Book 1 - Chapter 8

Reinforcement Problems

8-1. No. Paying a liability reduces a creditor’s claim, never the owner’s claim. An expense is a
reduction in the owner’s claim because of consuming resources to add value and make sales
(operations). It has nothing to do with paying liabilities.

	LG	8-2.
		1. An increase in owner’s equity caused by either an increase in assets or a decrease in liabilities as a result of performing services or selling products is called (i) Revenue. 2. Items such as paper, pencils, binders, staples, solvents, and paper towels are called (b) Supplies. 3. An asset created when a sale is made to a customer “on account” (that is, no cash is received at the time of sale) is (c) Accounts Receivable. 4. A liability that is created on the books of the seller when a customer prepays before the service or product is provided to the customer is called (h) Unearned Revenue. 5. An asset that is created for the recipient when a formal written promise to pay a certain amount is signed is called a (d) Note Receivable. 6. A liability that is created for the payor when a formal written promise to pay a certain amount is prepared and signed is called a (g) Note Payable. 7. The owner transferring personal assets into a business is called (l) Owner Investment. 8. A decrease in owner’s equity caused by a decrease in assets or an increase in liabilities resulting from the process of operating the business is an (m) Expense. 9. An obligation to pay money (normally in 30–90 days) to a supplier is an (f) Account Payable. 10. Currency that a business has on hand and the amounts in the checking and savings accounts that can be withdrawn on demand is called (a) Cash. 11. A short-term asset created when a business pays for goods or services before it receives them or uses them up is a (e) Prepaid Expense. 12. The owner’s withdrawal of assets from the business for personal use is called a (k) Withdrawal.

Learning Goal 8

SOLUTIONS

Learning Goal 8: Explain the Four Basic Changes in Owner’s Equity

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