Chapter 3
false
Substantial authoritative support for GAAP usually comes from two standards-setting bodies: the FASB and the IRS.
cost constraint
The cost to provide information should be weighed against the benefit that users will gain from having the information available.
financial statements should disclose all events and circumstances that would matter to users of financial statements.
The full disclosure principle dictates that:
true
The historical cost principle requires that if a company buys a building for $2,000,000 in 2015 that increases in value to $2,900,000 in 2017, the company will have to report the building at $2,000,000 in the balance sheet for 2017. (T/F?)
materiality
The judgment concerning whether an item's size makes it likely to influence a decision-maker.
false
The monetary unit assumption assures that all important information needed by investors, creditors, and managers is contained in the financial statements. (T/F?)
verifiable
The quality of information that occurs when independent observers, using the same methods, obtain similar results.
A set of accounting rules and practices that have authoritative support
What are generally accepted accounting principles? A. A set of accounting rules and practices that have authoritative support B. Usually established by the Internal Revenue Service C. The guidelines used to resolve ethical dilemmas D. Fundamental truths that can be derived from the laws of nature
verifiability
Which of the following is not a fundamental quality of useful accounting information? A. Verifiability B. Relevance C. Neutrality D. Faithful representation
consistency
__________________ means using the same accounting principles and methods from year to year within a company.
faithful representation
______________________ means that information accurately depicts what really happened.
an increase in liabilities and a decrease in stockholders equity
(Describe the effect of each transaction on assets, liabilities, and stockholders' equity) Incurred advertising expense for May of $840 on account.
a decrease in assets and a decrease in stockholders' equity
(Describe the effect of each transaction on assets, liabilities, and stockholders' equity) Paid $3,000 cash for May rent on storage space
a decrease in assets and a decrease in stockholders' equity
(Describe the effect of each transaction on assets, liabilities, and stockholders' equity) Paid Midland Power Co. $11,000 cash for energy usage in May.
a decrease in assets and a decrease in liabilities
(Describe the effect of each transaction on assets, liabilities, and stockholders' equity) Paid data equipment for the computers purchased in (1) above.
an increase in assets and an increase in stockholders' equity
(Describe the effect of each transaction on assets, liabilities, and stockholders' equity) Performed computer services for Ryan Construction Company for $2,700 cash
An increase in assets and an increase in liabilities
(Describe the effect of each transaction on assets, liabilities, and stockholders' equity) Purchased computers for $20,000 from Data Equipment on account.
an increase in assets and a decrease in assets
(Describe the effect of each transaction on assets, liabilities, and stockholders' equity) Received $15,000 cash from customers for contracts billed in April.
an increase in assets and an increase in stockholders' equity
(Describe the effect of each transaction on assets, liabilities, and stockholders' equity) Stockholders invested an additional $32,000 in the business.
increase assests and increase stockholders' equity
(Indicate how each business transaction affects the basic accounting equation) Issued common stock to investors in exchange for cash.
decrease assests and decrease liabilities
(Indicate how each business transaction affects the basic accounting equation) Paid an account payable in full.
decrease assets and decrease stockholders' equity
(Indicate how each business transaction affects the basic accounting equation) Paid cash for janitorial services.
increase assests and decrease assests
(Indicate how each business transaction affects the basic accounting equation) Purchased equipment for cash.
not affecting stockholders' equity
(Mark each transaction as affecting common stock, dividends, revenue, expense, or not affecting stockholders' equity) Paid cash to purchase equipment.
expense
(Mark each transaction as affecting common stock, dividends, revenue, expense, or not affecting stockholders' equity) Paid employee salaries.
revenue
(Mark each transaction as affecting common stock, dividends, revenue, expense, or not affecting stockholders' equity) Received cash for services performed.
periodicity assumption
(identify the assumption or principle that has been violated) Lopez Co. wanted to make its 2017 income look better, so it added 2 more weeks to its income statement reporting period (a 54-week year). Previous years were 52 weeks.
historical cost principle
(identify the assumption or principle that has been violated) Reported at its fair value of $260,000 merchandise inventory with a cost of $208,000.
economic entity assumption
(identify the assumption or principle that has been violated) The president of Lopez Co., Victor Lopez, purchased a truck for personal use and increased the company's equipment account.
historical cost principle
-Assets are recorded and reported at original purchase price -Measurement basis used when a reliable estimate of fair value is not available.
going concern assumption
-Assumes a business will remain in operation for the foreseeable future. -Belief that a company will remain in operation for the foreseeable future.
monetary unit assumption
-Items not easily quantified in dollar terms are not reported in the financial statements. -Only those items that can be expressed in money are included in the accounting records.
economic entity assumption
-Personal transactions are not mixed with the company's transactions. -Indicates that personal and business record-keeping should be separately maintained.
periodicity assumption
-The life of a business can be divided into artificial segments of time. -Separates financial information into time periods for reporting purposes.
full disclosure principle
-The reporting of all information that would make a difference to financial statement users. -Dictates that companies should report all circumstances and events that make a difference to financial statement users.
consistency
A company's use of the same accounting principles from year to year
neutral
Accounting information cannot be selected, prepared, or presented to favor one set of interested users over another.
timely
Accounting information must be available to decision-makers before it loses its capacity to influence their decisions.
faithful representation
Accounting information must be complete, neutral, and free from error.
predictive value
Accounting information should help provide accurate expectations about future events.
relevance
Accounting information should help users predict future events, and should confirm or correct prior expectations.
false
Consistency means that a company uses the same accounting principles and methods as the other companies in the same industry. (T/F?)
comparability
Different companies use the same accounting principles.
relevant
For information to be___________________, it should have predictive and confirmatory value
true
GAAP is a set of rules and practices established by accounting standard-setting bodies to serve as a general guide for financial reporting purposes.
false
Going concern is the qualitative characteristic of accounting information that allows a statement reader to compare a company's performance from one year to the next. (T/F?)
a. decrease b. increase c. decrease d. decrease e. decrease f. increase g. decrease
Indicate the effect each account has on Retained Earnings: a. Advertising expense: b. Service revenue: c. Insurance expense: d. Salaries and wages expense: e. Dividends: f. Rent revenue: g. Utilities expense:
true
Information has predictive value if it helps users form expectations about the future. (T/F?)