Chapter 5 Intermediate Accounting : Review - Balance Sheet and Statement of Cash Flows
Q 5.10: Which of the following questions would not be answered by looking at the Statement of Cash Flows? A What is the impact of inflation on the cash balance at the end of the year? B Where did the cash come from during the period? C What was the cash used for during the period? D What was the change in the cash balance during the period?
A
Q 5.16: The financial flexibility of a company can best be described by which of the following statements? A Financial flexibility is the firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities. B Financial flexibility describes the firm's ability to invest in a number of projects with different objectives and costs. C Financial flexibility measures the firm's ability to pay its debts as they mature. D Financial flexibility depends on the nearness to cash of assets and liabilities.
A
Q 5.21: How many steps are involved in preparing the statement of cash flows? A four B five C three D two
A
Q 5.23: GAAP allow companies to format the balance sheet using either the account form or the report form. A True B False
A
Q 5.24: __ require(s) that a company provide a statement of cash flows.
Both IFRS and GAAP
Q 5.12: An accountant would be least likely to use which one of the following basic information sources when preparing the statement of cash flows? A The current income statement. B Selected transaction data. C An analysis of sales by territory. D Comparative balance sheets.
C
Q 5.15: Coulter Industries sold 2 million shares of stock for $27.50 per share, for a gross income of $55 million. When the accountants at Coulter prepare the statement of cash flows, this transaction would be classified as a(n) ________ activity. A operating B investing This is correct answer : C financing D equity
C
Q 5.20: Frazier Enterprises needs to include an explanation of a line item on the balance sheet. The explanation will be three sentences long. The best method of disclosure to use is a A supporting schedule. B cross-reference. C note. D parenthetical explanation.
C
Q 5.7: Why are prepaid expenses included in the current assets section of the balance sheet? A Because they were already included in operating expenses on the income statement in the year cash was expended. B Because they reflect payments that were made in a prior period that will not be charged to expense in the current period. C Because if they had not been already paid they would require the use of cash during the next year or operating cycle. D Because they will be converted into cash within one year or the operating cycle, whichever is longer.
C
Q 5.25: __ cash flow is the amount of discretionary cash flow a company has.
Free
Intangible Assets 10. __ lack physical substance; however, their benefit lies in the rights they convey to the holder. Examples include patents, copyrights, franchises, goodwill, trademarks, trade names, and secret processes.
Intangible assets,
Intangible Assets 11. __ intangible assets are amortized over their useful lives. __ intangibles (such as goodwill) are not amortized but, instead, are assessed (at least annually) for impairment.
Limited life, Indefinite life
Property, Plant and Equipment 9. __, __ and __ are properties of a durable nature that are used in the regular operations of the enterprise. Examples include land, buildings, machinery, furniture, tools, and wasting resources. With the exception of land, these assets are either depreciable or depletable.
Property, plant, equipment
Q 5.47: Financing and investing activities that do not affect cash are reported at the __ of the statement of cash flows.
bottom
Uses and Limitations of the Balance Sheet 2. (L.O. 1) The balance sheet can be a very useful financial statement. If a balance sheet is examined carefully, users can gain a considerable amount of information related to __, __ and __. Liquidity is generally related to the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid. Solvency refers to the ability of an enterprise to pay its debts as they mature. Financial flexibility is the ability of an enterprise to take effective action to alter the amounts and timing of cash flow so that it can respond to unexpected needs and opportunities.
liquidity, solvency, financial flexibility
Q 5.19: The term "reserve" as it relates to preparation of financial statements is used correctly in which of the following ways? A When "reserve" is used to describe an appropriation of retained earnings, such as "reserve for preferred dividends." B When "reserve" is used in connection with an estimated liability, such as "estimated reserve for product warranty." C When "reserve" is used to describe the setting aside of funds for the subsequent payment of an existing liability, such as "reserve for bonds payable." D When "reserve" is used to describe amounts deducted from assets, such as "reserve for depreciation."
A
Q 5.27: Which of the following would be considered as major disclosure techniques for the balance sheet? I. notes. II. supporting schedules. III. parenthetical explanations. IV. worksheets. A I, II, and III B I, II, III, and IV. C II, III, and IV.
A
Q 5.29: Where are financing and investing activities reported when they do not impact cash? A At the bottom of the statement of cash flows. B At the top of the statement of cash flows. C In the body of the statement of cash flows. D These activities are not reported.
A
Q 5.36: How are liquidity and solvency similar? A: Both are concerned with a company's debt-to-asset ratio. B: Both are concerned with a company's revenue-to-expense ratio. C: Both are concerned with a company's debt-to-equity ratio. D: Both are concerned with a company's asset-to-equity ratio.
A
Q 5.6: Which of the following items should be classified as a current asset? A Trade installment receivables normally collectible in 20 months. B Cash surrender value of a life insurance policy of which the company is a beneficiary. C Cash designated for the redemption of callable bonds. D A deposit on equipment ordered, delivery of which will be made within 7 months.
A
Q 5.8: A liability to be paid next year by issuing new long-term debt or by __________ would not be included in the current liability section of the balance sheet. A paying the debt with noncurrent assets B paying with restricted cash C paying the debt with current assets D paying cash that the company expects to earn in the next year
A
Q 5.41: The following trial balance of Lambert Industries on December 31, 2016 has been properly adjusted except for the income tax expense adjustment. Trial Balance Cash-775,000-Dr. A/R (net)-2,695,000-Dr. Inventory-2,085,000-Dr. Property, plant, and equipment (net)-7,566,000-Dr. Accounts payable and accrued liabilities-1,701,000-Cr. Income taxes payable-654,000-Cr. Deferred income tax liability-85,000-Cr. Common stock-2,350,000-Cr. Additional paid-in capital-3,680,000-Cr. Retained earnings, 1/1/16-3,450,000-Cr. Net sales and other revenues-13,560,000-Cr. Costs and expenses-11,180,000-Dr. Income tax expenses-1,179,000-Dr. Total: 25,480,000-Dr./25,480,000-Cr. Other financial data for the year ended December 31, 2016: Included in accounts receivable is $1,200,000 due from a customer and payable in quarterly installments of $150,000. The last payment is due December 29, 2018. The balance in the Deferred Income Tax Liability account pertains to a temporary difference that arose in a prior year, of which $20,000 is classified as a current liability. During the year, estimated tax payments of $525,000 were charged to income tax expense. The current and future tax rate on all types of income is 30%. In Lambert's December 31, 2016 balance sheet, the final retained earnings balance is A : $5,176,000. B : $4,736,000. C : $5,105,000. D : $4,651,000.
A Final retained earnings includes beginning retained earnings balance ($3,450,000) + net sales and other revenues ($13,560,000) - costs and expenses ($11,180,000) - income tax expenses ($1,179,000 less the $525,000 estimated tax payments) = $5,176,000.
Q 5.14: When calculating cash provided by operations in the statement of cash flows using the indirect method, how would an increase in Accounts Receivable and an increase in Accounts Payable be handled? A Both an increase in Accounts Receivable and an increase in Accounts Payable would be deducted from net income. B An increase in Accounts Receivable would be deducted from net income, and an increase in Accounts Payable would be added to net income. C An increase in Accounts Receivable would be added to net income, and an increase in Accounts Payable would be deducted from net income. D Both an increase in Accounts Receivable and an increase in Accounts Payable would be added to net income.
B
Q 5.17: When classifying items on a balance sheet, __________ often require the greatest amount of supplementary disclosure. A current assets B long-term liabilities C plant assets D current liabilities
B
Q 5.18: Estrada Industries has $3.5 million in long-term assets. They use the straight-line method of depreciation for these assets. This is an example of ________ to be disclosed on financial statements. A a contingency that needs B an accounting policy that needs C a contractual situation that does not D GAAP that does not need
B
Q 5.26: Upon which of the following are level 1 fair value estimates based on? A Market prices for similar assets. B Market prices for identical assets. C Historical cost of similar assets. D Unobservable inputs.
B
Q 5.30: Typical contractual situations that should be disclosed in the notes to the balance sheet include which of the following? I. Pension obligations II. Debt covenants III. Lease obligations IV. Advertising contracts A II, III, and IV. B I, II, and III. C I, II, and IV. D I, II, III, and IV
B
Q 5.31: Which of the following results when dividing net cash provided by operating activities by average total liabilities? A : current ratio B : cash debt coverage C : free cash flow D : current cash debt coverage
B
Q 5.35: There is an absence of a requirement in the notes to a company's financial statement to clearly state which of the following provisions? A : Pension obligations. B : Direct relationships between preferred and common stockholders. C : Lease contracts. D : Stock option plans.
B
Q 5.38: Harrington Textiles reports on their balance sheet the fact that they use the FIFO method of inventory pricing. This is an example of a A fair value estimate. B significant accounting policy. C contractual situation. D contingency.
B
Q 5.43: Very short disclosure explanations should be disclosed using a A : cross-reference. B : parenthetical explanation. C : note. D : supporting schedule.
B
Q 5.49: Which of the following describes the generally accepted method of valuation? 1. trading securities at market value. 2. accounts receivable at net realizable value. 3. inventories at current cost. A : 1 and 3. B : 1 and 2. C : 2 and 3. D : 1, 2 and 3.
B
Q 5.9: What is the main difference between the account form and the report form of the balance sheet? A The report form lists assets on one side and liabilities and owners' equity on the other side, whereas the account form lists assets on top and liabilities and owners' equity on the bottom. B The account form lists assets on one side and liabilities and owners' equity on the other side, whereas the report form lists assets on top and liabilities and owners' equity on the bottom. C The report form lists only assets and liabilities, whereas the account form lists assets, liabilities, and owners' equity. D The account form lists every individual account, whereas the report form lists subtotals from groups of similar accounts.
B
Q 5.32: Maria's Company has reported the following information: Net income-480,000 Depreciation expense-140,000 Increase in accounts receivable-60,000 Which of the following should Maria's company report cash provided by operating activities? A : $400,000. B : $560,000. C : $280,000. D : $680,000.
B $480,000 + $140,000 - $60,000 = $560,000
Q 5.48: Cole Pharmaceuticals has been sued for damages as the result of accidental deaths caused by a newly released drug. The lawsuit has already cost them $1.6 million, and they expect additional related lawsuits to cost them $7.4 million. Therefore, Cole restricted $5 million in cash to partially cover the costs of the lawsuits. Cole would likely disclose the relationship between the restricted cash and the lawsuit liabilities with a A : parenthetical explanation. B : cross-reference. C : supporting schedule. D : note.
B Relationships between asset accounts and liability accounts are often disclosed through a cross-reference. While the nature of the lawsuit may be disclosed in a note, the relationship between the restricted cash and the lawsuit liabilities should be disclosed through a cross-reference.
Q 5.22: Which of the following is the denominator when determining the current cash debt coverage ratio? A average total long-term liabilities B average total liabilities C average current liabilities D average total assets
C
Q 5.37: In order to determine the current cash debt coverage, you need the net cash provided by operating activities and the A : dividends. B : capital expenditures. C : average current liabilities. D : average total liabilities.
C
Q 5.39: Quality Gems specializes in providing hand-selected, high-quality diamonds and other gems to jewelers. One of the company's greatest assets is its staff's knowledge about gems. However, Quality Gems does not report this asset on the balance sheet. This is an example of A : using judgments and estimates to value assets. B : providing information about a company's resources. C : omitting items that are of financial value. D : reporting items at historical cost.
C
Q 5.44: Elliot is preparing his company's balance sheet for a shareholders' meeting. The company prefers to use the report form. Therefore, Elliot should print the balance sheet on A : one horizontal page. B : two facing pages. C : one vertical page. D : two front-and-back pages.
C
Q 5.46: Which of the following is not included in the calculation of free cash flow? A : capital expenditures B : net cash provided by operating activities C : average total liabilities D : dividends
C
Q 5.11: Which financial statement is the most effective at providing information about a company's sources and uses of cash? A balance sheet B statement of owners' equity C income statement D statement of cash flows
D
Q 5.13: Under which activity classification section would the payment of cash dividends to the common shareholders be reported on a company's statement of cash flows? A Significant Transactions. B Investing Activities. C Operating Activities. D Financing Activities.
D
Q 5.1: In financial reporting, the balance sheet is least likely to provide a basis for which one of the following assessments? A: evaluating the capital structure of the enterprise. B: computing rates of return. C: assessing the liquidity and financial flexibility of the enterprise. D: determining the increase in cash due to operations.
D
Q 5.28: Where are liabilities placed on the balance sheet if a company plans to use the report form? A at the top of the second page B at the top of the first page C at the bottom of the first page This is correct answer : D in the middle of the page
D
Q 5.2: Which of the following describes the term solvency? A: The amount of time that is expected to elapse until an asset is converted into cash. B: The amount of time that is expected to elapse until a liability has to be paid. C: The amount of time that is expected to elapse until an asset is realized. D: The ability of an enterprise to pay its debts as they mature.
D
Q 5.34: Determining either the increase or the decrease in cash during the period is a step in A : determining the operating activities. B : determining the financing activities. C : preparing the statement of noncash activities. D : preparing the statement of cash flows.
D
Q 5.3: When using GAAP, which of the following qualities of the balance sheet limits risk? A: Failure to include items of financial value that cannot be recorded objectively. B: An extensive use of estimates. C: Use of historical cost to value assets and liabilities. D: Only amounts known with certainty are reported.
D
Q 5.40: One major disadvantage of the account form is it A : only lists assets and liabilities but not stockholders' equity. B : is usually too long to present on one page. C : uses technical language that only accountants understand. D : is usually too wide to present on one page.
D
Q 5.42: The reporting of noncash activities satisfies the A : balancing principle. B : operating activity principle. C : statement of disclosure. D : full disclosure principle.
D
Q 5.4: A delivery truck is purchased with $1,240 cash and a $4,760 note. Based on this transaction, A: assets and liabilities will increase but by different amounts. B: owners' equity will be increased. C: assets will increase and liabilities will decrease. D: assets and liabilities will change by the same amount, respectively
D
Q 5.5: The formal distinction between some current and noncurrent assets is somewhat arbitrary. Which of the following statements best illustrates this point? A: Accounts receivable due in less than one year or the operating cycle are classified as current assets, while accounts receivable due in longer than one year or the operating cycle are classified as noncurrent. B: An amount equal to the current depreciation charge on buildings should be placed in the current assets section at the beginning of the year, because it will be consumed in the next operating cycle. C: Inventory that may be sold next year, or in the subsequent year as demand dictates may be classified as current or noncurrent. D: An amount equal to the current depreciation charge on buildings should be placed in the current assets section at the beginning of the year, because it will be consumed in the next operating cycle. Accounts receivable due in less than one year or the operating cycle are classified as current assets, while accounts receivable due in longer than one year or the operating cycle are classified as noncurrent.
D
Q 5.50: Holden Company purchased 150 acres of land on the outer edge of a growing city. Holden expects the value of this land to appreciate by 500% over the next three years. How would you expect Holden to report the value of this land on their balance sheet? A : At a depreciated value. B : At market value. C : At the expected future value at the time of sale. D : At historical cost.
D Assets on a balance sheet, such as investments in land, are reported at historical cost even if the asset has appreciated in value or is expected to appreciate in value. This is one limitation of the balance sheet.
Q 5.45: Bauer Securities decided to purchase a 15% non-controlling interest in a small private company that produces software necessary to run their specialized analytical programs. Because the company is private, the market value of the stocks is not consistent. When this information is disclosed on Bauer's financial statements, the fair value of the stocks should be considered a ________ fair value measure. A : Level 1 B : Level 2 C : Level 4 D : Level 3
D Level 3 is the most subjective measure of fair value for financial instruments. Because the company is privately owned, no public market information is available and the value of the stock will have to be estimated based on the company's own financial information. This makes the fair value measurement a Level 3 measure.
Q 5.33: Although not commonly used, a balance sheet format that uses current assets and current liabilities to calculate working capital is an alternate format in addition to what other more common format(s)? (select all that apply) A : horizontal form B : common form C : standard form D : vertical form E : report form F : account form
E, F
Short-Term Investments and Other Items 7. Any restrictions on the general availability __ or any commitments on its probable disposition must be disclosed. Short-term investments are usually categorized as held-to-maturity, trading, or available-fo-rsale (only debt securities). Any anticipated loss due to uncollectibles, the amount and nature of any nontrade __, and any receivables designated as collateral should be clearly identified. For a proper presentation of __, the basis of valuation (i.e., lower of cost or market) and the method of pricing (FIFO or LIFO) should be disclosed. __ are expenditures already made for benefits (usually services) to be received within one year or the operating cycle, whichever is longer.
cash, receivables, inventories, prepaid expenses
Current Assets 6. __ are cash and other assets expected to be converted into cash, sold, or consumed either in one year or in the operating cycle, whichever is longer. There are some exceptions to a literal interpretation of the current asset definition. These exceptions involve prepaid expenses, investments in common stock, and the subsequent years' depreciation of fixed assets. These exceptions are recognized in the accounting process and are understood by most financial statement users. Current assets are presented in the balance sheet in the order of their liquidity and normally include cash, short-term investments, receivables, inventories, and prepaid expenses.
current assets
LongTerm Investments 8. Items classified as __ in the assets section of the balance sheet normally are one of four types. These include: a. Investments in securities, such as stock, bonds, or long-term notes. b. Investments in tangible fixed assets not currently used in operations. c. Investments set aside in special funds (sinking, pension, plant expansion, etc.) and cash surrender value of life insurance. d. Investments in nonconsolidated subsidiaries or affiliated companies. Long-term investments are rather permanent in nature as they are not normally disposed of for a long period of time. They are shown in the balance sheet below current assets in a separate section called __.
long term investments, investments
Classification in the Balance Sheet 5. (L.O. 2) The __ used in the balance sheet are __, __, and __. These items were defined in the discussion presented in Chapter 2. To provide the financial statement reader with additional information, these major classifications are divided into several __. Assets are further classified as __ or non-current, with the non-current divided among long-term investments; property, plant, and equipment; intangible assets; and other assets. Liabilities are classified as current or __. Owners' (stockholders') equity includes capital stock, additional paid-in capital, and retained earnings. These items are defined as follows: __. Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. __. Probable future sacrifices 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. __. Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest.
major classifications, assets, liabilities, equity, subclassifications, current, noncurrent, assets, liabilities, equity