Chapter 2

Question 1

assets

Answer 1

anything of value owned by the business (e.g., building, supplies, cash, vehicles)

Question 2

liabilities

Answer 2

money the business has borrowed and will pay back later; money borrowed to purchase assets (e.g, mortgages, bank loan, credit cards)

Question 3

mortgage

Answer 3

money borrowed to purchase real estate and it takes 25 years to pay off and requires downpayment

Question 4

bank loan

Answer 4

money borrowed and paid back within 5-10 years (e.g., equipment, vehicle, technology)

Question 5

owner’s equity

Answer 5

owner’s claim to assets; if all assets were sold + liabilities paid back, what money remains is the owner’s

Question 6

fundamental accounting equation

Answer 6

assets = liabilities + owner’s equity

Question 7

balance sheet

Answer 7

a financial statement that shows the financial position of a company at a certain point in time

Question 8

debtor

Answer 8

anyone who owes money to the business; accounts receivable

Question 9

creditor

Answer 9

anyone to whom the business owes money; accounts payable

Question 10

accounts receivable

Answer 10

(an asset) money owed to the business; allowed customers to pay you at a later date; payments are due in 30 days

Question 11

accounts payable

Answer 11

(a liability) money owed by the business; purchased from a supplier and allowed to pay later; payments are due in 30 days

Question 12

liquidity

Answer 12

how easily an asset can be converted into cash

Question 13

Why do creditors have claims against the assets of a business?

Answer 13

they either provided the funds to acquire the assets or they have provided the assets themselves

Question 14

Who benefits from gains made in closing down a business?

Answer 14

the owner

Question 15

Who primarily suffers from losses incurred in closing down a business?

Answer 15

the owner

Question 16

Why would the owner prefer to sell the business intact rather the assets?

Answer 16

the owner can get more money as a whole

Question 17

GAAPs

Answer 17

Generally Accepted Accounting Principles (was replaced by IFRS)

Question 18

IFRS

Answer 18

International Financial Reporting Standards; all public companies use these rules

Question 19

ASPE

Answer 19

Accounting Standards for Private Enterprises; rules for private companies to follow if they chose not to follow IFRS

Question 20

4 Rules/Principles of GAAPs/IFRS

Answer 20

1. Business Entity Concept
2. The Cost Principle
3. The Continuing Concern Concept
4. Revaluation Model

Question 21

Business Entity Concept

GAAPs/IFRS

Answer 21

account for a business is separate from personal affairs of the owner; only business items on business financial statements no personal items

Question 22

The Cost Principle

GAAPs/IFRS

Answer 22

assets are recorded at the price that was originally paid

Question 23

The Continuing Concern Concept

GAAPs/IFRS

Answer 23

assumes the business will continue to operate unless it is known it will not

Question 24

Revaluation Model

GAAPs/IFRS

Answer 24

IFRS allows accountants to change the value of certain assets based on market prices (e.g., buildings, property)

Question 25

current asset

Answer 25

cash/assets that will be converted into cash within a year (e.g., A/R) and also contains assets that will be used up within a year (e.g., supplies)

Question 26

current liability

Answer 26

liabilities that are due within a year (e.g., A/P)

Question 27

long-term assets

Answer 27

assets that lasts longer than a year (e.g., property, plant, equipment)

Question 28

long-term liabilities

Answer 28

liabilities that take more than a year to pay (e.g., mortgage)