Test Bank Foundations of Finance
2 Economic Questions - correct answers What is my worth?
Will my decision make me better off?
2. Generally Accepted Accounting Principles (GAAP) - correct answers Formal - So there is a place for all
relevant information.
Standardized - So all companies can compare one to another.
Established Value Questions - correct answers What assets does the firm have? What are the claims
against assets? What is the value of assets relative to the financial securities against those assets?
Record Performance Question - correct answers Does investment produce more revenues than costs?
What are the reports to stockholders? - correct answers Reports of how managers are doing. Especially
important to stockholders in a corporation.
Report to stockholders - correct answers Stockholders all want to know how well the business is run
Report to government - correct answers Government raises funds through taxes. Taxes are recorded
only if government can record the type of tax. Income, capital gains, etc.
Guiding Principles of Accounting - correct answers The Accrual Method/Matching Principle
The Revenue Recognition Principle
The Cost Principle
The Accrual Method/Matching Principle - correct answers Accountant matches expenses (outflows)
with revenues (inflows).
The Revenue Recognition Principle - correct answers Accountant recognizes a revenue when a contract
occurs, even though there can be significant time between a contract and actual cash flows.
The Cost Principle - correct answers Account records an asset at the buying price without adjusting the
price to reflect market changes
Current Assets - correct answers Expected to turn into cash within a year
Longterm Assets - correct answers Tangible assets such as buildings, vehicles, machines, and intangible
assets such as patents, copyrights, and good will.
Liabilities - correct answers Companies can borrow by issuing claims against themselves.
Current Liabilities - correct answers Claims that must be paid within a year.
longterm liabilities - correct answers Long term debt. Usually bonds issued to investors in return for
cash.
2 Economic Questions - correct answers What is my worth?
Will my decision make me better off?
2. Generally Accepted Accounting Principles (GAAP) - correct answers Formal - So there is a place for all
relevant information.
Standardized - So all companies can compare one to another.
Established Value Questions - correct answers What assets does the firm have? What are the claims
against assets? What is the value of assets relative to the financial securities against those assets?
Record Performance Question - correct answers Does investment produce more revenues than costs?
What are the reports to stockholders? - correct answers Reports of how managers are doing. Especially
important to stockholders in a corporation.
Report to stockholders - correct answers Stockholders all want to know how well the business is run
Report to government - correct answers Government raises funds through taxes. Taxes are recorded
only if government can record the type of tax. Income, capital gains, etc.
Guiding Principles of Accounting - correct answers The Accrual Method/Matching Principle
The Revenue Recognition Principle
The Cost Principle
The Accrual Method/Matching Principle - correct answers Accountant matches expenses (outflows)
with revenues (inflows).
The Revenue Recognition Principle - correct answers Accountant recognizes a revenue when a contract
occurs, even though there can be significant time between a contract and actual cash flows.
The Cost Principle - correct answers Account records an asset at the buying price without adjusting the
price to reflect market changes
Current Assets - correct answers Expected to turn into cash within a year
Longterm Assets - correct answers Tangible assets such as buildings, vehicles, machines, and intangible
assets such as patents, copyrights, and good will.
Liabilities - correct answers Companies can borrow by issuing claims against themselves.
Current Liabilities - correct answers Claims that must be paid within a year.
longterm liabilities - correct answers Long term debt. Usually bonds issued to investors in return for
cash.
