Ch. 3
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
Crazen Company has the following information in its financial statements: Cash 3,000 Accounts receivable 4,000 Inventory 5,000 Prepaid Rent 2,000 Accounts payable 10,000 What is Crazen's quick or acid-test ratio?
.7
Coral Company has the following financial statement information: Current assets 30,000 Noncurrent assets 70,000 Current liabilities 20,000 Noncurrent liabilities 40,000 Stockholders' equity 40,000 What is the debt to equity ratio?
1.50
Skylark has the following information in its financial statements: Cash $1,000 Accounts receivable 4,000 Short-term investment in trading securities 3,000 Inventory 2,000 Accounts payable 5,000 What is their quick or acid-test ratio?
1.6
If revenue from a single customer is ______% or greater, then a company must disclose that fact, together with the amounts of revenue from that customer and the operating segment that earned the revenue.
10
What is the threshold of revenues, assets, or income that qualifies a segment to be disclosed?
10%
Welston Corp. has the following information in its financial statements: Income before interest and taxes $10,000 Additional paid-in capital 30,000 Tax expense 2,000 Common stock 10,000 Interest expense 3,000 Retained earnings 60,000 Net income 5,000 What is the times interest earned ratio?
3.33
Boswell Corp. has the following information in its financial statements: Income before interest and taxes $20,000 Common stock 40,000 Tax expense 4,000 Interest expense 5,000 Additional paid-in capital 50,000 Retained earnings 40,000 Net income 11,000 What is the times interest earned ratio?
4.0
Linton Company has the following financial statement information: Current assets 20,000 Noncurrent assets 80,000 Current liabilities 20,000 Noncurrent liabilities 60,000 Stockholders' equity 20,000 What is the debt to equity ratio?
4.0
Larson Company has the following financial statement information: Earnings before interest and taxes 40,000 Net income 10,000 Common stock 20,000 Additional paid-in capital 140,000 Retained earnings 40,000 What is return on stockholders' equity?
5
What is the difference between an account payable and a note payable?
An account payable is usually due in 30-60 days.
Which of the following statements is true regarding errors, fraud, and illegal acts?
An illegal act is a violation of the law.
The current ratio is expressed as current divided by current .
Blank 1: assets Blank 2: liabilities
A popular measure of a company's ability to pay its short-term debt that is measured as current assets minus current liabilities is . (Enter one word per blank.)
Blank 1: working Blank 2: capital
Which of the following is a likely example of a related-party transaction?
Borrowing or lending money at unusually low interest rates.
Which of the following are included in the summary of significant accounting policies included in the notes to the financial statements? (Select all that apply.)
Choice between LIFO and FIFO. Items included in cash and cash equivalents. Method of depreciation.
You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0
Company D
Which of the following is the formula for the current ratio?
Current assets divided by current liabilities.
True or false: Current ratio gives a complete and accurate picture of a company's liquidity.
F
Which of the following transactions would be recorded as a prepaid expense? (Select all that apply.)
Insurance paid for 6 months. Rent for an office building paid for 12 months.
Which of the following are required disclosures for related-party transactions? (Select all that apply.)
Nature of the relationship. Amounts due to or from related parties. Nature of the relationship. Description of transaction. Dollar amount of transaction.
What does a liability represent?
Obligations owed to other entities
How are property, plant, and equipment presented on the balance sheet?
Original cost less accumulated depreciation
Which of the following are required segment disclosures? (Select all that apply.)
Reconciliation of total segment revenues with entity revenue General information about the segment assets profit or loss
True or false: Aggregated financial statements are difficult to analyze because they do not contain information regarding a company's various operations.
T
Which of the following are limitations of the balance sheet? (Select all that apply.)
The balance sheet is heavily reliant on estimates rather than determinable amounts Assets minus liabilities is not representative of the company's true market value
An "unqualified" audit opinion represents which of the following?
The financial statements are fairly presented in conformity with generally accepted accounting principles.
Which of the following must be disclosed for major customers? (Select all that apply.)
The operating segment reporting the revenue from the major customer Total revenue from each major customer
Which of the following are key differences between U.S. GAAP and IFRS in the presentation of a balance sheet?
The order in which assets and liabilities are presented The title of the statement
What is the role of the auditor?
To attest to the fairness of 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.
Which of the following situations would require an explanatory paragraph even though the auditors' report is unqualified? (Select all that apply.)
Uncertainty regarding a contingency for which a loss is material in amount. A significant matter concerning the financial statements and a related-party transaction
The purpose of the balance sheet is to report
a company's financial position on a specific date.
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? (Select all that apply.)
accrued salaries current maturities of long-term debt accounts payable unearned revenues income taxes payable accrued warranties
Related third-party transactions _____ required to be disclosed in the notes to the financial statements.
are
Which of the following are considered illegal acts? (Select all that apply.)
bribes illegal contributions kickbacks
Which of the following are noncurrent assets? (Select all that apply.)
building land intangible assets
Which of the following items are included in property, plant, and equipment? (Select all that apply.)
buildings natural resources land
Which of the following accounts represent amounts shareholders have invested in the company? (Select all that apply.)
common stock additional paid-in capital
Deferred revenues and accrued salaries payable are examples of what?
current liabilities
The formula for the acid-test or quick ratio is quick assets divided by
current liabilities
The purpose of comparative financial statements is to allow users to (Select all that apply.)
detect and predict trends. compare year-to-year data
The management approach to segment reporting requires that ______ financial information is available.
discrete
Favorable financial leverage occurs when a company
earns a return on borrowed funds that exceeds the cost of borrowing.
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.
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
f
Inventories include which of the following items? (Select all that apply.)
finished goods goods in production goods directly consumed in production
The higher the debt to equity ratio is for a company, then the ______ the risk of insolvency is for that company.
higher
Land is listed separately on the balance sheet because
it has an unlimited life.
U.S. GAAP requires public companies to report certain geographic area information unless
it is impracticable to do so.
What asset is listed as a separate item on the balance sheet because it has an unlimited life and is not depreciated?
land
The segment disclosure requirements for U.S. GAAP and IFRS for most items are similar; however, only IFRS requires that companies disclose total of its reportable segments
liabilities
Additional segment disclosures required under IFRS, but not under U.S. GAAP include
liabilities relating to the segment
The readiness of a company to pay its short-term debts as they come due is referred to as ______.
liquidity
Which of the following are required U.S. GAAP disclosures for geographic areas? (Select all that apply.)
long-lived assets revenues from external customers
Responsibility for the financial statements and other information found in the annual report lies with
management
What type of approach does the FASB require for segment reporting?
management
An investment should be classified as current on the balance sheet if (Select all that apply.)
management has the intent and ability to liquidate it in the near term. it will be sold within 12 months.
A _____ firm will include finished goods, work in process, and raw materials as part of their inventory.
manufacturing
The accounts common stock and paid-in capital in excess of par are classified as
paid-in capital
Which of the following are classified as long-term liabilities? (Select all that apply.)
pension obligations lease obligations longer than 1 year notes due in more than 1 year bonds payable lease obligations of more than 1 year
To help shareholders understand the content of executive pay packages and the commitments of the company with respect to such payments, the SEC requires that company disclose compensation information for directors and top executives in a filing called a
proxy statement
Analysts evaluate the performance and risk of the firm using relationships between two financial statement numbers, such as earnings per share of stock, or debt to assets. What type of analysis uses these relationships?
ratio analysis
Which of the following methods are used to compensate directors and executives? (Select all that apply.)
salaries bonuses stock options
When a company has distinct business units, it is necessary to provide reporting information to provide additional information on each of the business units
segmented
When a company has distinct business units, it is necessary to provide reporting information to provide additional information on each of the business units. (Enter only one word.)
segmented
True or false: The debt to equity ratio indicates the extent to which a company relies on creditors to provide resources for the company.
t
Goodwill is calculated as
the acquisition price above the fair value of the identifiable net assets acquired.
During the course of an audit, the auditor is required to evaluate
the company's ability to continue for a reasonable time as a going concern.
The debt to equity ratio is calculated as
total liabilities divided by total stockholders' equity.
An error is _____; fraud is _____ misappropriation of assets or fraudulent financial reporting.
unintentional; intentional
Examining expenses as a percentage of total sales for the current year is an example of
vertical
Goodwill is shown on the balance sheet
when one company acquires another company for a price above the fair value of the assets acquired.
A liability is classified as current if it is due
within 1 year or the current operating cycle, whichever is longer.