Question

Q 2-25 Identify the basic accounting equation. Q 2-26 What is the relationship between the accounting equation and the double-entry system of recording transactions? Q 2-27 Define the following: a. Permanent accounts b. Temporary accounts Q 2-28 A typical accrual recognition for salaries is as follows: Q 2-36 Describe the purchase method of accounting for a business combination. Q 2-37 Consolidated statements may be issued to show financial position as it would appear if two or more com- panies were one entity. What is the objective of these statements? Q 2-38 What is the basic guideline for consolidation? Q 2-39 Where must a company’s code of ethics be made available? Q 2-40 Describe the Treadway Commission. Q 2-41 WhyistheCOSOreportoninternalcontrolsystems important under requirements of the Sarbanes-Oxley Act? Q 2-42 Under Sarbanes-Oxley, the auditing firm will include which two reports with the audited statements? (Note: These two reports can be combined into one report.) Q 2-43 Under Sarbanes-Oxley, management must include what report with the audited statements? Q 2-44 Private companies are not under Sarbanes-Oxley. Why do some private companies follow the law? Q 2-45 Indicate the two approaches to presenting con- solidated statements. Q 2-46 Describe how a company could be required to consolidate another company in which it has no or minor voting stock. Q 2-47 Consolidation rules are similar between coun- tries. Comment. Salaries Expense Salaries Payable $1,000 (increase) 1,000 (increase) Explain how the matching concept applies in this situation. Q 2-29 Why are adjusting entries necessary? Q 2-30 Why aren’t all transactions recorded in the gen- eral journal? Q 2-31 Describe the filing deadline for Form 10-K. Q 2-32 Identify the usual forms of a business entity and describe the ownership characteristic of each. Q 2-33 Why would the use of insider information be of  concern if the market is efficient?

Answer 1

2-25: The basic accounting equation is: Assets = Liabilities+shareholder equity. In a compay’s balance sheet its total assets are equal to sum of liabilities and shareholder’s equity.

2-26: Accounting equation is the foundation of double entry accounting system. The concept of double entry states that every transaction has two effects i.e. a debit and a credit. Debit entries records increase in assets, increase in expenses, decrease in liability, decrease in equity, and decrease in income. Credit entries record decline in assets, decline in expenses, increase in liability, and increase in equity and increase in income.

Double entry is recorded in a manner so that accounting equation is always in balance.

2-27: Permanent accounts are those accounts that once opened will always be a part of chart of accounts that a company has. These accounts are not closed at the end of a year and are measured on a cumulative basis. Examples of permanent accounts – cash, accounts receivables, loans payable etc.

Temporary accounts, on the other hand, are those accounts that are closed at the end of a year and are not carried onto the next accounting period. Examples of temporary accounts are revenues, expenses and withdrawals.

2-28: Accrued salaries is the amount of liability that remains at the end of a reporting period for salaries that has not yet been paid to the employees but has been earned by them. Accrual recognition is that salary expenses are debited and accrued salary account is credited.