Financial Statement: assets, liabilities, and equity 1

Question 1

What is the accounting equation?

Answer 1

Assets = Liabilities + Equity

Question 2

What are assets?

Answer 2

Resources owned by a company that have economic value (cash, equipment, buildings, inventory)

Question 3

What are liabilities?

Answer 3

Debts and obligations a company owes to others (loans, accounts payable, wages payable)

Question 4

What is equity?

Answer 4

Owner’s stake in the business (what’s left after subtracting liabilities from assets)

Question 5

Which accounts normally have debit balances?

Answer 5

Assets, Expenses, Dividends

Question 6

Which accounts normally have credit balances?

Answer 6

Liabilities, Revenue, Common Stock, Retained Earnings

Question 7

What are current assets?

Answer 7

Assets expected to be converted to cash within one year (cash, accounts receivable, inventory)

Question 8

What are fixed assets?

Answer 8

Long-term assets not easily converted to cash (buildings, equipment, land)

Question 9

What are current liabilities?

Answer 9

Debts due within one year (accounts payable, short-term loans)

Question 10

What are long-term liabilities?

Answer 10

Debts due after one year (long-term loans, bonds payable)

Question 11

What is retained earnings?

Answer 11

Accumulated profits that have been reinvested in the business rather than paid out as dividends

Question 12

How do you calculate net income?

Answer 12

Revenues - Expenses = Net Income

Question 13

What does accumulated depreciation represent?

Answer 13

Total amount of depreciation expense recorded for an asset since its purchase

Question 14

What are unearned revenues?

Answer 14

Money received in advance for services not yet performed

Question 15

What are prepaid expenses?

Answer 15

Expenses paid in advance that haven’t been used up yet

Question 16

What’s the purpose of depreciation?

Answer 16

To allocate the cost of a long-term asset over its useful life

Question 17

If assets are $100,000 and liabilities are $60,000, what’s the equity?

Answer 17

$40,000 (Assets - Liabilities = Equity)

Question 18

If a company has $50,000 in common stock and $30,000 in retained earnings, what’s total equity?

Answer 18

$80,000 (Common Stock + Retained Earnings = Total Equity)

Question 19

How do you calculate net book value of equipment?

Answer 19

Original Cost - Accumulated Depreciation

Question 21

What is a debit balance?

Answer 21

When the total debits exceed total credits in an account

Question 22

What is a credit balance?

Answer 22

When the total credits exceed total debits in an account

Question 23

What does ‘normal balance’ mean?

Answer 23

The side (debit or credit) where an account’s balance is normally positive

Question 24

How is revenue recognized?

Answer 24

When services are performed or goods are delivered, regardless of when cash is received

Question 25

What is an accrued expense?

Answer 25

An expense that has been incurred but not yet paid

Question 26

What is an accrued revenue?

Answer 26

Revenue that has been earned but not yet received

Question 27

When are adjusting entries made?

Answer 27

At the end of the accounting period before financial statements are prepared

Question 28

What's the entry to record used supplies?

Answer 28

Debit Supplies Expense, Credit Supplies

Question 29

What's the entry to record earned revenue that was previously unearned?

Answer 29

Debit Unearned Revenue, Credit Revenue

Question 30

What is working capital?

Answer 30

Current Assets minus Current Liabilities

Question 31

What items appear on an income statement?

Answer 31

Revenues, Expenses, and resulting Net Income or Loss

Question 32

What does the balance sheet equation prove?

Answer 32

That total assets equal total claims (liabilities plus equity)

Question 33

What is Accounts Receivable?

Answer 33

Money owed to a company by customers for goods/services provided on credit

Question 34

What is Accounts Payable?

Answer 34

Money a company owes to suppliers for goods/services received on credit

Question 35

What is Prepaid Rent?

Answer 35

Rent that has been paid in advance but not yet used

Question 36

How do you record the purchase of equipment on credit?

Answer 36

Debit Equipment, Credit Accounts Payable

Question 37

How do you record owner's investment in the business?

Answer 37

Debit Cash, Credit Common Stock

Question 38

How do you record payment of salary?

Answer 38

Debit Salary Expense, Credit Cash

Question 39

What is straight-line depreciation?

Answer 39

Equal depreciation expense each year over asset's useful life

Question 40

How do you calculate annual depreciation?

Answer 40

(Cost - Salvage Value) ÷ Useful Life

Question 41

What's the entry to record depreciation?

Answer 41

Debit Depreciation Expense, Credit Accumulated Depreciation