ACCT 3131 Chapter 3
Rice Company purchases a building for $500,000, which will be used as a production facility. How should the building be classified on the balance sheet?
noncurrent asset
A company's total assets minus its total liabilities as shown on the balance sheet is known as the _______________ value.
book
Any receivable not expected to be collected within one year or the operating cycle, whichever is longer, is classified as a
noncurrent asset.
Which of the following items should be disclosed in other long-term assets on the balance sheet?
noncurrent investments that are not material long-term prepaid expenses
When a receivable is supported by a formal agreement that specifies payment terms, it is called a _______________ _______________
note receivable
Which of the following items are included in investments?
note receivable due in 5 years cash reserved to purchase land
Money on hand and in banks that is available for use in the operations of the business is shown in the _______________ account on the balance sheet.
cash
True or false: The operating cycle for most firms is 1 year or less.
True
Which of the following financial statements shows a firm's financial position on a particular date?
balance sheet
On January 1 of the current year, Lafferty signs a contract to rent a building for $1,000 per month for the next three years. On that date, Lafferty pays $36,000 for rent. On January 1 when payment is made, what is the amount of the prepaid rent that should be classified as a current asset?
$12,000
True or false: Accounts receivable result from the sale of goods or services for cash.
False
On January 1 of the current year, Lafferty signs a contract to rent a building for $1,000 per month for the next three years. On that date, Lafferty pays $36,000 for rent. On January 1 when payment is made, what is the amount of the prepaid rent that should be classified as a noncurrent asset?
$24,000
Barsky Corp. has the following items: Cash $5,000 Prepaid expenses 2,000 Building 40,000 Land 20,000 Inventory 15,000 Total noncurrent assets on the balance sheet is
$60,000.
Indicate the order of the following current assets on the balance sheet.
1. Cash and cash equivalent 2. Accounts receivables 3. Inventory 4. Prepaid expenses
_______________ _______________ result from the sale of goods or services on credit.
Accounts Receivable
True or false: Investments are assets used directly in the operations of the business.
False
What is the difference between an account payable and a note payable?
An account payable is usually due in 30-60 days.
An accrued liability represents which of the following?
An expense that has been incurred but will be paid in a future period.
How should liquid investments expected to be converted to cash within the current operating cycle be reported in the balance sheet?
As a short-term investment in the current asset section.
Bear Corp. has $100,000 cash in the bank restricted to repay a note payable that matures in 2 years. How should this $100,000 be reported?
As restricted cash in the long-term section of the balance sheet.
The current versus noncurrent classification applies to what in the financial statements?
Assets and liabilities
Which of the following are limitations of the balance sheet? Assets minus liabilities is not representative of the company's true market value The balance sheet reports the company's financial position over a period of time rather than on a particular date The balance sheet is heavily reliant on estimates rather than determinable amounts Assets minus liabilities is not representative of the company's true book value
Assets minus liabilities is not representative of the company's true market value The balance sheet is heavily reliant on estimates rather than determinable amounts
Which of the following items is classified as cash?
Bank drafts
True or false: The balance sheet displays all items at their fair value or market value.
False
Schwinn is a company that makes bicycles. Which of the following items would be included in Schwinn's inventory?
bicycle tires bicycle chains finished bicycles
Which of the following items are considered cash equivalents?
Commercial paper due in less than 3 months. Money market funds quickly converted into cash. U.S. Treasury bills due in 2 months.
In a balance sheet, how are assets classified?
Current and noncurrent.
Deferred revenues and accrued salaries payable are examples of what?
Current liabilities
What are the primary elements found on a balance sheet?
Equity Assets Liabilities
The ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities is known as what?
Financial flexibility
Ownership of an exclusive right to something such as a product, a process, or a name is called what?
Intangible asset
Assets not used directly in the operations of the business are called what?
Investments
Cash set aside for future plant expansion and a 3 year note receivable are both examples of what on a company's balance sheet?
Investments
What is the criterion to classify an investment as a cash equivalent versus a short-term investment?
It is a highly liquid investment with a maturity date of 3 months or less from date of purchase.
What asset is listed as a separate item on the balance sheet because it has an unlimited life and is not depreciated?
Land
Obligations to other entities are known as what?
Liabilities
On the balance sheet, current assets are listed in the order of their what?
Liquidity
Which of the following items are considered cash equivalents? Money market funds quickly converted into cash. Commercial paper due in less than 3 months. Cashier's checks payable on demand. Notes receivable.
Money market funds quickly converted into cash. Commercial paper due in less than 3 months.
What does a liability represent?
Obligations owed to other entities
Which of the following transactions would be recorded as a prepaid expense? January's utility bill paid in February. Rent for an office building paid for 12 months. Inventory purchased and held for sale. Salaries paid for the previous 2 months. Insurance paid for 6 months.
Rent for an office building paid for 12 months. Insurance paid for 6 months.
Which of the following are examples of prepaid expenses?
Rent paid in advance. Prepaid insurance.
Current assets include which of the following? Short term investments Property and equipment Intangible assets Cash
Short term investments Cash
Classifying items on the balance sheet as current and noncurrent assists financial statement users in assessing what aspects about a company?
Solvency and liquidity
Short-term investments are sometimes called which of the following?
Temporary investments Short-term marketable securities
Accounts receivable represents which of the following?
The amount owed by customers.
How are current liabilities satisfied? The use of current liabilities. The creation of other current liabilities. The use of current assets. The creation of other current assets.
The creation of other current liabilities. The use of current assets.
Why are inventories reported as current assets?
They are normally sold within the operating cycle.
Which of the following items are considered cash equivalents? U.S. Treasury bills due in 2 months. Commercial paper due in 1 month. Money market funds that are quickly converted to cash. Cashier's checks and money orders.
U.S. Treasury bills due in 2 months. Commercial paper due in 1 month. Money market funds that are quickly converted to cash.
Which of the following investments would be classified as a cash equivalent?
U.S. Treasury bills with a maturity of 90 days Money market funds
Which of the following are included in inventory? Work in process Raw materials Finished goods Trade receivables Intangibles
Work in process Raw materials Finished goods
Which of the following should be classified as current liabilities? notes payable due in 3 years accounts payable current maturities of long-term debt accrued salaries
accounts payable current maturities of long-term debt accrued salaries
The account that represents the amount of money owed by customers is called _______________ _______________.
accounts receivable
Another term for a trade receivable that occurs in the course of a company's normal trade or business is
accounts receivable.
Zantron Corp. pays $100,000 for robotic equipment to be used in its production facility. Zantron should include this transaction as
an increase in plant, property, and equipment.
Simply put, _______________ are the economic resources of a company.
asset
Which of the following is a probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events?
asset
Current _______________ include cash and other items that will be converted to cash or consumed within the coming year.
assets
The financial statement that displays a firm's financial position on a particular date is the _______________ _______________
balance sheet
The financial statement that provides information about liquidity and long-term solvency is the
balance sheet
Which of the following items should be included in cash on the balance sheet? cash on hand cashier's checks short-term investments money orders
cash on hand cashier's checks money orders
How are accounts receivable classified on the balance sheet?
current assets
Inventories held for sale in the normal course of business are classified in the balance sheet as
current assets
Cash and other assets that are reasonably expected to be converted to cash or consumed within 1 year or the current operating cycle are classified as
current assets.
A ______ is satisfied within 1 year or the current operating cycle, whichever is longer.
current liability
Investments are reported as _______________ when the company has both the intent and ability to sell within one year (or operating cycle).
current, short-term, or short term
The two classifications used for assets and liabilities on the balance sheet are ______ and ______.
current; noncurrent
When a company spends large amounts on research and development to obtain a patent on its own, the research and development cost is
expensed as incurred.
Inventory for a wholesale or retail company includes which of the following?
finished goods
Financial _______________ is the ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities and needs.
flexibility
Unearned revenue represents cash received from a customer for goods or services to be provided in a(n) _______________ period.
future
Assets are probable _____ economic benefits as a result of _____ transactions or events.
future; past
An asset that has no physical substance is referred to as a(n) ______ asset.
intangible
Which of the following are noncurrent assets? intangible assets building land inventory
intangible assets building land
Which of the following are noncurrent assets?
intangible assets land building
A technology company incurs costs to research and develop a new hand-held device and obtain a patent. This activity is an example of a(n)
internally developed intangible asset.
Assets not used directly in the operations of the business are referred to as _______________
investments
Which of the following items should be classified as investments on the balance sheet? investments in stock of another company accounts receivable from customers cash restricted to purchase building note receivable due in 3 years
investments in stock of another company cash restricted to purchase building note receivable due in 3 years
Land is listed separately on the balance sheet because
it has an unlimited life.
An investment should be classified as current on the balance sheet if it will be sold within 12 months. management has the intent and ability to liquidate it in the near term. it does not have a maturity date. it is an investment of stock of another company regardless of maturity.
it will be sold within 12 months. management has the intent and ability to liquidate it in the near term.
Obligations to other entities are classified as _______________ on the balance sheet.
liabilities
Which of the following items are included in property, plant, and equipment? investments machines furniture mineral mines inventory oil wells
machines furniture mineral mines oil wells
A _____ firm will include finished goods, work in process, and raw materials as part of their inventory.
manufacturing
Assets minus liabilities, measured according to GAAP, is not likely to be representative of the _______________ value of the entity.
market
Which of the following items are included in property, plant, and equipment? natural resources buildings inventory land accounts payable
natural resources buildings land
The _______________ cycle refers to the period of time necessary to convert cash to raw materials, raw materials to a finished product, the finished product to receivables, and then receivables back to cash.
operating
The time period necessary to convert cash to raw materials, convert raw materials into finished products, sell the products, and collect on the account receivable is referred to as the ______ cycle.
operating
Balance sheets often include a catch-all classification of noncurrent assets called _______________ long-term assets.
other
If a company's long-term investments are not material in amount, where should they be disclosed on the balance sheet?
other assets
Which of the following items represents an expense paid in advance that creates benefits used in the future?
prepaid expense
Which of the following are noncurrent assets? inventory property machines accounts receivable investments with maturity of 18 months
property machines investments with maturity of 18 months
Which of the following are noncurrent assets? property accounts receivable inventory machines investments with maturity of 18 months
property machines investments with maturity of 18 months
A manufacturing firm will use which of the following accounts to record inventory? sales returns and allowances short-term investments raw material finished goods work in process
raw material work in process finished goods
Which of the following items should not be included in cash and cash equivalents in the balance sheet?
restricted cash
Investments in stock and debt securities of other corporations are included as _____ if the company has the ability and intent to sell them within the next 12 months.
short-term investments
Which of the following are common characteristics of property, plant, and equipment?
tangible used in normal operations long-lived
Goodwill is calculated as
the acquisition price above the fair value of the identifiable net assets acquired.
Assets are classified as long-term if:
they are expected to be converted to cash or consumed in more than one operating cycle
Which of the following are characteristics of plant, property, and equipment?
used long-term in production tangible
Goodwill is shown on the balance sheet
when one company acquires another company for a price above the fair value of the assets acquired.
A liability is classified as current if it is due
within 1 year or the current operating cycle, whichever is longer.
