Session 2 (Balance Sheet)

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Questions and Answers

What is the impact on liabilities when a company purchases equipment for cash?

Increase

Repayment liability

Decrease

No change (correct)

What happens to shareholders' equity when a company incurs an expense on account?

Increases by the expense amount

Increases by accounts payable

Decreases by the expense amount (correct)

No change

Which transaction affects both assets and liabilities equally?

Purchase of equipment on credit (correct)

Sale of equipment for cash

Collection of accounts receivable

Payment of a liability

How does converting a debt into share capital impact shareholders' equity?

Increases capital Signup and view all the answers

What is the effect on assets when a company makes a payment on a liability?

Decrease in assets Signup and view all the answers

What is a correct definition of fixed assets?

Assets expected to benefit future operations in the long term. Signup and view all the answers

Which category of liability refers to obligations that are expected to be settled over a longer period?

Long-term liabilities Signup and view all the answers

Owners' equity represents which of the following?

Total assets minus total liabilities. Signup and view all the answers

What does an increase in owners' equity typically indicate?

Investments made by owners or profitable operations. Signup and view all the answers

Which of the following statements is true regarding contingent liabilities?

They are uncertain obligations that depend on future events. Signup and view all the answers

What are current assets primarily characterized by?

Assets that are frequently renewed or used up within a year. Signup and view all the answers

Which of the following transactions would cause a decrease in owners' equity?

Losses from unprofitable operations. Signup and view all the answers

What is the primary function of a balance sheet?

To provide a snapshot of a company's financial position at a given date. Signup and view all the answers

Which of the following represents a fundamental equation of accounting?

Assets = Liabilities + Owners' Equity Signup and view all the answers

What is considered the residual value of a company?

Shareholders' Equity Signup and view all the answers

In which order are assets listed in the US presentation?

From the more liquid to less liquid Signup and view all the answers

Which of the following components is NOT part of liabilities?

Retained Earnings Signup and view all the answers

What does the term 'double entry system' imply?

Two entries for every transaction Signup and view all the answers

Which of the following is a component of total assets in the French presentation?

Fixed Assets Signup and view all the answers

What must always be true for the balance sheet?

Total Assets equals Total Liabilities plus Total Owners' Equity Signup and view all the answers

Which of the following statements is correct concerning the structure of the balance sheet?

Transaction mainly affecting structure do not create value Signup and view all the answers

Study Notes

Part 2: Preparing a Balance Sheet

A balance sheet shows a company's financial position at a specific date, usually December 31st.
It displays the company's assets, liabilities, and owner's equity.
Assets represent what the company owns.
Liabilities represent what the company owes.
Owner's equity represents the residual interest in the assets after deducting liabilities.

Assets

Assets are economic resources controlled by the business.
They are expected to benefit future operations.
Assets are categorized as:
- Fixed assets (non-current assets): Used in the company's operations for a long time (more than one year). Examples: land, buildings, equipment.
- Current assets: Used in the company's operations for a shorter period (less than one year). Examples: cash, accounts receivable, inventory.

Liabilities

Liabilities are financial obligations or debts.
They represent negative future cash flows.
The entity to whom the company owes money is a creditor.
Liabilities are categorized as:
- Short-term liabilities: Obligations that need to be repaid within one year. Examples: accounts payable, and short-term loans.
- Long-term liabilities: Obligations that need to be repaid over a period longer than one year. Examples: mortgages, bonds.
- Contingent liabilities: Potential liabilities that may or may not occur in the future. Examples: pending lawsuits.

Owners' Equity

Owner's equity represents the owners' claims on the company's assets after deducting liabilities.
It is the residual interest in the assets.
It signifies the amount remaining for owners after creditors are paid.
It is always equal to total assets minus total liabilities.
Increases in owner's equity can result from investments by owners or earnings from profitable operations.
Decreases in owner's equity can stem from payments to owners or losses from unprofitable operations.

Basic Accounting Equation

The accounting equation is Assets = Liabilities + Owner's Equity.
Both sides of the equation must always balance.
Any transaction will affect both sides of the equation.
A double-entry system records each transaction to maintain this balance.
At least two entries are required for each transaction: one for the source of funds and one for the use of funds.

Impact of Transactions

Various business transactions impact the balance sheet.
Each transaction affects at least two accounts, maintaining the balance between assets, liabilities, and owner's equity, thereby illustrating the double-entry system.

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Description

This quiz covers the fundamental concepts of preparing a balance sheet, including the definitions and categories of assets, liabilities, and owner's equity. Test your understanding of fixed and current assets, as well as the financial obligations represented by liabilities.