Test Bank

Chapter 2
The Accounting Cycle

Name: _______________________________________

Class: _______________________________________

Date: _______________________________________

True/False Questions
1. A check written to a supplier is an example of a source document.
a. True
b. False

2. The cost principle states that a business may record the current market price if it is greater than
the amount listed on an invoice.
a. True
b. False

3. The matching principle states that expenses must be matched with their appropriate source
document.
a. True
b. False

4. After completing all postings an unadjusted trial balance is prepared.

a. True
b. False

5. The cash basis of accounting is the same as the accrual basis of accounting except for accounting
periods.
a. True
b. False

6. A net income is reported on both the income statement and statement of owner’s equity.
a. True
b. False

7. The financial statement that displays all assets, liabilities, and owner’s equity is the statement of
owner’s equity.
a. True
b. False

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8. The final stage in the accounting cycle is the preparation of closing entries.
a. True
b. False

9. Permanent accounts are closed to the owner’s capital account.

a. True
b. False

10. Rent expense and owner’s drawing are examples of temporary accounts.
a. True
b. False

Multiple Choice Questions

11. Which of the following is not a source document for a business?
a. A check from a customer.
b. An invoice sent to a customer.
c. An employment contract.
d. An employee time card.

12. Which of the following is not a Generally Accepted Accounting Principle (GAAP)?
a. Revenue principle
b. Expense spending principle
c. Matching principle
d. Time-period principle

13. What is the first step in the accounting cycle?

a. Post journal entries.
b. Prepare financial statements.
c. Analyze business transactions.
d. Prepare the unadjusted trial balance.

14. Revenue is recognized under the accrual basis of accounting when:

a. cash is received.
b. services are rendered.
c. it (revenue) is earned.
d. None of the above.

15. Which of the following is not a financial statement?

a. A bank statement.
b. An income statement.
c. A balance sheet.
d. A statement of cash flows.

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16. Which of the following is an example of a permanent account?

a. Rent expense
b. Owner’s draw
c. Unearned revenue
d. Rent revenue

Matching Questions
17. Match each of the following as appropriate:
A Check A document sent to a company that outlines business
activities for a given month.
B Source document A document that provides information regarding payment
received from a customer or made to a supplier.
C Invoice A document that provides information regarding one or
more transactions, and which can take different forms.
D Bank statement A bill for goods or services.

18. Match each of the following principles as appropriate:

A Cost principle
B Matching principle
C Time-period principle
D Revenue principle
E Monetary unit principle
F Full disclosure principle

The amount recorded in the financial records reflecting the cost paid.
States that a public company must report all pertinent information about
company activities.
Accounting activity must be reported over specific periods.
Expenses must be recorded in the same time period as the revenues that they
generated.
Revenues are recorded when earned regardless of when cash exchanges hands.
Expressing amounts in a consistent currency (U.S. Dollars).

19. Match each of the following as appropriate:

A Unadjusted trial balance Expenses are recorded when they are incurred,
B Accrual basis of accounting Designed to summarize all account balances in one
location.
C Cash basis of accounting Revenues are recorded when cash is received.

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20. Match each of the following as appropriate:

A Income statement
B Statement of owner’s equity
C Balance sheet
D Statement of cash flows
Reports net income and owner drawing.
Reports revenue, expenses, and net income.
Illustrates the accounting equation: assets = liabilities
plus owner’s equity.
Summarizes activities that lead to a company’s ending
cash balance.

21. Match each of the following aspects that pertain to closing a company’s books:
A Temporary account Revenue, expenses, and drawing.
B Permanent account The last step in the accounting cycle.
C Post-closing trial balance The act of re-setting certain accounts to zero.
D Closing process Accounts that remain after the closing process concludes.

Fill-in-the-Blank Questions
22. A __________ __________ provides information regarding the details of a transaction.

23. GAAP stands for __________ __________ __________ __________.

24. The __________ principle states that expenses must be recorded in the same period as the
revenues.

25. Under the __________ basis of accounting revenues are recorded when they are earned, and
expenses are recorded when they are incurred, regardless of when cash changes hands.

26. The final figure within the income statement is __________ __________.

27. Revenue is an example of a __________ account, whereas cash is an example of a __________

account.

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