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Fall 2010_Section Problem Set 2 (Chap 2)

Fall 2010_Section Problem Set 2 (Chap 2) - AEM 2210 Section...

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AEM 2210 Section Problem Set 2 Covering Material from Chapter 2 Name:_______________________________ Section:______________________ Material Review. Accounting Assumptions o Separate-entity assumption – business transactions are separate from the transactions of owners and other entities o Unit-of-measure assumption – financial results are reported in terms of the national monetary unit (i.e. dollars in the United States) o Continuity (going concern) assumption – assumes a business will continue operations long enough to fulfill all contractual obligations in the foreseeable future If a business is not expected to continue, items on the balance sheet should be reported as though they are to be liquidated (assets sold and debts paid) Balance sheet items o Assets – resources an entity can use for operation in the future; value reported using the judgment and past experience of managers Current assets – those assets to be used or turned into cash within one year Non-current (long term) assets – those to be used or turned into cash in more than one year Examples of assets are cash, short term investments, accounts receivable, inventories, prepaid expenses Assets are recorded using the historical cost principle which is the cash paid plus the current dollar value of any non-cash considerations as per the date of the transaction o Liabilities – debts or obligations that result from past transactions and are due to creditors; listed in order of maturity or how soon an obligation is to be paid Examples of assets are accounts payable, accrued expenses payable, notes payable o Stockholders’ Equity – financing provided by owners and business operations
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Contributed Capital – cash provided by owners for which they receive a share of stock in the company Transactions are events that have economic impact on a company and affect financial statements o External events – purchase of a machine, sale of merchandise, borrowing cash o Internal events – losses due to natural disasters, use of PP&E o Events not reflected on financial statements – signing a contract o Duality of Effects - every affects at least two accounts o The accounting equation (A = L + SE) must remain in balance following a transaction Debit – left side of an account – assets have a debit balance and increase on the left side
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