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Unformatted text preview: CHAPTER 2 Solutions to Questions and Multiple Choice Questions: 1. 2. Information should be relevant, reliable, consistent, and comparable. 3. 4. 5. 6. 7. 8. 9. 10. 11. Common names for shareholders' equity are: owners' equity and stockholders' equity. 12. 13. 14. 15. 16. 17. Accounting information should be useful to investors and other interested parties. The Financial Accounting Standards Board is an organization whose main function is to set generally accepted accounting principles for the United States. The separate entity assumptions means that the financial records of the owner(s) are kept separate from the firm's records. I.e., the firm is a "separate entity." Materiality refers to the financial significance of the amounts reported in the financial statements or to the significance of an item or transaction. For example, a $5 wastebasket with a life longer than one year is immaterial in amount would be reported as an expense on the income statement rather than as an asset on the balance sheet. A piece of furniture that costs $10,000 and will last 5 years, on the other hand, is material and will be placed as an asset on the balance sheet. According to the matching principle, costs are matched to revenues. In other words, costs are included as expenses on the same income statement as the revenues they help generate. For example, sales commissions would be an expense on the same income statement as the sales to which they pertain are shown as revenue. Matching relates to revenues and expenses. Full disclosure means that a firm should provide shareholders all the information they need to interpret the financial information given and to evaluate a firm's performance. The principle helps assure investors that all of the firm's crucial information is included in the financial statements. A current asset is something of future value to the firm that will be used or converted to cash in the coming year. A current liability is an obligation that will be satisfied with current assets. Accounts receivable are amounts owed to the firm by its customers. Accounts payable are amounts the firm owes its vendors. Equity is generated by (1) contributions from owners, and (2) by net income from the operations of the firm--earned equity. Accrual-basis accounting means that revenues are recognized--reported on the income statement--in the period they are earned, not necessarily the same as the period they are collected. Expenses are included in the same income statement as the revenues they help generate, regardless of when the cash is paid for those expenses. To recognize an amount means to report it on the income statement. Revenue should be recognized in the period it is earned, even if the related payment is not collected in that period....
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