CH 2 Homework Solutions (All)

CH 2 Homework Solutions (All) - Chapter 2 Basic Concepts of...

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Chapter 2 Basic Concepts of Accounting and Financial Reporting Review of Concepts A. The objectives of financial reporting are to provide stakeholders with information that is useful for credit and investment decisions; helps to assess future cash flows; and concerns entity resources, claims to resources, and changes in each over time. B. Accounting data are the raw results of economic transactions and events. Accounting information is the product of an accountant's organization, classification, and summarization of economic transactions and events so that it is useful to economic decision makers. C. The two primary qualitative characteristics of accounting information are relevance and reliability. Relevance requires that information pertain to and make a difference in a particular decision situation. Reliability requires the information to be reasonably unbiased and accurate. D. For information to be relevant it must be timely (information must be available before it is too late to make a decision), and have either predictive or feedback value. For information to be reliable it must be verifiable (have the ability to be substantiated by unbiased measures), representationally faithful (represent what it purports to represent), and the information must be value neutral (absence of bias). E. The two secondary qualitative characteristics are comparability and consistency. Comparability is the quality of information that allows users to identify similarities in and differences between two sets of accounting information. Consistency is the quality of information that represents conformity from period to period with accounting policies and procedures. 17
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18 Chapter 2: Basic Concepts of Financial Accounting and Reporting F. The accounting elements contained in the financial statements are: assets, liabilities, equity, investments by owners, comprehensive income, distributions to owners, revenues, expenses, gains and losses. G. The basic accounting equation is stated as: Assets = Liabilities + Equity . The expanded equation is as follows: Assets = Liabilities + Equity + Investments by Owners +/- Other Comprehensive Income – Distributions to Owners + Revenues – Expenses + Gains – Losses H. The statement of cash flows is important to the user of financial information because this statement explains where cash comes from and how the cash is used in the business. A business runs on cash and it is important to pay attention to the sources and uses of cash. Without cash a business will not be able to survive. By reviewing the cash flow statement, users can understand the business's priorities. I. The accounting assumptions include: Separate Entity Assumption – economic transactions and activities can be accounted for separately and apart from the personal activities of the owners. Going Concern Assumption
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CH 2 Homework Solutions (All) - Chapter 2 Basic Concepts of...

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