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Chapter 1 Page 8 1.Classify following items as either an expense (E),a revenue(R),an asset(A),or a liability( L);Cash, buildings, salaries of the sales force, $5 owed to a company for work performed, Mortgage to a bank, sales. Answer: Cash—A Buildings—A Salaries of the sales force—E $5 owed—L Mortgage to a bank—L Sales—R 2. Classify each of the following as n operating (O), bank (I) , or financing (F) in a statement of cash flows; Wage paid to workers, Cash received form a bank in the form of a mortgage, cash dividends paid to a supplier of inventory, Cash paid to purchase a new machine. Answer: Wage paid—O Cash of mortgage-- F Cash dividends paid -- F Cash paid to supplier of inventory—O Cash paid to purchase a machine—I Page11 List several economic decisions that rely on accounting information. Answer: ·Whether to grant a loan ·How much to pay for a share of common stock. ·Whether to grant a rate increase to an electric utility ·How much in damages the loser of a lawsuit must pay ·How much of a bonus to pay a plant manager ·Whether to enter a new market 2. Why do financial statements have footnotes, and what kinds of information might you find in them? Answer: Financial statements have footnotes because financial disclosure is a complex business. The notes tell us some of the specifics about the company environment , what accounting methods the company has used, what the accounting numbers might be if alternative methods had been used, and some of the major contingencies that are not formally included in the statement proper. Page 20 Describe the process of setting accounting standards. What are the roles of all the parties you mention? Answer: The FASB, a private, not-for-profit organization ,sets GAAP in the U.S. It publicly declares an agenda, promulgates Exposure Drafts of proposed standards, holds open meetings, and invites input from interested parties. The FASB has been delegated this authority by the SEC, a government agen