Chapter 2
1. A balance sheet format reports that assets equal liabilities plus stockholders’ equity.
True False
2. Liability accounts are reported on the income statement as they represent goods or services consumed or
used.
True False
3. A primary objective of accounting is to disclose the fair market value of assets on the balance sheet so
investors and creditors know their current value.
True False
4. Under the separate entity assumption, it is assumed that a business will continue to operate into the
foreseeable future.
True False
5. The historical cost principle measures assets and liabilities at the historical cash-equivalent amounts.
True False
6. Liabilities are listed on the balance sheet in the order of their maturity, meaning how soon they are due
to be paid.
True False
7. An “account” is a standardized format used to accumulate the effects of transactions on each financial
statement item.
True False
8. The payment of a liability in cash will decrease stockholders’ equity.
True False
9. The purchase of equipment for cash has no effect on total assets.
True False
10. The duality of effects means that every transaction must affect both sides of the accounting equation.
True False
11. When a business borrows money from a bank, both the left and right sides of the accounting equation
increase.
True False
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12. It is not possible for the left side of the accounting equation to both increase and decrease as a result of
the same transaction.
True False
13. A T-account shows total debits of $26,000 and total credits of $20,000; therefore, it has a $6,000 debit
balance.
True False
14. Debits always increase and credits always decrease an account.
True False
15. The chart of accounts of a company is the complete listing of all accounts and accounts numbers.
True False
16. If you want to know the balance of the supplies account, that information would be found in the general
ledger.
True False
17. The normal balance for an asset account is a debit and the normal balance for a liability account is a
credit.
True False
18. The financial leverage ratio is computed by dividing average total assets by average stockholders’
equity.
True False
19. When a company borrows money from a bank, it leads to a cash inflow from an investing activity.
True False
20. When a loan is repaid to the bank it leads to an inflow of cash from a financing activity.
True False
21. Which of the following statements about stockholders’ equity is not correct?
A. Stockholders’ equity is the shareholders’ residual interest in the company resulting from the difference
in assets and liabilities.
B. Stockholders’ equity accounts are increased with credits.
C. Stockholders’ equity results only from contributions of the owners.
D. The purchase of land for cash has no effect on stockholders’ equity.
22. All liabilities appear on the
A. Balance sheet.
B. Income statement.
C. Statement of stockholders’ equity.
D. Statement of cash flows.
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23. Morgan Company owes Regan Company $1,000, Morgan would reflect this on its
A. statement of cash flows.
B. income statement.
C. balance sheet.
D. statement of stockholders’ equity.
24. The assumption that a business can continue to remain in operation into the future is the
A. historical cost principle.
B. unit-of-measure assumption.
C. continuity assumption.
D. separate-entity assumption.
25. Assets are defined as
A. resources with possible future economic benefits owed by an entity as a result of past transactions.
B. resources with probable future economic benefits owned by an entity as a result of past transactions.
C. resources with probable future economic benefits owned by an entity as a result of future
transactions.
D. resources with possible future economic benefits owed by an entity as a result of future transactions.
26. The assumption that the assets and liabilities of the business are accounted for on the books of the
company but not included in the records of the owner is the
A. unit-of-measure assumption.
B. continuity assumption.
C. historical cost principle.
D. separate entity assumption.
27. Liabilities are defined as
A. possible debts or obligations of an entity as a result of future transactions which will be paid with
assets or services.
B. possible debts or obligations of an entity as a result of past transactions which will be paid with assets
or services.
C. probable debts or obligations of an entity as a result of future transactions which will be paid with
assets or services.
D. probable debts or obligations of an entity as a result of past transactions which will be paid with
assets or services.
28. Stockholders’ equity is
A. probable debts or obligations of an entity as a result of past transactions which will be paid with
assets or services.
B. assets minus liabilities.
C. probable future economic benefits owned by an entity as a result of past transactions.
D. the financing provided by the creditors of a business.
29. Chad Jones is the sole owner and manager of Jones Glass Repair Shop. In 2009, Jones purchases a truck
for $30,000 to be used in the business. Which of the following fundamentals requires Jones to record the
truck at the price paid to buy it?
A. Separate-entity assumption.
B. Revenue principle.
C. Full disclosure.
D. Historical cost principle.
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30. On a balance sheet, assets are listed in the order of
A. dollar amount (largest first).
B. date of acquisition (earliest first).
C. ease of conversion to cash.
D. importance to the operation of the business.
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