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Principles of Accounting.

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Home Chapter Summary Chapter 1 introduces the study of accounting. Accounting is defined as a set of concepts and techniques that are used to measure and report financial information about an economic entity. Accounting consists of both external reporting issues known as financial accounting, and internal reporting issues related to managerial accounting. There are numerous accounting career choices, and these options are discussed in the chapter. There is a long-standing fundamental accounting equation that is core to the overall reporting model: Assets = Liabilities + Equity. This chapter shows that the equality is preserved as transactions are processed through an accounting system. The system customarily results in the production of certain core financial statements: The Income Statement, Statement of Retained Earnings, Balance Sheet, and Statement of Cash Flows. Each of these statements, and their interrelationships, are illustrated. This chapter is foundational for beginning to understand how business activity is reflected in key financial reports.

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Problems Goals Achievement Fill in the Blanks Multiple Choice Objectives Key Terms Multiple Choice: Chapter One

1. The accounting profession can be divided into three major categories; specifically, the practice of public accounting, private accounting, and governmental accounting. A somewhat unique and important service of public accountants is:

a. Financial accounting. b. Managerial accounting. c. Auditing. d. Cost accounting. HELP ME! 2. The primary private sector agency that oversees external financial reporting standards is the: a. Financial Accounting Standards Board. b. Federal Bureau of Investigation. c. General Accounting Office. d. Internal Revenue Service. HELP ME! 3. Which of the following equations properly represents a derivation of the fundamental accounting equation? a. Assets + liabilities = owner's equity. b. Assets = owner's equity. c. Cash = assets. d. Assets - liabilities = owner's equity. HELP ME! 4. Wilson Company owns land which cost $100,000. If a "quick sale" of the land was necessary to generate cash, the company feels it would receive only $80,000. The company continues to report the asset on the balance sheet at $100,000. This is justified under which of the following concepts? a. The historical-cost principle. b. The value is tied to objective and verifiable past transactions. c. Neither of the above. d. Both "a" and "b". HELP ME! 5. Retained earnings will change over time because of several factors. Which of the following factors would explain an increase in retained earnings? a. Net loss. b. Net income. c. Dividends. d. Investments by stockholders. HELP ME! 6. Which of these items would be accounted for as an expense? a. Repayment of a bank loan. b. Dividends to stockholders. c. The purchase of land. d. Payment of the current period's rent.

HELP ME! 7. Which of the following transactions would have no impact on stockholders' equity? a. Purchase of land from the proceeds of a bank loan. b. Dividends to stockholders. c. Net loss. d. Investments of cash by stockholders. HELP ME! 8. Which of the following would not be included on a balance sheet? a. Accounts receivable. b. Accounts payable. c. Sales. d. Cash. HELP ME! 9. Remington provided the following information about its balance sheet: Cash Accounts receivable Stockholders' equity Accounts payable Bank loans $ 100 500 700 200 1,000

Based on the information provided, how much are Remington's liabilities? a. $200. b. $900. c. $1,200. d. $1,700. HELP ME! 10. Gerald had beginning total stockholders' equity of $160,000. During the year, total assets increased by $240,000 and total liabilities increased by $120,000. Gerald's net income was $180,000. No additional investments were made; however, dividends did occur during the year. How much were the dividends? a. $20,000. b. $60,000. c. $140,000. d. $220,000. HELP ME! SOLUTIONS Multiple choice:

1. c. Auditing, along with income tax and management advisory activities, are the major services offered by public accountants. Managerial and cost accounting are generally regarded as private accounting functions. Public accountants deal with financial accounting issues, but "financial accounting" is more of a concept than a "service." 2. a. The Financial Accounting Standards Board is the private sector oversight group for accounting standards. The Federal Bureau of Investigation is a government organization that employs many accountants, but has little to do with accounting rule development. The General Accounting Office and Internal Revenue Service are also government agencies. The GAO serves Congress and the IRS administers tax law. 3. d. The normal expression of the accounting equation is: assets = liabilities + owners' equity. The only choice which is a correct mathematical expression is "d." In "d," liabilities are subtracted from both sides of the "normal" accounting equation. 4. d. Both of these concepts justify the continued reporting at $100,000, as this amount is an objective and verifiable historical-cost measurement. 5. b. Net income would cause increases in retained earnings. In contrast, losses and dividends are factors that will cause decreases in retained earnings. Investments by stockholders' would cause an increase in capital stock, not retained earnings. 6. d. Payment of rent for the current period would be accounted for as rent expense. The repayment of a bank loan is the reduction of a liability, dividends are a distribution of equity, and the purchase of land establishes an asset. 7. a. The purchase of land would cause assets to increase and liabilities to increase. Dividends and net losses cause reductions in total equity, while investments cause increases. 8. c. Sales is a revenue item for the income statement. Accounts receivable and cash are assets and accounts payable is a liability. 9. c. $1,200. The only liabilities listed are accounts payable ($200) and bank loans ($1,000). 10. b. $60,000. Because total assets increased $240,000 and liabilities increased $120,000, the increase in equity must have been $120,000 ($240,000 - $120,000). Net income increases equity ($180,000) and dividends decrease equity. The increase in equity of $120,000 is therefore comprised of $180,000 in income (add) and $60,000 of dividends (subtract).


Form for giving intimation or seeking previous sanction under Rule 18(3) for transaction in respect of movable property 1. Name of the Government Servant

2. Scale of pay and present pay 3. Purpose of application-Sanction for transaction/Intimation of transaction 4. Whether property is being acquired or disposed of 5. (a) Probable date of acquisition or disposal of Property (b) If the property is already acquired/ disposed of - Actual date of transaction 6. (a) Description of property (e.g., Car/ Scooter/ Motor Cycle/ Refrigerator/Radio/ Radiogram/Jewellery/ Loans/ Insurance Policies etc.) (b) Make, Model (and also Registration Number in case of Vehicles), where necessary 7. Mode of acquisition/disposal (purchase/sale, gift, Mortgage, lease or otherwise) 8. Sale/Purchase price of the property (Market Value in the case of gifts) 9. In case of acquisition, source or sources from which finance/proposed to be financed: a) Personal savings b) Other sources giving details. 10. In the case of disposal of property, was requisite Sanction/intimation obtained/given for its acquisition ( A copy of the sanction/ acknowledgement should be attached) 11. (a) Name and address of the party with whom transaction is proposed to be made/has been made. (b) Is the party related to the applicant? If so, state the relationship. (c) Did the applicant have any dealings with party in his official capacity at any time, or is the applicant likely to have any dealings with him in the near future? (d) Nature of official dealings with the party. (e) How was the transaction arranged? (Whether through any statutory body or a private agency through advertisement or through friends and relatives. Full particulars to be given) 12. In case of acquisition by gift, whether sanction is also required under Rule 13 of CCS (Conduct) Rules, 1964. 13. Any other relevant fact which the applicant may like to mention. DECLARATION I ______________________________ hereby declare that the particulars given above are true. I request that I may be given permission to acquire/dispose of property as described

above from/to the party whose name is mentioned in Item 11 above. OR I _______________________________ hereby intimate the acquisition/disposal of property by me as detailed above. I declare that the particulars given above are true. Station: Signature: Date: Designation: Intercom/Room No. Note 1. In the above form, different portions may be used according to requirement. Note 2. Where previous sanction is asked for, the application should be submitted at least 30 days before the proposed date of transaction