Generally Accepted Accounting Principles and Assets

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ACC201 … STUDY GUIDE for TEST ONE (Chapters 1, 2, 3)

Test #1 will consist of 50-60 of the questions below.
(Finding the “answers” to these questions is part of the review)

True or False

1. Owner's equity represents the amount of assets that can be claimed by creditors.

2. The right-hand side of an account is always the increase side.

3. A ledger is a chronological record of a business’s transactions.

4. The chart of accounts proves that all transactions were correctly journalized and posted.

5. In accrual-basis of accounting, revenues are recorded when a service is performed.

6. Current liabilities are expected to be paid off or eliminated in the next 12 months. [pic]
7. Each time a business records revenue the account Cash is increased.

8. Accumulated depreciation of an asset – its depreciation expense = book value.

9. Financial accounting provides information for people inside the company while managerial accounting focuses on information for people outside the company.

10. Every adjusting entry affects one account on the income statement and one account on the balance sheet.

11. Financial statements will be inaccurate if they are prepared before the adjusting entries are completed.

12. The “current ratio” is calculated by dividing the Total Assets by Total Liabilities.

13. During the closing process, ALL revenue and expense accounts are closed.

14. “Liquidity” is a measure of how quickly an asset can be converted into cash.

15. Revenues and expenses are also classified as “current” or “long-term” on a classified Income Statement.

16. Cash-basis accounting results in a more accurate measurement of net income than does the accrual basis of accounting.

17. Financial statements will be inaccurate if they are prepared before the adjusting entries are completed.

18. Risk is the amount of uncertainty about the return we expect to earn in the future. 

19. Accounting records are also referred to as the books.

20.  Source documents provide evidence of business transactions and are the basis for accounting entries. 

21. As prepaid expenses are used up, the costs of these assets become expenses

22. An account balance is the difference between the debits and credits for an account including any beginning balance.

23.  The debt ratio reflects the risk of a company to both its owners and creditors.

24. The higher the debt ratio, the higher risk of a company not being able to meet its obligations.

25.  The debt ratio is calculated by dividing total assets by total liabilities.

26. A company that finances a relatively large portion of its assets with liabilities is said to have a high degree of financial leverage.

27.  If a company is highly leveraged, this means that it has relatively low risk of not being able to repay its debt. 

28. A company's fiscal year must correspond with the calendar year. 

29.  Adjusting entries are made after the preparation of financial statements.

30.  Current assets and current liabilities are expected to be used up or come due within one year or the company's operating cycle whichever is longer. 

31. For a corporation, the equity section is divided into two main accounts: Common Stock and Retained Earnings.

32.  Profit margin can also be called return on sales.

33.  The Income Summary account is closed to the retained earnings account. 

34. The primary objective of financial accounting is: 
A. To serve the decision-making needs of internal users B. To provide financial statements to help external users analyze and interpret an organization's activities C. To monitor and control company activities

D. To provide information on both the costs and benefits of managing products and services...
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