1. Two principles introduced in the first chapter are the historical cost principle and fair value principle. Explain both, then describe how a company should choose when to apply one or the other.
2. In the field of accounting assumptions provide a foundation for the accounting process. This chapter lists two assumptions. What are they? Define each assumption.
3. Show the basic accounting equation using its mathematical relationship. Now, describe those
4. Describe the accounting equation and each of its elements.
5. What are the two distinct elements of stockholders equity in a corporation? Define each element.
6. What is stockholders equity? What four items cause it to change? Which two items have a negative effect on Stockholders equity? Why?
7. Describe the term revenue and its effect on stockholders equity.
8. Describe the term expense and its effect on stockholders equity.
9. What is a dividend? Is a dividend an expense? Prove your response using the definition of expense.
10. Retained earnings is determined by three items. What are they?
11. Show the expanded accounting equation.
12. What are the four financial reports that companies prepare?
13. Describe the income statement. By what other names is it referred to as?
14. Explain in your own words the meaning of retained earnings (do not express it as an equation.)
15. What items are included in the calculation of ending retained earnings?
16. What does the balance sheet report?
17. What is the purpose of the statement of cash flows? What questions does it answer?