Chapter 9 Review Questions

1. What is the purpose of accounting?

The purpose of accounting is to provide the necessary financial information so that
accurate and timely decisions can be made.
2. Define double-entry bookkeeping.
Double-entry bookkeeping is the process of recording changes when transactions are
made in a business. It is called double entry because each transaction involves making
two changes.
3. What is the difference between an asset and a liability?
An asset is a resource, such as equipment, controlled by an individual/company as the
result of past events and from which future economic benefits are expected to flow to
the person/company. A liability is a debt, such as a bank loan, that is a resource owed
to another person/company.
4. Using Sonias example (see page 277), calculate her net worth if she had the
same asset total, but no debts.
Sonias assets totalled $1400, so her net worth would also equal $1400.
5. How can you calculate the owners equity in a business?
To calculate the owners equity in a business, subtract the total liabilities from the total
assets.
6. What is the cost principle?
For reasons of consistency, assets are always recorded at the actual amount they cost
the business, which is known as the cost principle.
7. What is the purpose of a balance sheet?
A balance sheet is one of the financial statements used in a business and prepared by
accountants to show the businesss financial position on a particular date.
8. Who owns, or can lay claim to, the assets of a business?
The owner or owners and the creditors to whom the business owes money can lay
claim to the assets of the business.
9. Why is it highly unlikely that a businesss balance sheet would appear as
follows: Assets= Owners Equity?
If Assets = Owners Equity, there would be no Liabilities, which would mean the
business has zero debts. Although possible, most businesses use debt financing to
acquire assets because the cost of those assets can be thousands of dollars and not
easily paid in cash.
10. What four groups are interested in the financial dealings of a business?
The four groups are owners, creditors, investors, and government.

Chapter 9 Review Questions

11. Define the following terms: net income, net loss, revenue, and expense.
Net income, or net profit, results when the revenue of a business is greater than the
total of the expenses. A net loss results when the expense total exceeds the revenue
total for a business. Revenue is the money or promise of money received from the sale
of goods or services. Expenses are items, such as rent and salaries, that get used up in
the production of he revenue for a business.
12. How is the heading of an income statement different from a balance sheet?
The third line on the statements is different. The third line on a balance sheet states the
specific date when that financial statement was prepared. The third line on an income
statement states the period of time that was covered in the preparation of that financial
statement.
13. Why is the matching principle important in accounting?
It is important to match the expenses with the revenue during the same period of time. If
expenses, which are used to generate revenue, are not matched correctly the net
income or net loss figures will be distorted.
14. Does a fiscal year always coincide with a calendar year? Explain.
No. A fiscal year is any 12-month period and can be from January 1st to December 31st
or can be from April 1st to March 31st.
15. Why is it important to have accurate inventory figures when preparing an
income statement?
If inventory figures are not accurate when preparing an income statement, the cost of
goods sold section will be incorrect. This will result in an incorrect income statement for
the business.
16. How is gross profit calculated?
Gross Profit = Revenue Cost of Goods Sold
17. Why is it important for a business to calculate and predict its cash flow
position?
Cash flow represents both the money that will be coming in and money that will be
going out of a business. A positive cash flow allows the business to operate without
having to borrow money and take on more debt. Also, by examining the cash flow, a
business can predict whether it will have enough cash on hand now and in the
immediate future.
18. Identify three important comparisons that an accountant could focus on when
analyzing a comparative balance sheet.
Individual assets can be compared. Is the inventory too high? Are accounts receivable
mounting up? Is there a positive cash position for the business? Individual liabilities can
be analyzed. Are debts increasing or decreasing? Owners equity can be examined.
Has the net worth changed?