Chapter Two Review

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True
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GAAP are standards and rules recognized as a general guide for financial reporting purposes.
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True
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The FASB conceptual framework identifies information useful to those making investment and credit decisions.
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False
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To be reliable, accounting information should have predictive value or feedback value, and be reported on a timely basis.
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False
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Consistent use of the same accounting principles and methods is unnecessary for meaningful analysis of accounting information and trends.
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True
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Depreciation and amortization policies can be justified on the basis of the going concern assumption.
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False
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The revenue recognition principle dictates that revenue should be recognized in the accounting period in which cash is received.
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True
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The matching principle dictates that expenses are recognized when efforts are expended to generate revenues.
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False
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Conservatism in accounting means the accountant should understate assets and income.
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False
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Generally accepted accounting principles are uniform throughout the world.
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False
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Net income for the period is determined by subtracting total expenses and drawings from total revenues.
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quantitative characteristics of accounting information.
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The conceptual framework does not include
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each company would have to develop its own set of accounting practices.
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If generally accepted accounting principles did not exist,
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To provide information that is useful in understanding everything about the company
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Which of the following is not a goal of financial reporting?
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pay its debts.
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Information that relates to a firm’s solvency is used to assess the firm’s ability to
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is information that is capable of making a difference in a decision.
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Relevant accounting information
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more meaningful financial information.
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A company can change to a new method of accounting if management can justify that the new method results in
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Comparability means using the same accounting principles from year to year within a company.
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Which of the following statements is not true?
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Timely, Neutral
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Which of the following is the correct representation of qualitative characteristics? Relevance, Reliability
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the economic life of a business can be divided into artificial time periods.
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The economic entity assumption states that
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will continue in operation long enough to carry out its existing objectives and commitments.
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The going concern assumption assumes that the business
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artificial time periods.
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The time period assumption states that the economic life of a business can be divided into
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sales salaries.
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An example of an expired cost is
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earned.
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The revenue recognition principle dictates that revenue should be recognized in the accounting period in which it is
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full disclosure principle.
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The information provided in the notes that accompany financial statements is required because of the
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they make their contribution to revenue.
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Expenses are recognized when
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it is likely to influence the decision of a reasonably prudent investor or creditor.
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In applying the operating guidelines within the conceptual framework, an item is considered material if
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3
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A common application of the conservatism constraint is the use of the 1. straight-line depreciation method for plant assets. 2. lower of cost or market method for inventories. 3. FIFO method for inventory valuation.
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International Accounting Standards Committee.
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The organization that is working toward uniformity in accounting practices throughout the world is the
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foreign currencies are involved.
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Accounting for multinational corporations is complicated because
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assets and liabilities both increase by $5,000.
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If Billy’s Bus Service purchases promotional items on account for $5,000, then
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increase an asset $1,000 and decreases an asset $1,000.
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Susie’s Sweets owes Sugar Surplus $1,000 on account. When Susie’s Sweets pays the debt, the transaction recorded on Sugar Surplus’ books will
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assets will decrease.
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If expenses are paid in cash, then
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Stockholders’ equity will decrease.
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If supplies that have been purchased are used in the course of business, then
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$625,000.
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As of June 31, 2008, Hobknob Club’s assets are $700,000 and stockholders’ equity is $75,000. What are the liabilities for Hobknob Club of June 31, 2008?
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$520,000 = $220,000 + $300,000
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The accounting equation for Juan’s Colombian Restaurant is as follows: Assets Liabilities Stockholders’ Equity $500,000 = $200,000 + $300,000 If Juan’s purchases kitchen equipment on account for $20,000, the accounting equation will change to:
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Revenues > Expenses.
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Net income results when
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assets, liabilities, and stockholders’ equity.
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A balance sheet shows
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presents the revenues and expenses for a specific period of time.
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An income statement
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$200,000
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During the year 2009, Rafael’s Restaurant earned revenues of $250,000, had expenses of $50,000, purchased assets with a cost of $30,000 and paid dividends to the shareholders of $10,000. Net income for the year is:
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$15,000
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At September 1, Harry’s Hotel reported Stockholders’ Equity of $30,000. During September, no additional investments were made and the company earned net income of $10,000. If Stockholders’ Equity at September 31 totals $25,000, what amount of dividends were paid during the month?
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Predictive, feedback, timely basis
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For accounting information to be relevant, it must have (1)______________ value, or (2)_______________ value and must be reported on a (3)________________.
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accepted, practices
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GAAP stands for Generally ____________ Accounting ___________.
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cost
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The ____________ accounting principle requires that assets be recorded at their historical cost.
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constraints
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___________ permit a company to modify generally accepted accounting principles without reducing the usefulness of the reported information.
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balance sheet
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The ________________ reports the assets, liabilities, and stockholders’ equity of a business enterprise at a specific date.
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Full Disclosure Principle
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Accounting principle that circumstances and events that make a difference to financial statement users should be disclosed.
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Consistency
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Use of the same accounting principles and methods from year to year.
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Matching Principle
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Accounting principle that expenses should be matched with revenues in the period when efforts are expended to generate revenues.
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Materiality
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The constraint of determining if an item is important enough to likely influence the decision of a reasonably prudent investor or creditor.
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Conservatism
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The approach of choosing an accounting method when in doubt that will least likely overstate assets and net income.
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Monetary Unit Assumption
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Accounting assumption that only transaction data capable of being expressed in monetary terms should be included in accounting records.
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Transactions
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Economic events recorded by accountants.
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Economic Entity Assumption
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Selecting those events that are considered evidence of economic activity.
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Comparability
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Ability to compare accounting information of different companies because they use the same accounting principles.
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Going Concern Assumption
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The assumption that the enterprise will continue in operation long enough to carry out its existing objectives and commitments.

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