Deck 4: The Accounting System: Concepts and Applications

Question 1

________________________________________ establish the rules to be followed when preparing financial statements.

Answer 1

Generally accepted accounting principles

Question 2

An ____________________ is considered to be separate from its owners and from any other business.

Answer 2

entity

Question 3

Each business is an entity and has its own accounting ____________________ and accounting records.

Answer 3

systems

Question 4

A ____________________ is an exchange of property or service by a business with another entity.

Question 5

A ____________________ is a business record used as evidence that a transaction has occurred.

Question 6

Identification, measurement and recording of accounting information are based on an analysis of ____________________ related to each transaction.

Question 7

The monetary unit concept states that ____________________ are to be recorded in terms of money.

Question 8

____________________ are the business' economic resources that will provide future benefits to the business.

Question 9

_________________________ are the amounts owed to the business by customers.

Question 10

____________________ are the economic obligations (debts) of the business.

Question 11

____________________ are the external parties to whom a business owes the debts

Question 12

____________________ are amounts owed to suppliers for credit purchases.

Question 13

The ____________________ of a business is the owner's current investment in the assets of the business.

Question 14

Owner's equity is sometimes referred to as residual equity because creditors have ____________________ legal claim to the assets of a business.

Question 15

The _________________________ is presented as Assets = Liabilities + Owner's Equity.

Question 16

Assets - ____________= Owner's Equity.

Question 17

The liabilities and owner's equity of an entity are claims on the economic ____________of the entity.

Question 18

Due to the dual effect of transactions, a business must make at least______________________ changes in its assets, liabilities and/or owners' equity when it records each transaction.

Question 19

____________________ are the prices a business charged to its customers for goods or services provided during a specific time period.

Question 20

____________________ are the costs of providing the goods or services to customers.

Question 21

An ____________________ is the time span for which a business reports its revenues and expenses.

Question 22

Under ____________________, a business records its revenues and the related expenses in the same accounting period that it provides the goods or services, regardless of when cash is received or paid.

Question 23

Financial statements can provide information to external users to help solve business problems.

Question 24

GAAP enables external users to instruct the issuing business on how to prepare their financial statements to meet the needs of the external user.

Question 25

GAAP sets the rules for businesses to follow in the preparation of financial statements.

Question 26

The entity concept allows owners the convenience of keeping track of their personal financial records through the business' accounting system.

Question 27

The entity concept means the business is considered separate from the owners.

Question 28

A transaction requires cash to be exchanged for goods or services before it can be recorded.

Question 29

A transaction would be recorded from a source document.

Question 30

The historical cost concept requires that a business record a transaction based on the cost at the time the transaction occurred.

Question 31

A business purchased a desk for $250. Another store had the same desk priced at $300. The historical cost concept would dictate that the business record $250 as the cost of the desk.

Question 32

A business purchased a desk for $250. Another store had the same desk priced at $300. The historical cost concept would dictate that the business record $300 as the cost of the desk.

Question 33

Assets are economic resources that will provide future benefits to the business.

Question 34

Prepaid expenses, such as prepaid insurance, are liabilities of an entity.

Question 35

An account payable is an example of an asset.

Question 36

An account payable is an example of a liability.

Question 37

An employee could be a creditor of the business for any salary earned but not yet paid for.

Question 38

Creditor is a term that refers to an outside investor in the business.

Question 39

A liability refers to a financial obligation on the part of the business to a creditor.

Question 40

A = L + OE represents the balance sheet for a business.

Question 41

A = L + OE represents the income position for a business.

Question 42

Assets - Liabilities = Net Assets

Question 43

The monetary total of a business' debt must equal the sum of resources and residual claims.

Question 44

The monetary total of a business' resources must equal the sum of the claims on resources by creditors and residual claimants.

Question 45

A business' resources less the amount of creditor's claims are referred to as the dual effect of transactions.

Question 46

Accounting transactions require at least two changes to keep the accounting equation in balance. This requirement is referred to as the dual effect of transactions.

Question 47

Because of the dual effect of transactions, every transaction will change both sides of the accounting equation.

Question 48

Revenue - Liabilities = Net Income

Question 49

The earning process refers to the cycle of purchasing inventory, selling the inventory, delivering the inventory, and collecting and paying cash.

Question 50

A business records revenue when the earning process is complete and collectible.

Question 51

Depreciation is the part of the cost of a physical asset allocated as an expense to each time period in which the asset is used.

Question 52

GAAP provides rules for entities to follow when preparing financial statements which assist external users with:

A) Analysing owner's personal transactions.
B) Interpreting bank statements.
C) Making comparisons between an entity's budgeted and actual results.
D) Making comparisons between the financial information of different entities.

Question 53

The three broad forms of business structure include all of the following except:

A) Sole proprietorships
B) Dual proprietorships
C) Partnerships
D) Companies / corporations

Question 54

Which of the following best describes an application of the entity concept?

A) Property is exchanged with another business for services received.
B) Transactions are valued in terms of the currency of the business' country.
C) An owner uses their personal checking account to buy milk at the grocery store.
D) A transaction is recorded based on the dollars exchanged at the time of the transaction.
E) A sales transaction is recorded from the customer sales order.

Question 55

Exchanges of property or service with other entities are called:

A) Transactions.
B) Cashflows.
C) Outgoings.
D) Expenses.

Question 56

The source documents for transactions show the value of the exchange in terms of money. This is known as:

A) The historical cost concept.
B) A transaction.
C) The monetary unit concept.
D) A source document.

Question 57

Which of the following best describes an application of historical cost?

A) Property is exchanged with another business for services received.
B) Transactions are valued in terms of the currency of the business' country.
C) An owner uses their personal cheque account to buy milk at the grocery store.
D) A transaction is recorded based on the dollars exchanged at the time of the transaction.
E) A sales transaction is recorded from the customer sales order.

Question 58

Which of the following best describes an asset?

A) Resources owned by an entity.
B) Resources owed by an entity.
C) Resources owned by an entity that are only tangible.
D) Resources that will provide future benefits to an entity.

Question 59

An example of a liability is:

A) Amounts owed to creditors.
B) Amounts owed to employees.
C) A loan from a bank.
D) All of the above.

Question 60

The accounting equation:

A) requires equilibrium of resources and the claims on those resources.
B) requires at least one entry to record a transaction.
C) provides the structure for the income statement.
D) is another name for the balance sheet.

Question 61

The dual effect of transactions means:

A) every transaction affects both assets and either liabilities or owners' equity.
B) every transaction affects either assets or liabilities.
C) every transaction affects both assets and owners' equity.
D) every transaction affects at least two accounts.

Question 62

Which of the following is true?

A) Revenue - Liability = Net Income
B) Revenue - Expense = Net Assets
C) Assets - Liabilities = Net Income.
D) Revenue - Expense = Net Income

Question 63

If an entrepreneur starts a business with $20 000 of their own money, what is the effect on the accounting equation?

A) Liabilities increase; equity decreases.
B) Assets increase; equity increases.
C) Assets increase; liabilities increase.
D) None of the above.

Question 64

If an entity pays for one year's insurance in the first month of operations, this payment is referred to as:

A) A liability.
B) A prepayment.
C) An expense.
D) Revenue.

Question 65

The accounting period is:

A) a month.
B) a year.
C) the time span for which the business reports its revenues and expenses.
D) a four-monthly period.

Question 66

The principle that the entity is able to continue as a viable entity for the foreseeable future is known as:

A) Going concern.
B) Matching principle.
C) Historical cost.
D) Accrual accounting.

Question 67

Which of the following best describes an application of accrual accounting?

A) Recording expenses in the same accounting period in which the liability was paid.
B) Recording expenses in the same accounting period in which the expense was matched to assets.
C) Recording expenses in the same accounting period in which the expense was paid.
D) Recording expenses in the same accounting period in which the expense was incurred.

Question 68

Which of the following best describes depreciation?

A) Accounts for the market value of a physical asset.
B) It is part of the cost of a physical asset allocated as an expense to each time period in which the asset is used.
C) It shows the increase in value of a physical asset over the asset's useful life.
D) It shows the drop in value of an asset when the asset is first used by an entity.

Question 69

The end of period adjustment to record interest on a note payable accumulated, but not yet paid for the period , paid would require:

A) Increasing expenses and increasing liabilities (note payable)
B) Increasing revenue and increasing liabilities (note payable).
C) Increasing assets and increasing owner's equity.
D) Increasing owner's equity and decreasing assets.

Question 70

Net income is:

A) Assets less liabilities.
B) Liabilities less equity.
C) Revenue less expenses.
D) Revenue less liabilities.

Question 71

An income statement normally includes all of the following except:

A) Revenue.
B) Expenses.
C) Net income.
D) Owner's Equity.

Question 72

Explain the entity concept.

Question 73

Provide a brief explanation of owner's equity.

Question 74

Explain the dual effect of transactions.

Question 75

Explain the accounting period.

Question 76

Describe the effect on the accounting equation of the receipt of cash from the sale of product on credit to a customer.

Question 77

Describe the effect on the accounting equation of the withdrawal of cash by the owner for personal use.

Question 78

Briefly explain the purpose of end-of-period adjustments.

Question 79

What are revenues and expenses and how is the accounting equation expanded to record these items?

Question 80

Example 4.1
The following information applies to the following questions. The accountant for Big Stores has compiled the following information about the business and its accounts:
$$\begin{array} { l r l r } \text { Cash } & \$ 1000 & \text { Inventory } & \$ 10000 \\\text { Revenues } & 5000 & \text { Expenses } & 3000 \\\text { Accounts Payable } & 3000 & \text { Equipment } & 15000 \\\text { Wages Payable } & 2000 & \text { Notes payable } & 12000\end{array}$$

-Refer to Example 4.1. What is the total amount of assets belonging to Big Stores?