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Chapter 03 Solution of fundamental of financial accouting by EDMONDS (4th edition)

Chapter 03 Solution of fundamental of financial accouting by EDMONDS (4th edition)

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Published by: awais on Sep 23, 2009
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ANSWERS TO QUESTIONS - CHAPTER 31.Assets are used by a business to generate profits. Onemeasure of the profitability of a business is return onassets, or how efficiently a business uses its assets.2.Deferral is the recognition of revenue or expenses in aperiod after the cash consequences are realized, i.e.,cash is collected in advance of performing the service.3.If cash is collected in advance for services, the revenue isrecognized when the services are rendered.4.Salvage value is the expected value of an asset at theend of its useful life.5.If cash is collected in advance for services, a liability iscreated (unearned revenue), increasing the claims side of the accounting equation.6.Unearned revenue is revenue that has been collected butthe service has not yet been performed.7.Straight line depreciation is computed by taking the costof an asset minus the salvage value and dividing by thenumber of years of useful life. Straight line depreciationallocates an equal amount of depreciation to eachaccounting period.8.Depreciation expense is the process of recognizing theused portion of a long-term tangible asset by allocatingits cost to expense over its useful life.9.A contra asset account is an account that has a balanceopposite of the normal balance and has the effect of reducing the asset to which it is associated.Example of a contra asset account: AccumulatedDepreciation
10.The book value of an asset is the asset's historical costminus the accumulated depreciation.11.$12,000
$10,000 = $2,000 book value.12.The concept of financial leverage is the practice of usingborrowed money to increase the return on owners'equity. The business borrows money and invests it inassets that will yield a return greater than the cost of theborrowed money.13.Cash paid for office equipment is shown in the cash flowsfrom investing activities section of the statement of cashflows.14.A cost can be either an asset or an expense. If the itemacquired has already been used in the process of earningrevenue, its cost represents an expense. If the item willbe used in the future to generate revenue, its costrepresents an asset.15.A cost is held in the asset account until the item is usedto produce revenue. When the revenue is generated, theasset is converted into an expense in order to matchrevenues with related expenses. Not all costs becomeexpenses. If the value of an asset will not expire in therevenue generating process, the asset will not become anexpense. For example, the cost of land will not becomean expense.16.Supplies used during the accounting period arerecognized in a single adjusting entry at the end of theperiod. The amount of supplies used is determined bysubtracting the amount of supplies on hand at the end of the period from the amount of supplies that wereavailable for use (beginning supplies balance plussupplies purchased).17. The depreciation of office equipment is an example of anasset whose cost is systematically allocated over severalaccounting periods.
18. Expenses are matched to revenues by: (1) direct match;(2) systematic allocation over several accounting periods;and (3) match with period incurred.19. Losses are decreases in assets or increases in liabilitieswhich result from peripheral or incidental transactions. Forexample, when land purchased for $4,000 is sold for$3,500, the loss is $500. This is a peripheral activity if thecompany is not in the business of selling land.20.Gains are increases in assets or decreases in liabilitieswhich result from peripheral or incidental transactions.For example, when land purchased for $4,000 is sold for$5,000, the gain is $1,000.21.Income from operations is computed by subtractingexpenses from revenues. Gains and losses are notincluded in the computation of income from operations.22.A peripheral activity is an activity that does not arisefrom normal or ordinary business operations.23.Revenues$45,000Oper. Exp. (36,000 )Income from Operations $9,000Gain from Sale of Land 12,500Net Income $21,50024. The concept of materiality: If the decision of a reasonableperson would be influenced by the omission ormisstatement of accounting information, the omission ormisstatement is considered material.25.Among the reasons a global GAAP has not beenestablished are:
Different political structures
Different economic structures26.Return on Assets= Net IncomeTotal Assets

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