ACCT 521 - Chapter 3 Homework

Confirmatory Bias

A decision maker under-weights information that is not consistent with her initial beliefs.

Groupthink Bias

A phenomenon that occurs in situations where members of a group, in an attempt to avoid conflict, reach a consensus decision without considering all of the reasonable alternatives.

What is​ equity? What are the three components of​ shareholders' equity? Explain each component. A. Equity is the​ owners' wealth or residual claim to the assets of the entity.​ Stockholders' Equity consists of three major​ components: contributed or paid in​ capital, accumulated other comprehensive​ income, and retained earnings. Contributed capital consists primarily of​ owners' investments in the business. Accumulated other comprehensive income increases or decreases with other comprehensive income. Other comprehensive income is an additional component of comprehensive income. Retained earnings represent the net earnings accumulated over time that have not been distributed as dividends. B. Equity is the​ owners' wealth or residual claim to the assets of the entity.​ Stockholders' Equity consists of contributed or paid in capital and retained earnings. Contributed or paid in capital consists primarily of​ owners' investments in the business. Retained earnings is the net profit before income taxes in the reporting period. C. Equity is the​ owners' wealth or residual claim to the assets of the entity.​ Stockholders' Equity consists of two major​ components: assets and liabilities. Assets consist primarily of​ owners' investments in the business. Liabilities are the financial obligations due to others. Equity is equal to assets less liabilities. D. Equity is the​ owners' wealth or residual claim to the assets of the entity.​ Stockholders' Equity consists of three major​ componenets: assets, liabilities and comprehensive income. Assets consist primarily of​ owners' investments in the business. Liabilities are the financial obligations due to​ others, and comprehensive income is​ non-operating income.

A. Equity is the​ owners' wealth or residual claim to the assets of the entity.​ Stockholders' Equity consists of three major​ components: contributed or paid in​ capital, accumulated other comprehensive​ income, and retained earnings. Contributed capital consists primarily of​ owners' investments in the business. Accumulated other comprehensive income increases or decreases with other comprehensive income. Other comprehensive income is an additional component of comprehensive income. Retained earnings represent the net earnings accumulated over time that have not been distributed as dividends.

When will retained earnings contain a positive​ balance? Negative​ balance? A. Revenue and gains increase retained​ earnings, whereas​ expenses, losses, and distributions to owners​ (dividends) decrease retained earnings. When revenues and gains exceed​ expenses, losses, and dividends over​ time, retained earnings is positive. Retained earnings is negative when​ expenses, losses, and dividends exceed revenues and gains over time. A negative balance in retained earnings is called a deficit. B. Revenue and gains decrease retained​ earnings, whereas​ expenses, losses, and distributions to owners​ (dividends) increase retained earnings. When revenues and gains are less than​ expenses, losses, and dividends over​ time, retained earnings is negative. Retained earnings is positive when​ expenses, losses, and dividends exceed revenues and gains over time. A negative balance in retained earnings is called a gain. C. Cash fluctuations increase or decrease retained earnings. We represent retained earnings in equation form as​ follows: ending retained earnings equals beginning retained earnings plus changes in cash. When cash​ increases, retained earnings is positive. Retained earnings is negative when cash decreases. A negative balance in retained earnings is called a deficit. D. Revenue and gains increase retained​ earnings, whereas​ expenses, losses, and distributions to owners​ (dividends) decrease retained earnings. When revenues and gains exceed​ expenses, losses, and dividends over​ time, retained earnings is positive. Retained earnings is negative when​ expenses, losses, and dividends exceed revenues and gains over time. A negative balance in retained earnings is called a deficit. The retained earnings balance should always equal the cash balance.

A. Revenue and gains increase retained​ earnings, whereas​ expenses, losses, and distributions to owners​ (dividends) decrease retained earnings. When revenues and gains exceed​ expenses, losses, and dividends over​ time, retained earnings is positive. Retained earnings is negative when​ expenses, losses, and dividends exceed revenues and gains over time. A negative balance in retained earnings is called a deficit.

Describe the accounting cycle. A. The accounting cycle is the process by which a company records transactions in its books and then presents them in the financial statements. There are nine steps in the accounting cycle. The process starts with a transaction analysis to determine whether an economic event has occurred that changes​ assets, liabilities, or equity. After making this​ determination, a company journalizes and posts transactions to its ledger accounts.​ Then, it ensures numerical accuracy of the process by preparing trial balances. Before preparing financial​ statements, a company determines whether adjustments are required to ensure that it has reported all economic events occurring in that period. Financial statements are then​ prepared, all temporary accounts are​ closed, and the​ post-closing trial balance is prepared. B. The accounting cycle is the process by which a company records transactions in its books. The process starts with a transaction analysis to determine whether an economic event has occurred that changes​ assets, liabilities, or equity. After making this​ determination, a company journalizes and posts transactions to its ledger accounts.​ Then, it ensures numerical accuracy of the process by preparing trial balances. C. The accounting cycle is the process by which a company records transactions in its books and then presents them in the financial statements. There are three steps in the accounting cycle. The process starts with entries into the general ledger.​ Then, it ensures accuracy of the general ledger entries by preparing trial balances.​ Finally, the financial statements are prepared and all temporary accounts are closed. D. The accounting cycle is the process by which a company records transactions in its books and then presents them in the financial statements. There are nine steps in the accounting cycle. The process starts with a transaction analysis to determine whether an economic event has occurred that changes revenue and expenses. After making this​ determination, a company journalizes and posts transactions to its ledger accounts.​ Then, it ensures numerical accuracy of the process by preparing the income​ statement, After the income statement is​ prepared, all temporary accounts are closed.

A. The accounting cycle is the process by which a company records transactions in its books and then presents them in the financial statements. There are nine steps in the accounting cycle. The process starts with a transaction analysis to determine whether an economic event has occurred that changes​ assets, liabilities, or equity. After making this​ determination, a company journalizes and posts transactions to its ledger accounts.​ Then, it ensures numerical accuracy of the process by preparing trial balances. Before preparing financial​ statements, a company determines whether adjustments are required to ensure that it has reported all economic events occurring in that period. Financial statements are then​ prepared, all temporary accounts are​ closed, and the​ post-closing trial balance is prepared.

Level 2 of literature hierarchy for U.S. GAAP

Authoritative rules and principles from U.S. GAAP for similar transactions.

Will all transactions have a dual effect on the accounting​ equation? Explain. A. Not all transactions will have a dual effect on the accounting equation. An increase in assets does not have any effect on the accounting equation. B. All transactions will have a dual effect on the accounting​ equation, which will result in debits equaling credits in the equation. If an asset​ increases, there must be one of the following account​ changes: a decrease in another​ asset, an increase in a specific​ liability, or an increase in​ stockholders' equity. C. All transactions will have a dual effect on the accounting​ equation, which will result in assets equaling liabilities in the equation. If an asset​ increases, then there must be a decrease in a specific liability. D. Not all transactions will have a dual effect on the accounting equation. If​ stockholders' equity​ increases, it has no effect on the accounting equation.

B. All transactions will have a dual effect on the accounting​ equation, which will result in debits equaling credits in the equation. If an asset​ increases, there must be one of the following account​ changes: a decrease in another​ asset, an increase in a specific​ liability, or an increase in​ stockholders' equity.

What is the accounting equation and what does it​ demonstrate? A. The accounting equation​ (also called the balance sheet​ equation) is used to evaluate assets. The accounting equation illustrates the net worth of a company to its shareholders. B. The accounting equation​ (also called the balance sheet​ equation) can be used to analyze transactions. The accounting equation illustrates the relationship among​ assets, liabilities, and​ stockholders' equity as​ follows: assets equal liabilities plus​ stockholders' equity. The equation demonstrates that creditors and owners have claim to a​ company's assets. C. The accounting equation refers to​ stockholders' equity. The accounting equation illustrates the investment that shareholders have made in a company. D. The accounting equation​ (also called the income statement​ equation) can be used to analyze transactions. The accounting equation illustrates the relationship between income and expenses. The equation demonstrates profitability of a company.

B. The accounting equation​ (also called the balance sheet​ equation) can be used to analyze transactions. The accounting equation illustrates the relationship among​ assets, liabilities, and​ stockholders' equity as​ follows: assets equal liabilities plus​ stockholders' equity. The equation demonstrates that creditors and owners have claim to a​ company's assets.

Identify areas where managers make estimates and assumptions in accounting for plant and equipment

Choice of depreciation method Estimates of the salvage value Estimates of the useful life Costs to include in the acquisition costs Assumptions on the pattern of use Determination of impairment

Level 1 of literature hierarchy for U.S. GAAP

Codification and all SEC rules and interpretive releases. Whereas the Codification applies to all entities that report under U.S. GAAP, the SEC materials apply only to publicly traded registrants.

Provide at least two examples of the accounting methods commonly covered in your first accounting course.

Cost of goods sold valuation Depreciation method

Identify at least three techniques used to mitigate cognitive biases in practice

Delay your final judgment until you have gathered all of the facts and information and have considered all of the alternatives. Document your rationale about the alternatives. Generate alternatives, even when you think you have already arrived at the correct answer.

Identify areas where managers make estimates and assumptions in accounting for accounts receivable.

Determining when an account receivable should be written off Determining which customers to extend credit to Estimating the allowance for accounts receivable

Level 3 of literature hierarchy for U.S. GAAP

Other material such as the FASB Concept Statements, IFRS, industry practice, and textbooks.

Anchoring Bias

The decision maker focuses on one piece of information, weighting it more heavily than other pieces of information.

Overconfident bias

The tendency to be more confident than your abilities and experience level would objectively warrant.

Availability bias

The tendency to use the data that is most readily available or most easily recalled to make a decision, as opposed to considering all relevant data.

Accountants must _________ in their decision making.​ Therefore, it is important for them to _________.

be as objective as possible understand and be free form any bias or other influences

The portfolio of GAAP a company uses can be found _____________ to the financial statements. This is known as the ___________. Some of the same information contained here can also be found in ___________.

in one of the first few footnotes accounting policies footnote management's discussion and analysis