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Financial Statements Demystified

Bonita Kramer, Christie Johnson

Chapter 2

Basic Concepts - all with Video Answers

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Chapter Questions

Problem 1

Which of the following is one of the qualitative characteristics of financial reporting?
a. Material
b. Relevant
c. Objective
d. Conservative

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Problem 2

Reliable information:
a. Can be verified
b. Is neutral
c. Is free from errors
d. All of the above

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Problem 3

The business entity assumption requires that the owner's personal assets and liabilities must be included on the business's financial statements.
a. True
b. False

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01:13

Problem 4

The monetary unit assumption:
a. Recognizes that the value of a dollar changes over time
b. Requires that financial statements be restated to show the effects of inflation
c. Means that only transactions and events that can be measured in terms of money are reported on financial statements
d. Requires judgment in assigning dollar values to nonmonetary transactions such as hiring a superior workforce

Prashant Bana
Prashant Bana
Numerade Educator

Problem 5

The time period assumption:
a. Recognizes that a company can divide its business activities and transactions into shorter periods, such as a year or less, and still provide useful financial statements
b. Requires that financial statements cover a period of at least one year to be useful
c. Requires that companies use a calendar year (January 1-December 31) for financial statement reporting purposes
d. Requires that reporting periods must be of sufficient length that no judgments or estimates are built into the financial statements

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Problem 6

The objectivity concept:
a. Allows opinions to be used in developing financial statement data
b. Requires that transactions entered into the accounting records be based on verifiable evidence
c. Would allow a company to record assets at the values the company believes the assets are worth
d. Allows opinions to be used in developing financial statement data as long as the company's accountants agree with the opinions

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Problem 7

The conservatism concept in accounting:
a. Encourages the overstatement of assets and revenues
b. Encourages the understatement of liabilities and expenses
c. Supports the selection of an accounting method that will understate assets or net income when there is doubt about the proper accounting treatment of an item or event
d. Supports the selection of an accounting method that will overstate liabilities or expenses when there is doubt about the proper accounting treatment of an item or event

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11:44

Problem 8

The assumption that the business will remain in existence forever unless there is evidence to the contrary is called the:
a. Going concern assumption
b. Business entity assumption
c. Monetary unit assumption
d. Time period assumption

Puneet Prajapati
Puneet Prajapati
Numerade Educator
04:46

Problem 9

The historical cost principle requires that goods and services purchased be recorded at the:
a. Original cost
b. Original cost with adjustments to market value at the end of each reporting period
c. Original cost with adjustments to market value at the end of each reporting period only if there is indisputable proof that the market value is reliable
d. Original cost adjusted for inflation

Puneet Prajapati
Puneet Prajapati
Numerade Educator
04:46

Problem 10

The matching principle requires that expenses:
a. Be recorded when the cash revenue is received
b. Be recorded when the cash is paid
c. Be recorded as soon as the company knows it will incur those expenses
d. That are incurred by a business be recorded in the same period in which the related revenue is recognized

Puneet Prajapati
Puneet Prajapati
Numerade Educator