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5. A company fails to record accrued wages for a reporting period. What effect will this error have on the company’s financial statement?

A. Assets and liabilities are understated.

B. Assets and owners’ equity are overstated.

C. Liabilities are understated and owners’ equity is overstated.

  
   
Ans: C.

Accrued wages should be recorded as a liability (wages payable). Failing to record a liability for accrued wages will understate wage expense, which leads to an overstatement of net income. Since net income is overstated, retained earnings and owners’ equity are both overstated. Assets are unaffected.

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3. At the start of the year, a company’s capital contributed by owners and retained earnings accounts had balances of $10,000 and $6,000, respectively. During the year, the following events took place: Net income earned $4,000 Interest paid on debt $ 500 Repayment of long-term debt $1,000 Proceeds from shares issued $1,000 Dividends paid $ 600 The end of year owners’ equity is closest to: A. $19,400. B. $19,900. C. $20,400.

Ans: C. Start of year capital contributed by owners $10,000 Additional shares issued 1,000 Initial retained earnings 6,000   Net income 4,000   Dividends paid (600) Increase in retained earnings 3,400 3,400 Ending owners’ equity $20,400

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2.  The segment of an accounting system that reports business transaction by account is the:

A. Trial balance.

B. General ledger.

C. Financial statements.
   
Ans: B.

The general ledger contains all the journal entries that are posted to the general journal and other specialized journals, except that the general ledger sorts the data by account where the general journal and the specialized journal records the transactions by date. The general ledger is considered the core of an accounting system.

  

A is incorrect. A trial balance is prepared at the end of an accounting period prior to the financial statements. A trial balance reports only ending balances (and not transactions) for each account. Adjusting entries are then made, if required, and then an adjusted trial balance can be prepared, for as many cycles as are necessary.

  

C is incorrect. Financial statements are prepared from an adjusted trial balance and provide a picture of the firm’s financial status. However, the financial statements do not report business transactions by account; they are much to summarized for that.