Chapter 2

Question 1

Accounting Equation

Answer 1

Assets = Liabilities + Owners’ Equity

Question 2

Accumulated Other Comprehensive Income

Answer 2

The source of these increased assets

Question 3

Assets

Answer 3

Assets are the firm’s economic resources, formally defined as ‘probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events’

Question 4

Balance Sheet

Answer 4

A statement of financial position shows the financial resources the company owns or controls and the claims on those resources

Question 5

Book Value

Answer 5

The book value of an asset is the asset’s cost minus the asset’s accumulated depreciation.

Question 6

Comparability

Answer 6

Information that becomes much more useful when it can be related to a benchmark or standard

Question 7

Conservatism

Answer 7

a pervasive factor in accounting, can be summarized as follows: When in doubt, recognize all losses but don’t recognize any gains.

Question 8

Consistency

Answer 8

The consistency principle states that, once you adopt an accounting principle or method, continue to follow it consistently in future accounting periods.

Question 9

Disclosure

Answer 9

The notes that accompany the financial statement.

Question 10

Earnings Per Share (EPS)

Answer 10

EPS tells the owner of one share of stock what he or she really wants to know

Question 11

Entity Concept

Answer 11

The idea that personal financial activity is kept separate from business financial activity

Question 12

Expenses

Answer 12

The amount of assets consumed from the performance of business operations and thus are the opposite of revenues

Question 13

Financing Activities

Answer 13

Those activities whereby cash is obtained from, or repaid to, owners and creditors

Question 14

Gains

Answer 14

Refers to money made on activities outside the normal business of a company

Question 15

Going Concern Assumption

Answer 15

allows the readers of financial statements to assume that the company will continue on long enough to carry out its objectives and commitments.

Question 16

Historical Cost Convention

Answer 16

An accounting technique that values an asset for balance sheet purposes at the price paid for the asset at the time of its acquisition

Question 17

Income Statement

Answer 17

A company’s financial performance for a specified period of time.

Question 18

Investing Activities

Answer 18

The purchase and sale of land, buildings, and equipment. Investing activities also include buying and selling stocks of other companies

Question 19

Liabilities

Answer 19

the future sacrifices of economic benefits that the entity is presently obliged to make to other entities as a result of past transactions or other past events

Question 20

Liquidity

Answer 20

the ease with which the item can be turned into cash

Question 21

Losses

Answer 21

Refers to money lost on activities outside the normal business of a company

Question 22

Materiality

Answer 22

the question of whether an item is large enough to make any difference to anyone

Question 23

Net Assets

Answer 23

total assets minus total liabilities. In a sole proprietorship the amount of net assets is reported as owner’s equity. In a corporation the amount of net assets is reported as stockholders’ equity.

Question 24

Net Income

Answer 24

the difference between revenues and expenses. If revenues exceed expenses, net income results. If, on the other hand, expenses exceed revenues, there will be a net loss

Question 25

Net Loss

Answer 25

the difference between revenues and expenses. If revenues exceed expenses, net income results. If, on the other hand, expenses exceed revenues, there will be a net loss

Question 26

Notes to Financial Statements

Answer 26

These provide additional information pertaining to a company’s operations and financial position and are considered to be an integral part of the financial statements.

Question 27

Operating Activities

Answer 27

Those activities involved in producing and selling goods and services and thus comprise the day-to-day business of a company

Question 28

Owners’ Equity

Answer 28

The owners’ residual interest in the assets of a firm.

Question 29

Paid-in Capital

Answer 29

The value of the assets given in exchange for shares of stock.

Question 30

Recognition

Answer 30

A breaking down of all of the estimates and judgements into one number and reporting that number in the financial statement.

Question 31

Relevance

Answer 31

A qualitative characteristic in accounting. Relevance is associated with information that is timely, useful, has predictive value, and is going to make a difference to a decision maker.

Question 32

Reliability

Answer 32

A qualitative characteristic in accounting. It is achieved when information is verifiable, objective (not subjective) and you can depend on it.

Question 33

Retained Earnings

Answer 33

Represent the portion of stockholders’ equity (resulting from cumulative profitable operations) that has not been paid to the owners as dividends

Question 34

Revenue

Answer 34

The amount of assets created through the performance of business operations

Question 35

Revenue Recognition

Answer 35

A generally accepted accounting principle (GAAP) that determines the specific conditions in which revenue is recognized or accounted for.

Question 36

Statement of Cash Flows

Answer 36

Individual cash flow items that are classified according to three main activities: operating, investing, and financing.

Question 37

Stockholders’ Equity

Answer 37

The portion of the balance sheet that represents the capital received from investors in exchange for stock (paid-in capital), donated capital and retained earnings

Question 38

Time Period Concept

Answer 38

The time period principle is the concept that a business should report the financial results of its activities over a standard time period, which is usually monthly, quarterly, or annually.

Question 39

Treasury Stock

Answer 39

Shown as a subtraction in the stockholders’ equity section of the balance sheet