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15. The going concern concept assumes that absent any information to the contrary,
the business entity will continue into the foreseeable future. It implies that
accounting records can continue from one period to the next.
16. The fundamental accounting equation is: assets = liabilities + owners’ equity.
17. Pacioli is known as the “father of accounting” because he wrote a book on the
“Method of Venice” that was one of the first printed works. He helped establish
the double-entry accounting system.
18. The financial statements convey information concerning revenues and expenses,
cash flows, and financial position to interested, informed external users.
19. The monetary unit concept requires that accounting events be recorded in
monetary terms.
20. The periodicity concept requires that the success or failure of the business be
determined at regular intervals.
21. Using cash basis accounting income is revenues received less expenses paid.
22. Limited liability means that the assets of the business are at risk if the business
fails, but the owners’ personal possessions are not at risk from the business’s
creditors.
23. Accrual basis income is revenue earned less expenses incurred in an effort to
generate that revenue.
24. The stock market crash of 1929 led to the regulation of the securities market.
The SEC was established to oversee publicly held companies and how they report
to stockholders.
25. Generally accepted accounting principles (GAAP) are the set of reporting
standards applicable to all companies that issue financial reports to external user.
The Financial Accounting Standards Board (FASB) is responsible for determining
GAAP in the United States.
26. The FASB Concepts Statements are designed to provide broad overview of
accounting and to serve as a foundation for future accounting standards.
27. The International Financial Reporting Standards are the global standards for
international external reporting by public companies.
28. The product life cycle is the time span from the conception of the product until it
is no longer in demand by customers. For example, consider the Schwin 10-speed
bicycle. Initially someone developed the idea of a 10-speed bicycle for road use.
This bicycle had very thin tires, handlebars that wrapped under, and a skinny seat.
Eventually these bicycles became less popular as mountain bikes were developed.
Eventually the Schwin 10-speed ceased to exist.
29. These types of “hybrid” organizational structures were developed to combine the
various characteristics of sole proprietorships, partnerships, and corporations to
minimize the risks for the owners.
30. The income statement is designed to show the revenues, expenses, and resulting
net income for a period of time. The statement of cash flows is designed to show
the cash inflows and outflows from operating, investing, and financing activities
for a period of time. The statement of owners’ equity is designed to show the
changes in owners’ equity for a period of time. The balance sheet is designed to
show the balances of the company’s assets, liabilities, and owners’ equity at the
end of the period.
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31. The PCAOB is responsible for developing auditing and attestation standards as
well as standard for ethics and to regulate the accounting firms that audit publicly
traded companies.
32. The current ratio shows the relationship between current assets and current
liabilities and measures liquidity. The debt to equity ratio shows the relationship
between total debt and owners’ equity and measures solvency. The return on
sales ratio shows the relationship between net income and sales and measures
profitability.
EXERCISES
E1.1 a. service b. service
c. service d. all
e. service f. manufacturing, service
g. merchandising h. merchandising
E1.2 a. service b. all
c. all d. service
e. manufacturing f. all
g. merchandising h. merchandising
E1.3 Answers vary.
E1.4 Answers vary.
E1.5 Owners’ equity = $3,000,000 - $1,200,000 = $1,800,000.
E1.6 Assets = $800,000 + $100,000 = $900,000.
E1.7 Debt to equity ratio = $800,000/$100,000 = 8
E1.8 Net assets = $5,000,000 - $3,200,000 = $1,800,000.
E1.9 Debt to equity ratio = $3,200,000/$1,800.000 = 1.78
E1.10 Periodicity and monetary unit
E1.11 Business entity
E1.12 Accrual basis income = $350,000 - $210,000 = $140,000.
E1.13 Cash basis income = $350,000 - $400,000 = ($50,000).
E1.14 a. liability b. asset
c. asset d. liability
e. asset f. liability
g. asset
E1.15 The current assets total $140,000 ($40,000 accounts receivable + $100,000 cash).
The current liabilities total $55,000 ($50,000 accounts payable + $5,000
obligation to employees). Therefore the current ratio is $140,000/$55,000 = 2.55.
E1.16 a. owners’ equity b. liability
c. asset d. asset
e. liability f. asset
g. liability
E1.17 The current assets total $51,500 ($50,000 inventory + $1,500 supplies). The
current liabilities total $3,250 ($2,000 obligation to the IRS + $1,250 obligation to
the utility company). Therefore the current ratio is $51,500/$3,250 = 15.85.
E1.18 a. revenue b. revenue
c. expense d. expense
e. expense f. revenue
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E1.19 The net income is total revenues ($14,000) less total expenses ($4,450) equals
$9,550. Therefore the return on sales ratio is $9,550/$14,000 = 68.21%.
E1.20 Answers vary.
E1.21 Answers vary.
E1.22 Answers vary, but the students should probably consider a partnership.
PROBLEMS
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CASES
CRITICAL THINKING
CT1.1 Answers vary. Students should consider the role of business versus the role of
government.
CT1.2 The primary risk with JIT is running out of inventory. If this happens it could
cause production slow downs and unhappy customers.
CT1.3 Answers vary. Students must understand that an asset is a right to use and the
business has no “right” to its employees.
CT1.4 Answers vary. Students must understand the percentage drop in the markets
during both events as well as the unemployment rates at the time.
ETHICAL CHALLENGES
EC1.1 Answers vary. Students should consider the impact on stockholders, employees,
customers, and suppliers.
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EC1.2 Answers vary. Students should consider the right of people to control their own
destiny as well as the rights of companies.
COMPUTER APPLICATIONS
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