Question 1

To maintain the balance sheet equality, it is necessary to report every event and transaction in a dual manner. If a transaction results in an increase in the left hand side of the balance sheet, dual transactions recording requires that which of the following must occur, to maintain the balance sheet equation?

Accepted Answer

To maintain balance sheet equality, any increase or decrease in assets must have a corresponding increase or decrease in liabilities or shareholders' equity. Therefore, to balance an increase in one asset, one of the following options that maintain the balance sheet equality must occur: decrease another asset, increase a liability or increase shareholders equity. Therefore, all of the above options will maintain the balance sheet equation.

Question 2

Firms that use International Financial Reporting Standards (IFRS) may, but need not, list their assets from least liquid to most liquid, with the same ordering used to list liabilities.

Accepted Answer

Under IFRS, there is no strict requirement to list assets or liabilities in order of liquidity. Companies have the flexibility to choose the presentation order that best reflects their operations, which can be different from the order of liquidity.

Question 3

A balance sheet prepared according to U.S.GAAP lists assets from most liquid to least liquid, where liquid refers to the ease of converting the asset into cash.

Accepted Answer

This statement is true. In a balance sheet prepared according to U.S.GAAP, assets are usually listed in order of their liquidity, starting with cash or cash equivalents, followed by short-term investments, accounts receivable, inventory, and so on. The idea is to provide a clear picture of how easy it would be for the company to convert its assets into cash if needed.

Question 4

A balance sheet account with a credit balance requires a closing entry that debits that account, because a debit closing entry will result in a zero ending balance in the account.

Accepted Answer

Balance sheet accounts, such as assets, liabilities, and equity, are not closed at the end of the accounting period. Only revenue, expense, and dividend accounts, which are income statement accounts, are closed to prepare for the new accounting period.

Question 5

Shareholders' equity is a residual interest or claim-that is, the owners (shareholders) of a firm have a claim on assets not required to meet the claims of creditors.

Accepted Answer

This is the definition of shareholders' equity.

Question 6

A balance sheet account with a debit balance requires a closing entry that credits that account, because a credit closing entry will result in a zero ending balance in the account.

Accepted Answer

Balance sheet accounts, such as assets, liabilities, and equity, are not closed at the end of the accounting period. Only revenue, expense, and dividend accounts, which are income statement accounts, are closed to prepare the accounts for the next period.

Question 7

The balance sheet provides all the information an analyst wants or needs about a firm's resources and the claims on those resources.

Accepted Answer

While the balance sheet does provide important information about a firm's resources and liabilities, it may not provide all the information an analyst wants or needs. Other financial statements, such as the income statement and statement of cash flows, may also be necessary for a complete understanding of a company's financial situation.

Question 8

The balance sheet amount of shareholders' equity does not, and is not intended to, provide the user of the financial reports with a measure of the market value of common equity.

Accepted Answer

The balance sheet amount of shareholders' equity reflects the amount of money that has been invested by shareholders into the company and retained earnings. It does not take into account market factors that impact the value of common equity, such as supply and demand, investor sentiment, and overall market conditions. Therefore, it is not intended to provide a measure of the market value of common equity.

Question 9

A potential investor can easily ascertain market value of common equity for a given publicly traded firm by looking up the most recent share price (as reported in various online services) and then multiplying this share price times the number of common shares outstanding, as reported on the balance sheet.

Accepted Answer

This is accurate information.

Question 10

Income statement accounts are temporary accounts and, as such, will have beginning and ending balances of zero.

Accepted Answer

Income statement accounts are considered temporary because they are closed out to the Retained Earnings account at the end of each accounting period, resulting in a zero balance to start the new period.

Question 11

The amounts that firms report as received from owners are equal to the amounts the firm received when it originally issued the shares of stock.

Accepted Answer

The answer of The amounts that firms report as received...

Question 12

The first step in the accounting record-keeping process is recording each transaction in a file or other record in the form of a journal entry.

Accepted Answer

The first step in the accounting record-keeping process is indeed recording each transaction in a file or other record in the form of a journal entry.

Question 13

The closing process involves reducing to zero the balance in each income statement account by debiting the revenue accounts and crediting the expense accounts, and transferring to Retained Earnings the differences between total revenues and total expenses.

Accepted Answer

This is a correct description of the closing process in accounting.

Question 14

In computerized systems, posting occurs instantly and automatically after journalizing.

Accepted Answer

Posting in computerized systems occurs instantly and automatically after journalizing, as the entire process is automated. This is different from manual systems where posting is a separate step after journalizing.

Question 15

A balance sheet prepared according to U.S.GAAP lists liabilities starting with those that the firm will discharge soonest (the most current or closest to maturity liabilities) and ending with those that it will pay latest (the most noncurrent or distant to maturity liabilities).

Accepted Answer

This statement is true. According to U.S. GAAP, liabilities are listed on the balance sheet in order of their maturity. The most current or closest-to-maturity liabilities are listed first, followed by those that will be paid later or are more noncurrent.

Question 16

Accounting does not normally recognize mutually unexecuted contracts as assets or liabilities.

Accepted Answer

Mutually unexecuted contracts are agreements that have been made but not yet carried out by either party, and so they do not qualify as assets or liabilities according to accounting standards.

Question 17

Accounting is governed by the balance sheet equation, which shows the equality of

Accepted Answer

The balance sheet equation is Assets = Liabilities + Shareholders' Equity. This equation shows that the total assets of a company are always equal to the sum of its liabilities and shareholders' equity. This equation is the foundation of accounting and is used to ensure that a company's books are balanced. Choice A accurately reflects the balance sheet equation.

Question 18

Retained earnings measures the cumulative excess of net income over dividends for the life of a firm.Cumulative means that retained earnings aggregates all undistributed earnings.

Accepted Answer

Retained earnings are the sum of all earnings that have been retained by a company since its inception, including all undistributed earnings.

Question 19

Both U.S.GAAP and IFRS require the disclosure, in the notes to the financial statements, of selected information about business segments.

Accepted Answer

Both U.S.GAAP and IFRS indeed require the disclosure of selected information about business segments in the notes to the financial statements.

Question 20

Depreciation allocates the asset's cost to the periods of benefit in some systematic and rational way, and it attempts to track changes in the asset's fair value.

Accepted Answer

Depreciation allocates the asset's cost to the periods of benefit in a systematic and rational way, but it does not attempt to track changes in the asset's fair value.

Quiz 2: The Basics of Record Keeping and Financial Statement Preparation: Balance Sheet