Page 52 - Accounting Principles (A Business Perspective)

1. Accounting and its use in business decisions

d. None of the above.
When services are performed on account, what is the effect?
a. Both cash and retained earnings decrease.

b. Both cash and retained earnings increase.
c. Both accounts receivable and retained earnings increase.
d. Accounts payable increases and retained earnings decreases.
Now turn to “Answers to self-test” at the end of your chapter to check your answers.

Questions
➢ Accounting has often been called the language of business. In what respects would you agree with
this description? How might you argue that this description is deficient?
➢ Define asset, liability, and stockholders’ equity.
➢ How do liabilities and stockholders’ equity differ? How are they similar?
➢ How do accounts payable and notes payable differ? How are they similar?

➢ Define revenues. How are revenues measured?
➢ Define expenses. How are expenses measured?
➢ What is a balance sheet? On what aspect of a business does the balance sheet provide information?
➢ What is an income statement? On what aspect of a business does this statement provide
information?
➢ What information does the statement of retained earnings provide?
➢ Identify the three types of activities shown in a statement of cash flows.

➢ What is a transaction? What use does the accountant make of transactions? Why?
➢ What is the accounting equation? Why must it always balance?
➢ Give an example from your personal life that illustrates your use of accounting information in
reaching a decision.
➢ You have been elected to the governing board of your church. At the first meeting you attend,
mention is made of building a new church. What accounting information would the board need in
deciding whether or not to go ahead?
➢ A company purchased equipment for USD 2,000 cash. The vendor stated that the equipment was
worth USD 2,400. At what amount should the equipment be recorded?

➢ What is meant by money measurement?
➢ Of what significance is the exchange-price (or cost) concept? How is the cost to acquire an asset
determined?
➢ What effect does the going-concern (continuity) concept have on the amounts at which long-term
assets are carried on the balance sheet?
➢ Of what importance is the periodicity (time periods) concept to the preparation of financial
statements?

➢ Describe a transaction that would:
➢ Increase both an asset and capital stock.
➢ Increase both an asset and a liability.

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