Chapter 3 Smartbook
What is the role of the auditor's attest function?
To provide an opinion on the financial statements.
Related third-party transactions _____ required to be disclosed in the notes to the financial statements.
are
A prepaid expense represents a(n)
asset recorded when an expense is paid in advance.
Common practice requires that current assets are presented on the balance sheet in the order of
liquidity
Assets not used directly in the operations of the business are called what?
Investments
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?
$12,000
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 The portion of rent that will be paid within the next 12 months is classified as current and the remainder is classified as noncurrent.
What is included in a company's paid in capital?
Additional paid-in capital Common stock
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.
How should liquid investments expected to be converted to cash within the current operating cycle be reported in the balance sheet?
As a short-term investment in the current asset section.
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 the long-term section of the balance sheet.
The current versus noncurrent classification applies to what in the financial statements?
Assets and liabilities
Current assets include which of the following?
Cash Short term investments
Which of the following items are considered cash equivalents?
Commercial paper due in 1 month. Money market funds that are quickly converted to cash. U.S. Treasury bills due in 2 months.
Which of the following is the formula for the current ratio?
Current assets divided by current liabilities.
Current assets divided by current liabilities is which ratio?
Current ratio
Which of the following are required SEC disclosures?
Executive stock option information Executive compensation Director compensation
The SEC requires disclosures on compensation for which of the following?
Executives Directors
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
False
True or false: The times interest earned formula is net income divided by interest expense.
False
Ownership of an exclusive right to something such as a product, a process, or a name is called what?
Intangible asset
________ consist of assets that a retail or wholesale company acquires for resale or goods that manufacturers produce for sale.
Inventories
Which of the following are characteristics of an operating segment?
Its operating results are regularly reviewed by the chief operating decision maker. It engages in business to earn revenues and incur expenses. Discrete financial information is available.
Obligations to other entities are known as what?
Liabilities
What refers to the riskiness of a company with regard to the amount of liabilities in its capital structure?
Long-term solvency
An analysis provided by the company's management is included in the
Management Discussion and Analysis.
Who is responsible for the information in the annual report?
Management of the company.
Which of the following are included in the summary of significant accounting policies included in the notes to the financial statements?
Method of depreciation. Items included in cash and cash equivalents. Choice between LIFO and FIFO.
Which of the following items are considered cash equivalents?
Money market funds quickly converted into cash. Commercial paper due in less than 3 months.
Which of the following best describes the formula for the times interest earned ratio?
Net income plus interest and tax expense divided by interest expense.
What does a liability represent?
Obligations owed to other entities
Which of the following are included in the summary of significant The Management Discussion and Analysis section of the financial statements includes a perspective on which of the following?
Operations Liquidity Capital resources
Short-term investments are sometimes called which of the following?
Short-term marketable securities Temporary investments
Classifying items on the balance sheet as current and noncurrent assists financial statement users in assessing what aspects about a company?
Solvency and liquidity.
Accounts receivable represents which of the following?
The amount owed by customers.
How are current liabilities satisfied?
The use of current assets. The creation of other current liabilities.
Why are inventories reported as current assets?
They are normally sold within the operating cycle.
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.
Which of the following is true regarding disclosure notes?
They explain or elaborate on data presented in the financial statements.
What is the purpose of additional financial disclosures in an annual report?
To assist in understanding the financial statements.
What is the role of the auditor?
To attest to the fairness of the financial statements.
True or false: Any event having a material effect on operations that occurs after a company's year-end but before the financial statements are issued requires a subsequent event disclosure.
True
Which of the following are included in inventory?
Work in process Finished goods Raw materials
The purpose of the balance sheet is to report
a company's financial position on a specific date.
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.
accounts, notes
An expense that has been incurred but not yet paid results is a(n)
accrued liability.
Which of the following are liquidity ratios?
acid-test or quick ratio current ratio
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.
The current ratio is expressed as current ______ divided by current ______
assets, liability
The financial statement that displays a firm's financial position on a particular date is the
balance sheet
The financial statement that provides information about liquidity and long-term solvency is the
balance sheet
Which of the following financial statements shows a firm's financial position on a particular date?
balance sheet
Schwinn is a company that makes bicycles. Which of the following items would be included in Schwinn's inventory?
bicycle chains finished bicycles bicycle tires
A company's assets minus its liabilities shown on the balance sheet is referred to as its ______ value.
book
Which of the following are noncurrent assets?
building land intangible assets
Money on hand and in banks that is available for use in the operations of the business is shown in the
cash account on the balance sheet
Indicate the order of the following current assets on the balance sheet.
cash and cash equivalents, accounts receivable, inventory, and prepaid expenses
Which of the following accounts represent amounts shareholders have invested in the company?
common stock additional paid-in capital
In a balance sheet, how are assets classified?
current and noncurrent
A temporary investment or short-term marketable security should be reported in which section of the balance sheet?
current asset
Cash and other assets that are reasonably expected to be converted to cash or consumed within 1 year or the current operating cycle are classified as
current assets
Inventories held for sale in the normal course of business are classified in the balance sheet as
current assets
A ______ is satisfied within 1 year or the current operating cycle, whichever is longer.
current liability
A ratio used to measure liquidity is the
current ratio.
The risk that a company will not be able to pay its obligations when they come due is referred to as
default risk
Which type of risk is the risk of a company not being able to pay its obligations when they come due?
default risk
are critical to understanding financial statements and to evaluating a firm's performance.
disclosures
The management approach to segment reporting requires that ______ financial information is available.
discrete
Shareholders' equity arises primarily from amounts invested by shareholders and amounts ______.
earned by the corporation
True or false: Investments are assets used directly in the operations of the business.
false
Inventory for a wholesale or retail company includes which of the following?
finished goods
A manufacturing firm will use which of the following accounts to record inventory?
finished goods raw material work in process
True or false: Accounts receivable result from the sale of goods or services for cash.
flase
What is the principle that requires that financial statements provide all material relevant information concerning the entity?
full-disclosure
Which of the following items are included in property, plant, and equipment?
furniture machines oil wells mineral mines
Inventories include which of the following items?
goods in production goods directly consumed in production finished goods
An asset that has no physical substance is referred to as a(n) ______ asset.
intangible
The times interest earned ratio can be calculated as (net income + interest expense + tax expense) divided by
interest expense
Which of the following are accrued liabilities?
interest payable salaries payable warranty liabilities
Assets not used directly in the operations of the business are referred to as
investments
Which of the following items are included in property, plant, and equipment?
land natural resources buildings
The debt to equity ratio is calculated as total _______ divided by shareholders' equity.
liabilities
Obligations to other entities are classified as
liabilities on the balance sheet
On the balance sheet, current assets are listed in the order of their what?
liquidity
The current ratio and the quick ratio are used to measure ______ of a company indicating the ability to pay current obligations.
liquidity
The current ratio and the quick ratio are used to measure _______ of a company indicating the ability to pay current obligations.
liquidity
The balance sheet provides useful information about a company's
liquidity and long-term solvency.
Property, plant, and equipment is a(n) ______ asset.
long-lived tangible
Responsibility for the financial statements and other information found in the annual report lies with
management
U.S. GAAP uses a _______ approach to determine reportable operating segments.
management
What type of approach does the FASB require for segment reporting?
management
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
market value of the entity
he full-disclosure principle requires financial statements to provide all _______ _______ information regarding the company
material relevant
Which of the following items should be included in cash on the balance sheet?
money orders cashier's checks cash on hand
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
Which of the following is included with the annual report to help evaluate a firm's financial performance and financial health?
note disclosures
Which of the following items should be classified as investments on the balance sheet?
note receivable due in 3 years cash restricted to purchase building investments in stock of another company
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
The time period necessary to convert cash to raw materials, convert raw materials into finished products, sell the products, and collect on the account receivable is referred to as the ______ cycle.
operating
Balance sheets often include a catch-all classification of noncurrent assets called
other long term assets
The two sources of stockholders' equity are amounts ______.
paid in from shareholders earned by the corporation
The accounts common stock and paid-in capital in excess of par are classified as
paid-in capital.
Default risk refers to the ability of a company to
pay its obligations when they come due.
Which of the following items represents an expense paid in advance that creates benefits used in the future?
prepaid expense
Which of the following are noncurrent assets?
property machines investments with maturity of 18 months
Which of the following items should not be included in cash and cash equivalents in the balance sheet?
restricted cash
Shareholders' equity is composed of which of the following accounts?
retained earnings paid-in capital
Companies that operate in more than one significant business must provide which of the following?
segment information
The FASB requires that companies that engage in more than one significant business must provide supplemental information concerning individual operating
segments
If an accounts receivable is due within 60 days, it is classified on the balance sheet as a(n)
short-term
Investments in stock and debt securities of other corporations are included as _____ if the company has the ability and intent to sell them within the next 12 months.
short-term investments
Which of the following items are required disclosures in the notes to financial statements?
significant accounting policies description of subsequent events related third-party transactions
If a company has a large amount of long-term debt in its capital structure, this will affect the firm's ______.
solvency
SEC requirements provide for disclosures on executive and director compensation, particularly concerning
stock options
A significant development that occurs after a company's fiscal year-end but before the financial statements are issued is called a(n)
subsequent event
Which of the following are common characteristics of property, plant, and equipment?
tangible long-lived used in normal operations
Which of the following are characteristics of plant, property, and equipment?
tangible used long-term in production
Which of the following are accrued liabilities?
taxes payable utilities payable
A summary of significant accounting policies includes information regarding
the choice of accounting policies.
Assets are classified as long-term if:
they are expected to be converted to cash or consumed in more than one operating cycle
The _____ ratio is calculated as (net income + interest expense + income taxes) divided by interest expense.
times interest earned
The debt to equity ratio is calculated as
total liabilities divided by total stockholders' equity.
True or false: The operating cycle for most firms is 1 year or less.
true
A customer pays in advance for services to be performed in a future period. In which account should the transaction be recorded?
unearned revenues
A liability is classified as current if it is due
within 1 year or the current operating cycle, whichever is longer.
