was received for this
d. Supplies costing $1,200 to be used in the business were purchased on account.
e. Consulting services were provided for clients. Earned revenue on account totaled
f. The following expenses were paid in cash:
- Salary expense, $4,000
- Rent expense, $1,400
- Advertising expense, $850
- Interest expense, $650
g. Carmen Conrad withdrew $2,800 for personal use.
h. Paid $4,200 owed on account.
i. Received $2,100 cash on account for services previously rendered.
1. Using the T-account format, open the following ledger accounts for Conrad Consulting with
the balances as indicated.
Accounts receivable, no balance
Supplies, no balance
Land, no balance
Accounts payable, $5,000
Notes payable, no balance
Carmen Conrad, capital, $27,000
Carmen Conrad, withdrawals, no balance
Consulting revenue, no balance
Salary expense, no balance
Rent expense, no balance
Interest expense, no balance
Advertising expense, no balance
2. Journalize the transactions using the format on page 59. Key each journal entry by its
2. Post to the T-accounts on the next two pages. Key all amounts by letter and compute a
balance for each account.
6 | P a g e 3. Prepare the trial balance as of June 30, 2005 using the format on page 64.
Multiple Choice Circle the best answer.
1. An accountant who does not necessarily recognize the impact of a business event as it
occurs is probably using:
A. accrual accounting C. income tax accounting
B. cash-basis accounting D. actual-basis accounting
2. An example of accrual-basis accounting is:
A. recording the purchase of land for cash
B. recording utility expense when the bill is paid
C. recording revenue when merchandise is sold on account
D. recording salary expense when wages are paid
3. Which of the following is considered an adjusting entry category?
A. accrued expenses C. amortization
B. unearned revenues D. all of the above
4. All of the following have normal debit balances except:
A. Accumulated Amortization C. Prepaid Rent
B. Accounts Receivable D. Supplies
5. The first financial statement prepared from the adjusted trial balance is the:
A. income statement C. statement of owner’s equity
B. balance sheet D. order does not matter
6. Which of the following statements regarding the link between the financial statements is
A. Net income from the income statement goes to the balance sheet.
B. Owner’s equity from the balance sheet goes to the statement of owner’s equity.
C. Net income from the balance sheet goes to the income statement.
D. Owner’s equity from the statement of owner’s equity goes to the balance sheet.
7. Ice Co. paid 12 months’ insurance on January 1 and appropriately debited Prepaid Rent for
$16,800. On January 31, Ice should:
7 | P a g e A. credit Prepaid Insurance for C. debit Insurance Expense for $15,400
B. debit Insurance Expense for $1,400 D. credit Cash for $15,400
8. A company has a beginning balance in Supplies of $6,400. It purchases $4,200 of supplies
during the period and uses $3,600 of supplies. If the accountant does not make an adjusting
entry for supplies at the end of the period, then:
A. assets will be understated by C. expenses will be overstated by $3,600
B. assets will be overstated by $3,600 D. expenses will be understated by $4,200
9. During June, a company received $13,000 cash for services rendered. It also performed
$9,100 of services on account and received $8,050 cash for services to be performed in
June. The amount of revenue to be included on the June income statement is:
A. $8,050 C. $13,000
B. $22,100 D. $9,100
10. A company correctly made an adjusting entry on December 31, 2008, and credited Prepaid
Advertising for $2,200. During 2008 it paid $3,700 for advertising. The December 31, 2008,
balance in Prepaid Advertising was $3,500. What was the balance in the Prepaid Advertising
account on January 1, 2008?
A. $0 C. $1,100
B. $2,000 D. $4,400
11. Ice Co. paid 12 months’ insurance on January 2, and debited Insurance Expense for
$16,800. On January 31, Ice should:
A. credit Prepaid Insurance for C. debit Prepaid Insurance for $1,400
B. debit Insurance Expense for D. credit Insurance Expense for $15,400
12. On December 1, Fees Earned was credited for $27,000, representing nine months of
revenue for the period December 1 to September 1. On December 31, the company should:
A. credit Fees Earned for $24,000 C. debit fees Earned for $24,000
B. debit Unearned Fees for D. credit Unearned fees for $3,000
2. The accounting records of Hanna’s House Sitting Service include the following unadjusted
normal balances on November 30:
8 | P a g e Accounts receivable $ 1,900
Salary payable 0
Unearned revenue 1,000
Salary expense 1,325
Service revenue 5,200
Supplies expense 0
Amortization expense 0
Accumulated amortization 1,200
The following information is available for the November 30 adjusting
a. Supplies on hand, $540
b. Salaries owed to employees, $405
c. Service revenue earned but not billed, $280
d. Services performed which had been paid for in advance, $100
e. Amortization, $210
1. Open the T-accounts.
2. Record the adjustments directly to the T-accounts. (Key each entry by letter.)
3. Compute the adjusted balance for each account.
Accounts Receivable Supplies Salary Payable
Unearned Revenue Service Revenue Salary Expense
Supplies Expense Amortization Expense Accumulated Amortization
9 | P a g e 3. The balance sheets for Sol’s Studio had the following balances after adjusting entries:
Supplies $4,400 $3,150
Prepaid advertising 5,800 2,600
Salaries payable 3,200 1,400
Unearned revenue 7,300 9,200
Cash payments and receipts for 2008 included
Payments for supplies $6,000
Payments for 7,000
Payments of salaries 3,800
Receipts from 163,000
How much supplies expense, advertising expense, salaries expense, and revenue were
reported on the 2008 income statement?
II. Multiple Choice Circle the best answer.
1. Which of the following companies would not be considered a merchandising entity?
A. a clothing store C. a restaurant
B. a car dealership D. a long-distance telephone company
2. A company will have a net loss if:
A. cost of goods sold exceeds operating C. sales exceed gross margin
B. operating expenses exceed D. sales exceed operating expenses
3. Which of the following is classified as an operating expense?
A. Cost of Goods Sold C. Sales Discount
B. Rent Expense D. Interest Expense
4. A debit to Sales Returns and Allowances will:
A. increase Inventory C. increase Net Sales
B. increase Net P