Chapter 17

Question 1

basic accounting equation?

Answer 1

A = L + O.E.
A - stands for Assets
L - stands for Liabilities
O.E. - stands for Owner’s 
Equity
- basis for a balance sheetA = L + O.E.
A - stands for Assets
L - stands for Liabilities
O.E. - stands for Owner’s Equity

Question 2

What is a balance sheet?

Answer 2

A snapshot of an organizations financial position.

Question 3

Examples of assets?

Answer 3

Cash
o Accounts Receivable (typically noted as A/R, and pronounced as “A.R.”)
o Inventory
Sample of inventory items:
 Raw Materials
 Goods in process
 Finished Goods
 Retail products
 Construction in process
o Plant, Property and Equipment (also known as “PP&E” or “Fixed Assets”)
Samples of PP&E
 Buildings
 Land
 Cooking Equipment (for companies like the Bagel Company)
 Tractors (for farms, etc.)
o Investments
 Marketable securities
 Stocks
 Bonds

Question 4

Examples of liabilities?

Answer 4

o Accounts Payable (typically noted as A/P, and pronounced as “A.P.”)
o Loans
Samples of Loans:
 Credit Cards
 Auto Loans
 Mortgages
 Business loans

Question 5

What is owners equity?

Answer 5

Owners equity is the difference between assets and liabilities.
ie) Common stock, retained earnings.

Question 6

What is an income statement?

Answer 6

An income statement is a summary of a firm’s revenues and expenses during a
specified accounting period—one month, three months, six months, or a year. The
income statement is sometimes called the profit and loss statement.

Question 7

Equation for income statement?

Answer 7

R - E = NI / NL

Question 8

Examples of revenue?

Answer 8

example of Revenues:
In our personal lives:
Wages
Gifts
Interest income for deposit accounts
Gains on selling items such as stocks
In businesses:
Sales
Fees
Charitable contributions (for non-profit organizations such as Carroll College)
Interest Income from Loans and Investments (for Banks and other financial
institutions)

Question 9

Examples of Expenses?

Answer 9

Sample of Expenses:
In our personal lives:
Rent
Insurance
Sundries (aka toiletries)
Food
Advertising (selling your car or house)
Utilities
Travel expenses
In businesses:
Rent
Insurance
Maintenance (sundries and toiletries)
Fuel (food)
Advertising
Utilities
Travel expenses

Question 10

SEC?

Answer 10

the Securities and Exchange Commission. This federal agency acts as an
information gathering place for all filings for publically-traded companies and as
the watchdog for investors who have bought stock in publically-traded
companies.

Question 11

Collateral?

Answer 11

anything of value that can be pledged to a creditor (i.e. a bank) for
the purpose of securing a loan.
Examples of collateral: A/R, PP&E (Property Plant & Equipment)

Question 12

who can perform an audit?

Answer 12

Only a certified public agent, (CPA), can perform an audit.

Question 13

Why have an audit?

Answer 13

So that creditors and other “stakeholders” can have some
assurance that the financial statements of an organization are complete and
accurate.

Question 14

Why are credit cards called “credit” cards? Why are debit cards called “debit”
cards?

Answer 14

Because of the double entry accounting system. The double entry accounting system is labeled as such, because each entry into
the accounting records has at least one debit and at least one credit, and in all
cases the total debits must equal the total credits.

Question 15

How is a balance sheet linked to an income statement?

Answer 15

The Balance Sheet is “as
of” a point in time, while the Income Statement is “over” a period of time.
- The asset “accounts receivable” would never happen without the revenue account “sales” right?
The asset “inventory” is reduced every time the expense “cost of good sold” occurs, right
- If a company has an increase in owners equity throughout a year, it is likely the companies net income.
ie) cost of goods sold = beginning inventory + net purchases - ending inventory.

Question 16

Accrual accounting?

Answer 16

Requires items be recorded

when “occurred” not necessarily when “paid”.