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CHAPTER 2 Review

CHAPTER 2 Review - CHAPTER 2 Analyzing Business...

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CHAPTER 2 Analyzing Business Transactions 0REVIEWING THE CHAPTER Objective 1: Explain how the concepts of recognition, valuation, and classification apply to business transactions and why they are important factors in ethical financial reporting. 10. Before recording a business transaction, the accountant must determine three things:0 a0. When the transaction should be recorded (the recognition issue) b0. What value, or dollar amount, to place on the transaction (the valuation issue) c0. How the components of the transaction should be categorized (the classification issue) 20. Normally, a sale is recognized (entered into the accounting records) when title to the merchandise passes from the supplier to the purchaser, regardless of when payment is made or received. This point of sale is referred to as the recognition point.0 a0. Some business events, such as the hiring of a new employee, are not recordable transactions. b0. Other business events, such as payment to an employee for work performed, are recordable transactions. 30. The cost principle states that business transactions should be recognized at their original cost (also called historical cost ). In this case, cost refers to a transaction’s exchange price —a verifiable measure based on the agreement between the buyer and the seller—at the point of recognition. Generally, any change in value that occurs after the original transaction is not reflected in the accounting records. 40. Ethical financial reporting requires that accountants apply generally accepted accounting principles when dealing with recognition, valuation, and classification issues. For example, when a company overstates its revenue, it has violated the guideline of recognition. When an asset is reported at an inflated dollar amount, for example, the guideline of valuation has been violated. And when expenses, for example, are treated as assets, the guideline of classification has been violated. Significant, intentional violations are viewed as fraudulent. Objective 2: Explain the double-entry system and the usefulness of T accounts in analyzing business transactions. 50. Every business transaction is classified in a filing system consisting of accounts. An account is the basic storage unit for accounting data. Each asset, liability, and component of owner’s equity, including revenues and expenses, has a separate account. 60. The double-entry system of accounting requires that one or more accounts be debited and one or more accounts be credited for each transaction and that total dollar amounts of debits equal total dollar amounts of credits. 70. A T account shows an account in its simplest form. It has three parts:0 a0. A title that expresses the name of the asset, liability, or owner’s equity account b0. A left side, which is called the debit side c0. A right side, which is called the credit side
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80. To prepare the financial statements at the end of an accounting period, the accountant calculates the balance of each account (also called the account balance ). Using T accounts to determine the
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