Module 1 - Chapter 2

Question 1

Accounting equation

Answer 1

Assets = Equities; or Assets = Liabilities + Stockholders’ equity.

Question 2

Accounts payable

Answer 2

Amounts owed to suppliers for goods or services purchased on credit.

Question 3

Accounts receivable

Answer 3

Amounts due from customers for services already provided.

Question 4

Assets

Answer 4

Things of value owned by the business. Examples include cash, machines, and buildings.
To their owners, assets possess service potential or utility that can be measured and expressed in
money terms.

Question 5

Balance sheet

Answer 5

Financial statement that lists a company’s assets, liabilities, and stockholders’ equity (including dollar amounts) as of a specific moment in time. Also called a statement of financial position.

Question 6

Business entity concept (or accounting entity concept)

Answer 6

The separate existence of the business organization.

Question 7

Capital stock

Answer 7

The title given to an equity account showing the investment in a business corporation by its stockholders.

Question 8

Continuity

Answer 8

See going-concern concept.

The assumption by the accountant that unless strong
evidence exists to the contrary, a business entity will continue operations into the indefinite
future.

Question 9

Corporation

Answer 9

Business incorporated under the laws of one of the states and owned by a few stockholders or by thousands of stockholders.

Question 10

Cost

Answer 10

Sacrifice made or the resources given up, measured in money terms, to acquire some desired thing, such as a new truck (asset).

Question 11

Dividend

Answer 11

Payment (usually of cash) to the owners of a corporation; it is a distribution of income to owners rather than an expense of doing business.

Question 12

Entity

Answer 12

A business unit that is deemed to have an existence separate and apart from its owners, creditors, employees, customers, other interested parties, and other businesses, and for which
accounting records are maintained.

Question 13

Equities

Answer 13

Broadly speaking, all claims to, or interests in, assets; includes liabilities and stockholders’ equity.

Question 14

Equity ratio

Answer 14

A ratio found by dividing stockholders’ equity by total equities (or total assets).

Question 15

Exchange-price (or cost) concept (principle)

Answer 15

The objective money prices determined in the exchange process are used to record most assets.

Question 16

Expenses

Answer 16

Costs incurred to produce revenues, measured by the assets surrendered or consumed in serving customers.

Question 17

Going-concern (continuity) concept

Answer 17

The assumption by the accountant that unless strong
evidence exists to the contrary, a business entity will continue operations into the indefinite
future.

Question 18

Income statement

Answer 18

Financial statement that shows the revenues and expenses and reports the profitability of a business organization for a stated period of time. Sometimes called an earnings
statement.

Question 19

Liabilities

Answer 19

Debts owed by a business—or creditors’ equity. Examples: notes payable, accounts payable.

Question 20

Manufacturing companies

Answer 20

Companies that buy materials, convert them into products, and
then sell the products to other companies or to final customers.

Question 21

Merchandising companies

Answer 21

Companies that purchase goods ready for sale and sell them to
customers.

Question 22

Money measurement concept

Answer 22

Recording and reporting economic activity in a common
monetary unit of measure such as the dollar.

Question 23

Net income

Answer 23

Amount by which the revenues of a period exceed the expenses of the same period.

Question 24

Net loss

Answer 24

Amount by which the expenses of a period exceed the revenues of the same period.

Question 25

Notes payable

Answer 25

Amounts owed to parties who loan the company money after the owner signs a written agreement (a note) for the company to repay each loan.

Question 26

Partnership

Answer 26

An unincorporated business owned by two or more persons associated as partners.

Question 27

Periodicity (time periods) concept

Answer 27

An assumption that an entity’s life can be meaningfully
subdivided into time periods (such as months or years) for purposes of reporting its economic activities.

Question 28

Profitability

Answer 28

Ability to generate income. The income statement reflects a company’s profitability.

Question 29

Retained earnings

Answer 29

Accumulated net income less dividend distributions to stockholders.

Question 30

Revenues

Answer 30

Inflows of assets (such as cash) resulting from the sale of products or the rendering of services to customers.

Question 31

Service companies

Answer 31

Companies (such as accounting firms, law firms, or dry cleaning
establishments) that perform services for a fee.

Question 32

Single proprietorship

Answer 32

An unincorporated business owned by an individual and often
managed by that individual.

Question 33

Solvency

Answer 33

Ability to pay debts as they become due. The balance sheet reflects a company’s solvency.

Question 34

Source document

Answer 34

Any written or printed evidence of a business transaction that describes the essential facts of that transaction, such as receipts for cash paid or received.

Question 35

Statement of cash flows

Answer 35

Financial statement showing cash inflows and outflows for a
company over a period of time.

Question 36

Statement of retained earnings

Answer 36

Financial statement used to explain the changes in retained
earnings that occurred between two balance sheet dates.

Question 37

Stockholders’ equity

Answer 37

The owners’ interest in a corporation.

Question 38

Stockholders or shareholders

Answer 38

Owners of a corporation; they buy shares of stock, which are
units of ownership, in the corporation.

Question 39

Summary of transactions

Answer 39

Teaching tool used in Chapter 1 to show the effects of transactions on the accounting equation.

Question 40

Transaction

Answer 40

A business activity or event that causes a measurable change in the items in the accounting equation,

Assets = Liabilities + Stockholders’ equity.