Chapter 2Analyzing Transactions: The Accounting Equation

Chapter 2—Analyzing Transactions: The Accounting Equation

TRUE/FALSE

• A business entity is an individual, association, or organization with control over economic resources

and which engages in economic activities.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-1 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-03-Business Forms KEY: Bloom's: Knowledge

NOT: 1 min.

• Liabilities represent an "inside" interest in a business.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-1 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-03-Business Forms KEY: Bloom's: Knowledge

NOT: 1 min.

• The accounting equation shows the relationship among the three basic accounting elementsassets,

revenues, and owner's equity.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-2 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• If owner's equity and liabilities increased during the period, then assets must also have increased.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-2 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• An accounts payable is an unwritten promise to pay a supplier for assets purchased or services

rendered.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-1 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• If the revenue of a period exceeds the expenses, the excess represents a net loss.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-5 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-09-Financial Statements KEY: Bloom's: Evaluation

NOT: 1 min.

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• Any accounting period of twelve months' duration is usually referred to as a calendar year.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-5 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• Revenues received during an accounting period increase owner's equity.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-4 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-09-Financial Statements KEY: Bloom's: Knowledge

NOT: 1 min.

• Since supplies last for several months, they are recorded as assets.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-4 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• Since insurance lasts for several months, it is recorded as owner's equity.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-4 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• The income statement provides information about events over a period of a month, year, or other

period of time.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-5 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-09-Financial Statements KEY: Bloom's: Knowledge

NOT: 1 min.

• The terms "profit and loss statement" or "operating statement" are sometimes used as synonyms for the

balance sheet.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-5 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-09-Financial Statements KEY: Bloom's: Knowledge

NOT: 1 min.

• Other terms used for owner's equity include net worth and capital.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-1 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• Any item a business owns that will provide future benefits is called owner's equity.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-1 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• It is not necessary to measure a business transaction in dollars.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-3 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• The accounting equation may be expressed as assets  liabilities = owner's equity.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-2 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• According to the business entity concept, a proprietor may include nonbusiness assets and liabilities in

the business entity's accounting records.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-1 NAT: BUSPROG: Communication STA: AICPA BB-Industry TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• Recognizing the effects of transactions on assets, liabilities, owner's equity, revenue, and expenses of a

business is the processing function.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-6 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-06-Recording Transactions KEY: Bloom's: Comprehension

NOT: 1 min.

• Expenses represent a decrease in liabilities.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-4 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.

• Expenses that are incurred in operating the enterprise increase owner's equity.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-4 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Comprehension

NOT: 1 min.

• Withdrawing cash from a business entity will result in an increase in owner's equity.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-4 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Comprehension

NOT: 1 min.

• An increase in a revenue account may also result in an increase in the accounts receivable account.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-4 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-09-Financial Statements KEY: Bloom's: Comprehension

NOT: 1 min.

• Financial statements commonly prepared by businesses include an income statement, a statement of

owner's equity, and a balance sheet.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-5 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-09-Financial Statements KEY: Bloom's: Knowledge

NOT: 1 min.

• The statement of owner's equity shows the state of the business on a specific date.

ANS: F PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-5 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-09-Financial Statements KEY: Bloom's: Knowledge

NOT: 1 min.

• The balance sheet reports assets, liabilities, and owner's equity on a specific date.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-5 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-09-Financial Statements KEY: Bloom's: Knowledge

NOT: 1 min.

• The income statement and statement of owner's equity provide information covering a period of time.

ANS: T PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-5 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-09-Financial Statements KEY: Bloom's: Knowledge

NOT: 1 min.

MULTIPLE CHOICE

• The accounting equation may be expressed as
• owner's equity = assets  liabilities.
• revenue  expenses = net income.
• revenue = net income  expenses.
• liabilities  owner's equity = assets.

ANS: A PTS: 1 DIF: Difficulty: Easy OBJ: LO: 2-2 NAT: BUSPROG: Communication STA: AICPA FN-Measurement TOP: ACBSP: APC-02-GAAP KEY: Bloom's: Knowledge

NOT: 1 min.