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Questions and Answers
What is the basic accounting equation?
What is the basic accounting equation?
When can a firm recognize a resource as an asset?
When can a firm recognize a resource as an asset?
Which of the following is NOT a method of asset valuation?
Which of the following is NOT a method of asset valuation?
What is an example of a classification of assets?
What is an example of a classification of assets?
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What defines an asset?
What defines an asset?
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In what context is the term 'dual-entry recording' important?
In what context is the term 'dual-entry recording' important?
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Which of the following liabilities is generally due within one year?
Which of the following liabilities is generally due within one year?
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What distinguishes 'current assets' from other types of assets?
What distinguishes 'current assets' from other types of assets?
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What must occur for an obligation to be recognized as a liability?
What must occur for an obligation to be recognized as a liability?
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Which method is typically used to value liabilities due within a year?
Which method is typically used to value liabilities due within a year?
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What distinguishes current liabilities from long-term liabilities?
What distinguishes current liabilities from long-term liabilities?
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Which of the following is considered part of shareholders' equity?
Which of the following is considered part of shareholders' equity?
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What is the relationship between total assets, total liabilities, and shareholders' equity?
What is the relationship between total assets, total liabilities, and shareholders' equity?
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Which component is NOT part of Contributed Capital?
Which component is NOT part of Contributed Capital?
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How is Additional Paid-In Capital defined?
How is Additional Paid-In Capital defined?
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Which of these statements about liabilities is correct?
Which of these statements about liabilities is correct?
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What is the impact on cash when the company issues 10,000 shares?
What is the impact on cash when the company issues 10,000 shares?
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What type of account is affected when inventory is purchased on account?
What type of account is affected when inventory is purchased on account?
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What is the definition of a debit in accounting?
What is the definition of a debit in accounting?
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How are journal entries related to the ledger?
How are journal entries related to the ledger?
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What occurs when a supplier is paid in cash for a portion of the amount owed?
What occurs when a supplier is paid in cash for a portion of the amount owed?
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What is recorded on the right side of a journal entry?
What is recorded on the right side of a journal entry?
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What is shown in a T-Account?
What is shown in a T-Account?
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When a customer pays for merchandise to be delivered in the future, what happens to accounts?
When a customer pays for merchandise to be delivered in the future, what happens to accounts?
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How are retained earnings affected by the payment of dividends to shareholders?
How are retained earnings affected by the payment of dividends to shareholders?
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What is the formula to calculate ending retained earnings for an accounting period?
What is the formula to calculate ending retained earnings for an accounting period?
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Which of the following represents a valid combination of effects on the accounting equation?
Which of the following represents a valid combination of effects on the accounting equation?
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In the dual-entry recording framework, what must every economic event reflect?
In the dual-entry recording framework, what must every economic event reflect?
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What impact does a positive net income have on retained earnings?
What impact does a positive net income have on retained earnings?
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When a company issues new shares for cash, what is the immediate effect on the accounting equation?
When a company issues new shares for cash, what is the immediate effect on the accounting equation?
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If a company pays $8,000 cash to suppliers of a total $15,000 owed, what effect does this transaction have?
If a company pays $8,000 cash to suppliers of a total $15,000 owed, what effect does this transaction have?
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In the basic accounting equation, what is meant by maintaining balance?
In the basic accounting equation, what is meant by maintaining balance?
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What is the purpose of journalizing in the accounting process?
What is the purpose of journalizing in the accounting process?
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Which statement is true regarding the balance sheet?
Which statement is true regarding the balance sheet?
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In which stage of the accounting process is the trial balance prepared?
In which stage of the accounting process is the trial balance prepared?
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What do owners expect from management concerning the assets?
What do owners expect from management concerning the assets?
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What is involved in the preparation of adjustments in the accounting process?
What is involved in the preparation of adjustments in the accounting process?
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The asset side of the balance sheet provides information about what?
The asset side of the balance sheet provides information about what?
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What comes after the preparation of the unadjusted trial balance in the accounting process?
What comes after the preparation of the unadjusted trial balance in the accounting process?
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What is the final goal of the accounting process?
What is the final goal of the accounting process?
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Study Notes
Balance Sheet Basics
- The balance sheet presents the accounting concepts of assets, liabilities, and shareholders' equity.
- It explains the dual-entry recording framework, where every transaction has two sides.
Assets
- Assets are resources with future economic benefit acquired through past transactions.
- Valuation is the process of assigning monetary value to assets.
- Common asset valuation methods include historical cost, current replacement cost, net realizable value, and present value of future net cash flows.
- Assets are classified into categories like current assets, investments, property, plant and equipment, and intangible assets.
Liabilities
- Liabilities arise from receiving benefits and promising to pay in the future.
- Liabilities are valued at the amount of cash payment for short-term liabilities and at the net present value of future cash payments for long-term liabilities.
- Liabilities are categorized into current liabilities, long-term debt, and other long-term liabilities.
Shareholders' Equity
- Shareholders' equity represents the residual interest in the firm after liabilities are satisfied.
- It's calculated as total assets minus total liabilities.
- Shareholders' equity is divided into contributed capital (initial investment) and retained earnings (accumulated earnings after dividends).
- Contributed capital is comprised of par or stated value and additional paid-in capital.
- Retained earnings increase with net income, decrease with losses, and are reduced by dividend payments.
- The accounting equation for a period is: Beginning Retained Earnings + Net Income (or - Net Losses) - Dividends Declared = Ending Retained Earnings.
Dual-Entry Recording
- Every economic event has two sides, a give and a take.
- Transactions are recorded with both sides, ensuring that the basic accounting equation remains balanced.
- Transactions can increase an asset and a liability/equity by the same amount.
- Alternatively, they can decrease an asset and a liability/equity.
- Transactions can also involve an increase in one asset and a decrease in another.
- Finally, transactions may result in an increase in one liability/equity and a decrease in another.
Debits and Credits
- Debits increase assets and decrease liabilities or owners’ equity.
- Credits increase liabilities or owners’ equity and decrease assets.
- For all transactions and the basic equation, Debits = Credits.
Journal Entries and Ledger
- Accountants use journal entries to record transactions.
- Journal entries show the accounts and their debits or credits.
- The ledger summarizes changes to individual accounts, often represented using T-accounts.
Balance Sheet Analysis
- The balance sheet reflects the effects of a firm’s investing and financing decisions.
- The asset side shows the resources available to the firm.
- Owners expect management to use these assets efficiently.
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Description
Test your understanding of the balance sheet, focusing on assets, liabilities, and shareholders' equity. This quiz covers key concepts like valuation methods and the dual-entry recording framework essential for financial accounting.
