Smartbook Ch 3

Inventory for a wholesale or retail company includes which of the following?

finished goods

Which of the following are included in inventory?

finished goods, work in process, raw materials

The intentional misappropriation of assets or deceitful financial reporting is known as

fraud

What is the principle that requires that financial statements provide all material relevant information concerning the entity?

full disclosure

______ analysis compares financial statements of 2 or more years; ______ analysis examines the relationships between financial statement items of the same year.

horizontal and vertical

A technology company incurs costs to research and develop a new hand-held device and obtain a patent. This activity is an example of a(n)

internally developed intangible asset.

___________ consist of assets that a retail or wholesale company acquires for resale or goods that manufacturers produce for sale.

inventory

Cash set aside for future plant expansion and a 3 year note receivable are both examples of what on a company's balance sheet?

investments

Land held for speculation, noncurrent receivables, and cash set aside for future plant expansion are all examples of

investments

Land held for speculation, noncurrent receivables, and cash set aside for future plant expansion are all examples of

investments or assets

Which of the following are noncurrent assets?

investments with maturity of 18 months property machines

An investment should be classified as current on the balance sheet if

it will be sold within 12 months. management has the intent and ability to liquidate it in the near term.

Which of the following items are included in property, plant, and equipment?

land buildings natural resources

Obligations to other entities are known as what?

liabilities

The three primary elements found on a balance sheet are assets,_________ , and shareholders' equity.

liabilities

Common practice requires that current assets are presented on the balance sheet in the order of

liquidity

The balance sheet provides useful information about a company's _______ and long-term solvency.

liquidity

The current ratio and the quick ratio are used to measure _________ of a company indicating the ability to pay current obligations.

liquidity

What refers to the riskiness of a company with regard to the amount of liabilities in its capital structure?

long-term solvency

Responsibility for the financial statements and other information found in the annual report lies with

management

Who is responsible for the information in the annual report?

management company

A _____ firm will include finished goods, work in process, and raw materials as part of their inventory.

manufacturing

Which of the following items are included in investments?

note receivable due in 5 years cash reserved to purchase land

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 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 requires supplemental disclosures in the notes to the financial statements?

pension plans leases long-term debt

A(n) ________ audit opinion occurs when there is an exception to the standard opinion but not of sufficient seriousness to invalidate the whole of the financial statements.

qualified

Which of the following opinions is used when an auditor has an exception to the standard opinion but there is not sufficient seriousness to invalidate the financial statements as a whole?

qualified

The accumulated net income earned since the inception of the corporation and not yet paid to shareholders is referred to as

retained earnings

Which of the following represents the net income earned by a corporation and not yet paid to shareholders?

retained earnings

Shareholders' equity is composed of which of the following accounts?

retained earnings and 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

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

Classifying items on the balance sheet as current and noncurrent assists financial statement users in assessing what aspects about a company?

solvency and liquidity

A _______ event is a significant development that occurs after a company's fiscal year-end but before the financial statements are issued or available to be issued.

subsequent

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

A customer pays in advance for services to be performed in a future period. In which account should the transaction be recorded?

unearned revenues

An error is _____; fraud is _____ misappropriation of assets or fraudulent financial reporting.

unintentional and intentional

Which of the following are accrued liabilities?

utilities payable taxes payable

Which of the following items are included in the professional opinions given in the auditor's report?

The effectiveness of internal control. The fairness of the financial statements.

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's attest function?

To provide an opinion on the financial statements.

What is the purpose of an audit report?

To provide users with a professional opinion regarding 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

True or false: The operating cycle for most firms is 1 year or less.

True; Most firms have an operating cycle of less than 1 year because they can make and sell the goods within a short period of time.

Another term for a trade receivable that occurs in the course of a company's normal trade or business is

accounts receivable

An expense that has been incurred but not yet paid results is a(n)

accrued liability

Which of the following should be classified as current liabilities?

accrued warranties unearned revenues income taxes payable

Which of the following opinions is necessary when the auditor finds exceptions that are so material that the financial statements may be misleading?

adverse

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.

What are the primary elements found on a balance sheet?

assets, liabilities, equity

The role of a(n) ________ is to attest to the fairness of the financial statements they have examined.

auditor

A company's total assets minus its total liabilities as shown on the balance sheet is known as the _________ value.

book

Which of the following are considered illegal acts?

bribes kickbacks illegal contributions

Which of the following items should be classified as investments on the balance sheet?

cash restricted to purchase building note receivable due in 3 years investments in stock of another company

Which of the following accounts represent amounts shareholders have invested in the company?

common stock and additional paid-in capital

Which of the following may be recorded on the balance sheet as intangible assets?

copyrights, trademarks, patents

In a balance sheet, how are assets classified?

current and noncurrent

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

Deferred revenues and accrued salaries payable are examples of what?

current liabilities

The portion of a long-term note that is due and payable within the next 12 months should be reported on the balance sheet as a:

current liability

Which of the following should be classified as current liabilities?

current maturities of long-term debt accounts payable accrued salaries

Which of the following are liquidity ratios?

current ratio and quick ratio

Which of the following is a ratio used to evaluate a company's solvency?

debt and equity

Which of the following ratios are used to evaluate a company's ability to pay long-term debts?

debt to equity ratio, times interest earned ratio

Which type of risk is the risk of a company not being able to pay its obligations when they come due?

default risk

What account is affected when a customer pays in advance for services to be performed in the future?

deferred revenues

Shareholders' equity arises primarily from amounts invested by shareholders and amounts ______.

earned by the corporation

The SEC requires disclosures on compensation for which of the following?

executives, directors

When a company spends large amounts on research and development to obtain a patent on its own, the research and development cost is

expensed as incurred

Which of the following are common disclosures on the face of a financial statement?

Common stock information Allowance for uncollectible accounts

True or false: Default risk refers to how adept a company is at withstanding various events that might impair its ability to earn profits.

False

True or false: The balance sheet will directly measure the company's market value.

False The balance sheet measures the company's book value because many assets are not recorded at fair value.

True or false: Information about fair value is commonly listed as an additional disclosure on the face of the financial statements.

False Detailed information about fair value is disclosed using disclosure notes

Patents, copyrights, and franchises are examples of what?

Intangibles

The Management Discussion and Analysis section of the financial statements includes a perspective on which of the following?

Liquidity Capital resources Operations

An analysis provided by the company's management is included in the

Management discussion and analysis

The full-disclosure principle requires financial statements to provide all ________ _______ information regarding the company.

Material and relevant

Which of the following are included in the summary of significant accounting policies included in the notes to the financial statements?

Method of depreciation. Choice between LIFO and FIFO. Items included in cash and cash equivalents.

Which of the following items are considered cash equivalents?

Money market funds that are quickly converted to cash. Commercial paper due in 3 month. U.S. Treasury bills due in 2 months.

Which of the following are required disclosures for related-party transactions?

Nature of the relationship. Amounts due to or from related parties.

Which of the following are required disclosures for related-party transactions?

Nature of the relationship. Description of transaction. Dollar amount of transaction.

When a receivable is supported by a formal agreement that specifies payment terms, it is called a _________ _________

Notes receivables

What does a liability represent?

Obligations owed to other entities

Investments are reported as ________-_________ investments when the company has both the intent and ability to sell within one year (or operating cycle).

Short-term

Indicate the order of the following current assets on the balance sheet.

1-cash and cash equivalents 2-accounts receivable 3-inventory 4-prepaid expenses

Which of the following would be the best current ratio, assuming the company had excellent liquidity and an ability to generate positive income?

2.4

A(n) ________ audit opinion occurs when the exceptions to the standard opinion are so great that the financial statements may be misleading.

Adverse

The full-disclosure principle requires that financial statements report which of the following?

All material relevant information.

Which of the following are common disclosures on the face of a financial statement?

Allowance for uncollectible accounts Common stock information

Which of the following statements is true regarding errors, fraud, and illegal acts?

An illegal act is a violation of the law.

The current versus noncurrent classification applies to what in the financial statements?

Assets and Liabilities Details: The usefulness of the balance sheet is enhanced when assets and liabilities are grouped according to common characteristics. The broad distinction made in the balance sheet is the current versus long-term (non-current) classification of both assets and liabilities.

Current assets include which of the following?

Cash and short-term investments

Which of the following are included in the summary of significant accounting policies included in the notes to the financial statements?

Choice between LIFO and FIFO. Items included in cash and cash equivalents. Method of depreciation.

Which of the following items are considered cash equivalents?

Commercial paper due in 1 month U.S Treasury bills due in 2 months Money market funds that are quickly converted to cash.

If a company has a current ratio of 1.2, which of the following is true?

The company has $1.20 in current assets for each dollar of current liabilities.

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; The portion of rent that will be paid within the next 12 months is classified as current and the remainder is classified as noncurrent.

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.

Barsky Corp. has the following items: Cash $5,000 Prepaid expenses 2,000 Building 40,000 Land 20,000 Inventory 15,000 Total noncurrent assets on the balance sheet is

$60,000

Barsky Corp. has the following items: Cash. $5,000 Prepaid expenses. 2,000 Building. 40,000 Land. 20,000 Inventory. 15,000 Total noncurrent assets on the balance sheet is

$60,000

On January 1, Year 1, Renquist Corp. borrowed $100,000 by signing a 5-year note payable with annual interest of 8%. The terms of the contract require Renquist to repay the principal over 5 years with a payment of $20,000 made at the end of each year. On December 31, Year 1, Renquist made the first payment plus interest. On January 1, Year 2, what portion of the note should be classified as noncurrent liabilities?

$60,000; Reason: Remaining balance on the loan is $80,000. $20,000 will be paid during year 2 so that amount is current and the remaining $60,000 that will be paid beyond year 2 is noncurrent.

On January 1, Year 1, Renquist Corp. borrowed $100,000 by signing a 5-year note payable with annual interest of 8%. The terms of the contract require Renquist to repay the principal over 5 years with a payment of $20,000 made at the end of each year. On December 31, Year 1, Renquist made the first payment plus interest. On January 1, Year 2, what portion of the note should be classified as noncurrent liabilities?

$60,000; Remaining balance on the loan is $80,000. $20,000 will be paid during year 2 so that amount is current and the remaining $60,000 that will be paid beyond year 2 is noncurrent.

Which of the following are required disclosures for related-party transactions?

Description of transaction. Nature of the relationship. Dollar amount of transaction.

Which of the following are required SEC disclosures?

Director compensation Executive stock option information Executive compensation

Examining expenses as a percentage of total sales for the current year is an example of _______ analysis

Vertical