Chapter 3 Smartbook - Balance Sheet and Financial Statements
On January 1, Year 1, Renquist Corp. borrowed $100,000 by signing a 5-year interest bearing note payable with annual interest of 8%. The terms of the contract require Renquist to repay the principal over 5 years with a payment of $20,000 made at the end of each year. On December 31, Year 1, Renquist made the first payment plus interest. What portion of the note should be classified as current liabilities?
$20,000 Reason: Remaining balance on the loan is $80,000. $20,000 will be paid during year 2 so that amount is current and the remaining $60,000 that will be paid beyond year 2 is noncurrent.
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 Reason: The portion of rent that will be paid within the next 12 months is classified as current and the remainder is classified as noncurrent.
The full-disclosure principle requires that financial statements report which of the following?
All material relevant information.
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.
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 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 items is classified as cash?
Bank drafts - defined as short term investments no more than 3 months
Barsky Corp. has the following items: Cash $5,000 Prepaid expenses 2,000 Building 40,000 Land 20,000 Inventory 15,000
Building + Land = $60,000
Indicate the order of the following current assets on the balance sheet.
Cash and cash equivalents Accounts receivable Inventory Prepaid expenses
Detailed information about fair value is disclosed using disclosure notes
Detailed information about fair value is disclosed using disclosure notes
Financial _________ is the ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities and needs.
Flexibility
On the balance sheet, current assets are listed in the order of their what?
Liquidity
Classifying items on the balance sheet as current and noncurrent assists financial statement users in assessing what aspects about a company?
Solvency and Liquidity Liquidity - most often refers to the ability of a company to convert its assets to cash to pay its current liabilities Solvency - refers to an assessment of whether a company will be able to pay its liabilities
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?
a
The purpose of the balance sheet is to report
a company's financial position on a specific date.
The account that represents the amount of money owed by customers is called
account receivable
result from the sale of goods or services on credit.
account receivable
An obligation to pay a supplier within 30 days should be recorded _____ in payable, whereas a signed promise to pay cash at some point in the future should be recorded as _____ payable.
account, note
An expense that has been incurred but not yet paid results is a(n)
accrued liability
Which of the following should be classified as current liabilities?
accrued warranties income taxes payable unearned revenues
Which of the following accounts represent amounts shareholders have invested in the company?
additional paid-in capital common stock
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.
Related third-party transactions _____ required to be disclosed in the notes to the financial statements.
are
Which of the following should be classified as current liabilities?
income taxes payable accrued warranties unearned revenues
An asset that has no physical substance is referred to as a(n) ______ asset.
intangible
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
investment
Land held for speculation, noncurrent receivables, and cash set aside for future plant expansion are all examples of
investment
Land is listed separately on the balance sheet because
it has an unlimited life.
The criteria used to determine if a liability should be classified as long-term is
it will not be satisfied within 12 months or the operating cycle, whichever is longer.
Which of the following are noncurrent assets?
land building intangible assets
Which of the following are classified as long-term liabilities?
lease obligations of more than 1 year bonds payable
Long-term _____ are obligations that will not be satisfied in the next year or operating cycle, whichever is longer.
liabilities
Obligations to other entities are classified as
liabilities
Which of the following is a probable future sacrifice of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events?
liability
Common practice requires that current assets are presented on the balance sheet in the order of
liquidity
The balance sheet provides useful information about a company's _______ and long term solvency
liquidity
Property, plant, and equipment is a(n) ______ asset.
long lived tangible
Which of the following are common characteristics of property, plant, and equipment?
long-lived tangible used in normal operations
An investment should be classified as current on the balance sheet if
management has the intent and ability to liquidate it in the near term. it will be sold within 12 months.
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
Retained earnings represents the accumulated _________ reported since the inception of the corporation and not yet paid to shareholders as dividends.
net income
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
Any receivable not expected to be collected within one year or the operating cycle, whichever is longer, is classified as a
noncurrent assets
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
A ______ is satisfied within 1 year or the current operating cycle, whichever is longer.
noncurrent liability
When a receivable is supported by a formal agreement that specifies payment terms, it is called a
notes receivable
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
If a company's long-term investments are not material in amount, where should they be disclosed on the balance sheet?
other assets
The accumulated net income earned since the inception of the corporation and not yet paid to shareholders is referred to as
retained earnings
Shareholders' equity is composed of which of the following accounts?
retained earnings paid-in capital
Investments are reported as ________ investments when the company has both the intent and ability to sell within one year (or operating cycle).
short term
Goodwill is calculated as
the acquisition price above the fair value of the identifiable net assets acquired.
Cohen Company purchases a new building with a long-term notes payable. In the notes to the financial statements, it must disclose the following:
the interest rate on the loan the payment terms of the loan the maturity date of the loan
Mueller Company reports a long-term notes payable on its balance sheet. In its financial statement notes, Mueller Company should disclose
the interest rate on the loan the payment terms of the loan the maturity date of the loan
Assets are classified as long-term if:
they are expected to be converted to cash or consumed in more than one operating cycle
A customer pays in advance for services to be performed in a future period. In which account should the transaction be recorded?
unearned revenues
Which of the following are accrued liabilities?
utilities payable taxes payable accrued liabilities - are liabilities that are not payed yet but will in the subsequent reporting period
Which of the following are accrued liabilities?
warranty liabilities salaries payable interest payable
Balance sheets often include a catch-all classification of noncurrent assets called _____ long term assets
goodwill
A liability has which of the following characteristics?
-It is a present obligation -It is a probable future sacrifice of an economic benefit -It is due to a past transaction or event
What is an operating cycle?
for a typical merchandising or manufacturing company refers to the period of time from the initial outlay of cash for the purchase of inventory until the time the company collects cash from a customer from the sale of inventory.
Current assets include which of the following?
Cash; Short term investments
Which of the following items are considered cash equivalents?
Commercial paper due in less than 3 months. Money market funds quickly converted into cash.
What is included in a company's paid in capital? (Select all that apply.)
Common stock Additional paid-in capital Paid in capital - is the amount that shareholders have invested in the company.
Unearned revenue represents cash received from a customer for goods or services to be provided in a(n) ______ period.
future
True or false: The balance sheet displays all items at their fair value or market value
False: The balance sheet displays many items at book value. Only certain items may be valued at fair value.
The ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities is known as what?
Financial flexibility
Which of the following are included in inventory?
Finished goods Raw materials Work in process
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.
Which of the following transactions would be recorded as a prepaid expense?
Insurance paid for 6 months. Rent for an office building paid for 12 months.
Ownership of an exclusive right to something such as a product, a process, or a name is called what?
Intangible assets - ex) patents, copyrights, etc
Assets not used directly in the operations of the business are called what?
Investment
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
Short-term investments are sometimes called which of the following?
Investments not classified as cash equivalents that the company has the ability and intent to sell within one year
Which of the following investments would be classified as a cash equivalent?
Money market funds U.S. Treasury bills with a maturity of 90 days
Which of the following items are considered cash equivalents?
Money market funds quickly converted into cash. Commercial paper due in less than 3 months.
How are property, plant, and equipment presented on the balance sheet?
Original cost less accumulated depreciation
On January 1, Year 1, Renquist Corp. borrowed $100,000 by signing a 5-year note payable with annual interest of 8%. The terms of the contract require Renquist to repay the principal over 5 years with a payment of $20,000 made at the end of each year. On December 31, Year 1, Renquist made the first payment plus interest. On January 1, Year 2, what portion of the note should be classified as noncurrent liabilities?
Reason: Remaining balance on the loan is $80,000. $20,000 will be paid during year 2 so that amount is current and the remaining $60,000 that will be paid beyond year 2 is noncurrent.
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?
Reason: $12,000 The portion of rent that will be paid within the next 12 months is classified as current and the remainder is classified as noncurrent.
Which of the following are limitations of the balance sheet?
The balance sheet is heavily reliant on estimates rather than determinable amounts Assets minus liabilities is not representative of the company's true market value
Which of the following describe long-term liabilities?
They do not require the use of current assets. They do not require the creation of current liabilities for payment.
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.
Assets are probable _____ economic benefits as a result of _____ transactions or events
future;past
A prepaid expense represents recorded when an ______ expense is paid in advance.
assets
Current ________ include cash and other items that will be converted to cash or consumed within the coming year.
assets
What are the primary elements found on a balance sheet?
assets, liabilities, equity
Which of the following financial statements shows a firm's financial position on a particular date?
balance sheet
A company's assets minus it's liabilities shown on the balance sheet is referred to as its _____ value
book
Which of the following items should be included in cash on the balance sheet?
cashier's checks money orders cash on hand
How are accounts receivable classified on the balance sheet?
current asset
If an accounts receivable is due within 60 days, it is classified on the balance sheet as a(n)
current asset
Deferred revenues and accrued salaries payable are examples of what?
current liabilities
Which of the following should be classified as current liabilities? (Select all that apply.)
current maturities of long-term debt accrued salaries accounts payable
What account is affected when a customer pays in advance for services to be performed in the future?
deferred revenues
Additional _______ are critical to understanding financial statements and to evaluating a firm's performance.
disclosures
The two sources of stockholders' equity are amounts ______.
earned by the corporation paid in from shareholders
Inventories include which of the following items?
goods directly consumed in production finished goods goods in production
