Chapter 2: Basic Financial Statements:

I. Self-Test Question: 1. 2. A.c.d 3. B 4. B,d 5. C 6. B,c 7. B,d 8. A 9. A,b,d

II. Discussion Question: 1) The purpose of accounting is to accumulate and report on financial information about the performance, financial position, and cash flows of a business. This information is then used to reach decisions about how to manage the business, or invest in it, or lend money to it. 2) Because most managers, regardless of their area of responsibility (sales, production, etc.) will have some financial responsibilities - preparing budgets or forecasts, controlling costs, etc. Many will have bottom line responsibility for their department or business segment which will require the ability to read and understand financial statements. 3) - Revenues are the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income.
- Expenses are the economic costs that a business incurs through its operations to earn revenue. In order to maximize profits, businesses must attempt to reduce expenses without also cutting into revenues. Because expenses are such an important indicator of a business's operations, there are specific accounting rules on expense recognition.
- The relation of revenues and expenses in the determination of an enterprise’s net income or net loss:
+ Revenue and Net Income: Under the generally accepted accounting principle of accrual, revenue recognition does not necessarily occur when cash is received. Generally, service organizations such as accounting firms, use the cash basis of accounting and only recognize income when they are paid by a client (not when the client was billed). On the