Discussion Questions:

1. What are generally accepted accounting principles (GAAP)?

- are a set of principles and assumptions that guide the preparation of

financial statements, and that have gained wide-spread acceptance among
users and practitioners.

2. When is revenue recognised?

- Revenue is recognised when is earned by the entity at the time when a

service is provided or when a sale is made.

3. How does the matching concept more accurately determine the Net
Income of a business?

- The matching concept states that revenue is recognized in the time period
when goods and services are provided and that the assets of the entity that
have been used up during the time period must be matched with the asset
inflows during the same period.

4. What are the qualities that accounting information is expected to have?

What are the limitations on the disclosure of useful accounting information?

- Accounting information should be comparable, verifiable, timely and

understandable. Accounting information should only be disclosed if it is
material – that is, of sufficient size or importance to influence the judgement
of a reasonably knowledgeable user. Accounting information should also be
disclosed in such a manner that the benefits of doing so outweigh the costs.

5. What are assets?

- Assets are economic resources that provide future benefits to the business.
Examples include cash, accounts receivable, prepaid expenses, equipment,
and trucks

6. To what do the terms liability and equity refer?

-A liability is an obligation to pay an asset in the future, while Equity

represents the net assets owned by the owners.
7. Explain the term financial transaction. Include an example of a financial
transaction as part of your explanation.

-The exchange of assets or obligations by a business entity, expressed in

monetary terms like dollars, is called a financial transaction. The exchange
of cash for land or a building is an example of such a transaction.

8. Identify the three forms of business organization.

-The three forms of business organization are Proprietorship, Partnership,

and Corporation.

9. What is the business entity concept of accounting? Why is it important?

A business entity is a unit of accountability that exists independently from

other units. A set of accounting records is kept for each unit or entity.

10. What is the general purpose of financial statements? Name the four
financial statements?

-The general purpose of financial statement is to issue information about the

results of operation, cash flows, and financial position of a company or an
organization. The four financial statements are Income Statement,
Statement of Changes in Equity, Balance Sheet or Statement of Financial
Position, and Statement of Cash Flow.

11. Each financial statement has a title that consists of the name of the
financial statement, the name of the business, and a date line. How is the
date line on each of the four financial statements the same or different?

- The date line on the income statement, statement of changes in equity,

and statement of cash flows represents a period of time. The income
statement details the revenues and expenses that occurred over a given
period of time. The statement of changes in equity shows how equity
changed over a given period of time. The statement of cash flows shows how
the balance in cash changed over a given period of time. The date line on
the balance sheet is a point in time because each account listed on the
balance sheet identifies the account balance on a specific date.
 12. What is the purpose of an income statement? a balance sheet? How do
they interrelate?

-The purpose of the income statement is to communicate the inflow of

assets, in the form of revenues, and the outflow or consumption of assets, in
the form of expenses, over a period of time. The purpose of the balance
sheet is to communicate what the entity owns what the entity owes and the
difference between assets and liabilities at a point in time.

13. Define the terms revenue and expense.

-Revenues are created when a business provides products or services to a

customer in exchange for assets, while expenses are the assets that have
been used up or the obligations incurred in the course of earning revenues.

14. What is net income? What information does it convey?

-Net income is when the revenues is more than the expenses. I convey the
income of the company

15. What is the purpose of a statement of changes in equity? a statement of

cash flows?

-The statement of changes in equity provides information about how the

balances in Share capital and Retained earnings changed during the period,
while the statement of cash flows explains how the balance in cash changed
over a period of time by detailing the sources and uses of cash by type of
activity: operating, investing, and financing, as these are the three types of
activities a business engages in.

16. Why are financial statements prepared at regular intervals? Who are the
users of these statements?

-Financial statements are prepared at regular intervals to keep a number of

interested groups informed about the financial performance of an entity.

17. What is the accounting equation?

Assets= Liabilities + Equity

18. Explain double-entry accounting.

-The double entry accounting system reflects the fact that each financial
transaction affects at least two items in the accounting equation, in order to
maintain the equality of the equation.

19. What is a year-end? How does the timing of year-end financial

statements differ from that of interim financial statements?

-A year-end is the end of fiscal year. Year-end financial statements are

prepared at the end of each 12- month period, while interim financial
statements are, usually every three months, primarily for the use of
shareholders or creditors.

20. How does a fiscal year differ from a calendar year?

-A fiscal year can start and end at any point of the year as long as it
compromises of full 12 months, while calendar year is Jan 1 to Dec 31.
EXERCISE 1–1 (LO1,2,3) Matching

(Ethics) (Managerial accounting)

(Financial accounting) (Partnership)

(International Financial Reporting Standards) (Separate legal entity)

(Limited liability) (Unlimited liability)

Required: Match each term in the above alphabetized list to the

corresponding description below.

a. The owners pay tax on the business’s net income. (Partnership)

b. Accounting standards followed by PAEs in Canada. (International Financial

Reporting Standards)

c. Rules that guide us in interpreting right from wrong. (Ethics)

d. Accounting aimed at communicating information to external users.

(Financial accounting)

e. Accounting aimed at communicating information to internal users.

(Managerial accounting)

f. The business is distinct from its owners. (Separate legal entity)

g. The owner(s) are not responsible for the debts of the business. (Limited
liability)

h. If the business is unable to pay its debts, the owner(s) are responsible.
(Unlimited liability)
Exercise 1-2

a. Violation: Cost

b. Violation: Business Entity

c. Violation: Business Entity

d. Violation: Recognition

e. Correct: Materiality

f. Correct: Monetary

g. Correct: Matching

h. Violation: Consistency

i. Violation: Full disclosure

Exercise 1-3

Assets = Liabilities + Equity

a. 50,000 = 20,000 + ? (30,000)

b. 10,000 = ? (9,000) + 1,000

c. ? (95,000) = 15,000 + 80,000

Required: Calculate the missing amounts in a, b, and c above. Additionally,
answer each of the

questions in d and e below.

d. Assets are financed by debt and equity. The greatest percentage of debt
financing is reflected in a, b, or c?

In a, the debt financing = (20,000/50,000) x 100 =40%. In b, the debt

financing = (9,000/10,000) x 100 =90%. In c, the debt financing =
(15,000/95,000) x 100 = 15.79%. The greatest percent of debt financing is
B.

e. The greatest percentage of equity financing is reflected in a, b, or c?

In a, the equity financing = 100 − 40 = 60%. In b, the equity financing =

100 − 90 = 10%. In c, the equity financing = 100 − 15.79 = 84.21%. The
greatest percent of equity financing is C.

EXERCISE 1–6 (LO4) Identifying Assets, Liabilities, Equity Items

Required: Indicate whether each of the following is an asset (A), liability

(L), or an equity (E) item.

a. Accounts Payable (L) g. Loan Payable (L)

b. Accounts Receivable (A) h. Office Supplies (A)

c. Bank Loan Payable (L) i. Prepaid Insurance (A)

d. Building (A) j. Utilities Expense (E)

e. Cash (A) k. Dividends (E)

f. Share Capital (E) l. Interest Receivable (A)

m. Retained Earnings (E)

n. Interest Revenue (E)

o. Interest Payable (L)

p. Interest Expense (E)

q. Prepaid Insurance (A)

r. Insurance Expense (E)

s. Insurance Revenue (E)

t. Machinery (A)