Balance Sheet & Statement of Cash Flows

42. Payment of dividends would come under which activity on the statement of cash flows? a. Financing. b. Operating. c. Investing. d. None of these.

A

29. Which of the following statements shows the amount of cash used to pay dividends or purchase treasury stock? a. statement of stockholders' equity. b. all of these answer choices are correct. c. statement of financial position. d. income statement.

A

31. Peterson Enterprises reports the following information: Net income $5,000,000 Depreciation expense 680,000 Loss on the sale of investments 154,000 Increase in accounts receivable 320,000 Peterson should report cash provided by operating activities of a. $5,514,000. b. $3,846,000. c. $6,154,000. d. $5,000,000.

A

34. 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. a high degree of financial flexibility. b. a high degree of liquidity. c. a low degree of solvency. d. low degree of financial flexibility.

A

40. Which of the following are acceptable balance sheet formats? a. Report form and account form. b. Condensed form and multiple step form. c. Condensed form and report form. d. Multiple step form and account form.

A

41. The financial statement which summarizes the operating, investing, and financing activities of an entity for a period of time is the a. statement of cash flows. b. statement of financial position. c. income statement. d. retained earnings statement.

A

44. Addison, Inc. reports: Cash provided by operating activities $2,300,000 Cash used by investing activities 640,000 Cash used by financing activities 220,000 Beginning cash balance 340,000 What is Addison's ending cash balance? a. $1,780,000. b. $3,500,000. c. $1,440,000. d. $3,060,000.

A

51. The statement of cash flows provides answers to all of the following questions except a. What is the impact of inflation on the cash balance at the end of the year? b. What was the cash used for during the period? c. Where did the cash come from during the period? d. What was the change in the cash balance during the period?

A

53. The first step in preparing the statement of cash flows is to: a. determine the cash provided by or used in operations. b. determine the cash provided by or used in investing and financing activities. c. determine the change in cash during the period. d. reconcile the change in cash with the beginning and the ending cash balances.

A

54. Which of the following is not a type of information that is supplemental to amounts presented in the balance sheet? a. Balance sheet format. b. Contractual situations. c. Contingencies. d. Accounting policies.

A

9. 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 *A current asset is either cash, something that will be converted into cash or consumed in one year or the operating cycle, whichever is longer. If installment sales are a normal part of operations, they may be classified as current assets because they will be converted into cash within the company's normal operating cycle. Answer (B) is incorrect because the cash deposit is a part of the cost of the machinery ordered and should be classified as a noncurrent asset. Answer (C) is incorrect because cash that is restricted for an indefinite period of time should be classified as a noncurrent asset. Answer (D) is incorrect because a life insurance policy is not likely to be canceled in the near future; therefore, its cash surrender value would be most appropriately reported in the long-term investment section of the balance sheet.

11. 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 *Alternative (B) is incorrect because dividing liabilities between current and long-term has nothing to do with the amount of the debt. Alternative (C) is incorrect because the term "capital" is not a correct term to use in describing debt. Alternative (D) is incorrect because total equity includes both debt and owners' equity.

2. 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 *Solvency refers to the ability of an enterprise to pay its debts as they mature. Alternatives (B), (C) and (D) are all part of the definition of liquidity.

6. 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 *This transaction causes assets to increase by $4,760. The asset account truck increases by $6,000 (the purchase price), but assets also decrease by $1,240 due to the cash payment. Liabilities increase by $4,760 as a result of the issuance of the note.

32. Companies are not required to disclose information about: a. depreciation methods. b. the identity of all stockholders. c. the use of estimates. d. inventory cost flow methods.

B

26. Assets include all of the following sub classifications except a. Long-term investments. b. Noncontrolling interest. c. Other. d. Intangibles.

B

27. Which of the following is an intangible asset? a. Restricted cash. b. Customer lists. c. Deferred income taxes. d. Prepaid pension costs.

B

30. Activities that involve the cash effects of making and collecting loans and acquiring and disposing of property, plant, and equipment are classified as: a. noncash activities. b. investing activities. c. operating activities. d. financing activities.

B

35. Major limitations of the balance sheet include all of the following except: a. judgments and estimates are used in determining many of the items reported. b. only amounts known with certainty are reported. c. it necessarily omits many items that are of financial value but cannot be recorded objectively. d.most assets and liabilities are stated at historical cost.

B

38. Which of the following pairings of an item and a basis of valuation is incorrect? a. Cash - Fair value. b. Receivables - Lower-of-cost-or-market. c. Prepaid expenses - Cost. d. Short-term investments - Fair value.

B

39. Which of the following is included in an owners' equity section reported in the balance sheet? a. Accumulated capital. b. Noncontrolling interest. c. Working capital. d. Dividends.

B

43. Receipt of interest from a Note Receivable would be reported as a cash inflow in which of the following sections: a. financing activities. b. operating activities. c. investing activities. d. stock activities.

B

45. Trent Co. reports the following information: Net cash provided by operating activities $430,000 Average current liabilities 300,000 Average long-term liabilities 200,000 Dividends paid 120,000 Capital expenditures 220,000 Purchase of treasury stock 22,000 Payments of debt 70,000 Trent's free cash flow is a. $210,000. b. $90,000. c. $310,000. d. $20,000.

B

56. Which of the following would be reported as a long-term investment at December 31, 2021? a. Equipment used in the manufacturing process. b. Land held for speculative purposes. c. Trademark. d. Trading securities.

B

57. The balance sheet format listing liabilities and stockholders' equity directly below assets is called the: a. solvency form. b. report form. c. account form. d. financial position form.

B

58. Which of the following statements regarding the statement of cash flows is incorrect? a. The statement of cash flows reports the following: (1) the cash effects of operations during a period, (2) investing transactions, (3) financing transactions, and (4) the net increase or decrease in cash during the period. b. Due to its format and level of detail, most individuals have difficulty comprehending the information reported in the statement of cash flows. c. The income statement, the statement of stockholders' equity, and the balance sheet each present some information about the cash flows of an enterprise during a period. d. The statement of cash flows presents a detailed summary of all the cash inflows and outflows, or the sources and uses of cash during the period.

B

60. Which of the following would be added back to net income in the operating activities section of the statement of cash flows? a. Payment of a cash dividend. b. Increase in accounts payable. c. Gain on sale of equipment. d. Increase in inventory.

B

62. If additional explanations cannot be conveniently shown as parenthetical explanations, the information should be disclosed by: a. supporting schedules. b. notes. c. a contra account. d. cross reference.

B

18. 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.

B *Financing activities involve liability and owners' equity items. They include (1) obtaining capital from owners and providing them with a return on (and a return of) their investment and (b) borrowing money from creditors and repaying the amounts borrowed.

20. 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 *Financial flexibility refers to a firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities. Alternative "D" is an indication of flexibility, but does not take into account adversity and unexpected needs. The nearness to cash of assets and liabilities is a firm's liquidity, and the firm's ability to pay its debts refers to solvency.

7. 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 *Generally, the rule is that if an asset is to be turned into cash, sold, or consumed either in one year or the operating cycle, whichever is longer, it is classified as current. The cash surrender value of a life insurance policy is not expected to be turned into cash, etc. within a year or the operating cycle. This item is normally shown in the long-term investments section of the balance sheet.

10. 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 *Prepaid expenses are expenditures already made for benefits to be received within one year or the operating cycle, whichever is longer. The cash has already been expended, but its inclusion on the income statement will not occur until the benefit has been received by the company.

3. 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 *The balance sheet is criticized for its failure to reflect current value (A), the extensive use of estimates in its preparation (C), and its failure to include items of financial value that cannot be measured objectively (D). The balance sheet is rarely, if ever, criticized for its division of items into separate classifications.

4. 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 *The primary purpose of the balance sheet is to reflect items of value, debts, and net worth. The three classes of items that appear on the balance sheet are assets (items of value measured by historical costs or net realizable values), liabilities (debts and obligations of the firm which represent creditor claims to the assets of the firm), and owners' equity (the net worth of the owners as represented by their claims to the firm's assets). The balance sheet reflects these items as of a particular date.

25. The correct order to present current assets is a. Cash, inventories, prepaid items, accounts receivable. b. Cash, accounts receivable, prepaid items, inventories. c. Cash, accounts receivable, inventories, prepaid items. d. Cash, inventories, accounts receivable, prepaid items.

C

28. Which of the following balance sheet formats lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side? a. Multiple step form. b. Single step form. c. Account form. d. Report form.

C

36. Other assets include all of the following except: a. Property held for sale. b. Assets in special funds. c. Timberlands. d. Restricted cash.

C

46. Which of the following is not included in the summary of significant accounting policies? a. Depreciation methods. b. Inventory cost flow assumption. c. Length of operating cycle. d. Valuation method for investments.

C

48. Companies use a ____________ to show a direct relationship between an asset and a liability on the balance sheet? a. supporting schedule. b. note. c. cross-reference. d. parenthetical explanation.

C

49. ____________ is the ability of a company to pay its debts as they mature. a. Insolvency. b. Liquidity. c. Solvency. d. Financial flexibility.

C

50. On a classified balance sheet, a company should report separately? a. Assets and liabilities with different general liquidity characteristics. b. Assets and liabilities with different implications for the company's financial flexibility. c. All of these answer choices are correct. d.Assets that differ in their type or expected function.

C

5. 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 operating cycle concept is used as a basis for classifying current items. The operating cycle of a firm is the length of time elapsed from the time cash is expended for such items as inventory to the time it converts the inventory back to cash. When the operating cycle is longer than 12 months, the longer period should be used. Therefore, the operating cycle concept does allow some assets to be classified as current even though their conversion into cash will not take place within one year.

13. 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 characteristic of all assets and liabilities comprising working capital is that they are current. The accounting profession defines working capital as the excess of current assets over current liabilities. Answers (A), (B), and (D) are incorrect because not all working capital assets and liabilities are monetary (e.g., inventory), marketable (e.g., federal income taxes payable), or cash equivalents (e.g., prepaid expenses).

17. 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 *A statement of cash flows deals with gross inflows and outflows of cash. An analysis of sales by territory would generate no information about the cash flow from the sales.

14. If a company converted a short-term note payable into a long-term 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 *Conversion of a short-term note payable (current liability) into a long-term note payable (noncurrent liability) would increase working capital. Working capital is the difference between current assets and current liabilities. Conversion of the short-term note payable reduces current liabilities and does not affect current assets. Answers (A) and (D) are incorrect because there is no effect on net income or owners' equity.

1. 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 *The balance sheet provides a basis for computing rates of return based on asset growth. The balance sheet also includes information used in evaluating capital structure (equity section) and assessing the liquidity and financial flexibility (assets and liabilities) of the enterprise. However, to determine the increase in cash due to operations one should refer to the statement of cash flows.

59. The cash effects of transactions that enter into the determination of net income are a. financing activities. b. income activities. c. investing activities. d. operating activities.

D

61. Supplemental balance sheet information that addresses material events with uncertain outcomes is referred to as a. Contractual situations. b. Accounting policies. c. Fair values. d. Contingencies.

D

16. 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 *The statement of cash flows does not adjust the cash balance for the effects of inflation or deflation during the period. Such an amount can be determined by the use of certain indices, but this is not a function of the statement of cash flows.

15. How are the following items handled in computing the total stockholders' equity section of the balance sheet? Treasury Additional Stock Paid-in Capital A. Added Added B. Added Subtracted C. Subtracted Added D. Subtracted Subtracted

C *Treasury stock (the company's own stock reacquired and not canceled) is shown as a reduction of stockholders' equity, while additional paid-in capital is added to the stockholders' equity section of the balance sheet.

12. 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 long-term issue, or A. the operating cycle is less than one year. B. the liability is to be paid with cash that the company expects to earn during the next year. C. when the debt is retired out of noncurrent assets. D. the liability is the result of a nonoperating debt instrument due with the next year.

C *When the operating cycle is less than one year and/or the debt will be paid with cash (alternatives A & B) the item is properly classified as a current liability. Also, all debt acquired or assumed by a company is a liability of that company. However, when the debt is retired out of noncurrent assets it should not be classified as current even if it meets the operating cycle/one year criteria.

23. The balance sheet is useful for analyzing all of the following except a. liquidity. b. financial flexibility. c. solvency. d. profitability.

D

24. Which of the following is not one of the classifications in owners' equity? a. Retained earnings. b. Capital stock. c. Noncontrolling interest. d. Accumulated capital.

D

33. Which of the following is not a major disclosure technique for the balance sheet? a. Notes. b. Parenthetical explanations. c. Supporting schedules. d. Worksheets.

D

37. Which of the following investments should always be reported as current assets? a. Held-to-maturity securities. b. Long-term investments. c. Available-for-sale securities. d. Trading securities.

D

47. Typical loss contingencies include all of the following except: a. Government investigations. b. Environmental issues. c. Possible tax assessments. d. Tax operating-loss carryforwards.

D

52. Borrowing money from creditors and repaying the amounts borrowed are a. liquidity activities. b. investing activities. c. operating activities. d. financing activities.

D

55. A _______________ on a balance sheet reduces either an asset, liability, or owners' equity account. a. Cross-reference. b. Note. c. Parenthetical explanation. d. Contra account.

D

8. 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 *Cash is a current asset whether it is in a checking or savings account. Inventory is a current asset at the time the balance sheet is prepared even though it may not all be sold in the subsequent year, as it is held for sale in the normal course of business. The accounts receivable that are not collectible in the coming year should be classified as a noncurrent asset. However, while the theoretical treatment of next year's depreciation should be shown as a current asset, common practice is to ignore the formal distinction in this case.

21. 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. Long-term liabilities.

D *Long-term liabilities normally require the greatest amount of supplementary disclosure. This is because the terms of all long-term liability agreements, including maturity date or dates, rate of interest, nature of obligation, and any security pledged to support the debt, should be disclosed. The other classifications do require supplementary disclosure, but rarely is it as extensive as that required for long-term liabilities.

22. 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 *The profession has recommended that the word "reserve" be used only to describe an appropriation of retained earnings. The term had been used to describe a number of items in the financial statements which has resulted in a great deal of confusion.

19. How would the two items shown below be handled in arriving at cash provided by operations in the statement of cash flows? Increase in Increase in Accounts Receivable Accounts Payable A. Add to net income Add to net income B. Deduct from net income Deduct from net income C. Add to net income Deduct from net income D. Deduct from net income Add to net income

D *To arrive at cash provided by operation, the increase in accounts receivable must be deducted from net income, and the increase in accounts payable must be added back to net income.