Chapter 2—The Accounting Information System
TRUE/FALSE
1. The time-period assumption assumes that a company prepares its financial statements every month.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
2. Because it tends to provide the most reliable measure of activity, all assets are reported on the balance
sheet at their fair market values.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
3. The term used to refer to an asset's original cost is book value.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
4. The going concern assumption infers that a company will continue to operate into the future.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
5. A company in the process of liquidation is considered to be under the going concern assumption.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
6. The International Accounting Standards Board (IASB) was created in order to develop worldwide ac-
counting standards that are required for all financial statements, regardless of the country where the fi-
nancial statements were prepared.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
7. The initial step in the recording process is sometimes referred to as journalizing.
ANS: T PTS: 1 DIF: Difficulty: Moderate
, OBJ: LO: 2-6 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
8. The issuance of common stock increases a company's assets and stockholders’ equity.
ANS: T PTS: 1 DIF: Difficulty: Moderate
REF: CS2-1 OBJ: LO: 2-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Analysis NOT: 1 min.
9. The payment of a dividend increases both cash and stockholders' equity of the distributing entity.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS2-1 OBJ: LO: 2-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Analysis NOT: 1 min.
10. According to the historical cost principle, assets are always carried at their current market value.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
11. An accounting transaction may impact only one financial statement or multiple statements.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
12. The accounting equation must balance before and after every accounting transaction.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
13. A chart of accounts is prepared to determine whether the books have gotten out of balance.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
14. GAAP has established a universal chart of accounts that is applicable to all businesses in the United
States.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
,15. A T-account for Cash cannot contain any credits.
ANS: F PTS: 1 DIF: Difficulty: Easy
REF: CS2-2 OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
16. A debit entry increases assets and revenue accounts.
ANS: F PTS: 1 DIF: Difficulty: Easy
REF: CS2-2 OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
17. The dividends account has a normal debit balance.
ANS: T PTS: 1 DIF: Difficulty: Easy
REF: CS2-3 OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
18. Under the double-entry system of accounting, every transaction is entered in at least two accounts on
opposite sides of a T-account.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
19. Under the double-entry system of accounting, a debit is always a negative entry.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
20. Income statement accounts have normal credit balances.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
21. Only events that can be measured with sufficient reliability will be recognized in the accounting sys-
tem.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-2 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
22. The general ledger is an example of a book of original entry.
ANS: F PTS: 1 DIF: Difficulty: Easy
, OBJ: LO: 2-5 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
23. The general ledger is often used for the initial recording of repetitive transactions.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-6 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
24. A trial balance is the listing of each active account and its corresponding debit or credit balance at a
particular point in time.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
25. Even though a trial balance reveals that the debits equal the credits, there still may be errors in the
company’s books.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
26. The purchase of office supplies from a supplier is an example of an external event.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-2 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
27. The conservatism principle is concerned with the possibility of understating assets or income.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
28. A full disclosure policy stipulates that all information that would make a difference to financial state-
ment users should be revealed.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
29. If a company performed services for credit, then the debit side of the journal entry would be to Ac-
counts Payable and the credit would be to Service Revenue.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS2-4 OBJ: LO: 2-5 NAT: BUSPROG: Communication
TRUE/FALSE
1. The time-period assumption assumes that a company prepares its financial statements every month.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
2. Because it tends to provide the most reliable measure of activity, all assets are reported on the balance
sheet at their fair market values.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
3. The term used to refer to an asset's original cost is book value.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
4. The going concern assumption infers that a company will continue to operate into the future.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
5. A company in the process of liquidation is considered to be under the going concern assumption.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
6. The International Accounting Standards Board (IASB) was created in order to develop worldwide ac-
counting standards that are required for all financial statements, regardless of the country where the fi-
nancial statements were prepared.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-02-GAAP KEY: Bloom's: Knowledge
NOT: 1 min.
7. The initial step in the recording process is sometimes referred to as journalizing.
ANS: T PTS: 1 DIF: Difficulty: Moderate
, OBJ: LO: 2-6 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
8. The issuance of common stock increases a company's assets and stockholders’ equity.
ANS: T PTS: 1 DIF: Difficulty: Moderate
REF: CS2-1 OBJ: LO: 2-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Analysis NOT: 1 min.
9. The payment of a dividend increases both cash and stockholders' equity of the distributing entity.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS2-1 OBJ: LO: 2-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Analysis NOT: 1 min.
10. According to the historical cost principle, assets are always carried at their current market value.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
11. An accounting transaction may impact only one financial statement or multiple statements.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
12. The accounting equation must balance before and after every accounting transaction.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-3 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
13. A chart of accounts is prepared to determine whether the books have gotten out of balance.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
14. GAAP has established a universal chart of accounts that is applicable to all businesses in the United
States.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
,15. A T-account for Cash cannot contain any credits.
ANS: F PTS: 1 DIF: Difficulty: Easy
REF: CS2-2 OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
16. A debit entry increases assets and revenue accounts.
ANS: F PTS: 1 DIF: Difficulty: Easy
REF: CS2-2 OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
17. The dividends account has a normal debit balance.
ANS: T PTS: 1 DIF: Difficulty: Easy
REF: CS2-3 OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
18. Under the double-entry system of accounting, every transaction is entered in at least two accounts on
opposite sides of a T-account.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
19. Under the double-entry system of accounting, a debit is always a negative entry.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
20. Income statement accounts have normal credit balances.
ANS: F PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-4 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
21. Only events that can be measured with sufficient reliability will be recognized in the accounting sys-
tem.
ANS: T PTS: 1 DIF: Difficulty: Moderate
OBJ: LO: 2-2 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
22. The general ledger is an example of a book of original entry.
ANS: F PTS: 1 DIF: Difficulty: Easy
, OBJ: LO: 2-5 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
23. The general ledger is often used for the initial recording of repetitive transactions.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-6 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
24. A trial balance is the listing of each active account and its corresponding debit or credit balance at a
particular point in time.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
25. Even though a trial balance reveals that the debits equal the credits, there still may be errors in the
company’s books.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-7 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-05-Accounting Cycle
KEY: Bloom's: Knowledge NOT: 1 min.
26. The purchase of office supplies from a supplier is an example of an external event.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-2 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
27. The conservatism principle is concerned with the possibility of understating assets or income.
ANS: F PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
28. A full disclosure policy stipulates that all information that would make a difference to financial state-
ment users should be revealed.
ANS: T PTS: 1 DIF: Difficulty: Easy
OBJ: LO: 2-1 NAT: BUSPROG: Communication
STA: AICPA FN-Reporting | ACBSP-APC-06-Recording Transactions
KEY: Bloom's: Knowledge NOT: 1 min.
29. If a company performed services for credit, then the debit side of the journal entry would be to Ac-
counts Payable and the credit would be to Service Revenue.
ANS: F PTS: 1 DIF: Difficulty: Moderate
REF: CS2-4 OBJ: LO: 2-5 NAT: BUSPROG: Communication
