HSET 366
Ch 1. Introduction Dr. Kim
1. Several terms are used in basic financial accounting as follows:
a) fundamental accounting equation i) ledger
b) assets j) journal
c) liabilities k) trial balance
d) owners’ equity l) accounting cycle
e) permanent accounts m) posting
f) account n) adjusting entry
g) debit o) income statement
h) credit p) balance sheet
1) A(n) ___account___ is a record containing information regarding a particular type of business
transaction.
2) The __balance sheet___ reflects the assets owned by the business organization.
3) A = L + E is the _fundamental accounting equation__.
4) Obligations of a business are shown on the balance sheet and are called __liabilities____ .
5) A(n) __journal__ is a book of original entry.
6) A(n) __ledger____ is a book of final entry.
7) Transferring amounts from journals to ledgers is referred to as ___posting____.
8) Common stock is an example of a(n) _permanent account______.
2. Fill in the blanks below with the accounting principle that best applies.
A. Cost F. Continuity of business
B. Business entity G. Consistency
C. Conservatism H. Matching
D. Full disclosure I. Unit of measurement
E. Materiality J. Objective evidence
1) A hotel describes its inventory valuation method in the footnotes to its financial statement
because of _full disclosure_____.
2) During 20X4 a club used LIFO to value its inventory. If the club uses the FIFO method in 20X5 it
will violate the _consistency____ principle.
3) The owner of a food service operation decides to take some steaks home for dinner. He records
the cost of the steaks as a “withdrawal” because of the __business entity___ principle.
4) The _matching_ principle is the basis for recording the payroll accrual at the end of each
month.
5) A new van was purchased for $4,000 below its list price of $25,000. If the purchasing firm
records the van at $25,000, it will violate the __cost___ principle.
6) H. Smith, owner of Smith’s Catering, contributes a van to the business. He believes the van is
worth $15,000; however, the business records the van at its Blue-Book value of $10,000 because
of the _objective evidence_ principle.
7) The Wizard Inn has purchased 100 new water glasses with its “WI” crest on each. The cost per
glass is $1.50; however, the resale values is considered to be only $.15 each. The glasses are
recorded at cost and will be written off over the next three years rather than written down
immediately because of the __continuity of business____ principle.
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HSET 366
Ch 1. Introduction Dr. Kim
3. Select the best response in each item below.
1) The Zebra Inn sold 10,000 shares of its common stock for $20 per share. Its common stock has a
par value of $1 per share. Which of the following statements is false?
a. Cash of $200,000 was received.
b. The common stock account increased by $200,000.
c. The additional paid-in capital account increased by $190,000.
d. Retained earnings is not affected by this transaction.
2) Which of the following account types normally has a debit balance?
a. Liability accounts
b. Permanent owners’ equity accounts
c. Owners’ equity revenue accounts
d. Asset accounts
3) Permanent owners’ equity accounts have what kind of normal balance?
a. Debit
b. Credit
c. Either debit or credit
4. Answer the questions below.
1) The Tech Hotel purchased a computer for $3,000 that the salesperson said was actually worth
$3,500; it is projected that the computer will have a market value of $2,500 in one year. The
cost principle dictates that the computer purchase be recorded at the date of purchase for:
$2,500
2) If owners’ equity equals $200,000 and liabilities equal $320,000, how much are assets worth?
200,000+320,000 = $520,000
3) If assets equal $450,000 and owners’ equity equals $200,000, liabilities must equal:
450,000-200,000=$250,000
5. Examples of Debits and Credits in a Corporation
1) A corporation issues common stock and receives $20,000 of cash
Account titles Debit Credit
Cash 20,000
Common Stock 20,000
2) The corporation purchases equipment for $5,000
Account titles Debit Credit
Equipment 5,000
Cash 5,000
3) The corporation earns consulting revenues of $9,000 and allows the client to pay 10 days later
Account titles Debit Credit
A/R 9,000
Revenue 9,000
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HSET 366
Ch 1. Introduction Dr. Kim
4) The corporation collects the $9,000 from the client who received services 10 days earlier
Account titles Debit Credit
Cash 9,000
A/R 9,000
5) The corporation incurs $1,500 of advertising expense which is paid immediately
Account titles Debit Credit
Advertising Expense 1,500
Cash 1,500