Chapters 1-4

Question 1

Going Concern Assumption

Answer 1

Rationale for why plant assets are not reported at liquidation value.

Question 2

Economic entity assumption

Answer 2

Indicates that personal and business recording should be separately maintained

Question 3

Monetary Unit Assumption

Answer 3

Only those things that can be expressed in money are included in the accounting records

Question 4

Periodicity Assumption

Answer 4

Company can divide its economic activities into artificial time periods (monthly, quarterly, yearly)

Question 5

Historical cost principle

Answer 5

GAAP requirement that companies account for and report most assets and liabilities on the basis of acquisition price

Question 6

Revenue Recognition Principle

Answer 6

Principle prescribing that revenue is recognized when it’s earned

Question 7

Expense Recognition Principle

Answer 7

Also known as matching, expenses should be recognized in the same period that the related revenues are recognized

Question 8

Full disclosure principle

Answer 8

Ensures all relevant financial information is reported

Question 9

Cost-Benefit relationship

Answer 9

The cost of providing the info against the benefits that can be derived from using it

Question 10

Materiality constraint

Answer 10

Immaterial items need not be given a strict accounting treatment

Question 11

Industry practices constraint

Answer 11

States that peculiar nature of some industries and business require departure from what normally be considered good accounting practice

Question 12

Conservatism constraint

Answer 12

Dictates that in matters of doubt and uncertainty that the accountant should choose the safest option

Question 13

Fair Value

Answer 13

Assets and liabilities should be reported at fair value

Question 14

Cost constraint

Answer 14

Weigh the cost that companies will incur to provide the information against the benefit that the financial statement users will gain from having information available.

Question 15

Debt to assets ratio

Answer 15

Total Liabilities divided by total assets

Question 16

Current ratio equation

Answer 16

Current assets divided by current liabilities

Question 17

Free cash flow

Answer 17

Cash provided by operations-Cash Exp.-Cash Div

Question 18

Three types of ratios

Answer 18

Profitability
Liquidity
Solvency

Question 19

Liquidity

Answer 19

Ability to pay obligations due in the next year/cycle

Question 20

Working capital equation

Answer 20

Ca-CL

Question 21

Define solvency

Answer 21

Ability to survive long term

Question 22

What is included on the income statement?

Answer 22

Revenue
Expenses
Net income
R-i=Ni

Question 23

Retained Earnings Statement

Answer 23

“For the month ended”
Beg. RE
Add: NI
Minus: Dividends

End RE

Question 24

Balance sheet

Answer 24

Exact date
Assets
Total assets

Liabilities and SE
Liabilities 
Total Liabilities 
SE 
Total SE 
Total SE and liability
(Should equal assets)

Question 25

Statement of Cash flows

Answer 25

Cash flows from operating activities

Cash flows from

Question 26

Classified Balance Sheet

Answer 26

Assets

CA 
LTInvestments
PPE
(Minus depreciation)
Intangible assets and goodwill

Liabilities

Current liabilities
LTLiabilities
SE

Question 27

What accounts are natural debits

Answer 27

Assets
Dividends
Expenses

Question 28

Basic accounting equation

Answer 28

Assets=Liabilites+SE

Question 29

What makes up SE in debits and credits

Answer 29

Common stock
RE 
Dividends 
Revenues 
Expenses

Question 30

Earnings per share equation

Answer 30

Net income - preferred dividends divided by weighted average common shares outstanding

Question 31

Solvency

Answer 31

Ability to pay interest as it comes due and to repay the balance of a debt due at its maturity

Question 32

Liquidity

Answer 32

Ability to pay obligations expected to become due short term