BUS 251 Chapter 2
1. The basic accounting equation can be described as: Shareholders' Equity (Net Assets) =
Assets – Liabilities.
2. Under accrual accounting, costs incurred should be expensed in the same period that related
revenue is recognized. This concept is known as:
B. revenue recognition
3. If a company records an increase in sales revenue over the prior year, the company's net
income will increase.
4. The purchase of inventory, for future resale to customers, would be classified as an operating
5. The requirement to calculate and record amortization expense for the period to reflect the use
of a company's machinery is an example of:
A. the matching principle
B. the revenue recognition criteria
C. a non-monetary exchange of goods
D. residual value 1. Cost of Goods Sold can be calculated by using the following equation:
Ending Inventory + Purchases – Beginning Inventory
Cost of Goods Available for Sale – Sales
C. Purchases – Ending Inventory + Beginning Inventory
D. None of the above is correct.
2. Expenses appear on the income statement, and thus:
A. do not affect shareholders' equity on the balance sheet
increase shareholders' equity through an increase in net income
increase retained earnings through an increase in net income
D. decrease shareholders' equity through a decrease in net income
3. When an insurance policy is paid for in advance of the coverage period, this creates a/an:
4. Company A borrows $24,000 from the bank on October 1, 2008. Interest, at 8% per year, is
due quarterly on December 31 , March 31 , June 30 and September 30 . Company A does
nostmake any principal repayments on the loan, but pays ste interest owing on December
31 , 2008. The amount of interest paid on December 31 , 2008 is:
D. None of the above.
5. The operating section of the cash flow statements is useful because it :
It should cash flows from the business's main source of operations.
A. B. Provides information about a company's operations that is not provided by the
They show the company's sources and uses of cash from continuing activities, which
C. are recurring.
D. All of the above.
6. A company that has not yet started the normal day-to-day operations of selling goods to
customers would have no need for:
A. any financial statements
B. a balance sheet
C. an income statement
D. a cash flow statement
What would be the effect on the basic accounting equation if inventory was purchased and
One asset would increase and another asset would decrease.
Expenses would increase and an asset would decrease.
Expenses would increase and a liability would decrease.
D. An asset would increase and a liability would increase.
8. Which of the following is a revenue recognition criterion?
A. All amounts hav