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182. Match each of the following items 1 through 8 with the financial statement a through d in which each item would most likely appear. An item may appear on more than one statement. a. Income statement
b. Statement of owner's equity c. Balance sheet
d. Statement of cash flows _____1. Assets.
_____2. Withdrawals. _____3. Revenues.
_____4. Cash from investing activities. _____5. Expenses. _____6. Liabilities.
_____7. Cash from operating activities. _____8. Total equity.
183. Classify the following activities according to the appropriate section of the statement of cash flows. a. Operating activity b. Investing activity c. Financing activity
____ 1. Cash received from a one-time sale of used office equipment. ____ 2. Cash paid for withdrawals by owners. ____ 3. Cash received from customers.
____ 4. Cash received from owner contributions. ____ 5. Cash paid for utilities.
____ 6. Cash paid for a delivery van to be used in the business.
Short Answer Questions
184. Explain the role of accounting in the information age.
Answer: Accounting is an information and measurement system. It identifies, records, and communicates relevant, reliable and comparable information about business activities. Accounting also includes the crucial process of analysis and interpretation. 185. What is the balance sheet? What is its purpose?
Answer: The balance sheet is a listing of the types and amounts of assets, liabilities, and equity of a business at a specified point in time. The statement's purpose is to provide information that helps users assess the financial condition of the business. 186. Identify the users and uses of accounting information.
Answer: There are two general types of users of accounting information. Internal users are managers and officers of businesses. They require information about business activities in order to make decisions about planning, monitoring, and control. External users rely on financial statements to make business decisions. These users include lenders, and shareholders. Lenders need information for measuring the risk and return of loans. Shareholders need information for assessing the risk and return in owning shares.
187. Identify several opportunities in accounting and its related fields.
Answer: The traditional areas of accounting include financial accounting, managerial accounting, and tax accounting. Work in related fields includes lending, underwriting, market research, and business valuation.
188. Explain why ethics are an integral part of accounting.
Answer: The purpose of accounting is to provide useful information for decision makers. For information to be useful, it must be trusted. This requires ethical behavior by accountants and managers in all phases of gathering, analyzing and reporting financial information so that good decisions are made.
189. Describe the three important guidelines for revenue recognition.
Answer: The three important guidelines for revenue recognition include: (1) Revenue is recognized when earned. (2) Assets received from selling products and services do not need to be in cash. (3) Revenue recognized is measured by cash received plus the cash equivalent of other assets received.
190. Identify the three basic forms of business organizations.
Answer: The three basic forms of business organizations are sole proprietorships, partnerships, and corporations.
191. How does the objectivity principle support ethical behavior?
Answer: The objectivity principle supports ethical behavior since it requires that financial information be documented by independent, unbiased evidence.
Consequently, the impact of belief and opinions on the recording and reporting of business transactions and events is lessened.
192. Identify the two main groups involved in establishing generally accepted accounting principles.
Answer: The FASB is the private group that establishes GAAP. The SEC establishes reporting requirements for companies that issue stock to the public.
193. How does the going-concern principle affect reporting asset values of a business?
Answer: The going-concern principle means that financial statements reflect an assumption that the business continues in operation instead of being closed or sold. Assets are therefore reported at cost rather than at liquidation value. 194. Describe the relation between revenues, expenses, and net income.
Answer: Revenues are the increases in equity from a company's earnings activities. Expenses are the costs of assets or services used to earn revenues. Net income is the excess of revenues over expenses.
195. Explain the accounting equation and define its terms.
Answer: The accounting equation is stated as: Assets = Liabilities + Equity. Assets are resources owned or controlled by a business. Creditors' claims on assets are called liabilities. The owner's claim on assets is called equity. The accounting equation shows that the ownership of business assets can be shared between creditors and owners. 196. What distinguishes liabilities from equity?
Answer: Liabilities are creditors' claims on assets. They reflect obligations to transfer assets or provide products or services to others. Equity is owner's claim to assets. Equity is also called net assets or residual interest.
197.What is the purpose of return on assets as an analytical tool?
Answer: Return on assets is useful in evaluating management, analyzing and forecasting profits, and planning activities.
198.Discuss the relation between risk and return.
Answer: Net income is related to return. Risk is the uncertainty about the amount of the expected return. In general, the lower the risk of an investment; the lower the expected return is. Higher return is expected in exchange for accepting higher risk. 199. Describe the three types of activities reported on the statement of cash flows. Answer: The three types of activities reported in the statement of cash flows are (1) operating, which are the cash inflows and outflows from operations; (2) financing, which are the cash inflows and cash outflows related to owner investments and
withdrawal and long-term borrowing and repaying cash from lending and (3) investing, which represent the cash inflows and outflows from the purchase and sale of long-term assets.
200. Identify and describe the four basic financial statements:
Answer: The four basic financial statements are the balance sheet, income statement, statement of owner's equity, and statement of cash flows. The balance sheet describes the company's financial position and lists the types and amounts of assets, liabilities, and equity at a point in time. The income statement describes the company's revenues, expenses, and net income over a period of time. The statement of owner's equity explains changes in equity from net income or loss, and from owner investments and withdrawals over a period of time. The statement of cash flows reports on cash flows for operating, investing, and financing activities over a period of time.
Problems 201. The characteristics below apply to at least one of the forms of business
organization.
a. Is a separate legal entity.
b. Is allowed to be owned by one person only.
c. Owner or owners are personally liable for debts of the business. d. Is a taxable entity. e. Is a business entity.
f. May have a contract specifying the division of profits among the owners. g. Has an unlimited life
Use the following format to indicate (with a \characteristic applies to each type of business organization.
a. b. c. d. e. f. g. Proprietorship Partnership Corporation 202. A parcel of land is offered for sale at $600,000, is assessed for tax purposes at $500,000, is recognized by its purchasers as easily being worth $575,000, and is sold for $570,000. At what amount should the land be recorded in the purchaser's books? What accounting principle supports your answer?
203. You are reviewing the accounting records of Cathy's Antiques, owned by Cathy Miller. You have uncovered the following situations. Compose a memo to Ms. Miller. Cite the appropriate accounting principle and suggest an action for each separate item. 1. In August, a check for $500 was written to Wee Day Care Center. This amount represents child care for her son Brandon.
2. Cathy plans a Going Out of Business Sale for May, since she will be closing her business for a month-long vacation in June. She plans to reopen July 1 and will continue operating Cathy's Antiques indefinitely.
3. Cathy received a shipment of pine furniture from Quebec, Canada. The invoice was stated in Canadian dollars.
4. Joseph Clark paid $1,500 for a dining table. The amount was recorded as revenue. The table will be delivered to Mr. Clark in six weeks.
204. At the beginning of the year, a company had $120,000 worth of liabilities. During the year, assets increased by $160,000 and at year-end they equaled $360,000. Liabilities decreased $20,000 during the year. Calculate the beginning and ending values of equity.
205. The accounts of Garfield Company with the increases or decreases that occurred during the past year are as follows:
Account Increase Decrease Cash ..................................... $25,000 Accounts receivable ............ $(5,000) Accounts payable ................ (11,000) Notes payable ...................... 16,000
Except for net income, an investment of $3,000 by the owner, and a withdrawal of $11,000 by the owner, no other items affected the owner's capital account. Using the balance sheet equation, compute net income for the past year.
206. Annie's Attic has the following account balances for the dates given:
September 1 September 30 Cash ......................................................... $40,000 60,000 Accounts Receivable ................................ 40,000 38,000 Accounts payable ..................................... 6,000 ?