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Unformatted text preview: Chapter 02 - Reporting Investing and Financing Results on the Balance Sheet Chapter 2 Reporting Investing and Financing Results on the Balance Sheet ANSWERS TO QUESTIONS 1. (a) An asset is a resource owned by a company that has measurable value and is expected to provide future benefits. (b) A current asset is an asset that will be used up or turned into cash within the next 12 months. (c) A liability is a debt or obligation arising from past transactions or events, which the company is likely to pay, settle, or fulfill by sacrificing resources in the future. (d) A current liability is a debt or obligation that will be paid, settled, or fulfilled within one year. (e) Contributed capital includes the amount of financing (cash and sometimes other assets) provided to the company by stockholders in exchange for shares of stock. (f) Retained earnings are the cumulative earnings of a company that are not distributed to the owners and instead are reinvested in the business. 2. A transaction is an exchange or event that has a direct and measurable financial effect on the assets, liabilities, or stockholders equity of a business. Transactions include two different types of events: (1) external exchanges and (2) internal events. The first situation (1) is exemplified by the sale of goods or services to customers. The second situation (2) is exemplified by employees using up the benefits of equipment owned by the company. 3. Accounts are used to accumulate and report the effects of different business activities. Accounts are necessary to keep track of all increases and decreases in the basic accounting equation. 4. The basic accounting equation is: Assets = Liabilities + Stockholders Equity. 2-1 Chapter 02 - Reporting Investing and Financing Results on the Balance Sheet 5. 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 or a decrease in liabilities or stockholders equity. A credit is the opposite a decrease in assets or an increase in liabilities or stockholders equity. 6. Transaction analysis is the process of studying a transaction to determine its financial effect on the business in terms of the basic accounting equation: Assets = Liabilities + Stockholders Equity The two principles underlying the process are: * Duality of effects: every transaction affects at least two accounts. * A=L+SE; the accounting equation must remain in balance after each transaction. 7. The accounting equalities in transaction analysis are: (a) Assets = Liabilities + Stockholders Equity (b) Debits = Credits 8. A journal entry is a method for expressing the effects of a transaction on accounts in a debits equal credits format. The title of the account(s) to be debited is (are) listed first. The title of the account(s) to be credited is (are) listed underneath the debited accounts and both account title(s) and amount(s) are indented to the right....
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