Fundamentals of Accounting Chapter 5

What is the cash debt coverage ratio?

(Net cash provided by operating activities)/(average total liabilities)

What are the limitations of the balance sheet?

1. Most assets and liabilities are reported at historical costs 2. Use of judgments and estimates 3. Many items of financial value are omitted

Which of the following is not included in the summary of significant accounting policies? 1. Depreciation methods 2. Inventory cash flow assumption 3. Length of operating cycle 4. Valuation methods for investments

Length of operating cycle - companies do not disclose their length of operating cycle

What are investing cash flows?

Making and collecting loans and acquiring and disposing of investments and property, plant, and equipment

What are contingencies?

Material events that have an uncertain outcome

What are activity ratios?

Measures of how effectively the company uses its assets

What are liquidity ratios?

Measures of the company's short-term ability to pay its maturing obligations

What are coverage ratios?

Measures of the degree of protection for long-term creditors and investors

What are profitability ratios?

Measures the degree of success or failure of a given company or division for a given period of time

Which of the following is included in OE section reported in the balance sheet 1. Working capital 2. Dividends 3. Accumulated Capital 4. Non-controlling interests

Non-controlling interest

Assets include all of the following sub-classifications except: 1. Intangibles 2. Non-controlling interests 3. Long-term investments 4. Other

Non-controlling interests

Major limitations of the balance sheet include all of the following except: 1. Most asset and liabilities are stated at historical costs 2. Judgments and estimates are used in determining many of the items reported 3. It necessarily omits many items that are of financial value but cannot be recorded objectively 4. Only amounts with known certainty are reported

Only amounts with known certainty are reported

Receipt of interest from a Note Receivable would be reported as a cash inflow in which of the following sections: 1. Operating activities 2. Financing activities 3. Investing activities

Operating activities

What are assets?

Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events

What are liabilities?

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

The balance sheet is useful for analyzing all of the following except: 1. Liquidity 2. Solvency 3. Profitability 4. Financial Felxability

Profitability

Which of the following pairings of an item and a basis of valuation is incorrect? 1. Prepaid expense -- Cost 2. Cash -- Fair value 3. Short-term investments -- Fair value 4. Receivables -- Lower-of-cost-or-market

Receivables -- Lower-of-cost-or-market

What is equity?

Residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest

In preparing a statement of cash flows, which of the following would be considered an investing activity? 1. Sale of equipment at book value 2. Sale of merchandise on credit 3. Declaration of cash dividend 4. Issuance of bonds payable at a discount receivable

Sale of equipment at book value

What is considered a cash equivalent?

Short-term highly liquid investment that matures within 3 months or less

The financial statement which summarizes the operating, investing, and financing activities of an entity for a period of time is the:

Statement of cash flows

Which statement shows the amount of cash used to pay dividends or purchase treasury stock?

Statement of stockholders' equity

Typical loss contingencies include all of the following except: 1. Possible tax assessment 2. Government investigation 3. Environmental issues 4. Tax operating-loss carry forwards

Tax-operating-loss carry forwards - This is a gain contingency

What is free cash flow?

The amount of discretionary cash flow a company has that may be used for purchasing additional investments, retiring its debt, purchasing treasury stock, or simply adding to its liquidity

What are retained earnings?

The corporation's undistributed earnings

What is additional paid-in capital?

The excess of amounts paid in over the par or stated value

Other assets include all of the following except: 1. Restricted cash 2. Timberlands 3. Property held for sale 4. Assets in special funds

Timberlands

Which of the following is a coverage ratio? 1. Asset turnover 2. Profit margin on sales 3. Payout ratio 4. Times interest earned

Times interest earned

What is the purpose of the statement of cashflows?

To provide relevant information about the cash receipts and cash payments of an enterprise during a period

Which of the following investments should always be reported as a current asset? 1. Available-for-sale securities 2. Held-to-maturity securities 3. Long-term investments 4. Trading securities

Trading securities

True or False. Companies frequently use judgments and estimates in valuing items on the balance sheet

True

True or False. Indicators of poor financial flexibility include a low debt coverage ratio and negative free cash flow

True

True or False. Liquidity refers to the amount of time that is expected to elapse until a liability has to be paid

True

True or False. The excess of current assets over current liabilities is referred to at net working capital

True

True or False. The operation section is the first section of the statement of cash flows

True

Which of the following is not a major disclosure technique on the balance sheet? 1. Notes 2. Parenthetical explanations 3. Supporting schedules 4. Worksheets

Worksheets

What does non-controlling interest mean?

A portion of the equity of subsidiaries not wholly owned by the reporting company

Which of the following is not one of the classifications of OE? 1. Retained earnings 2. Capital stock 3. Accumulated Capital 4. Noncontrolling interests

Accumulated capital

Which of the following ratios measures how effectively the company uses its assets? 1. Profitability ratios 2. Coverage ratios 3. Liquidity ratios 4. Activity ratios

Activity ratios

What does fair values mean?

Disclosures of fair values, for financial instruments

What are contractual situations?

Explanations of certain restrictions or covenants attached to specific assets or more likely, to liabilites

True or False. When companies comparing the account form and the report form of the balance sheet, current assets will be higher under report form, but total assets will be equal under both forms

False - The only difference of the two forms is the layout

Payment of dividends would come under which activity on the statement of cash flows

Financing

What are long-term liabilities?

Obligations that a company does not reasonable expect to liquidate within the normal operating cycle

What is a current liability?

Obligations that a company reasonably expects to liquidate either through the use of current assets or the creation of other current liabilities

What are financing cash flows?

Obtaining resources from owners and providing them with a return on their investment, and borrowing money from creditors and repaying the amounts borrowed

Statement of cashflows

Presents a detailed summary of all the cash inflows and outflows, or the sources and uses of cash during the period

What are the acceptable balance sheet formats

Report and account

Companies are not required to disclose information about: 1. Inventory cost flow methods 2. Depreciation methods 3. The identity of all stockholders 4. The use of estimates

The identity of all stockholders

What is capital stock?

The par or stated value of the shares issued

A company with a ___________________ is better able to survive bad times, to recover from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities

a high degree of financial flexibility

The correct order to present current assets is:

cash, accounts receivable, inventories, prepaid items

The current cash debt coverage ratio is often used to assess:

liquidity

What is the current cash debt coverage ratio?

(net cash provided by operating activities)/(average current liabilities)

What items are considered current assets?

1. Cash and cash equivalents 2. Short-term investments 3. Receivables 4. Inventories 5. Prepaid expenses

What are the four types of information that are supplemental to account titles and amounts presented in the balance sheet?

1. Contingencies 2. Accounting policies 3. Contractual situation 4. Fair values

What are the types of assets?

1. Current Assets 2. Long-term investments 3. Property, plant, and equipment 4. Intangible assets 5. Other assets

What are the types of liabilities and OE?

1. Current liabilities 2. Long-term debt 3. OE Capital Stock Additional paid-in capital Retained earnings

What are the four steps in preparing the Statement of Cash Flows?

1. Determine the net cash provided by (or used in) operating activities 2. Determine the net cash provided by (or used in) investing and financing activities 3. Determine the change (increase or decrease) in cash during the period 4. Reconcile the change in cash with the beginning and ending cash balances

What are the major types of ratios?

1. Liquidity ratios 2. Activity ratios 3. Profitability ratios 4. Convergence ratios

What re the techniques of disclosure?

1. Parenthetical explanations 2. Notes 3. Cross-reference and contra items 4. Supporting schedules 5. Terminology

What does the balance sheet do?

1. Reports assets, liabilities, and equity at a specific date 2. Provides information about resources, obligations to creditors, and equity in net resources 3. Helps in predicting amounts, timing, and uncertainty of future cash flows

What is considered a long-term asset?

1. Securities 2. Tangible fixed assets 3. Special funds 4. Nonconsolidated subsidiaries or affiliated companies

Which of the following balance sheet formats lists the assets on the left side and the liabilities and OE on the right side? 1. Single step form 2. Account form 3. Multiple step form 4. Report form

Account form

What are accounting policies?

Explanations of the valuation methods used or the basic assumptions made concerning inventory valuations, depreciation methods, investments in subsidiaries etc.

True or False. The balance sheet is sometimes referred to as the Statement of Net resources

False - Statement of financial position

True or False. Borrowing money from creditors is considered an investing activity on the statement of cash flows

False - would be considered a financing activity

Activities that involve the cash effects of making and collecting loans and acquiring and disposing of property, plant, and equipment are classified as:

Investing activities

What are operating cash flows?

Cash effects of transactions that enter into the determination of net income

What are current assets?

Cash or other assets a company expects to convert into cash, sell, or consumer in one year or in the operating cycle, whichever is longer

What is the correct order to present current assets?

Cash, AR, inventories, prepaid items - Order of liquidity

Companies use a ___________ to show a direct reference between an asset and a liability on the balance sheet

Cross-reference

Which of the following is an intangible asset? 1. Prepaid pension costs 2. Restricted cash 3. Deferred income taxes 4. Customer lists

Customer lists