Chapter 1

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Questions and Answers

What do you call the amount you owe to others?

  • Assets
  • Liabilities (correct)
  • Revenue
  • Equity

What is the equation that represents the relationship between Assets, Liabilities, and Owner's Equity?

  • Assets - Liabilities = Owner's Equity
  • Owner's Equity - Liabilities = Assets
  • Liabilities + Owner's Equity = Assets
  • Assets = Liabilities + Owner's Equity (correct)

Which of the following terms is NOT synonymous with Owner’s Equity?

  • Liabilities (correct)
  • Net Worth
  • Owner's Equity
  • Stockholders' Equity

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Study Notes

The Accounting Game: Lemonade Stand

  • The text uses a lemonade stand as a metaphor to learn about accounting.
  • The lemonade stand starts with $5 in cash, which is considered an asset.
  • The owner also has Notes Payable of $10, representing money borrowed from parents.
  • Assets are what a company owns, while liabilities represent what a company owes to others.
  • Owner’s Equity represents the owner's share of the business.
  • Assets are equal to the sum of Liabilities and Owner's Equity.
  • The lemonade stand sells lemonade for $0.50 per glass.
  • The cost of producing one glass of lemonade is $0.20.
  • The lemonade stand makes a profit of $15 after selling 50 glasses.
  • Expenses are costs incurred in running the business, like glass rental, advertising, and rent.
  • Expenses are paid out of cash.

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