Chapter 5 study guide

If a company converted a shortterm note payable into a longterm note payable, this transaction would A. increase both working capital and net income. B. decrease only working capital. C. increase only working capital. D. decrease both working capital and owners' equity.

C

Lindsey Corp. is concerned with measuring its ability to meet interest payments as they come due. Lindsey Corp. would most likely use which following ratio? A. Payout ratio. B. Inventory turnover. C. Times interest earned. D. Price earnings ratio.

C

The payment of cash dividends to the common shareholders would be reported on a company's statement of cash flows under the classification of A. Operating Activities. B. Financing Activities. C. Investing Activities. D. Significant Transactions.

C

The statement of cash flows provides answers to all of the following questions except: A. Where did the cash come from during the period? B. What was the cash used for during the period? C. What is the impact of inflation on the cash balance at the end of the year? D. What was the change in the cash balance during the period?

C

Which of the following would not be considered a basic source of information useful in preparing a statement of cash flows? A. Selected transaction data. B. Comparative balance sheets. C. An analysis of sales by territory. D. The current income statement.

C

Availableforsale investments are debt securities that the enterprise has the positive intent and ability to hold to maturity.

F

Current assets include only assets expected to be sold within one year or the operating cycle, whichever is longer.

F

Determination of cash flows from operating activities requires predicting the amount of cash the entity will collect from customers who purchase the entity's product on account.

F

Intangible assets lack physical substance and may include financial instruments such as contractual rights to receive cash.

F

Liquidity is the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities.

F

Securities classified as available forsale should be reported at cost.

F

The balance sheet reflects a corporation's results of operations for a specified period of time.

F

The current cash debt coverage ratio provides information on financial flexibility and the company's ability to repay its liabilities from net cash provided by operating activities.

F

The sale of 12,000 shares of its common stock by Xerax Company for $22,000 cash would be classified an investing activity due to the increased investment by company shareholders.

F

The stockholders' equity accounts used by a corporation are the same as those used in accounting for a partnership or proprietorship.

F

Amy Carlson Company had current assets of $12,000, current liabilities of $20,000, net sales of $40,000, cost of goods sold of $24,000, and net income of $8,000. What is Amy Carlson's profit margin on sales? A. 80%. B. 60%. C. 50%. D. 20%.

D

Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure? A. Current assets. B. Current liabilities. C. Plant assets. D. Longterm liabilities.

D

Which of the following items should never be included in the current section of the balance sheet? A. Receivable from a customer outstanding for more than a year. B. Deferred income taxes resulting from interperiod tax allocation. C. Threeyear premium for fire insurance on plant and equipment. D. A pension fund.

D

If $1,240 cash and a $4,760 note are given in exchange for a delivery truck to be used in a business: A. assets and liabilities will change by the same amount. B. owners' equity will be increased. C. assets will increase and liabilities decrease. D. assets and liabilities will increase but by different amounts.

A

One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is: A. failure to reflect current value information. B. the extensive use of separate classifications. C. an extensive use of estimates. D. failure to include items of financial value that cannot be recorded objectively.

B

Companies often include insurance and other prepayments for 2 or 3 years in current assets even though part of the advance payment applies to periods beyond one year or the current operating cycle.

T

Contracts and negotiations of significance, in addition to contingencies, are disclosed in footnotes to the financial statements.

T

It is recommended that there be a disclosure for all significant accounting principles and methods that involve selection from among alternatives or those that are peculiar to a given industry.

T

Notes are commonly used to disclose the existence and amount of any preferred stock dividends in arrears.

T

Proper presentation of inventories for a manufacturing concern includes disclosure of the basis of valuation, the method of pricing, and the stage of completion.

T

The primary purpose of the statement of cash flows is to provide relevant information about the cash receipts and cash payments of an enterprise during a period.

T

The profession has recommended that the word "reserve" be used only to describe an appropriation of retained earnings.

T

The three general classes of items included in the balance sheet are assets, liabilities, and equity.

T

The use of an otherasset section varies widely in practice. It should be restricted to unusual items that are different from assets included elsewhere.

T

Trading securities are reported at fair value in the current asset section.

T

Of the following items, the one which should be classified as a current asset is A. trade installment receivables normally collectible in 20 months. B. a deposit on equipment ordered, delivery of which will be made within 7 months. C. cash designated for the redemption of callable bonds. D. cash surrender value of a life insurance policy of which the company is a beneficiary.

A

One of the main reasons for separating liabilities into current and long-term is: A. to provide decision makers with information regarding currently maturing debts. B. to separate large and small debts. C. to separate capital into its component parts. D. to separate total equity into its two basic parts.

A

Solvency refers to: A. the ability of an enterprise to pay its debts as they mature. B. the amount of time that is expected to elapse until an asset is realized. C. the amount of time that is expected to elapse until a liability has to be paid. D. the amount of time that is expected to elapse until an asset is converted into cash.

A

Current liabilities are the obligations that are reasonably expected to be liquidated either by creation of other current liabilities or through the use of current assets.

T

If cash is restricted for purposes other than the liquidation of current obligations, it should not be classified as a current asset.

T

Individual balance sheet items should be separately reported and classified in sufficient detail to permit users to assess the amounts, timing, and uncertainty of future cash flows.

T

Longterm liabilities are obligations that are not reasonably expected to be liquidated within one year or the normal operating cycle, whichever is longer.

T

To arrive at cash provided by operations, an increase in accounts receivable must be deducted from net income, and an increase in accounts payable must be added back to net income.

T

One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility? A. The nearness to cash of assets and liabilities. B. The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities. C. The firm's ability to pay its debts as they mature. D. The firm's ability to invest in a number of projects with different objectives and costs.

B

Prepaid expenses are included in the current assets section of the balance sheet because A. they will be converted into cash within one year or the operating cycle, whichever is longer. B. if they had not been already paid they would require the use of cash during the next year or operating cycle. C. they were already included in operating expenses on the income statement in the year cash was expended. D. they reflect payments that were made in a prior period that will not be charged to expense in the current period.

B

The primary purpose of the balance sheet is to reflect A. the firm's potential for growth in stock values in the stock market. B. items of value, debts, and net worth. C. the value of items owned by the firm. D. the status of the firm's assets in case of forced liquidation of the firm.

B

Which of the following is not a current asset? A. Prepaid property taxes that relate to the next operating period. B. The cash surrender value of a life insurance policy carried by a corporation on its president. C. Marketable securities purchased as a temporary investment of cash. D. Installment notes receivable due over 15 months in accordance with normal trade practices.

B

A characteristic of all assets and liabilities comprising working capital is that they are A. monetary. B. marketable. C. current. D. cash equivalents.

C

A liability to be paid next year would not be included in the current liability section of the balance sheet if the debt is expected to be refinanced through another longterm issue, or A. the operating cycle is less than one year. B. the liability will be paid with cash that the company earns during the next year. C. when the debt is retired out of noncurrent assets. D. the liability is a nonoperating debt instrument due within the next year.

C

For accounting purposes the "operating cycle concept" A. has become obsolete. B. affects the income statement but not the balance sheet. C. permits some assets to be classified as current even though they are more than one year removed from becoming cash. D. causes the distinction between current and noncurrent items to depend on whether they will affect cash within one year.

C

The balance sheet contributes to financial reporting by providing a basis for all of the following except A. computing rates of return. B. evaluating the capital structure of the enterprise. C. determining the increase in cash due to operations. D. assessing the liquidity and financial flexibility of the enterprise.

C

Of the following statements, which best illustrates the fact that the formal distinction made between current and noncurrent assets is somewhat arbitrary? A. Cash in a checking account is a current asset, while cash in a savings account is more permanent and is normally classified as noncurrent. B. Inventory that may be sold next year, or in the subsequent year as demand dictates may be classified as current or noncurrent. C. 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. 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.

D

Which of the following reflects proper use of the term "reserve" in the preparation of financial statements? A. The term used to describe amounts deducted from assets, such as "reserve for depreciation." B. The initial term used in connection with an estimated liability, such as "estimated reserve for product warranty." C. The term used to describe the setting aside of funds for the subsequent payment of an existing liability, such as "reserve for bonds payable." D. The term used to describe an appropriation of retained earnings in the stockholders' equity section of the balance sheet.

D