SHORT ANSWER QUESTIONS, EXERCISES AND PROBLEMS

Questions:
➢  Accounting has often been called the language of business. In what respects would you
agree with this description? How might you argue that this description is deficient?
➢  Define asset, liability, and stockholders’ equity.
➢  How do liabilities and stockholders’ equity differ? How are they similar?
➢  How do accounts payable and notes payable differ? How are they similar?
➢  Define revenues. How are revenues measured?
➢  Define expenses. How are expenses measured?
➢  What is a balance sheet? On what aspect of a business does the balance sheet provide
information?
➢  What is an income statement? On what aspect of a business does this statement provide
information?
➢  What information does the statement of retained earnings provide?
➢  Identify the three types of activities shown in a statement of cash flows.
➢  What is a transaction? What use does the accountant make of transactions? Why?
➢  What is the accounting equation? Why must it always balance?
➢  Give an example from your personal life that illustrates your use of accounting information in
reaching a decision.
➢  You have been elected to the governing board of your church. At the first meeting you
attend, mention is made of building a new church. What accounting information would the board
need in deciding whether or not to go ahead?
➢  A company purchased equipment for $ 2,000 cash. The vendor stated that the equipment
was worth $ 2,400. At what amount should the equipment be recorded?
➢  What is meant by money measurement?
➢  Of what significance is the exchange-price (or cost) concept? How is the cost to acquire an
asset determined?
➢  What effect does the going-concern (continuity) concept have on the amounts at which long-
term assets are carried on the balance sheet?
➢  Of what importance is the periodicity (time periods) concept to the preparation of financial
statements?
➢  Describe a transaction that would:
 Increase both an asset and capital stock.
 Increase both an asset and a liability.
  Increase one asset and decrease another asset.
 Decrease both a liability and an asset.
 Increase both an asset and retained earnings.
 Decrease both an asset and retained earnings.
 Increase a liability and decrease retained earnings.
 Decrease both an asset and retained earnings.
 Identify the causes of increases and decreases in stockholders’ equity
B) Accounting Exercises:
Exercise 1. Applying Basic Accounting Equation
Royals Palm, Inc. reports the following assets and liabilities. Compute the totals that would
appear in the corporation’s basic accounting equation (Assets = Liabilities + Stockholders’
Equity (Capital Stock)).
 
Cash………………………….$55,000
Accounts Payable……………25,000
Office Supplies………………. 1, 500
Loan Payable…………………..7,000
Accounts Receivable………….10,000
Answer:

Assets = Liabilities + Stockholders’ Equity

 
Exercise 2. Applying Basic Accounting Equation
Dan and Den, Inc. reports the following assets and liabilities. Compute the totals that would
appear in the corporation’s basic accounting equation (Assets = Liabilities + Stockholders’
Equity (Capital Stock)).
 
Cash………………………….$37,000
Accounts Payable……………15,000
Supplies……………………….1, 800
Loan Payable…………………..9,000
Inventory……………………….12,000
 
Answer:

Assets = Liabilities + Stockholders’ Equity

 
Exercise 3. Complete missing amounts in fundamental accounting equation for
several businesses:

Assets = Liabilities + Stockholders’ Equity

578,000 152,000

25,000 180,500

127,000 17,000

269,000  45,000

850,000  675,000

 250,000  657,450