Chapter 2

Question 1

Accrual-basis accounting

Answer 1

Transactions that change a company’s financial statements are recorded in the periods in which the events occur

Question 2

Classified balance sheet

Answer 2

A balance sheet that contains anumber of standard classifications and sections

Question 3

Comparability

Answer 3

Ability to compare the accounting information of different companies because they use the same accounting principles

Question 4

Consistency

Answer 4

Use of the same accounting principles and methods from year to year within a company

Question 5

Cost constraint

Answer 5

Constraint of determining whether the cost that companies will incur to provide the information will outweigh the benefit that financial statement users will gain from having the information avilable

Question 6

Cost principle

Answer 6

An accounting principle that states that companies should record assets at their cost

Question 7

Current assets

Answer 7

Cash and other resources that companies reasonably expect to convert to cash or use within one year or the operating cycle, whichever is longer

Question 8

Current liabilities

Answer 8

Obligations that a company reasonably expects to pay within the next year or operating cycle, whichever is longer

Question 9

Current ratio

Answer 9

a measure used to evaluate a company’s liquidity and short-term debt-paying ability; computed as current assets divided by current liabilities

Question 10

Debt to total assets ratio

Answer 10

Measures the percentage of total financing provided by creditors; computed as total debt divded by total assets

Question 11

Earings per share

Answer 11

A measure of the net income earned on each share of common stock

Question 12

Economic entity assumption

Answer 12

An assumption that every economic entity can be seperately identified and accounted for

Question 13

Fair value principle

Answer 13

Assets and liabilities should be reported at fair value

Question 14

Faithful representation

Answer 14

Information that is complete, neutral, and free from error

Question 15

Financial Accounting Standards Board (FASB)

Answer 15

The primary accounting standard-setting body in the United States

Question 16

Free cash flow

Answer 16

Cash remaining from operating activities after adjusting for capital expenditures and dividends paid

Question 17

Full disclosure principle

Answer 17

Accounting principle that dictates that companies disclose circumstances and events that make a difference to financial statement users

Question 18

Generally accepted accounting principles (GAAP)

Answer 18

A set of rules and practices, having substantial authoritative support, that the accounting profession recognizes as a general guide for financial reporting purposes

Question 19

Going concern assumption

Answer 19

The assumption that the company will continue in operation for the foreseeable future

Question 20

Intangible assets

Answer 20

Assets that do not have physical substance

Question 21

International Accounting Standards Board (IASB)

Answer 21

An accounting standard-setting body that issues standards adopted by many countries outside of the U.S.

Question 22

IFRS

Answer 22

Accounting standards, issued by the IASB, that have been adopted by international countries

Question 23

Timely

Answer 23

Information that is available to decision makers before it loses its capacity to influence decisions

Question 24

Understandability

Answer 24

Information presented in a clear and concise fashion so that users can interpret it and comprehend its meaning

Question 25

Verifiable

Answer 25

Information that is proven to be free from error

Question 26

Alternative term for Property, plant, and equpment

Answer 26

Fixed assets or plant assets

Question 27

China international note

Answer 27

China adopted IFRS in 2007

-under these, many items are reported at current fair values

Question 28

Other term for intangible assets

Answer 28

“Other assets”

Question 29

Alternative terminology for long-term investments

Answer 29

“investments”

Question 30

Alternative terminology for common stock

Answer 30

“capital stock”

Question 31

Debt to equity ratio

Answer 31

Total liabilities

Stockholder’s equity

The higher this ratio is, the lower a company’s solvency

Question 32

International note: IFRS

Answer 32

Over 100 countries use international standards.

All companies in the European Union follow international standards

Question 33

Ethics note: Adelphia

Answer 33

Senior company employees entered into transactions that blurred the line between the employees’ financial interests and those of the company

Ex. Adelphia guranteed over 2 billion of loans to the founding family

Question 34

Alternative terminology for Stockholders

Answer 34

Shareholders

Question 35

Ethincs Note: Circus

Answer 35

Circus-founder, Barnum is alleged to have said, “Trust everyone, but cut the deck.”

The Sarbanes-Oxley provides measures that help ensure that fraud will not occur

Question 36

PP&E is sometimes called what?

Answer 36

fixed assets

Question 37

International Note: IFRS and GAAP

Answer 37

Generally accepted accounting principles are the same

Neither has specific rformat requirements

However, sometimes format differences do exist in presentations commonly employed by IFRS