Chapter 1

Question 1

Define net worth.

Answer 1

The money that you own.

Question 2

Differentiate between liability and equity.

Answer 2

Liabilities are what belongs to someone else, or something you owe. Equity is synonymous with net worth - it is what you own and what belongs to you.

Question 3

What is the accounting equation?

Answer 3

Assets = Liabilities + Net Worth (Equity)

Question 4

The accounting equation is the __________ of the company.

Answer 4

balance sheet

Question 5

Resources that have future benefit over which we have control are ________.

Answer 5

assets

Question 6

The accounting equation must always ________.

Answer 6

balance

Question 7

T or F: If the item has no future benefit, then it must be an asset.

Answer 7

False - money, investments, or items are only considered assets if they have a future economic benefit to you.

Question 8

What kind of cost is incurred when it has no future economic benefit?

Answer 8

An expense

Question 9

An ___________ ________ is like a record of an entire year’s operations for a company.

Answer 9

income statement

Question 10

What is an income statement?

Answer 10

The statement that captures all of the revenue and expenses of a company. It indicates how much you’ve earned.

Question 11

A ________ ______ is like a picture of the company’s financial position of a specific date.

Answer 11

balance sheet

Question 12

A balance sheet illustrates the ___________ _________.

Answer 12

accounting equation

Question 13

What is the focus of financial accounting?

Answer 13

Provide info to external users for decision making.

Question 14

What are some examples of assets?

Answer 14

Accounts receivable - amounts due to a company by customers

Inventory - products held for sale

Supplies - items held for use by the business

Cash, equipment, building, land, or investments.

Question 15

_____________ are a company’s obligations to creditors, or what the company ______.

Answer 15

Liabilities

owes

Question 16

List some examples of liabilities.

Answer 16

Accounts payable - amount due to suppliers

Salaries payable - salaries due to employees (salaries have worked but have not yet been paid)

Utilities payable - amt due to utility companies

Notes payable - amt due to banks or other lenders

Unearned revenue - obligation to provide goods or services to a customer who paid in advance.

Question 17

__________ equity is the owner financing and reinvested earnings or the net worth of the company.

Answer 17

stockholder’s

Question 18

What are the two main accounts of stockholder’s equity?

Answer 18

Common stock

Retained earnings

Question 19

Explain what common stock is.

Answer 19

They are shares representing ownership of a corporation, such as contributions by owners/investors.

Question 20

What are retained earnings?

Answer 20

Undistributed profits earned throughout the life of the company

Question 21

What are payments to the company’s shareholders?

Answer 21

Dividends

Question 22

What three things are also parts of the stockholder’s equity accounts which roll into retained earnings?

Answer 22

Revenues, expenses, and dividends.

Net income = revenue - expenses

Dividends would be subtracted from the net income.

The end result would be the stockholder’s equity.

Question 23

Describe the dual effects concept.

Answer 23

Every accounting transaction has two or more effects - meaning the business generally receives something and gives something up.

Question 24

__________ triggers an accounting event.

Answer 24

Performance

Question 25

T or F: When changing the accounting equation, you could change only one side of the equation, such as increasing and decreasing your assets.

Answer 25

True, imagine spending the business’s cash on new supplies. Since cash is an asset and office supplies are also an asset, we would see only the asset’s side of the equation changing.

This is an example of an asset exchange transaction.

Question 26

What is the name of the liability for loans from banks or lenders?

Answer 26

Notes payable

Question 27

When a company generates ___________, it’s retained earnings _____________. The accounting equation’s assets and stockholder’s equity are increased as a result.

Answer 27

revenue

increase

Question 28

As salaries expense increases, __________ decreases.

Answer 28

stockholders’ equity

Question 29

What is GAAP and what does it stand for?

Answer 29

GAAP is an acronym for “generally accepted accounting principles. They are the established principles followed within the US.

Question 30

Which organization establishes GAAP?

Answer 30

The Financial Accounting Standards Board (FASB)

Question 31

Explain the purpose of a statement of cash flows.

Answer 31

To identify the cash receipts and payments that caused the cash account to change during an accounting period.

Question 32

Which statement reports contributions from or payments to investors and the amount of income the company invested for future growth during an accounting period?

Answer 32

statement of stockholder’s equity

Question 33

T or F: You can still see assets, liabilities or stockholder’s equity on an income statement.

Answer 33

False, you will only ever seen revenue, expenses and the net income or loss.

Question 34

What concept tells us that we need to record the revenues and related expenses in the same accounting period?

Answer 34

the matching concept - a.k.a. the matching principle.

Question 35

If a company is ____, their beginning retained earnings is $0. However, if the company has been operational, their beginning retained earnings is their ______ retained earnings from the prior year.

Answer 35

new

ending

Question 36

T or F: If a business has a net loss for the accounting period, the net loss is reported on the statement of stockholder’s equity, and therefore, deducted from the stockholder’s equity.

Answer 36

True

Question 37

Which financial statement reports the economic resources that a company owns and shows their sources of financing?

Answer 37

balance sheet

Question 38

These activities come from cash earned from issuing stock, paying dividends to owners, and borrowing/paying cash from/to creditors or lenders.

Answer 38

financing activities

Question 39

What are the three categories of the statement of cash flows?

Answer 39

(1) Financing Activities
(2) Investing Activities
(3) Operating Activities

Question 40

Which activities involve buying or selling long-term assets such as a building or large equipment?

Answer 40

investing activities

Question 41

These activities involve receiving cash from revenue or spending cash for expenses (salaries, rent, advertising etc). These types of activities are commonly repeated by a business.

Answer 41

operating activities

Question 42

A financially healthy company should generate most of their cash from _________ activities.

Answer 42

operating

Question 43

What item is pulled from the income statement and added to the statement of stockholder’s equity?

Answer 43

net income

Question 44

When filling out your balance sheet, which financial statement do you look to for retained earnings?

Answer 44

statement of stockholder’s equity

Question 45

Cash assets must match on the ___________ and the ____________.

Answer 45

statement of cash flows

balance sheet

Question 46

What is earned from the major ongoing operations of the business?

Answer 46

revenue

Question 47

T or F: Under GAAP, it does not matter if the customer has paid for the good or service for it to be considered revenue.

Answer 47

True, but the service must have provided.

Question 48

__________ are costs incurred to generate revenues during a period.

Answer 48

expenses

Question 49

T or F: Under GAAP, expenses are triggered by the consumption or utilization of resources, not by the payment of cash.

Answer 49

True

Question 50

What is the matching principle?

Answer 50

Costs incurred to generate revenues should be recorded in the same period as the corresponding revenue.