AU 60 - Assignment 5 - Understanding Financial Statements
Current liabilities
A balance sheet liability classification that includes obligations whose payments are reasonably expected to require the use of cash or the creation of other current liabilities within one year.
Treasury stock
A corporate stock issued as fully paid to a stockholder and subsequently reacquired by the corporation to use for business purposes.
Comprehensive income
A measure of income that goes beyond that reported on the income statement by including items such as unrealized gains and losses.
D. $200,000
A start-up company, New Corporation, issued 10,000 shares of stock with a par value of $15 a share at $20 a share. What is the amount of New's paid-in capital? A. $10,000 B. $50,000 C. $150,000 D. $200,000
Income Statement
A(n) ____ provides stakeholders with information regarding the profitability of an organization over a given period of time and allows risk and insurance professionals to gain a better understanding of an organization and its insurance needs.
Receivables
An asset classification that consists of the amounts owed to a company by customers and other outsiders.
Marketable securities
An asset classification that includes temporary investments that can easily be converted into cash.
B. Other income and expenses.
Heritage Planners Ltd is a consulting group that provides company cars to management. The fleet of vehicles was recently sold for a gain of $5,000. The gain should be classified on the income statement as A. Other operating income in the trading section of the income statement. B. Other income and expenses. C. A reduction to other automobile expense. D. Revenue earned in the ordinary course of business.
D. Home Houseware's financial position as of the balance sheet date.
Home Housewares Inc. is a retail store applying for commercial coverage with ABC Insurance. The underwriter requested a copy of Home Houseware's most recent financial statements. The underwriter will use the balance sheet to determine A. Dividend payments to shareholders as of the balance sheet date. B. Home Houseware's gross profit margin as of the balance sheet date. C. Home Houseware's sources of cash as of the balance sheet date. D. Home Houseware's financial position as of the balance sheet date.
B. Gross margin
In a manufacturing operation, the cost of goods sold includes all of these, EXCEPT: A. Labor involved in production B. Gross margin C. Cost of material to make a product D. Overhead costs
B. A review of the financial statements helps John to determine XYZ's insurance needs.
John is a risk management specialist for XYZ Company. John examines XYZ's financial statements on a quarterly basis. Which one of the following best describes a reason for this analysis? A. A review of the financial statements helps John to determine XYZ's ability to pay upcoming insurance premiums. B. A review of the financial statements helps John to determine XYZ's insurance needs. C. A review of the financial statements helps Joe to assess XYZ's compliance with loan covenants. D. A review of the financial statements helps Joe to evaluate XYZ's ability to finance premiums.
A. Unpaid invoices from vendors
Liabilities are claims against the organization's assets. Which one of the following best describes a current liability? A. Unpaid invoices from vendors B. Treasury stock to be retired in six months C. Deferred acquisition costs D. Unamortized portion of goodwill
Surplus
On the balance sheet of a not-for-profit organization, shareholders' equity is often called a ____.
D. Retained earnings
One of the purposes of this section of the statement of changes in shareholders' equity is to connect the income statement to the balance sheet by indicating how much of the net income of the company is being reinvested for ongoing and future business needs rather than distributed to the owners in the form of dividends. What section is described? A. Treasury stock B. Paid-in capital C. Accumulated other comprehensive income D. Retained earnings
C. Retained earnings.
Owners' equity represents the capital contributed by an organization's owners plus the organization's A. Treasury stock. B. Net worth. C. Retained earnings. D. Net assets.
B. Net income.
The "bottom line" of an income statement shows the organization's A. Net revenues. B. Net income. C. Capital expenses. D. Capital gains.
D. Unrealized gains on securities available for sale.
The Financial Accounting Standards Board (FASB) requires organizations to report comprehensive income. Comprehensive income includes an organization's net income and A. Write-down of goodwill due to impairment. B. Additional capital contributions made by shareholders. C. Change in market value of stock issued by the organization. D. Unrealized gains on securities available for sale.
Income Statement/Balance Sheet
The ____ describes the organization's experience over time, whereas a ____ lists the organization's assets and liabilities at a given moment.
Statement of changes in shareholders' equity
The ____ shows changes from the beginning to the end of the period for each major component of the capital accounts that constitute shareholders' equity.
Accounting Equation
The balance sheet illustrates the ____ (also known as the balance sheet equation), which relates assets to liabilities and shareholders' equity.
B. At a given point in time.
The balance sheet provides a snapshot of an organization's financial condition A. Over one 12 month period. B. At a given point in time. C. At the start and end of a business day. D. For at least two points in time for comparison purposes.
A. Assets = Liabilities + Net Worth
The basic accounting equation on which the balance sheet is structured is A. Assets = Liabilities + Net Worth B. Liabilities = Assets + Net Worth C. Net Worth = Liabilities + Assets D. Assets = Liabilities - Net Worth
Retained earnings
The cumulative net income that an organization has retained, after payment of dividends, for reinvestment in the organization's operations.
Shareholders' Equity (Shareholders' equity is shown on the liabilities side of the balance sheet because a business does not own its net worth. It "owes" its net worth to its owners.)
The difference between assets and liabilities in a for-profit business is called ____(also known as owners' equity, net worth, or book value).
Statement of changes in shareholders' equity
The financial statement that explains any changes that have occurred in the organization's capital accounts during a specific period.
Balance sheet
The financial statement that reports the assets, liabilities, and owners' equity of an organization as of a specific date.
Statement of cash flows
The financial statement that summarizes the cash effects of an organization's operating, investing, and financing activities during a specific period.
C. Statement of changes in shareholders' equity.
The four primary types of financial statements include the balance sheet, the income statement, the statement of cash flows, and the A. Summary of accounting policies. B. Statement of retained earnings. C. Statement of changes in shareholders' equity. D. Schedule of contingencies.
B. Statement of cash flows.
The four primary types of financial statements include the balance sheet, the income statement, the statement of changes in shareholders' equity, and the A. Profit and loss statement. B. Statement of cash flows. C. Audited statement. D. Summary of operations.
C. Income statement.
The four primary types of financial statements include the balance sheet, the statement of changes in shareholders' equity, the statement of cash flows, and the A. Statement of financial position. B. Statement of transactions. C. Income statement. D. Statement of assets and liabilities.
C. Balance sheet.
The four primary types of financial statements include the income statement, the statement of changes in shareholders' equity, the statement of cash flows, and the A. Statement of revenues and expenses. B. Statement of activities. C. Balance sheet. D. Statement of shares and other equity.
D. Statement of changes in shareholders' equity.
The income statement provides a detailed explanation of the results of the organization's operations. Net income is found on the income statement as well as the A. Statement of statutory accounting. B. Balance sheet. C. Form 8-K. D. Statement of changes in shareholders' equity.
Revenue
The inflow of assets, usually cash or accounts receivable, resulting from the sale of products or the rendering of services to customers.
Gross margin (gross profit margin)
The percentage of sales remaining after deducting the cost of goods sold from sales, calculated by dividing gross profit by sales.
A. To communicate information about an organization's financial activities to decision makers.
The primary purpose of financial statements is A. To communicate information about an organization's financial activities to decision makers. B. To enable customers to make informed decisions concerning a company's products. C. To ensure that a company's cash flow balances at the end of a business day. D. To enable a sales department to make convincing presentations to potential buyers.
B. Communicate information about the organization's financial activities to individuals who need to make informed financial decisions about the organization.
The primary purpose of financial statements is to: A. Determine how much money an organization has on hand. B. Communicate information about the organization's financial activities to individuals who need to make informed financial decisions about the organization. C. Determine which of the organization's activities and investments have been profitable. D. Allow management to make plans regarding the organization's future.
B. The purchase price is expensed over the building's life expectancy.
The purchase of a building is a capital expenditure. How is the purchase recorded on the income statement? A. The purchase price is an expense on the closing date of the sale. B. The purchase price is expensed over the building's life expectancy. C. Capital expenditures are reported on the cash flow statement as an operating activity. D. The purchase is expensed over the number of years of the related financing agreement.
Financial Statements
The purpose of ____ is to communicate information about an organization's financial activities, and the results of those activities, to individuals who need to make informed financial decisions about the organization.
Statement of cash flows
The purpose of the ____ is to identify the sources and uses of cash during the year, essentially reconciling any difference in the beginning and ending balances in the cash account.
Investing
The statement of cash flows is divided into three sections: operating activities, investing activities, and financing activities. The ____ activities section reflects the actual cash inflows and outflows that have occurred as a result of activities such as the sale or purchase of property, plant, or equipment; the acquisition or disposal of marketable securities; and the receipt of payments on loans made to others.
Financing
The statement of cash flows is divided into three sections: operating activities, investing activities, and financing activities. The ____ activities section reports the cash inflows and outflows that have occurred as a result of activities such as issuing or repurchasing stock, bonds, or mortgages. Financing activities include cash payments for the payment of dividends.
Operating
The statement of cash flows is divided into three sections: operating activities, investing activities, and financing activities. The ____ activities section starts with the net income figure, which reflects operating cash inflows (such as cash receipts from the sale of goods and services) and operating cash outflows (such as cash payments to suppliers and employees).
Paid-in capital
The total amount invested in an organization by the owners.
D. To communicate information about an organization's financial status.
Which of the following best describes the purpose of financial statements? A. To interrelate the balance sheet, income statements, and owners equity. B. To present financial information to the accounting department for bookkeeping. C. The classification, analysis, and determination of appropriate reporting. D. To communicate information about an organization's financial status.
B. The balance sheet, the income statement, the statement of changes in shareholders' equity, and the statement of cash flow.
Which one of the following groups of financial statements, when considered together, would best present an organization's financial condition? A. The balance sheet and the statement of cash flow. B. The balance sheet, the income statement, the statement of changes in shareholders' equity, and the statement of cash flow. C. The income statement and the statement of owners' equity. D. The balance sheet, the income statement, and the statement of cash flow.
D. A summary of loss contingencies
Which one of the following important pieces of risk management information is found in the notes to the financial statement? A. An accounting equation B. A disclaimer of opinion C. Changes in owner's equity D. A summary of loss contingencies
C. It is used to assess the ability to meet financial obligations.
Which one of the following is a major purpose of the statement of cash flows? A. It is used in the cash allocation process by line managers. B. It is used by insurance producers to balance daily bank deposits. C. It is used to assess the ability to meet financial obligations. D. It is used by middle management to assess future resource needs.
B. It is used to assess an organization's need for additional financing.
Which one of the following is a major purpose of the statement of cash flows? A. It is used in the cash allocation process by line managers. B. It is used to assess an organization's need for additional financing. C. It is used by insurance brokers to balance daily bank deposits. D. It is used by middle management to assess future resource needs.
C. It is illustrated by the accounting equation.
Which one of the following is a true of an organization's balance sheet? A. It reports the inflow of assets to the organization. B. It compares revenues to expenses for the period. C. It is illustrated by the accounting equation. D. It is the result of revenue over a period of time.
A. Long-term notes payable
Which one of the following is an example of a noncurrent liability? A. Long-term notes payable B. Unearned revenue C. Short-term debt D. Accounts payable
A. Financial activity→ Bookkeeping→ Accounting→ Financial statements
Which one of the following paths best illustrates the flow of financial information within an organization? A. Financial activity→ Bookkeeping→ Accounting→ Financial statements B. Accounting→ Bookkeeping→ Financial statements C. Financial statements→ Bookkeeping→ Accounting→ Financial activity D. Financial activity→ Accounting→ Financial statements
B. Assets Liabilities Owners' Equity Total Liabilities and Owners' Equity
Which one of the following represents the general form of a balance sheet? Select one: A. Liabilities Assets Total Assets and Owners' Equity B. Assets Liabilities Owners' Equity Total Liabilities and Owners' Equity C. Owners' Equity Stocks Receivables D. Net Worth and Liabilities Owners' Equity Assets
C. Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets.
Which one of the following statements about the balance sheet is correct? A. Change in asset and liability valuation from historical cost to fair value has no effect on the value of shareholders' equity. B. The balance sheet must always balance, but an exception is that the balance sheet will not balance if net worth is a negative number. C. Net worth is positive whenever the value of assets exceeds the value of liabilities and negative if the value of liabilities exceeds the value of assets. D. The balance sheet contains important financial information about net worth and assets, both which indicate the source of an organization's funding.
B. $40
Year-end balance sheet entries for We Make Things, Inc. (WMTI) appear below. Assets Cash $ 40 All other assets $500 Total assets $540 Liabilities and Owners' Equity Total liabilities $300 Owner's equity: Paid-in capital $210 Retained earnings 30 Total owners' equity $240 Liabilities and Owners' Equity $540 Which one of the following figures from WMTI's balance sheet, above, shows the same amount as the total cash in the statement of cash flows? A. $30 B. $40 C. $210 D. $240
D. $240
Year-end balance sheet entries for We Make Things, Inc. (WMTI), appear below. Assets Cash $ 40 All other assets 500 Total assets $540 Liabilities and Owners' Equity Total liabilities $300 Owner's equity: Paid-in capital $210 Retained earnings 30 Total owners' equity $240 Liabilities and Owners' Equity $540 Which one of the following figures from WMTI's balance sheet, above, shows the same amount as the total in WMTI's statement of changes in owner's equity? A. $30 B. $40 C. $210 D. $240
Liabilities
____ are the debts and obligations that represent claims against an organization's assets.
Dividends
____ are the portion of an organization's profits that is paid to shareholders and are not deducted as expenses to arrive at net income; therefore, they are deducted from net income to determine the change in retained earnings from one period to the next.
Assets
____ are the resources an organization owns or uses to operate its business.
Noncurrent
____ assets are those assets that will be used over a period greater than one year, and they are grouped into tangible assets (such as land, buildings, and equipment) and intangible assets. Intangible assets include all assets that cannot be seen or touched, such as leaseholds, patents, copyrights, and trademarks, and they are often categorized as intellectual property.
Current
____ assets can include cash, marketable securities, receivables (accounts and notes), inventories, and prepaid expenses.
Comprehensive
____ income includes a corporation's net income from the income statement plus other income that is not required to be reported on the income statement.
Depreciation
____ is an accounting term used to describe the allocation of the value of a noncurrent tangible asset over its useful life.
Paid-in capital
____ is the amount of money raised by issuing stock, calculated as the par value of the stock issued plus any additional paid-in capital over the par value, which is an arbitrary dollar value that a corporation assigns to its shares.
Shareholders' equity (owners' equity)
____ is the net amount of assets after deducting an organization's debts and obligations (liabilities).
Goodwill
____ is usually classified as an intangible asset and is usually generated as part of an acquisition. Whenever the acquiring organization pays more than the book value for the acquired organization, the difference between the price paid for the organization and the book value can be listed as this on the balance sheet and is not amortized over any specific time period, like other intangible assets.
Noncurrent
____ liabilities are those that will be paid or satisfied more than one year after the balance sheet date, such as long-term notes payable.
Current
____ liabilities can include accounts payable, short-term debt, or the current position of a long-term debt.
True
(T/F) Revenue does not include gains from the sale of property, plant, or equipment.
Accounting
The classification, analysis, and determination of the appropriate method of reporting the effects of the bookkeeping records in an organization's financial statements.
Gross Profit
The cost of goods sold expense, which is shown separately from other expenses, is subtracted from sales on the income statement to arrive at the ____.
Net Income
= Revenue - Expenses (including depreciation) + Gains - Losses - Taxes
Balance Sheet
A ____ indicates the financial position of an organization and is a listing of everything that the organization owns and everything that it owes at a particular moment in time. It is a snapshot of the company's financial position as of that date. The accounting equation ties together the balance sheet's main components, which are assets, liabilities, and shareholders' equity.
Financial Statement
A ____ is a document that quantitatively presents an organization's financial activities or status. Such activities include sales, purchases, borrowings, repayments, and investments.
general operating expense
A ____ is one that is necessary to run the business but bears no direct relationship to the volume of sales, such as a retail store's cost for heating or air conditioning its place of business.
Current assets
A balance sheet asset classification that includes cash and other assets that are expected to be converted into cash, sold, or exchanged within the business's normal operating cycle, usually one year.
Prepaid expenses
An asset classification that represents the amount that has already been paid for services that have not been received or used.
C. Utility charges for the manufacturing plant
Ace Woodworking Company makes household furniture. Which one of the following best describes an expense that should be classified as an operating expense on Ace's income statement? A. Payments to lumber suppliers B. Wages paid to furniture assemblers C. Utility charges for the manufacturing plant D. Costs for new factory equipment
B. Long-term notes payable
All of these are listed as current liabilities on the balance sheet, EXCEPT: A. Short-term debt B. Long-term notes payable C. Accounts payable
expense directly related to sales
An ____ is one that increases or decreases in direct relationship to sales, such as the cost of goods sold, commissions, or the cost of the materials used to ship goods that have been sold.
Income Statement
An ____ shows an organization's profit or loss for a stated period. It is created by comparing the revenue generated with the expenses incurred to produce those revenues, and then adding any gains and subtracting any losses during the reported period.
Depreciation expense
An accounting method that spreads out the expense of a purchase over the life expectancy of the item.
Inventory
An asset classification that consists of goods available for sale to customers; for a manufacturing company, also includes raw materials and finished goods.
Operating income
An income statement value that reflects income that results from the normal operations of the business during the period covered by the statement; calculated as the gross profit less selling, general, and administrative expenses.
Gross profit
An income statement value that represents sales or operating revenue minus the cost of goods sold.
C. Unrealized gains and losses on securities.
An insurer's comprehensive income includes A. Listings of salaries of key employees. B. Any dividends paid to stockholders. C. Unrealized gains and losses on securities. D. The insurer's completed balance sheet.
Retained earnings
An organization may use ____ for purposes such as funding capital expenditures, research and development, or debt repayment.
Shareholders' equity (owners' equity)
Assets - Liabilities =
A. A copyright that expires in 10 months
Assets on the balance sheet are classified as current and noncurrent. Which one of the following is classified as a noncurrent asset? A. A copyright that expires in 10 months B. A $10,000 corporate bond that matures in 15 months C. Inventory for sale that was purchased one year ago D. Marketable securities purchased 15 months ago
A. Cost of goods sold reports expenses after an inventory item is sold.
Cost of goods sold appears on the income statements of manufacturing and retail entities. Which one of the following statements best describes cost of goods sold? A. Cost of goods sold reports expenses after an inventory item is sold. B. Cost of goods sold expenses inventory evenly throughout the year. C. Cost of goods sold calculation adds ending inventory and subtracts beginning inventory from purchases. D. Cost of goods sold is equal to a percentage of purchases made by the entity during the year.
C. Can be used by agents and brokers to assess coverage needs.
Financial statements A. Can be useful when read individually but fail to provide a comprehensive picture when viewed together. B. Are of no use to underwriters or claim representatives. C. Can be used by agents and brokers to assess coverage needs. D. Are not useful to insurance professionals because of the limited nature of information provided.
A. Gross profit = sales - cost of goods sold
Gross profit is reported on the income statement. How is gross profit calculated? A. Gross profit = sales - cost of goods sold B. Gross profit = sales - cost of goods sold - operating income C. Gross profit = sales - cost of goods sold + investment income D. Gross profit = sales - operating expenses
Goodwill
If ____ becomes impaired, it is reduced in value on the balance sheet and is recognized as a loss on the income statement.
Negative
Shareholders' equity is (negative/positive) whenever liabilities exceed assets.
Statement of Cash Flows
This statement is used to determine an organization's ability to generate positive future cash flows, its ability to meet its financial obligations, and its need for additional financing. It is also used to determine the reasons for any differences between net income and associated cash receipts and disbursements, such as those resulting from loan proceeds or repayments, increases or decreases in accounts receivable, or depreciation expense.
Treasury stock
When a corporation buys back its own stock, those shares become ____ stock. The cost of this stock is deducted from shareholders' equity because the company used an asset (cash) to buy back stock that it had previously issued.
C. The financial condition of the organization
Which one of the following best describes the result of the four major financial statements all taken together? A. The status of the organization as an ongoing concern B. The impact that the business has had on the price of the stock C. The financial condition of the organization D. The total net worth of the organization at that time period
D. Shareholders' equity is negative when liabilities exceed assets.
Which one of the following statements best describes the shareholders' equity section of the balance sheet? A. Shareholders' equity is negative when the entity reports a net loss for the year. B. Shareholders' equity decreases by the amount of debt satisfied during the year. C. Shareholders' equity is an asset of the business entity. D. Shareholders' equity is negative when liabilities exceed assets.
Expenses
____ are measured by the assets relinquished or consumed in the process of delivering goods or rendering services to customers.
Comprehensive Income (In other words, comprehensive income includes an organization's net income from the income statement plus other income that is not required to be reported on the income statement.)
is defined in the Financial Accounting Standards Board's as "the change in equity [net assets] of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners.