Chapter 2, Problem 2.1KTQ

Read each definition below and write the number of the definition in the blank beside the appropriate term. The quiz solutions appear at the end of the chapter.

Understandability

Relevance

Faithful representation

Comparability

Depreciation

Consistency

Materiality

Conservatism

Operating cycle

Current asset

Current liability

Liquidity

Working capital

Current ratio

Single-step income statement

Multiple-step income statement

Gross profit

Profit margin

Auditors’ report

1. An income statement in which all expenses are added together and subtracted from all revenues.
2. The magnitude of an accounting information omission or misstatement that will affect the judgment of someone relying on the information.
3. The capacity of information to make a difference in a decision.
4. An income statement that shows classifications of revenues and expenses as well as important subtotals.
5. The practice of using the least optimistic estimate when two estimates of amounts are about equally likely.
6. The quality of accounting information that makes it comprehensible to those willing to spend the necessary time.
7. Current assets divided by current liabilities.
8. The quality of information that makes it complete, neutral, and free from error.
9. An obligation that will be satisfied within the next operating cycle or within one year if the cycle is shorter than one year.
10. Current assets minus current liabilities.
11. Net income divided by sales.
12. For accounting information, the quality that allows a user to analyze two or more companies and look for similarities and differences.
13. An asset that is expected to be realized in cash or sold or consumed during the operating cycle or within one year if the cycle is shorter than one year.
14. The ability of a company to pay its debts as they come due.
15. For accounting information, the quality that allows a user to compare two or more accounting periods for a single company.
16. The process of allocating the cost of a long-term tangible asset over its useful life.
17. The period of time between the purchase of inventory and the collection of any receivable from the sale of the inventory.
18. Sales less cost of goods sold.
19. The opinion rendered by a public accounting firm concerning the fairness of the presentation of the financial statements.

To determine

Accounting concepts and conventions: Accounting is consisting of various concepts and conventions such as materiality, reliability, comparability, conservatism, consistency and relevance. These are important part of accounting or it can be said that it is the base of the accounting.

The correct number of explanation given and write beside the appropriate term given.

Answer to Problem 2.1KTQ

• ___06__ Understandability
• ___03__ Relevance
• ___08__ Faithful representation
• ___12__ Comparability
• ___16__ Depreciation
• ___15__ Consistency
• ___02__ Materiality
• ___05__ Conservatism
• ___17__ Operating cycle
• ___13__ Current asset
• ___09__ Current liability
• ___14__ Liquidity
• ___10__ Working capital
• ___07__ Current ratio
• ___01__ Single step income statement
• ___04__ Multiple step income statement
• ___18__ Gross profit
• ___11__ Profit margin
• ___19__ Auditor’s report

Explanation of Solution

• Understandability: The accounting information in the financial statements should be clear and precise and should be presented properly so that it can be understood by the users easily and can take proper decisions.
• Relevance: The information in accounting statements should have an impact so that the user can rely on it and take various decisions correctly.
• Faithful representation: The presentation of the accounting statements should be reliable so that decision making by the users will be precise and correct.
• Comparability: For analyzing two or more companies and take decisions according to the comparative differences and similarities is comparability.
• Depreciation: It is the process of dividing the value of assets over the period of life.
• Consistency:Consistency means making company’s financial statements with same accounting principles, methods, procedures, etc.
• Materiality:Materiality refers to the importance of transactions in the financial statements, its balances, errors, etc. Materiality is important in preparing financial statements.
• Conservatism:It is a process of recording all the expenses and liability which are likely to be incurred but not to record any revenues and assets even if they will be received surely.
• Operating Cycle:It is the cycle which shows the ability of the company to use cash which is indulged at the beginning of the period in the business to be received back at the end of the period.
• Current assets: The assets which can be easily converted into the cash whenever required within a year.
• Current liability: The liability which can be easily paid off within the year is called current liability.
• Liquidity: This shows how easily assets can be converted into cash.
• Working capital:Working capital is total current assets less total current liability of the company. This shows the cash available for working of the company.
• Current ratio: Current ratio is current assets by current liability.
• Single step income statement:It is the statement which calculates the profit by subtracting expenses from incomes in single columnar and using single calculation for net income.
• Multiple step income statement:It is the statement which calculates the income using multiple columns and calculations for presentations and it is mostly used in huge businesses.
• Gross profit: It is net sales less cost of goods sold i.e. all the cost related to procurement of goods and services.
• Profit margin: It is calculated by dividing net profit by revenues of the company. It shows the profitability status of the company.
• Auditor’s report: It contains the opinion of the auditor for the financial statements of the company and states whether it comply with accounting principles or not.