Multiple Choice
Which of the following questions can be answered by reviewing a firm's balance sheet?
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1. Introduction to Accounting
The Financial Statements
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Which fundamental accounting concept is primarily explained by the balance sheet?
A
The accounting equation: Assets = Liabilities + Equity
B
The matching principle
C
The accrual basis of accounting
D
The revenue recognition principle
Verified step by step guidance1
Understand the purpose of the balance sheet: The balance sheet is a financial statement that provides a snapshot of a company's financial position at a specific point in time. It lists the company's assets, liabilities, and equity.
Recall the fundamental accounting equation: The balance sheet is structured around the accounting equation, which is expressed as: . This equation ensures that the company's resources (assets) are balanced with the claims against those resources (liabilities and equity).
Eliminate unrelated concepts: The matching principle, accrual basis of accounting, and revenue recognition principle are related to the income statement and the timing of revenue and expense recognition, not the balance sheet.
Identify the correct concept: Since the balance sheet directly reflects the accounting equation, it primarily explains the relationship between assets, liabilities, and equity.
Conclude: The fundamental accounting concept primarily explained by the balance sheet is the accounting equation: .
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