Chapt 2 Acc Equation

Question 1

What is the accounting equation?

Answer 1

Assets = Liabilities + Equity

Question 2

Which side of the accounting equation represents what the company owns?

Answer 2

Assets

Question 3

Which side of the accounting equation represents what the company owes?

Answer 3

Liabilities

Question 4

What is equity in the accounting equation?

Answer 4

Equity represents the owner’s claim on the company’s assets after all liabilities are paid off.

Question 5

In the accounting equation, what happens if assets increase?

Answer 5

Equity increases.

Question 6

In the accounting equation, what happens if liabilities increase?

Answer 6

Equity decreases.

Question 7

True or False: The accounting equation must always balance.

Answer 7

True

Question 8

If total assets are $100,000 and total liabilities are $40,000, what is equity?

Answer 8

$60,000

Question 9

If equity is $50,000 and liabilities are $20,000, what are the total assets?

Answer 9

$70,000

Question 10

What is the fundamental principle behind the accounting equation?

Answer 10

The fundamental principle is that a company’s resources must be financed by either debt or equity.

Question 11

What are examples of assets in the accounting equation?

Answer 11

Cash, accounts receivable, inventory, equipment, buildings, land, investments, etc.

Question 12

What are examples of liabilities in the accounting equation?

Answer 12

Accounts payable, loans payable, wages payable, bonds payable, etc.

Question 13

What are examples of equity in the accounting equation?

Answer 13

Common stock, retained earnings, additional paid-in capital, etc.

Question 14

What is the formula to calculate equity in the accounting equation?

Answer 14

Equity = Assets - Liabilities

Question 15

How does the accounting equation relate to the balance sheet?

Answer 15

The accounting equation is the foundation of the balance sheet, as it shows the relationship between a company’s assets, liabilities, and equity.

Question 16

What is the purpose of the accounting equation?

Answer 16

The purpose is to provide a clear picture of a company’s financial position by ensuring that total assets are always equal to the sum of liabilities and equity.

Question 17

What is the significance of the accounting equation for financial decision-making?

Answer 17

It helps stakeholders understand how a company’s resources are financed and how changes in assets, liabilities, and equity impact the overall financial health of the business.

Question 18

What is the role of the accounting equation in double-entry accounting?

Answer 18

The accounting equation is the basis for double-entry accounting, where every transaction affects at least two accounts to maintain the equation’s balance.

Question 19

What happens if the accounting equation does not balance?

Answer 19

If the equation does not balance, it indicates an error in the financial records that needs to be identified and corrected.

Question 20

How does the accounting equation help in financial analysis?

Answer 20

By examining changes in assets, liabilities, and equity, analysts can assess a company’s financial performance, stability, and leverage ratios.

Question 21

What are the limitations of the accounting equation?

Answer 21

It does not account for the time value of money, market fluctuations, or intangible assets that may impact a company’s true financial position.

Question 22

How does the accounting equation impact financial reporting?

Answer 22

The equation ensures that financial statements accurately reflect a company’s financial position, performance, and cash flows to provide relevant information to investors and stakeholders.

Question 23

What are the key assumptions underlying the accounting equation?

Answer 23

The key assumptions are that assets are acquired through debt or equity financing, and that the company operates as a separate entity from its owners.

Question 24

What role does the accounting equation play in budgeting and forecasting?

Answer 24

It helps in setting financial goals, allocating resources, and predicting future financial outcomes based on expected changes in assets, liabilities, and equity.