ACCT (3110) - Chapter 5

Trading Investments

Debt and equity securities bought and held primarily for sale in the near term to generate income on short-term price differences.

Available-for-sale Investments

Debt and equity securities not classified as held-to-maturity or trading securities.

CONTRACTUAL SITUATIONS

Explanations of certain restrictions or covenants attached to speci c assets or, more likely, to liabilities.

ACCOUNTING POLICIES

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

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.

Treasury Stock

Generally, the amount of ordinary shares repurchased

Held-to-maturity Investments

Held-to-maturity

Current assets are presented in the balance sheet in order of liquidity

How are current assets presented in the balance sheet?

It is desirable to report any premium or discount separately as an addition to or subtraction from the bonds payable

How do we report a premium or discount on a bond payable?

A company writes off (amortizes) limited-life intangible assets over their useful lives It periodically assesses indefinite-life intangibles (such as goodwill) for impairment.

How does a company measure/value intangible assets

Fair Value

How should a company measure Available-For-Sale securities?

at amortized cost

How should a company measure held-to-maturity securities?

Fair Value

How should a company measure trading securities?

Current Asset

How should a company report trading securities?

A

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.

account form

If a classified balance sheet lists assets, by sections, on the left side, and liabilities and stockholders' equity, by sections, on the right side it is known as...

patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists

List examples of intangible assets

Investments set aside in special funds, pension fund, plant expansion fund, the cash surrender value of life insurance. Investments in securities, such as bonds, common stock, or long-term notes Investments in tangible xed assets not currently used in operations, such as land held for speculation. Investments in nonconsolidated subsidiaries or af liated companies

List examples of long-term investments

Cash and cash equivalents Short-term investments Receivables Inventories Prepaid expenses

List the most common current asset categories.

Current assets Long-term investments Property, plant, and equipment Intangible assets Other assets

List the proper headings of the assets section of the balance sheet.

Current liabilities Long-term debt Owners' (stockholders') equity

List the proper headings of the liabilities & equity section of the balance sheet.

CONTINGENCIES

Material events that have an uncertain outcome

ACTIVITY RATIOS

Measures of how effectively the company uses its assets.

PROFITABILITYRATIOS.

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

Free Cash Flow

Net Cash Provided by Operating Activities - Capital Expenditures - Dividends =

Current Cash Debt Coverage

Net Cash Provided by Operating Activities ÷ Average Current Liabilities

A

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.

D

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.

B

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.

Assets

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

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.

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.6

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.

1. Most assets and liabilities are reported at historical cost. 2. Companies use judgments and estimates to determine many of the items reported in the balance sheet. 3. The balance sheet necessarily omits many items that are of nancial value but that a company cannot record objectively.

Some of the major limitations of the balance sheet are?

FALSE

TRUE OR FALSE A contingent liability and an estimated liability are treated in the same manner for financial statement reporting purposes.

TRUE

TRUE OR FALSE According to the conceptual framework project, 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.

FALSE

TRUE OR FALSE Available-for-sale investments are debt securities that the enterprise has the positive intent and ability to hold to maturity.

TRUE

TRUE OR FALSE 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.

TRUE

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

FALSE

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

TRUE

TRUE OR FALSE 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.

FALSE

TRUE OR FALSE 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.

TRUE

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

TRUE

TRUE OR FALSE 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.

FALSE

TRUE OR FALSE 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.

TRUE

TRUE OR FALSE Long-term liabilities are obligations that are not reasonably expected to be liquidated within one year or the normal operating cycle, whichever is longer.

TRUE

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

FALSE

TRUE OR FALSE Price level adjusted information should be disclosed in the balance sheet whenever the inflation rate is above 10%.

TRUE

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

FALSE

TRUE OR FALSE Securities classified as available-for-sale should be reported at cost.

TRUE

TRUE OR FALSE The AICPA has recommended that the word "reserve" be used only to describe an appropriation of retained earnings.

FALSE

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

TRUE

TRUE OR FALSE 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.

FALSE

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

FALSE

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

TRUE

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

TRUE

TRUE OR FALSE The use of an other-asset section varies widely in practice. It should be restricted to unusual items that are different from assets included elsewhere.

TRUE

TRUE OR FALSE 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.

TRUE

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

ACCUMULATED OTHER COMPREHENSIVE INCOME

The aggregate amount of the other comprehensive income items.

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.

Retained Earnings

The corporation's undistributed earnings

Additional Paid-In Capital

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

working capital

The excess of total current assets over total current liabilities; the liquidity buffer avail- able to meet the financial demands of the operating cycle.

Capital Stock

The par or stated value of the shares issued.

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. items of value, debts, and net worth. B. the value of items owned by the firm. C. the status of the firm's assets in case of forced D. liquidation of the firm.

Lower of cost or market; FIFO or LIFO

To present inventories properly, a company discloses the basis of valuation (______) and the cost flow assumption used (_______ or _______).

Long-Term Investments Property, Plant, and Equipment Intangible Assets Other Assets

What are the primary Noncurrent Assets?

it helps users evaluate liquidity, solvency, and financial flexibility

What is the value of the cash flow statement?

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.

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. Three-year premium for fire insurance on plant and equipment. D. A pension fund.

Financial flexibility

a company's ability to respond and adapt to financial adversity and unexpected needs and opportunities.

Current assets

are cash and other assets a company expects to convert into cash, sell, or consume either in one year or in the operating cycle, whichever is longer.

classified

balance sheets group together simi- lar items to arrive at significant subtotals, that is to say the balance sheet is ________.

Ratio analysis

expresses the relationship among pieces of selected financial statement data, in a percentage, a rate, or a simple proportion.

Other Assets

include items such as long-term prepaid expenses, prepaid pension cost, and non- current receivables. Other items that might be included are assets in special funds, deferred income taxes, property held for sale, and restricted cash or securities

Investing activities

includes making and collecting loans and acquiring and dis- posing of investments (both debt and equity) and property, plant, and equip- ment.

Financing activities

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

adjunct account

increases either an asset, liability, or owners' equity account

cash debt coverage

indicates a company's ability to repay its liabilities from net cash provided by operating activities, without having to liquidate the assets employed in its operations.

Operating activities

involve the cash effects of transactions that enter into the determination of net income.

Intangible Assets

lack physical substance and are not financial instru- ments

report form

lists the sections one above the other, on the same page; assets, followed by liabili- ties and stockholders' equity directly below, on the same page.9

financial flexibility

measures 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

Long-term liabilities

obligations that a company does not reasonably expect to liquidate within the normal operating cycle

Current Liabilities

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

Non controlling Interest

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

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

balance sheet

provides information about the nature and amounts of investments in enterprise resources, obligations to creditors, and the owners' equity in net resources; helps in predicting the amounts, timing, and uncertainty of future cash flows.

Cash equivalents

short-term highly liquid investments that will mature within three months or less

Property, Plant, and Equipment

tangible long- lived assets used in the regular operations of the business.

Solvency

the ability of a company to pay its debts as they mature

Free cash flow

the amount of discretionary cash flow a com- pany has.

Liquidity

the amount of time that is expected to elapse until an asset is realized or otherwise converted into cash or until a liability has to be paid

unappropriated retained earnings

the amount that is usually available for dividend distribution

Net cash provided by operating activities

the excess of cash receipts over cash payments from operating activities

Solvency

the firm's ability to pay its debts as they mature.

reserve

used only to describe an appropriation of retained earnings

current cash debt coverage

used to assess liquidity; indicates whether the company can pay off its current liabilities from its operations in a given year

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.10

what does the statement of cash flows report?