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Financial accounting: Balance sheet and financial positions

Components and classifications

1) The current assets section of a balance sheet includes both inventory and prepaid expenses.

2) The stockholders' equity section of a balance sheet includes capital contributed by owners and also retained earnings.

3) Under the monetary unit assumption, accounting information should be measured and reported in terms of the national monetary unit, with an adjustment for changes in purchasing power.

4) Assets are reported on the balance sheet in the order of liquidity.

5) Many valuable internally-developed intangible assets such as trademarks and copyrights are not reported on a company's balance sheet.

6) Stockholders' equity reflects the financing provided by owners.

7) Common stock and additional-paid in capital represent the financing sources from shareholders.

Financial reporting and transactions

8) Financial reporting focuses on reporting the impact of transactions on an entity's financial position.

9) Unearned revenue is reported on the balance sheet as a liability and represents amounts paid to an entity in exchange for future services and/or goods.

10) The dual effects concept implies that every transaction has at least two effects on the accounting equation.

11) The accounting equation does not have to be in balance after the recording of each transaction.

Shareholders' equity

12) Additional paid-in capital is reported on the balance sheet as a component of shareholders' equity.

13) Common stock and additional paid-in capital are both reported on the balance sheet as components of shareholders' equity.

14) A company's assets and stockholders' equity both increase when the company sells additional shares of stock in exchange for cash.

Transactions and balances

15) Purchasing supplies for cash results in an increase in total assets for the purchasing company.

16) The normal balance for an asset account is a debit and the normal balance for a liability account is a credit.

17) An asset account normally has a debit balance and is increased by debiting the account.

18) Liability and stockholders' equity accounts normally have credit balances and are decreased by debiting the accounts.

19) A journal entry is a written expression of the effects of a transaction on accounts and has equal debits and credits.

20) The T-account is very useful for accumulating the effects of transactions on account balances and for determining individual account balances.

Current assets and liabilities

21) Current assets include accounts receivable and prepaid expenses.

22) The current ratio is current assets divided by current liabilities.

23) Current liabilities are defined as obligations to be paid within six months.

24) The current ratio measures the ability of a company to pay its short-term obligations with short-term assets.

25) A company wit