Principles of Accounting - Chapter Two Study Guide

A trial balance:

lists all accounts and their balances.

The going concern assumption is concerned with

the company's ability to continue operations long enough to carry out its existing obligations.

A trial balance is a(n)

tool used to prove the equality of debits and credits in the general ledger.

Homevestors purchased land for $400,000 in 2009. In 2021, an independent appraiser assessed the value of the land at 900,000. At what amount should the land be recorded on the company's 2021 financial statements?

at its cost of $400,000

What effect does the payment of employee salaries have on the accounting equation?

Assets and stockholders' equity decrease

What effect does the purchase of office equipment on credit have on the accounting equation?

Assets and liabilities increase

A novelties company makes cash sales to customers. What effect does this transaction have on the accounting equation?

Assets and retained earnings increase

Which of the following statements is true concerning assets? A. Assets are initially recorded using the historical cost principle B. Assets are measured using a time-period approach C. Assets are initially recorded at market value and then adjusted for inflation. D. Assets are initially recorded at market value since historical cost tends to be too arbitrary.

A. Assets are initially recorded using the historical cost principle

Which of the following organizations is primarily responsible for establishing GAAP in the United States? A. Securities Exchange Commission (SEC) B. Financial Accounting Standards Board (FASB) C. Internal Revenue Service (IRS) D. International Accounting Standards Board (IASB)

B. Financial Accounting Standards Board (FASB)

Which of the following is a constraint to the qualitative characteristics of useful accounting information? A. Relevance B. Materiality C. Conservatism D. Comparability

B. Materiality

All of the following accounts have normal debit balances except A. supplies expense B. service revenue C. dividends declared D. accounts recievable

B. service revenue

All of the following accounts have normal credit balances except A. common stock B. unearned revenue C. inventory D. accounts payable

C. inventory

A quality of information that enables an analyst to evaluate the financial performance of two different companies in the same industry.

Comparability

Is a prudent reaction to uncertainty.

Conservatism

A financial item that may be useful to investors is not required to be reported because the cost of measuring and reporting this information is judged to be too great.

Cost Vs. Benefit

Which of the following accounts is increased by a credit entry? A. dividends declared B. cash C. salary expense D. capital stock

D. capital stock

Allows a company to report financial activities separate from the activities of the owners.

Economic Enity

Requires that expenses be recorded and reported in the same period as the revenue that it helped generate.

Expense Recognition

Which principle requires that expenses be recorded and reported in the same period as the revenue that it helped generate?

Expense Recognition

Justifies why some assets and liabilities are not reported at their value if sold.

Going-Concern

Requires that an activity be recorded at the exchange price at the time the activity occurred.

Historical Cost

A trash can that is purchased for $10 is expensed even though it should be recorded as an asset because it will be used for many years.

Materiality

Implies that items such as customer satisfaction cannot be reported in the financial statements.

Monetary Unit

Timely information that is used to predict future events or provide feedback about prior events is said to possess this characteristic.

Relevance

Specifies that revenue should only be recognized when a company has satisfied its performance obligation to a customer.

Revenue Recognition

Allows the life of a company to be divided into artificial time periods so accounting reports can be provided on a timely basis.

Time-Period

The effects of paying salaries for the current period are to:

decrease assets and decrease stockholders' equity.

Which of the following accounts is increased by a debit entry?

equipment

Debit entries are used to

increase asset accounts

The effects of purchasing inventory on credit are to:

increase assets and increase liabilities.

Credit entries are used to

increase liability accounts

The term for the process of recording business events in a book of original entry is

journalizing