IngramSM02rev - CHAPTER 2 Business ActivitiesThe Source of...

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CHAPTER 2 Business Activities—The Source of Accounting Information THINKING BEYOND THE QUESTION How do we know how well our business is doing? Revenues are earned when goods are transferred or services are provided to customers. In most cases, these events are associated with completion of certain critical events, such as delivery of goods. Ex- penses are incurred when resources are consumed in the process of providing goods and services. Therefore, a system that identifies when goods are transferred, services are provided, and resources are con- sumed is important for identifying revenues and expenses. Some resources are consumed when goods or services are transferred to customers: the cost of goods, supplies, and labor associated with par- ticular jobs. In other cases, the amount of resources consumed is meas- ured each fiscal period: salaries and wages, utilities, rent, and insurance. Depending on the type of resource consumed, identification of the cost of the resource associated with specific sales or identification of the cost of the resource associated with a fiscal period is an important event for identifying expenses during a fiscal period. QUESTIONS Q2-1 Chapter 2 illustrates two sources of money for companies—loans and owner contributions. Chapter 1 discussed the three forms of business organizations—proprietorships, partnerships, and corporations. To maintain control, Joan probably would want to organize her business as a proprietorship. If she has enough money or other resources, she can borrow the rest of the capital she needs from a bank. If she does not have enough money or other resources and cannot borrow as much as she needs, she may have to find one or more partners to help finance the business. Because this is a small business, she is unlikely to want or need to incorporate at this time or to issue bonds. Q2-2 Major sources of financing for corporations are stocks and debt. Bank loans also are possible. Managers should consider how much stock or how much debt they can incur, what amount of money they will receive 23
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24 Chapter 2 from the issuance, and whether they can repay debt as it becomes due from the profits they expect to earn. Q2-3 From the corporation’s perspective, this event was a financing activity. The corporation raised capital (i.e., raised financing) by selling shares of stock to Jerrilyn. Q2-4 Assets = Liabilities + Equity. The question indicates that assets are accurately reported. Therefore, if liabilities are understated, equity must be overstated. For example, assume assets, liabilities, and equity are correctly reported as $10,000, $3,000, and $7,000 respectively ($10,000 = $3,000 + $7,000). If liabilities are understated by $1,000, equity must be overstated by $1,000 to make the accounting equation balance ($10,000 = $2,000 + $8,000). Q2-5 Both liabilities and owners’ equity represent claims to a company’s resources.
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