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{b}{g,0}2.0 Part 2 More about the Balance Sheet{s}
{b}Learning Objectives
In this part you will learn:
1. Two more of the nine basic accounting concepts:{s}
- The going-concern concept.
- The cost concept.
2. The meaning of the principal items reported on a balance sheet.
@
2.1 Going-Concern Concept
Every year some entities go bankrupt or cease to operate for other
reasons. Most entities, however, keep on going from one year to the next.
Accounting must be based on the assumption either
(A) that entities are about to cease operations, or
(B) that entities are likely to keep on going.{s}
{d}
The more realistic assumption is {1,-1}.
*1
- POST - {b}{a,12,13}{r}
B - OK - Correct.
A - QUIT - No.
@
2.2
Accounting assumes that an entity, or {b}concern{n}, will normally
keep on going from one year to the next. This assumption is called
the going- C{1,7} concept.
*1
ONCERN - OK - Fine.
CONCERN - OK - Fine.
- HINT - This is called the {b}going-concern concept.
@
2.3
More specifically, the {b}going-concern concept{n} is that accounting
assumes that a business will continue to operate {u}indefinitely{n}.
@
2.4
Because of the going-concern concept, accounting {1,8} report
what the assets could be sold for if the entity ceased operations.
(A) does
(B) does not
*1
- POST - {b}{a,8,13}{r}
DOES NOT - OK - Correct.
B - OK - Correct.
DOES - QUIT - No. You will soon find out more about why.
A - QUIT - No. You will soon find out more about why.
@
2.5
On December 31, 19x1, the balance sheet of Hamel Company reported
total assets of $50,000. If Hamel Company ceased to operate, {1,-1}
(A) its assets could be sold for $50,000.
(B) we do not know what its assets could be sold for.
*1
- POST - {b}{a,8,13}{r}
B - OK - Correct. Let's look into this further.
A - QUIT - No. Let's look into this further.
@
2.6 Cost Concept
When a business buys an asset, it records the amount of the asset
at its cost. Thus, if Garsden Company bought a plot of land for $10,000
in 19x1, it would show on its December 31, 19x1, balance sheet the item:
Land ............ ${1,-6}.
This amount was the COST of the land.
*1
10,000 - OK - Correct.
10000 - OK - Correct.
10K - QUIT - This is not accepted terminology for $10,000. Please avoid its use.
- HINT - Garsden Company paid $10,000 for this item.
@
2.7
The amount for which an asset can be sold in the marketplace is
called its {b}market value{n}. If you bought a pair of shoes a year ago
for $25 and find that today you can sell them for $5, then their cost
was ${1,-2}, and their market value today is ${2,-2}.
*1
25 - OK - Correct.
- HINT - The cost was $25.
*2
5 - OK - Correct.
- HINT - The market value is now $5.
@
2.8
Some assets wear out. Inflation affects the value of some assets.
For these and other reasons, the market value of assets {b}changes{n} as time
goes on. Therefore, on December 31, 19x6, the market value of Garsden
Company's land was probably {1,-1}
(A) $10,000.
(B) different from $10,000.
*1
- POST - {b}{a,12,13}{r}
B - OK - Correct.
A - QUIT - No. It would be unusual for it to remain the same!
@
2.9
Accounting, however, does not attempt to trace changes in the
market value of most assets. Instead, accounting focuses on their {b}cost.
Thus, on its December 31, 19x6, balance sheet, Garsden Company would report
the land at its {u}cost{n} of ${1,-6}.
*1
10,000 - OK - Correct.
10000 - OK - Correct.
- HINT - No. The cost of $10,000 goes on the balance sheet.
@
2.10
The {b}cost concept{n} is that accounting focuses on the {1,12}
(A) cost (B) market value
of assets, rather than on their {2,12}.
(A) cost (B) market value
*1
- POST - {b}{a,4,13}cost
COST - OK - Correct.
A - OK - Correct.
MARKET VALUE - QUIT - No. Cost is correct here.
B - QUIT - No. Cost is correct here.
*2
- POST - {b}{a,8,29}market value
MARKET VALUE - OK - Correct.
B - OK - Correct.
COST - QUIT - No. Market value is correct here.
A - QUIT - No. Market value is correct here.
@
2.11
Many people think that the balance sheet shows what assets are worth,
that is, their market value. This belief is {1,5}.
(A) true
(B) false
*1
- POST - {b}{a,8,13}{r}
FALSE - OK - Correct.
F - OK - Correct.
B - OK - Correct.
TRUE - QUIT - No. The balance sheet focuses on {u}cost{n}.
T - QUIT - No. The balance sheet focuses on {u}cost{n}.
A - QUIT - No. The balance sheet focuses on {u}cost{n}.
@
2.12
One reason for the {b}cost concept{n} is that the market value of an asset
is difficult to estimate. If you bought a pair of shoes for $25, the cost
was clearly $25. However, if a few months later you asked two friends to
give the market value of these used shoes, they probably would {1,8}
on the amount.
(A) agree
(B) disagree
*1
- POST - {b}{a,14,13}{r}
DISAGREE - OK - Correct.
B - OK - Correct.
AGREE - QUIT - Probably not.
A - QUIT - Probably not.
@
2.13
Estimating the market value of each of the assets every
time a balance sheet was prepared would be {1,9}.
(A) difficult
(B) easy{s}
{d}
Furthermore, the estimates would be a matter of opinion and
therefore {2,10}.
(C) objective
(D) subjective
*1
- POST - {b}{a,6,13}{r}
DIFFICULT - OK - Definitely.
A - OK - Definitely.
EASY - QUIT - Not really.
B - QUIT - Not really.
*2
- POST - {b}{a,17,13}{r}
SUBJECTIVE - OK - Correct.
D - OK - Correct.
OBJECTIVE - QUIT - "Objective" means not based on personal opinion.
C - QUIT - "Objective" means not based on personal opinion.
@
2.14
A second reason for the {b}cost concept{n} is that the entity is not
going to sell many of its assets immediately. It will keep them to use in
its operations. The entity therefore {1,8} need to know their market
(A) does
(B) does not
value. This reason follows from the previous concept, the {2,13,2}
concept.
(C) entity
(D) going-concern
*1
- POST - {b}{a,10,13}{r}
DOES NOT - OK - Correct.
B - OK - Correct.
DOES - QUIT - No. The entity does NOT need to track the market value of assets it keeps.
A - QUIT - No. The entity does NOT need to track the market value of assets it keeps.
*2
- POST - {b}{a,18,13}{r}
- POST - {a,12,65}-
GOING CONCERN - OK - Yes, that's right.
D - OK - Yes, that's right.
ENTITY - QUIT - No, this follows from the {b}going-concern{n} concept.
C - QUIT - No, this follows from the {b}going-concern{n} concept.
@
2.15
Thus the two reasons why accounting focuses on {b}costs{n} rather
than on {b}market values{n} are that:
(1) market values are difficult to estimate -- that is, they
are {1,10},
(A) objective (B) subjective
whereas costs are {2,10}.
(A) objective (B) subjective
(2) the going-concern concept makes it {u}unnecessary{n} to know
the market value of many assets.
*1
- POST - {b}{a,10,41}subjective
SUBJECTIVE - OK - Correct.
B - OK - Correct.
OBJECTIVE - QUIT - No.
A - QUIT - No.
*2
- POST - {b}{a,14,21}objective
OBJECTIVE - OK - Correct.
A - OK - Correct.
SUBJECTIVE - QUIT - No.
B - OK - No.
@
2.16
Accounting {u}does not{n} report what many of the individual assets
are worth, that is, their {u}market value{n}. Accounting therefore {1,8}
report what the whole entity is worth.
(A) does
(B) does not{s}
{d}
{u}Failure to appreciate this point is the most serious cause of{n}
{u}misunderstanding about the meaning of amounts on the balance sheet{n}.
*1
- POST - {b}{a,10,13}{r}
DOES NOT - OK - Correct.
B - OK - Correct.
DOES - QUIT - No.
A - QUIT - No.
@
2.17
An entity bought land in 19x1 for $10,000. On December 31, 19x6,
the entity received an offer of $20,000 for the land. At what amount should
this land be reported on the balance sheet of December 31, 19x6? ${1,-6}
*1
10,000 - OK - Correct. The COST is $10,000.
10000 - OK - Correct. The COST is $10,000.
- HINT - No. The COST is $10,000.
@
2.18
A shoe store purchases shoes in 19x1 for $1,000. It had every expecta-
tion of selling these shoes to customers for $1,500. At what amount should
these shoes be reported on the December 31, 19x1 balance sheet? ${1,-6}
*1
1,000 - OK - Correct.
1000 - OK - Correct.
- HINT - No. The COST was $1,000.
@
2.19{s}
The {b}cost concept{n} is the fifth of the nine fundamental accounting concepts.
After the definition of each concept, type the number of its definition.
(1) Dual-aspect concept
(2) Money-measurement concept
(3) Entity concept
(4) Going-concern concept
(5) Cost concept
- Accounts are kept for entities, as distinguished
from the persons associated with the entities .. {1,4,1}
- Accounting records show only facts that can be
expressed in monetary terms .................... {2,4,1}
- Accounting focuses on the cost of assets, rather
than on their market value ..................... {3,4,1}
- Assets = equities ................................. {4,4,1}
- Accounting assumes that an entity will continue
to operate indefinitely ........................ {5,4,1}
*1
- POST - {a,7,7}{c,016}
ENTITY CONCEPT - OK - Correct.
3 - OK - Correct.
*2
- POST - {a,6,7}{c,016}{a,14,61}-
MONEY MEASUREMENT CONCEPT - OK - Correct.
2 - OK - Correct.
*3
- POST - {a,9,7}{c,016}
COST CONCEPT - OK - Correct.
5 - OK - Correct.
*4
- POST - {a,5,7}{c,016}{a,17,60}-
DUAL ASPECT CONCEPT - OK - Correct.
1 - OK - Correct.
*5
- POST - {a,8,7}{c,016}{a,19,61}-
GOING CONCERN CONCEPT - OK - Correct.
4 - OK - Correct.
@
2.20 The Balance Sheet
Refer to Exhibits 1 and 2 in your booklet. Exhibit 2 is the same
balance sheet you worked with in Part 1. It reports the amount of
A{1,6,3} and E{2,8,4} of Garsden Company as of December 31, {3,4}.
*1
SSETS - BEST - Correct.
ASSETS - OK - Correct.
- HINT - No, the left-hand column reports ASSETS.
*2
QUITIES - BEST - Correct.
EQUITIES - OK - Correct.
- HINT - No, the other column reports EQUITIES.
*3
19X1 - OK - Correct.
- HINT - No, this report is for 19x1.
@
2.21
Exhibit 2 is an expanded version of this same balance sheet. In order
to introduce the balance sheet as simply as possible, we condensed the items,
and we used small amounts. For example, the amount of cash reported was
actually $3,449,000 instead of the ${1,-5} you worked with earlier.
*1
3,449 - OK - Correct.
3449 - OK - Correct.
- HINT - You worked with $3,449,000 with the three zeros omitted.
@
2.22
In order to use realistic amounts and still not have many digits,
the numbers in Exhibit 2 are rounded to the nearest thousand dollars.
We show this by the legend under the date, "(000 omitted)." Thus Exhibit 2
tells us that the total assets of Garsden Company were ${1,-10}.
*1
36,236,000 - OK - Correct.
36236000 - OK - Correct.
- HINT - No. Append "000" to the "total assets" figure.
@
2.23
Although the balance sheet you have just seen is more detailed,
it is still a summary. For example, the CASH is probably lodged in a
number of separate bank accounts, in cash registers, and in petty cash
boxes. The detailed records of the amount of cash in each of these
locations {1,6} appear on the balance sheet.
(A) do
(B) do not
*1
- POST - {b}{a,14,13}{r}
DO NOT - OK - Correct.
B - OK - Correct.
DO - QUIT - No. DETAILED records of cash locations do NOT appear on the balance sheet.
A - QUIT - No. DETAILED records of cash locations do NOT appear on the balance sheet.
@
2.24
The remainder of this part explains each item on the detailed balance
sheet of Exhibit 2. {s}
{d}
{b}ASSETS
In Part 1 we referred to assets as {b}"things of value."{n} We now make
this idea more specific. In order to count as an asset, an item must
meet {u}three{n} requirements, as follows.
@
2.25
The first requirement is that the item must be {b}controlled{n} by
the entity. Usually [see next screen], this means that the entity must
{b}own{n} the item. If Able Company rents a building owned by Baker Company,
this building {1,6} an asset of Able Company.
(A) is (B) is not {s}
{d}
The building {2,6} an asset of Baker Company.
(A) is (B) is not
*1
- POST - {b}{a,10,24}is not
IS NOT - OK - Correct, because Able Company does NOT own it.
B - OK - Correct, because Able Company does NOT own it.
IS - QUIT - No, because Able Company does NOT own it.
A - QUIT - No, because Able Company does NOT own it.
*2
- POST - {b}{a,15,13}is
IS - OK - Correct, because Baker Company does own it.
A - OK - Correct, because Baker Company does own it.
IS NOT - QUIT - Incorrect. Baker Company does own it.
B - QUIT - Incorrect. Baker Company does own it.
@
2.26
As an exception to ownership, a leased item is an asset if the
entity controls it by a lease agreement that extends over practically
the whole life of an item. Such a lease is called a {b}capital lease.
Capital leases are discussed in Part 8.
@
2.27
In accounting, the employees of an entity {1,7} assets.
(A) are
(B) are not
*1
- POST - {b}{a,6,13}{r}{n}{a,9,1}(Prior to the abolition of slavery, some human beings {u}were{n} assets {a,11,1} of the plantations that owned them.)
ARE NOT - OK - Correct, because a company does NOT own its employees.
B - OK - Correct, because a company does NOT own its employees.
ARE - QUIT - No. A company does NOT own its employees.
A - QUIT - No. A company does NOT own its employees.
@
2.28
The second requirement is that the item must be {b}valuable{n}
to the entity. Which of these would qualify as assets of a company
that sells dresses? For each item answer (Y) yes or (N) no.
{s}
- The right to collect monies owed by
customers to the company ............. {1,3}
- Good-looking dresses ................... {2,3}
- Dresses no one wants because they have
gone out of style .................... {3,3}
- A cash register in working condition.... {4,3}
- A cash register that doesn't work and
can't be repaired .................... {5,3}
*1
YES - OK - Correct, these monies are {u}valuable{n}.
Y - OK - Correct, these monies are {u}valuable{n}.
NO - QUIT - Incorrect. These monies ARE {u}valuable{n}.
N - QUIT - Incorrect. These monies ARE {u}valuable{n}.
*2
YES - OK - Correct, this merchandise is {u}valuable{n}.
Y - OK - Correct, this merchandise is {u}valuable{n}.
NO - QUIT - Incorrect. This merchandise IS {u}valuable{n}.
N - QUIT - Incorrect. This merchandise IS {u}valuable{n}.
*3
NO - OK - Correct. Something no one wants has no value in a company.
N - OK - Correct. Something no one wants has no value in a company.
YES - QUIT - No. Something no one wants has NO value in a company.
Y - QUIT - No. Something no one wants has NO value in a company.
*4
YES - OK - Correct. This has value!
Y - OK - Correct. This has value!
NO - QUIT - Incorrect. This IS valuable.
N - QUIT - Incorrect. This IS valuable.
*5
NO - OK - Correct. This item has no value.
N - OK - Correct. This item has no value.
YES - QUIT - No. This item has NO value.
Y - QUIT - No. This item has NO value.
@
2.29
The third requirement is that an item must have been acquired at
a {b}measurable cost{n}. If Jones Company paid a specific amount of money
to acquire a good name, as when purchasing another business to acquire
its good name, then this good name {1,9} be counted as an asset.
(A) would
(B) would not
*1
- POST - {b}{a,10,13}{r}
WOULD - OK - Correct, the amount paid for the name is a measurable cost
A - OK - Correct, the amount paid for the name is a measurable cost.
- HINT - No. The amount paid IS a measurable cost.
@
2.30
By contrast, if Jones Company has built up an excellent name because
of the consistently high quality of its goods and services, this name
{1,9} be counted as an asset in accounting.
(A) would
(B) would not
*1
- POST - {b}{a,10,13}{r}
WOULD NOT - OK - Correct, because the name/reputation was not acquired at a {u}measurable{n} cost.
B - OK - Correct, because the name/reputation was not acquired at a {u}measurable{n} cost.
WOULD - QUIT - No, the name was NOT acquired at a measurable cost.
A - QUIT - No, the name was NOT acquired at a measurable cost.
- HINT - The name was NOT acquired at a measurable cost.
@
2.31
"Schaefer" and "Schlitz" are well-known names for beer. Schaefer
Corporation purchased the rights to its name from another company for
$51 million. Schlitz Brewing Company developed the value of its name
through its own efforts. {s}
{d}
In accounting, the name "Schaefer" {1,6} an asset to its owner.
(A) is (B) is not
The name "Schlitz" {2,6} an asset to its owner.
(A) is (B) is not
*1
- POST - {b}{a,13,13}is
IS - OK - Correct.
A - OK - Correct.
IS NOT - QUIT - Incorrect. The name "Schaefer" had a measurable cost.
B - QUIT - Incorrect. The name "Schaefer" had a measurable cost.
*2
- POST - {b}{a,17,25}is not
IS NOT - OK - Correct.
B - OK - Correct.
IS - QUIT - No. The name "Schlitz" had no measurable cost.
A - QUIT - No. The name "Schlitz" had no measurable cost.
@
2.32
The accounting name for a favorable name or reputation that was
purchased by an entity is {b}goodwill{n}. Thus the balance sheet for
Schaefer Corporation would show the asset:
{1,-10} .................... $51,000,000
*1
GOODWILL - OK - Correct.
GOODWILL - OK - Correct.
GOOD WILL - OK - Okay, but it is spelled as one word.
@
2.33
To summarize, an item that is listed as an asset must meet
three requirements:
(1) It must be {u}owned or controlled{n} by the entity.
(2) It must be {u}valuable{n} to the entity.
(3) It must have been acquired at a {u}measurable cost{n}.
@
2.34{s}
Which of the following items of Homes Incorporated, a builder of
houses, are its assets? For each item, answer (Y) yes or (N) no.
- Telephones it rents from the telephone
company, worth $5,000 ......................... {1,3}
- Lumber purchased for $10,000 .................... {2,3}
- Its reputation for building fine houses,
said to be worth $50,000 ...................... {3,3}
- Its trucks, purchased for $100,000 .............. {4,3}
*1
NO - BEST - Correct, NOT owned by Homes, Inc.
N - OK - Correct, NOT owned by Homes, Inc.
YES - QUIT - No. The phones are not owned by Homes, Inc.
Y - QUIT - No. The phones are not owned by Homes, Inc.
*2
YES - BEST - Correct. This is valuable to Homes, Inc. and satisfies the three requirements.
Y - OK - Correct. This is valuable to Homes, Inc. and satisfies the three requirements.
NO - QUIT - Incorrect. The lumber is {u}valuable{n} to Homes, Inc.
N - QUIT - Incorrect. The lumber is {u}valuable{n} to Homes, Inc.
*3
NO - BEST - Correct. This was not acquired at a {u}measurable cost{n}.
N - OK - Correct. This was not acquired at a {u}measurable cost{n}.
YES - QUIT - No. This was NOT acquired at measurable cost.
Y - QUIT - No. This was NOT acquired at measurable cost.
*4
YES - BEST - Correct, these are {u}valuable{n} and {u}owned by{n} Homes, Inc.
Y - OK - Correct, these are {u}valuable{n} and {u}owned by{n} Homes, Inc.
NO - QUIT - Incorrect. They are owned by Homes, Inc.
N - QUIT - Incorrect. They are owned by Homes, Inc.
@
2.35 Current Assets
On a balance sheet, current assets are usually reported separately
from other assets. {b}Current assets{n} are cash and assets that are
expected to be converted into cash or used up in the near future, usually
within one year. Groceries on the shelves of a grocery store {1,7}
(A) are (B) are not
current assets. The store building {2,6} a current asset.
(C) is (D) is not
*1
- POST - {b}{a,10,13}are
ARE - OK - Correct. These should be sold within the year!
A - OK - Correct. These should be sold within the year!
ARE NOT - QUIT - Incorrect. These should be sold within the year!
B - QUIT - Incorrect. These should be sold within the year!
- HINT - Choose from (A) or (B).
*2
- POST - {b}{a,14,25}is not
IS NOT - OK - Correct. The building will hopefully be around for a while!
D - OK - Correct. The building will hopefully be around for a while!
IS - QUIT - No. The building will hopefully be around for a while!
C - QUIT - No. The building will hopefully be around for a while!
@
2.36
{b}Cash{n} is money on hand and money in bank accounts that can be
withdrawn at any time. On January 8, Jones Company had $843 in its cash
register and $12,012 in its checking account at the bank. Its cash
totalled ${1,-6}.
*1
12,855 - OK - Correct.
12855 - OK - Correct.
- HINT - $12,012 + $843 = $12,855.
@
2.37
On the evening of January 8, Jones Company deposited in its checking
account $743 of the money in the cash register. After it had done this,
its {b}cash{n} {1,-1}
(A) still totalled $12,855.
(B) totalled more than $12,855.
(C) totalled less than $12,855.
*1
- POST - {b}{a,8,13}{r}
A - OK - Correct. Cash is cash, whether in the bank or in the drawer.
B - NO - No. Total cash remains constant.
C - NO - No. Total cash remains constant.
@
2.38
When an entity writes a check, the amount of its cash is not
actually reduced until the check has been cashed. Nevertheless, the
usual practice is to record a decrease in cash on the day the check
is mailed.
@
2.39
Refer to Exhibit 2 to see the other types of current assets.
{b}Securities{n} are stocks and bonds. They give the company that owns
them valuable rights from the entity that issued them. U.S. Treasury
Bonds owned by Garsden Company {1,7} assets of Garsden Company.
(A) are
(B) are not
*1
- POST - {b}{a,10,13}{r}
ARE - OK - Correct. These bonds are {b}securities{n} and are of value to Garsden.
A - OK - Correct. These bonds are {b}securities{n} and are of value to Garsden.
ARE NOT - QUIT - Incorrect. These bonds are {b}securities{n} and are of value to Garsden.
B - QUIT - Incorrect. These bonds are {b}securities{n} and are of value to Garsden.
@
2.40
{b}Marketable securities{n} are securities that are expected to be
converted into cash within a year. They are owned so as to earn a
return on funds that otherwise would be idle. Marketable securities
are {1,10} assets.
(A) current
(B) noncurrent
{b}Investments{n} are securities that are expected to be held for a longer
period of time. They are {2,10} assets.
(C) current
(D) noncurrent
*1
- POST - {b}{a,10,13}{r}
CURRENT - OK - Correct.
A - OK - Correct.
NONCURRENT - QUIT - No. They are expected to be turned into cash within the year.
B - QUIT - No. They are expected to be turned into cash within the year.
*2
- POST - {b}{a,20,13}{r}
NONCURRENT - OK - Correct.
D - OK - Correct.
CURRENT - QUIT - No. They are NOT intended to be turned into cash within the year.
C - QUIT - No. They are NOT intended to be turned into cash within the year.
@
2.41
In Exhibit 2, note that next to the term {b}marketable securities,
the {1,12} is given in parentheses as ${2,-7}.
(A) cost (B) market value
The amount of $246,000 listed as an asset must therefore be the
{3,12} of these securities. This is in accordance with the
{4,6} concept.
(A) cost (B) market value
*1
- POST - {b}{a,6,29}{r}
MARKET VALUE - BEST - Correct.
B - OK - Correct.
COST - QUIT - No. This amount is the {u}market value{n}.
A - QUIT - No. This amount is the {u}market value{n}.
*2
248,000 - OK - Correct.
248000 - OK - Correct.
248 - QUIT - No, remember that $248 is only shorthand. (000 is omitted)
*3
- POST - {b}{a,14,13}cost
COST - BEST - Correct.
A - OK - Correct.
MARKET VALUE - QUIT - No, $246 (000 omitted) is the COST.
B - QUIT - No, $246 (000 omitted) is the COST.
*4
COST - OK - Correct.
A - OK - Correct.
- HINT - {a,21,1}The {u}cost concept{n} states that "accounting focuses on the cost {a,22,1}of assets, rather than on their market value."
@
2.42
The third item under the "Current assets" heading in
Exhibit 2 is {1,19}. [two words]
*1
ACCOUNTS RECEIVABLE - OK - Correct.
ACCOUNTS RECIEVABLE - OK - (okay - check spelling)
- HINT - The third item is "Accounts receivable."
@
2.43
An {b}account receivable{n} is an amount that is owed to the business,
usually by one of its customers, as a result of the ordinary extension
of credit. A customer's monthly bill from the telephone company would
be an A{1,19} [two words] of the telephone company until the
customer paid the bill.
*1
CCOUNT RECEIVABLE - OK - Correct.
CCOUNTS RECEIVABLE - OK - Correct.
ACCOUNTS RECEIVABLE - OK - Correct.
ACCOUNT RECEIVABLE - OK - Correct.
@
2.44
Banks require borrowers to sign a note called a {b}promissory note
as acknowledgment of the amounts they owe. An amount owed that is
evidenced by such a written promise is called a {b}note receivable{n}. Thus
a note promising to repay a bank loan is a(n) {1,7} receivable
(A) note (B) account
on the balance sheet of the bank. An obligation to pay the gas company
for gas consumed last month is a(n) {2,7} receivable on the balance
(A) note (B) account
sheet of the gas company.
*1
- POST - {b}{a,10,13}note
NOTE - OK - Correct.
A - OK - Correct.
ACCOUNT - QUIT - No.
B - QUIT - No.
*2
- POST - {b}{a,16,29}account
ACCOUNT - OK - Correct.
B - OK - Correct.
NOTE - QUIT - No.
A - QUIT - No.
@
2.45
Goods being held for sale, as well as supplies, raw materials,
and partially finished products that will be sold upon completion, are
termed {b}inventories{n}. For example, a truck owned by an automobile dealer
for {u}resale{n} to its customers {1,6} inventory. A truck owned
(A) is (B) is not
by an entity and {u}used{n} to transport its own goods {2,6} inventory.
(A) is (B) is not
*1
- POST - {b}{a,10,13}is
IS - OK - Correct.
A - OK - Correct.
IS NOT - QUIT - No. It is being held for sale.
B - QUIT - No. It is being held for sale.
*2
- POST - {b}{a,14,25}is not
IS NOT - OK - Correct.
B - OK - Correct.
IS - QUIT - No. It is NOT being held for sale.
A - QUIT - No. It is NOT being held for sale.
@
2.46
In Exhibit 2 the inventories of Garsden Company are reported
as ${1,-10}.
*1
12,623,000 - OK - Correct.
12623000 - OK - Correct.
12,623 - NO - Remember, "000 omitted."
12623 - NO - Remember, "000 omitted."
- HINT - $12,623,000 is correct.
@
2.47
A fence around an entity's property is valuable because it provides
security and protection against loss. The fence is an asset. Would a fire
insurance policy that protects the business against losses caused by fire
damage in the coming year also be an asset? Answer (Y) yes or (N) no. {1,-3}
*1
YES - OK - Correct.
Y - OK - Correct.
NO - QUIT - Incorrect. The insurance policy IS an asset.
N - QUIT - Incorrect. The insurance policy IS an asset.
@
2.48
The protection provided by a one-year fire insurance policy will
be used up within a relatively short period. Therefore such a policy is
a {1,10} asset.
(A) current
(B) noncurrent
*1
- POST - {b}{a,8,13}{r}
CURRENT - OK - Correct.
A - OK - Correct.
NONCURRENT - QUIT - No.
B - QUIT - No.
@
2.49
An asset such as insurance protection is reported under the
heading {b}prepaid expenses{n}. Exhibit 2 shows that Garsden Company
had ${1,-7} of prepaid expenses on December 31, 19x1.
*1
389,000 - OK - Correct.
389000 - OK - Correct.
389 - NO - Remember, "000 omitted."
- HINT - $389,000 is correct.
@
2.50
In summary, {u}current assets{n} consist of cash and of assets
that are expected to be converted into cash or used up within a short
period, usually within {1,9}. [how long?]
*1
ONE YEAR - OK - Fine.
1 YEAR - OK - Fine.
A YEAR - OK - Fine.
12 MONTHS - OK - Fine.
@
2.51 Noncurrent Assets
{b}Tangible assets{n} are assets that can be seen or touched; they have
physical substance. Buildings, trucks, and machines are T{1,8} assets.
*1
ANGIBLE - BEST - Correct.
TANGIBLE - OK - Correct.
@
2.52
The name for noncurrent tangible assets in Exhibit 2 is {b}Property and
{b}plant{n}. Because they are {u}noncurrent{n}, we know that these assets are expected
to be used in the entity for more than {1,10}. [how long?]
*1
ONE YEAR - OK - Correct.
1 YEAR - OK - Correct.
A YEAR - OK - Correct.
12 MONTHS - OK - Okay.
- HINT - {a,21,1}Noncurrent assets are expected to be owned by the entity for more than one year.{s}
@
2.53
Exhibit 2 shows the {1,12} of property and plant to
(A) cost (B) market value
be $26,946,000. It also shows that a portion of the cost of this asset
has been subtracted from the original cost because it has been "used up."
This "used up" portion is called the {b}accumulated depreciation{n} and
totals ${2,-10}. {s}
{d}
After this amount is subtracted, the asset amount is finally shown at
${3,-10}. (Later in the program we shall explain what is meant
by this term. For now, do not be concerned about it.)
*1
- POST - {b}{a,4,15}cost
COST - OK - Correct.
A - OK - Correct.
MARKET VALUE - QUIT - No. The balance sheet shows COST of assets.
B - QUIT - No. The balance sheet shows COST of assets.
- HINT - The balance sheet shows COST of assets.
*2
13,534,000 - OK - Correct.
13534000 - OK - Correct.
13,534 - NO - Remember, "000 omitted."
13534 - NO - Remember, "000 omitted."
- HINT - $13,534,000 is correct.
*3
13,412,000 - OK - Correct.
13412000 - OK - Correct.
- HINT - $13,412,000 is correct.
@
2.54
The "investments" in the noncurrent asset section of Exhibit 2
are securities. Evidently Garsden Company does not intend to turn
these investments into cash within {1,10}. [how long?] If these
securities were expected to be turned into cash within that period,
they would be listed as a current asset, M{2,9} S{3,9}.
*1
ONE YEAR - OK - Correct.
1 YEAR - OK - Correct.
A YEAR - OK - Correct.
12 MONTHS - OK - Correct.
- HINT - "One year" is correct.
*2
ARKETABLE - OK - Correct.
*3
ECURITIES - OK - Correct.
@
2.55
The last noncurrent asset reported is {b}goodwill{n}. Because it is
reported as an asset, we know that Garsden Company {1,7} buy this
item at a measurable cost.
(A) did
(B) did not
*1
- POST - {b}{a,8,13}{r}
DID - OK - Correct.
A - OK - Correct.
DID NOT - QUIT - No, an item reported as an asset was bought for a measurable cost.
B - QUIT - No, an item reported as an asset was bought for a measurable cost.
@
2.56
Some of the assets we have mentioned are tangible properties;
others are intangible property rights. An automobile is {1,16}
(A) property (B) a property right
An insurance policy is {2,16}.
(A) property (B) a property right
*1
- POST - {b}{a,6,13}property
PROPERTY. - OK - Correct.
PROPERTY - OK - Correct.
A - OK - Correct.
A PROPERTY RIGHT - QUIT - No.
B - QUIT - No.
*2
- POST - {b}{a,10,31}{r}
A PROPERTY RIGHT - OK - Correct.
B - OK - Correct.
PROPERTY - QUIT - No.
A - QUIT - No.
@
2.57 Current Liabilities
The right-hand side of the Garsden Company balance sheet lists the
company's equities. As explained in Part 1, these are the C{1,6} against
the assets. Equities consist of (1) the claims of creditors or other outside
parties, which are called L{2,11}, and (2) the claims of the owners,
which are called {u}owners' equity{n}.
*1
LAIMS - BEST - Correct.
CLAIMS - OK - Correct.
- HINT - Equities are {u}claims{n} against assets.
*2
IABILITIES - BEST - Correct.
LIABILITIES - OK - Correct.
IABILITY - OK - (okay).
- HINT - Non-owner claims are {u}liabilities{n}.
@
2.58
In Exhibit 2, the first category on the equities side is
the {u}current liabilities{n}. As we might expect from the discussion
of current assets, current liabilities are claims that become due
within a {1,5} time, usually within {2,10}. [2 words]
(A) short
(B) long
*1
- POST - {b}{a,10,13}{r}
SHORT - OK - Correct.
A - OK - Correct.
LONG - QUIT - No.
B - QUIT - No.
*2
ONE YEAR - OK - Correct.
1 YEAR - OK - Correct.
A YEAR - OK - Correct.
12 MONTHS - OK - Correct.
- HINT - Current liabilities are usually due within one year.
@
2.59
The first current liability listed in Exhibit 2 is {u}accounts payable{n}.
These are the opposite of accounts receivable; that is, they are amounts
that {1,-1}
(A) the company owes to its suppliers.
(B) are owed to the company by its customers.
*1
- POST - {b}{a,8,13}{r}
A - OK - Correct.
B - QUIT - No. Accounts payable are amounts the company owes its suppliers.
@
2.60
In December 19x1, Smith Company sold a typewriter to Brown Company.
Brown Company agreed to pay $300 for it within 60 days. On the December 31,
19x1 balance sheets, this amount would be reported as an account {1,10}
(A) receivable (B) payable
by Smith Company, and as an account {2,10} by Brown Company.
(A) receivable (B) payable
*1
- POST - {b}{a,8,13}receivable
RECEIVABLE - OK - Correct.
A - OK - Correct.
PAYABLE - QUIT - No, Smith {u}is owed{n} $300 by Brown.
B - QUIT - No, Smith {u}is owed{n} $300 by Brown.
*2
- POST - {b}{a,12,33}{r}
PAYABLE - OK - Correct.
B - OK - Correct.
RECEIVABLE - QUIT - No, Brown {u}owes{n} Smith $300.
A - QUIT - No, Brown {u}owes{n} Smith $300.
@
2.61
If Brown Company gave Smith Company a promissory note as evidence
of its obligation, this amount would be reported as a NOTE {1,10}
(A) receivable (B) payable
on the balance sheet of Smith Company and as a NOTE {2,10} on the
balance sheet of Brown Company.
(A) receivable (B) payable
*1
- POST - {b}{a,6,13}receivable
RECEIVABLE - OK - Correct.
A - OK - Correct.
PAYABLE - QUIT - No, Smith is owed the $300 by Brown.
B - QUIT - No, Smith is owed the $300 by Brown.
*2
- POST - {b}{a,12,33}{r}
PAYABLE - OK - Correct.
B - OK - Correct.
RECEIVABLE - QUIT - No, Brown owes $300 to Smith.
A - QUIT - No, Brown owes $300 to Smith.
@
2.62
The amount owed to the government for taxes is shown separately
from other liabilities, both because the amount is large and because the
amount owed may not be precisely known as of the date of the balance sheet.
In Exhibit 2, this amount is shown as ${1,-10} and is listed opposite
the title "Estimated tax liability."
*1
1,672,000 - OK - Correct.
1672000 - OK - Correct.
1,672 - NO - Remember, "000 omitted."
1672 - NO - Remember, "000 omitted."
- HINT - Estimated tax liability is $1,672,000.
@
2.63
Suppose that as of December 31, 19x1, Ms. Thomas, an employee of
Smith Company, has earned two weeks' salary but has not yet been paid.
As of December 31, 19x1, does she have a legitimate claim against the
company for the amount of her earnings? Answer (Y) yes or (N) no. {1,-3}
*1
YES - OK - She does.
Y - OK - She does.
NO - QUIT - Incorrect. She does.
N - QUIT - Incorrect. She does.
@
2.64
Thomas's claim is included under the heading "Other current
liabilities." Such a claim is often called an {b}accrued liability{n}.
Claims of this nature against Garsden Company totalled ${1,-7} as of
December 31, 19x1.
*1
845,000 - OK - Correct.
845000 - OK - Correct.
845 - NO - Remember, "000 omitted."
- HINT - The answer is $845,000.
@
2.65 Current Ratio{s}
The current assets and current liabilities are shown separately
from noncurrent assets and noncurrent liabilities because they indicate
the entity's ability to meet its current obligations. A measure of this
ability is the {b}current ratio{n}, which is the ratio of current assets to
current liabilities. In the Garsden Company, the current ratio is:
{d}
{d} ${1,-10} {s}
current assets
{d} {l,19 } = {l,13 } = {3,-3}{c,42} to 1 {s}
current liabilities
{d} ${2,-10 }
{c,42} Carry this amount to one decimal place.
*1
22,651,000 - OK - Correct.
22651000 - OK - Correct.
- HINT - The answer is $22,651,000.
*2
9,119,000 - OK - Correct.
9,119,000 - OK - Correct.
9119000 - OK - Correct.
- HINT - The answer is $9,119,000.
*3
2.5 - OK - Correct.
2.4 - QUIT - (okay - 2.5 is more accurate)
2.3 - QUIT - (okay - 2.5 is more accurate)
2.6 - QUIT - (okay - 2.5 is more accurate)
2.7 - QUIT - (okay - 2.5 is more accurate)
- HINT - The correct ratio is 2.5.
@
2.66
As a rough rule of thumb, a current ratio of at least 2 to 1
is desirable. Garsden Company {1,8} pass this test.
(A) does
(B) does not
*1
- POST - {b}{a,6,13}{r}
DOES - OK - Correct.
A - OK - Correct.
DOES NOT - QUIT - 2.5 to 1 is greater than 2 to 1, so it DOES pass.
B - QUIT - 2.5 to 1 is greater than 2 to 1, so it DOES pass.
@
2.67 Noncurrent Liabilities
On the Garsden Company balance sheet in Exhibit 2, the item
"mortgage bonds payable" is listed as a {1,10} liability.
(A) current (B) noncurrent
Evidently this claim does not fall due within {2,8}. [what period?]
*1
- POST - {b}{a,6,31}{r}
NONCURRENT - OK - Correct.
B - OK - Correct.
CURRENT - QUIT - No, look again!
A - QUIT - No, look again!
*2
ONE YEAR - OK - Correct.
1 YEAR - OK - Correct.
A YEAR - OK - Correct.
- HINT - If it is NONcurrent, it is not due within ONE year.
@
2.68
A single obligation can have both a current portion and a noncurrent
portion. On December 31, 19x1, Smith Company borrowed $300,000, giving a note
payable. It promised to pay back $100,000 in 19x2, and $200,000 in 19x3.
On its December 31, 19x1, balance sheet, Smith Company would report a {u}current{n}
liability, notes payable, of ${1,-7} and a {u}noncurrent{n} liability, also notes
payable, of ${2,-7}.
*1
100,000 - OK - Correct.
100000 - OK - Correct.
- HINT - No, $100,000 is due within one year.
*2
200,000 - OK - Correct.
200000 - OK - Correct.
- HINT - No, $200,000 is NOT due within one year.
@
2.69
During 19x2 Smith Company paid the $100,000 of the $300,000 note due
in that year. On its December 31, 19x2, balance sheet, Smith Company would
report notes payable of ${1,-7}, which would be a {2,10} liability.
(A) current
(B) noncurrent
{s}({b}Note{n}: Although a single {b}liability{n} may have both a current and a noncurrent
portion, a single {b}asset{n} is not so divided. A two-year insurance policy of
$1,000 is reported as a current asset of $1,000.)
*1
200,000 - OK - Correct.
200000 - OK - Correct.
- HINT - No, $200,000 is still due by 19x2.
*2
- POST - {b}{a,8,55}current
CURRENT - OK - Correct.
A - OK - Correct.
NONCURRENT - QUIT - No, $200,000 is now due within one year.
B - QUIT - No, $200,000 is now due within one year.
@
2.70
Liabilities are claims against all the assets. The $6,602,000
of {u}accounts payable{n} on the Garsden Company balance sheet is a claim
against {1,-1}
(A) the cash of $3,449,000.
(B) the total assets of $36,236,000.
*1
- POST - {b}{a,10,13}{r}
B - OK - Correct.
A - QUIT - No, it is a claim against {u}total{n} assets.
@
2.71 Owners' Equity
The total assets of Garsden Company are $36,236,000. The liabilities
total $12,119,000. Therefore the owners' equity must total ${1,-10}.
*1
24,117,000 - OK - Correct.
24117000 - OK - Correct.
- HINT - Owners' Equity = Total Assets minus Total Liabilities = $36,236,000 {a,22,1}minus $12,119,000.
@
2.72
The headings in the owners' equity section of the balance sheet vary,
depending on the legal nature of the entity. Garsden Company is a corporation.
In a corporation, the owners are called {b}shareholders{n} (or stockholders) because
the company issues them shares of stock as evidence of their ownership interest.
The {b}shareholders{n} contribute capital to the corporation in return for {1,6}
of stock.
*1
SHARES - OK - That's right.
@
2.73
In a corporation, the owners' equity is reported as two separate
amounts. The first amount is the amount that the shareholders contributed
in exchange for their stock. This amount is usually labelled "Capital stock"
or "Common stock." In Exhibit 2, for example, the phrase "Common stock" is
used, and the amount is ${1,-10}.
*1
15,000,000 - OK - Correct.
15000000 - OK - Correct.
15,000 - NO - Remember, "000 omitted."
15000 - NO - Remember, "000 omitted."
- HINT - The answer is $15,000,000.
@
2.74
Thus one part of the {u}owners' equity{n} in a corporation is the amount
that was originally contributed by the {b}shareholders{n}.
@
2.75
Individual shareholders may later sell their stock to someone else, but
this has no effect on the balance sheet of the corporation. The market price
of shares of General Motors Corporation stock changes practically every day;
the amount shown on the General Motors Corporation balance sheet {1,8}
reflect these changes.
(A) does
(B) does not
*1
- POST - {b}{a,14,20}{r}
DOES NOT - OK - Correct.
B - OK - Correct.
DOES - QUIT - No.
A - QUIT - No.
@
2.76
The other owners' equity item shows the increase or decrease in the
shareholders' equity that has resulted from the operations of the business.
Thus the two items on the balance sheet of a corporation that represent
owners' equity are:
(1) the amount assigned to the shares of stock at the time they were
originally issued, and
(2) the increase or decrease that has resulted from the operations
of the business.
@
2.77
The second of these items is labelled {b}Retained earnings{n}.
Exhibit 2 shows that in the case of Garsden Company, company
operations have {1,9} the owners' equity by ${2,-9}.
(A) increased
(B) decreased
*1
- POST - {b}{a,8,11}{r}
INCREASED - OK - Correct.
A - OK - Correct.
DECREASED - QUIT - Operations have {u}added to{n} the shareholders' equity.
B - QUIT - Operations have {u}added to{n} the shareholders' equity.
*2
9,117,000 - OK - Correct.
9117000 - OK - Correct.
9,117 - NO - Remember, "000 omitted."
9117 - NO - Remember, "000 omitted."
- HINT - No, this amount is $9,117,000.
@
2.78
The term "Retained earnings" represents, approximately,
those earnings that have been retained in the business after part of
the company's {b}earnings{n} (i.e., profits) have been paid to S{1,12,8}
in the form of {b}dividends{n}. Thus we might write the equation:
retained earnings = earnings - dividends
*1
HAREHOLDERS - OK - Good.
SHAREHOLDERS - OK - Good.
- HINT - Dividends are paid out to shareholders.
@
2.79
Retained earnings are those earnings accumulated since the business
began, not those of a single year. Therefore, unless Garsden Company has
been in business only one year, the $9,117,000 shown as retained earnings
as of December 31, 19x1, must reflect {1,12} year(s) of operation.
(A) one
(B) all previous
*1
- POST - {b}{a,12,13}{r}
ALL PREVIOUS - OK - Correct.
B - OK - Correct.
ONE - QUIT - No.
A - QUIT - No.
@
2.80
The amount of retained earnings is part of the owners' claim
against the assets. It is not cash. As shown in Exhibit 2, Garsden's
cash is reported as an {u}asset{n} in the amount of ${1,-10}.
*1
3,449,000 - OK - Correct.
3449000 - OK - Correct.
- HINT - The reported amount of cash is $3,449,000.
@
{s}Key Points to Remember
- The going-concern concept: Accounting assumes that an entity will continue
to operate indefinitely.
- The cost concept: Accounting focuses on the cost of assets, rather than on
their market value.
- Assets are valuable items that are owned or controlled by the entity and
that were acquired at a measurable cost. Goodwill is not an asset unless
it was purchased.
- Current assets are cash and assets that are expected to be converted into
cash or used up in the near future, usually within one year. Current
liabilities are obligations due in the near future. The current ratio is
the ratio of current assets to current liabilities.
- Marketable securities are current assets; investments are "other assets."
<continued>
@
Key Points to Remember{s}
- Amounts due to employees and other accrued liabilities are current
liabilities.
- A single obligation may have both a current portion and a noncurrent portion.
- In a corporation, owners' equity consists of the shareholders' original
contribution of capital plus earnings retained since the business began.
It has nothing to do with the market value of the stock. Retained earnings
is not cash; it is part of the owners' claim.
<continued>
@
You have completed Part 2 of this program. If you feel you have understood
the material in this part, you should now take Post Test 2. If you would like
to review the material before taking the post test, please do so. {s}
{d}
The post test will serve both to test your comprehension and to review the
highlights of Part 2. After taking the post test, you may find that you are
unsure about certain points the test raises. You should review these points
before continuing with Part 3.
@
{m}
@@@@