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Chapter 2
The Balance Sheet
ANSWERS TO QUESTIONS
(b) A current asset is an asset that will be used up or turned into cash within
the next 12 months.
(d) A current liability is a debt or obligation that will be paid, settled, or fulfilled
within one year.
(e) Common stock includes the amount of financing (cash and sometimes
other assets) provided to the company by stockholders in exchange for
shares of common stock.
(f) Retained earnings are the cumulative earnings of a company that are not
distributed to the owners and instead are reinvested in the business.
3. Accounts are used to accumulate and report the effects of different business
activities. Accounts are necessary to keep track of all increases and decreases
in the basic accounting equation.
5. Debit is the left side of a T-account and credit is the right side of a T-account. A
debit is an increase in assets or a decrease in liabilities or stockholders’ equity.
A credit is the opposite – a decrease in assets or an increase in liabilities or
stockholders’ equity.
10. The cost principle requires that assets and liabilities be recorded at their original
cost to the company.
11. Because the customer list was not purchased by her salon (it was developed
internally), her salon does not report it on the balance sheet. Knowing this, she
should be sure to advise her banker that the salon has established a loyal group
of customers that holds considerable value for generating future revenues (but is
excluded from the balance sheet for accounting reasons).
Skills Continuing
Mini-exercises Exercises Problems Development Case
Cases*
No. Time No. Time No. Time No. Time No. Time
1 2 1 8 CP2-1 45 1 15 1 30
2 2 2 10 CP2-2 50 2 15
3 4 3 5 CP2-3 50 3 45
4 4 4 5 PA2-1 45 4 20
5 4 5 3 PA2-2 50 5 20
6 4 6 5 PA2-3 50 6 10
7 3 7 3 PB2-1 45 7 35
8 3 8 10 PB2-2 50
9 5 9 5 PB2-3 50
10 6 10 15
11 6 11 20
12 6 12 25
13 10 13 10
14 10 14 15
15 10 15 30
16 10
17 10
18 10
19 10
20 10
21 15
22 10
23 3
24 8
25 8
* Due to the nature of cases, it is very difficult to estimate the amount of time students
will need to complete them. As with any open-ended project, it is possible for students
to devote a large amount of time to these assignments. While students often benefit
from the extra effort, we find that some become frustrated by the perceived difficulty of
the task. You can reduce student frustration and anxiety by making your expectations
clear, and by offering suggestions (about how to research topics or what companies to
select). The skills developed by these cases are indicated in the table on the following
page.
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