Chapter 2 Self-Test (printable version)

Questions:

1. Why is going concern important as an accounting concept?
   
2. Why is it important to distinguish monetary from non-monetary assets?
   
3. Describe the basic accounting equation?
   
4. Conceptually define the balance sheet?
   
5. Review the classification of Assets within the Balance Sheet?
   
6. Give examples of assets in each section?
   
7. Give some examples of current liabilities?
   
8. Describe the Owners equity section and in particular the definition of Retained Earnings

   

Answers:

1. If we cannot assume a going concern then asset would be valued a liquidation prices rather than what they are worth as productive resources.|
    
2. Monetary assets are financial resources; they are generally not productive resources of a business. Exception would be financial institutions. When evaluating business we need to know how the company is generating its’ returns. Passive from monetary assets and active from productive resources.
    
3. Assets = Liabilities + Owners equity. The key is that resources (assets) have claimants. They may be debt holders or equity investors. Different constituencies have different expected returns.
    
4. The Balance Sheets holds the stocks of the company and displays them as of a moment in time. It is useful for evaluating the financial strength of the company.
    
5. The asset section is broken down into two major sections: Current Assets (assets that will become cash within one year or the operating cycle) and Long Lived Productive Assets.
    
6. Current Assets are: Cash, Accounts Receivable, Inventory and Prepaid Expenses. Long Lived Assets are: Property Plant and Equipment, Investments and Intangibles.
    
7. Accounts Payable, Taxes payable, accrued expenses like utilities payable, interest payable.
    
8. Owners Equity has two main sections. Contributed Capital and Retained Earnings. Retained Earnings is the cumulative undistributed profits of the company since inception.