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CHAPTER 2 HOMEWORK SOLUTIONS Questions: 3. (a) The separate-entity assumption requires that business transactions are separate from the transactions of the owners. For example, the purchase of a truck by the owner for personal use is not recorded as an asset of the business. (b) The unit-of-measure assumption requires information to be reported in the national monetary unit. That means that each business will account for and report its financial results primarily in terms of the national monetary unit, such as Yen in Japan and Australian dollars in Australia. (c) Under the continuity or going-concern assumption, businesses are assumed to operate into the foreseeable future. That is, they are not expected to liquidate. (d) The historical cost principle requires assets to be recorded at the cash-equivalent cost on the date of the transaction. Cash-equivalent cost is the cash paid plus the dollar value of all noncash considerations. 5. An account is a standardized format used by organizations to accumulate the dollar effects of transactions on each financial statement item. Accounts are necessary to keep track of all increases and decreases in the fundamental accounting model. 6. The fundamental accounting model is provided by the equation: Assets = Liabilities + Stockholders' Equity 8. Debit is the left side of a T-account and credit is the right side of a T- account. A debit is an increase in assets and a decrease in liabilities and stockholders' equity. A credit is the opposite -- a decrease in assets and an increase in liabilities and stockholders' equity. 10. The equalities in accounting are: (a) Assets = Liabilities + Stockholders' Equity (b) Debits = Credits 13. The financial leverage ratio is computed as average total assets divided by average stockholders’ equity (where “average” is the average of the beginning and ending balances for the year). It measures the relation
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