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Unformatted text preview: Chapter Two Questions 1. In business terminology, what does the term assets mean? Assets are resources . They are things a company can use . Examples include cash, supplies, and buildings. 2. What does the term liabilities mean? Liabilities are sources of borrowed resources . Accounts payable is an example of a liability. 3. What does the term stockholders' equity mean? Sources of resources invested by owners and generated by management and retained in the company are called stockholders' equity . Examples of stockholders' equity are common stock and retained earnings. 4. Identify the two separate parts of stockholders' equity. Common stock represents the dollar amount of resources invested by owners . Retained earnings is the dollar amount of resources generated through management operations and retained in the company. 5. Why is it important that financial statements are logical? Illogical financial statements do not relate to one another . In logical financial statements, (1) net income on the income statement also appears on the statement of retained earnings, (2) retained earnings on the statement of retained earnings also appears on the balance sheet, and (3) the balance sheet balances . In illogical financial statements, the balance sheet does not balance . This suggests the information on the income statement, statement of retained earnings, and balance sheet contains at least one error and possibly many more . Such financial statements cannot be relied on for information about a company. 6. What contribution did Fra Luca Pacioli make to accounting? Fra Luca Pacioli developed the double-entry record keeping system that makes use of the debits = credits rule. 7. What is the left side of a T account called? Debit. 8. What is the right side of a T account called? Credit. 9. How does the debits = credits rule affect the accounting equation? If debits = credits, assets must equal liabilities + stockholders' equity. 10. What term is used to identify the increase in resources through the process of providing service to customers? Revenues are increases in resources through providing service to customers. 11. What affect do revenues have on retained earnings? Revenues increase retained earnings . Retained earnings is part of stockholders' equity . Owners (stockholders) have rights to resources generated through management operations. 12. What term is used to identify the decrease in resources through the process of providing service to customers? Expenses are decreases in resources through providing service to customers. 13. What affect do expenses have on retained earnings? Expenses decrease retained earnings. 14. What term is used to identify the decrease in resources through payments made to owners?...
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This note was uploaded on 10/09/2011 for the course ACCT 60.201 taught by Professor Monty during the Spring '11 term at UMass Lowell.
- Spring '11
- Financial Accounting