Chapter 2: Investing, Financing Decisions, and the Accounting System

Question 1

Separate Entity Assumption

Answer 1

Transactions of the business are accounted for separately from transactions of the owner

Question 2

Going Concern Assumption

Answer 2

A business is expected to continue to operate into the foreseeable future

Question 3

Monetary Unit Assumption

Answer 3

Financial information is reported in the national monetary unit without adjustment for changes in purchasing power

Question 4

Accountants measure the elements of the balance sheet initially at their cost (historical cost), which is the

Answer 4

cash-equivalent value on the date of the transaction; however, these values may be adjusted to other amounts, such as market value, depending on conditions

Question 5

Current Assets

Answer 5

Assets that will be used or turned into cash within one year. Inventory is always considered a current asset regardless of the time needed to produce and sell it.

Question 6

Most companies list assets in

Answer 6

order of liquidity

Question 7

Liabilities are usually listed on the balance sheet in

Answer 7

order of maturity

Question 8

Current Liabilities

Answer 8

Short-term obligations that will be paid or settled within the coming year in cash, goods, other current assets, or services.

Question 9

Financing provided by owners is called

Answer 9

contributed capital

Question 10

Financing provided by operations is called

Answer 10

earned capital / retained earnings

Question 11

Transaction

Answer 11

(1) An exchange between a business and one or more external parties to a business or (2) a measurable internal event such as the use of assets in operations.

Question 12

External Events

Answer 12

Exchanges of assets, goods, or services, or promises to pay (liabilities) from one or more other parties

Question 13

Internal Events

Answer 13

Include certain events that aren’t exchanges between the business and other parties but nevertheless have a direct and measurable effect on the entity.

Question 14

An exchange of promises doesn’t make a

Answer 14

transaction

Question 15

Account

Answer 15

A standardized format that organizations use to accumulate the dollar effect of transactions on each financial statement item.

Question 16

Transaction Analysis

Answer 16

The process of studying a transaction to determine its economic effect on the business in terms of the accounting equation.

Question 17

Additional Paid-in Capital

Answer 17

The amount of contributed capital minus the par value of the stock.

Question 18

Because assets are on the left side of A = L + SE

Answer 18

increases in assets accounts are on the left

Question 19

Because liabilities and stockholders’ equity are on the left side of A = L + SE

Answer 19

Increases in them are on the right

Question 20

Debit

Answer 20

The left side of an account.

Question 21

Credit

Answer 21

The right side of an account.

Question 22

Journal Entry

Answer 22

An accounting method for expressing the effects of a transaction on accounts in a debits-equal-credits format.

Question 23

Current Ratio =

Answer 23

Current Assets / Current Liabilities

Question 24

Creditors and security analysts use the current ratio to

Answer 24

measure the ability of the company to pay its short-term obligations with short-term assets

Question 25

Cash

Answer 25

Asset

Question 26

Accounts Receivable

Answer 26

Asset

Question 27

Inventory

Answer 27

Asset

Question 28

Prepaid Expenses

Answer 28

Asset

Question 29

Investments

Answer 29

Asset

Question 30

Property

Answer 30

Asset

Question 31

Equipment

Answer 31

Asset

Question 32

Intangibles (rights without physical substance)

Answer 32

Asset

Question 33

Accounts Payable

Answer 33

Liability

Question 34

Notes Payable

Answer 34

Liability

Question 35

Accrued Expenses Payable

Answer 35

Liability

Question 36

Unearned Revenues

Answer 36

Liability

Question 37

Taxes Payable

Answer 37

Liability

Question 38

Common Stock

Answer 38

Stockholders’ Equity

Question 39

Additional Paid-in Capital

Answer 39

Stockholders’ Equity

Question 40

Retained Earnings

Answer 40

Stockholders’ Equity