FA Chapter 2

Question 1

Define: Financial Reporting

Answer 1

To provide useful economic information to external users for decision making and for assessing future cash flows.

Question 2

Relevancy

Answer 2

predictive value,

feedback value, and timeliness.

Question 3

Reliability

Answer 3

verifiability,

representational faithfulness,

and neutrality

Question 4

Comparability

Answer 4

across companies.

Question 5

Consistency

Answer 5

over time.

Question 6

Asset

Answer 6

economic resource with

probable future benefits.

Question 7

Liability

Answer 7

probable future sacrifices of

economic resources.

Question 8

Stockholders’ Equity

Answer 8

financing

provided by owners and business
operations.

Question 9

Revenue

Answer 9

increase in assets or

settlement of liabilities from ongoing

operations.

Question 10

Expense

Answer 10

decrease in assets or

increase in liabilities from ongoing

operations.

Question 11

Gain

Answer 11

increase in assets or settlement

of liabilities from peripheral

activities.

Question 12

Loss

Answer 12

decrease in assets or

increase in liabilities from peripheral

activities.

Question 13

Historical Cost

Answer 13

cost is measured on the date of the transaction as the cash paid plus the dollar value of all non cash considerations.

Question 14

UNEARNED REVENUE IS A

Answer 14

Liability

Question 15

PREPAID EXPENSE IS ALWAYS AN

Answer 15

Asset

Question 16

Separate Entity

Answer 16

each business’s activities must be accounted for separately from the activities of its owners

Question 17

Unit of measure

Answer 17

each business entity accounts for and reports its financial results primarily in terms of the national monetary unit

Question 18

continuity

Answer 18

business normally is assumed to continue operating long enough to meet its contractual commitments and plans

Question 19

Nature of a business transaction

Answer 19

Most transactions with external parties involve an exchange where the business entity gives up something but receives something in return.

Question 20

Accounts

Answer 20

An organized format used by companies to accumulate the dollar effects of transactions.

Question 21

Every transaction affects at least

Answer 21

two accounts

Question 22

How to Identify and Classify Accounts (4 steps)

Answer 22

§Identify the accounts (by title) affected and make sure at least two accounts change.
§Classify them by type of account. Was each account an asset (A), a liability (L), or a stockholders’ equity (SE)?
§Determine the direction of the effect. Did the account increase [+] or decrease [-]?
§Verify that the accounting equation (A = L + SE) remains in balance.

Question 23

Signing a contract…

Answer 23

does not indicate a transaction

Question 24

ordering without paying….

Answer 24

requires no entry

Question 25

Leverage Ratio asks the question…

Answer 25

Do they have enough current Assets to pay off current liabilities?

Question 26

Leverage Ratio Formula

Answer 26

CA/CL=Ratio