ACCT 201 Principles of Financial Accounting
Practice Exam - Chapter 2
Accounting Information System
Dr. Fred Barbee

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1. The principle that requires every business to be accounted for separately and distinctly from its owner or owners is known as the
a.  Objectivity Principle
b.  Business Entity Principle
c.  Going-Concern Principle
d.  Revenue Recognition Principle.
2. If a parcel of land is offered for sale at $45,000, is assessed for tax purposes at $20,000, is recognized by its purchasers as easily being worth $36,000, and is purchased for $34,000, the land should be recorded in the purchaser's books at:
a.  $20,000.
b.  $34,000
c.  $36,000
d.  $45,000.
3. The objectivity principle:
a.  Means that information is supported by independent, unbiased information.
b.  Means that information can be based on what the preparer thinks is true.
c.  Means that financial statements should contain information that is optimistic.
d.  All of the above.
4. The accounting process begins with:
a.  Analysis of business transactions and events.
b.  Preparing financial statements and other reports.
c.  Summarizing the recorded effect of business transactions.
d.  Ratio analysis of financial statements.
5. Unearned revenues are:
a.  Revenues that have been earned and received.
b.  Revenues that have been earned but not yet collected.
c.  Liabilities created by advance cash payments from customers for products or services.
d.  Increases to owners' equity.
6. An account balance is:
a.  The total of the credit side of an account.
b.  The total of the debit side of the account.
c.  The difference between the increases and decreases (including the beginning balance) recorded in the account.
d.  Unchanged by posting debits and credits to the account.
7. Of the following accounts, the one that normally has a credit balance is:
a.  Cash.
b.  Office Equipment.
c.  Sales Salaries Payable.
d.  Sales Salares Expense.
8. If the liabilities of a business increased $13,000 during a period of time and the owners equity in the business decreased $3,000 during the same period, the assets of the business must have:
a.  Decreased $10,000.
b.  Decreased $16,000.
c.  Increased $10,000.
d.  Increased $12,000.
9. Crimson Company has assets of $100,000, liabilities of $10,000, and equity of $90,000. It buys office equipment on credit for $5,000. The effect of this transaction include:
a.  Assets increase by $5,000 and equity increases by $5,000.
b.  Assets increase by $5,000 and equity decreases by $5,000.
c.  Liabilities increase by $5,000 and equity decreases by $5,000.
d.  Assets increase by $5,000 and liabilities increase by $5,000.
10. A company produced net income for the year of $157,250. Its average equity for the period was $850,000. It's return on equity was:
a.  5.4%.
b.  18.5%.
c.  185%
d.  9.5%.

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Part II: Short Problems

Short Problem #1

Select the appropriate financial statement for each of the following accounts (Note: Some items may appear on more than one financial statement.)

a. Income Statement
b. Statement of Retained Earnings
c. Balance Sheet
d. Statement of Cash Flows

_____ 1. Cash
_____ 2. Dividends
_____ 3. Notes Payable
_____ 4. Fees Earned
_____ 5. Common Stock
_____ 6. Accounts Receivable
_____ 7. Rent Expense
_____ 8. Supplies Expense

Short Problem #2

For each of the following errors, indicate on the table below the amount by which the trial balance will be out of balance and which trial balance column (debit or credit) will have the larger total as a result of the error.

a. $100 debit to Cash was debited to the cash account twice.
b. $1,900 credit to Sales was posted as a $190 credit.
c. $5,000 debit to Office Equipment was debited to Office Supplies.
d. $625 debit to Prepaid Insurance was posted as a $62.50 debit.
e. $520 credit to Accounts Payable was not posted.

Amount Out of Balance
Column Having Larger Total

Part III: Problems

Monica Benson began business as Benson Law Firm, Inc. on November 1. Set up T-accounts forthe following accounts: cash, accounts receivable, law library, office equipment, accounts payable, common stock, dividends, legal fees earned and salaries expense. The following transactions occurred in November

a. Benson invested $15,000 cash and a law library valued at $3,000 in exchange for common stock.
b. Purchased $7,500 of office equipment from Johnson Bros. on credit.
c. Completed legal work for a client and received $1,000 cash in full payment.
d. Paid Johnson Bros. $3,500 cash in partial settlement of the amount owed.
e. Completed $4,000 of legal work for a client on credit.
f. Paid $3,000 as a cash dividend.
g. Received $2,000 cash as partial payment for the legal work completed for the client in part e.
h. Paid $2,500 cash for the legal secretary's salary.


  1. Record the above transactions directly to the T-accounts and prepare an unadjusted trial balance.
  2. Prepare an unadjusted income statement, statement of retained earnings and balance sheet.

Last Modified January 15, 2003

Last Modified September 19, 2002