Ch 3 Smartbook
Current ______ include cash and other items that will be converted to cash or consumed within the coming year.
assets
Which of the following accounts represent amounts shareholders have invested in the company?
common stock additional paid-in capital
Which of the following items should be disclosed in other long-term assets on the balance sheet?
noncurrent investments that are not material long-term prepaid expenses
The risk that relates to how effectively a company manages its business and its ability to earn profits is referred to as Blank______ risk.
operational
Which of the following represents an expense paid in advance that creates benefits used in the future?
prepaid expense
Which of the following are noncurrent assets?
property investments with maturity of 18 months machines land intangible assets building
Which of the following is in the numerator of the quick ratio?
quick assets
Borrowing or lending money at an interest rate significantly different from the market interest rate is a likely example of a(n) _____ ________ transaction.
related party
Which of the following items should not be included in cash and cash equivalents in the balance sheet?
restricted cash
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
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.
Reports that communicate the environmental, social, and governance factors of an organization's activities are called:
sustainability reports.
On the balance sheet, current assets are listed in the order of their what?
Liquidity
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.
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 investments would be classified as a cash equivalent?
U.S. Treasury bills with a maturity of 90 days Money market funds
Which type of audit opinion indicates the financial statements are prepared in accordance with U.S. GAAP?
Unqualified
The account that represents the amount of money owed by customers is called _____ ______ .
account receivable
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 items are included in investments?
cash reserved to purchase land note receivable due in 5 years
Which type of analysis uses ratios to analyze the financial statements of 2 or more years?
horizontal analysis
Any receivable not expected to be collected within one year or the operating cycle, whichever is longer, is classified as a
noncurrent asset.
If a company's long-term investments are not material in amount, where should they be disclosed on the balance sheet?
other assets
Default risk refers to the ability of a company to
pay its obligations when they come due.
Inventories include which of the following items?
goods directly consumed in production finished goods goods in production
Which of the following are required segment disclosures?
assets profit or loss
The mathematical formula for working capital is current assets ______ current liabilities.
minus
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 Reason: 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? Multiple choice question.
$24,000 Reason: The portion of rent that will be paid within the next 12 months is classified as current and the remainder is classified as noncurrent.
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
What is the threshold of revenues, assets, or income that qualifies a segment to be disclosed?
10%
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
When a company discloses its segments, what amount of consolidated revenue must be reported?
75%
Quick assets divided by current liabilities is which ratio?
Acid test ratio
What is included in a company's paid in capital?
Additional paid-in capital Common stock
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.
Which of the following financial statements shows a firm's financial position on a particular date?
Balance Sheet
Which of the following items is classified as cash?
Bank drafts
Which of the following is a likely example of a related-party transaction?
Borrowing or lending money at unusually low interest rates.
The Management Discussion and Analysis section of the financial statements includes a perspective on which of the following?
Capital resources Liquidity Operations
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 less than 3 months. Money market funds quickly converted into cash. U.S. Treasury bills due in 2 months. Commercial paper due in 1 month. Money market funds that are quickly converted to cash
Which of the following items should be classified as a short-term investment?
Investments to be sold in 12 months.
Which of the following is the formula for the current ratio?
Current assets divided by current liabilities.
Deferred revenues and accrued salaries payable are examples of what?
Current liabilities
Which of the following is a ratio used to evaluate a company's solvency?
Debt to equity
Which of the following are required SEC disclosures?
Director compensation Executive stock option information Executive compensation
The SEC requires disclosures on compensation for which of the following?
Directors Executives
True or false: Investments are assets used directly in the operations of the business.
False Reason: Investments are NOT used directly in operations.
True or false: The balance sheet will directly measure the company's market value.
False Reason: The balance sheet measures the company's book value because many assets are not recorded at fair value.
True or false: Working capital is a popular measure of a company's ability to satisfy its long-term obligations.
False Reason: Working capital relates to short-term obligations.
True or false: Accounts receivable result from the sale of goods or services for cash.
False Reason: Accounts receivable are a result of sales on credit.
Which of the following are required segment disclosures?
General information about the segment Reconciliation of total segment revenues with entity revenue
Patents, copyrights, and franchises are examples of what?
Intangibles
Assets not used directly in the operations of the business are called what?
Investments
The management approach to segment reporting requires that ______ financial information is available.
discrete
Which of the following transactions would be recorded as a prepaid expense?
Rent for an office building paid for 12 months. Insurance paid for 6 months.
Sustainability Disclosures include
Social Environmental Governance
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.
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.
How are current liabilities satisfied?
The creation of other current liabilities. The use of current assets.
Which of the following items are included in the professional opinions given in the auditor's report?
The fairness of the financial statements. The effectiveness of internal control.
An "unqualified" audit opinion represents which of the following?
The financial statements are fairly presented in conformity with generally accepted accounting principles.
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 creation of current liabilities for payment. They do not require the use of current assets.
Which of the following ratios are used to evaluate a company's ability to pay long-term debts?
Times interest earned ratio Debt to equity ratio
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.
The debt to equity ratio is calculated as
Total liabilities / Total equity.
In a balance sheet, how are assets classified?
current and noncurrent
How are accounts receivable classified on the balance sheet?
current asset
Inventories held for sale in the normal course of business are classified in the balance sheet as
current assets
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 Multiple choice question.
current assets.
A ______ is satisfied within 1 year or the current operating cycle, whichever is longer.
current liability
Investments are reported as ________ investments when the company has both the intent and ability to sell within one year (or operating cycle).
current, short-term, or short term
If an accounts receivable is due within 60 days, it is classified on the balance sheet as a(n) _____ asset.
current, short-term, or shortterm
If an accounts receivable is due within 60 days, it is classified on the balance sheet as a(n) ______ asset.
current, short-term, or shortterm
Which type of risk is the risk of a company not being able to pay its obligations when they come due?
default risk
A customer pays in advance for services to be performed in a future period. In which account should the transaction be recorded?
deferred revenues
What account is affected when a customer pays in advance for services to be performed in the future?
deferred revenues
An asset that has no physical substance is referred to as a(n)
intangible
The times interest earned ratio can be calculated as (net income + interest expense + tax expense) divided by ______ expense.
interest
Which of the following are accrued liabilities?
interest payable salaries payable warranty liabilities taxes payable utilities payable
Land is listed separately on the balance sheet because
it has an unlimited life.
The criteria used to determine if a liability should be classified as long-term is
it will not be satisfied within 12 months or the operating cycle, whichever is longer.
Obligations to other entities are known as what?
liabilities
Long-term ______ are obligations that will not be satisfied in the next year or operating cycle, whichever is longer.
liability
Common practice requires that current assets are presented on the balance sheet in the order of __________.
liquidity
The readiness of a company to pay its short-term debts as they come due is referred to as
liquidity
The readiness of a company to pay its short-term debts as they come due is referred to as ______.
liquidity
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:
management has the intent and ability to liquidate it in the near term. it will be sold within 12 months.
U.S. GAAP uses a ______ approach to determine reportable operating segments.
management or managerial
Assets minus liabilities, measured according to GAAP, is not likely to be representative of the ______ value of the entity.
market
The full-disclosure principle requires financial statements to provide all ______ ________ information regarding the company.
material relevant
The FASB requires that companies that engage in more than one significant business must provide supplemental information concerning individual operating _________.
segment
Companies that operate in more than one significant business must provide which of the following?
segment information
When a company has distinct business units, it is necessary to provide ________ reporting information to provide additional information on each of the business units.
segment or segmented
If a company has a large amount of long-term debt in its capital structure, this will affect the firm's Blank______.
solvency
The ability to pay its long-term debts as they become due is referred to as ______ of the company.
solvency
SEC requirements provide for disclosures on executive and director compensation, particularly concerning _______ options.
stock
A summary of significant accounting policies includes information regarding
the choice of accounting policies.
The current versus noncurrent classification applies to what in the financial statements?
Assets and liabilities
Which of the following are characteristics of an operating segment?
It engages in business to earn revenues and incur expenses. Discrete financial information is available. Its operating results are regularly reviewed by the chief operating decision maker.
What is the criterion to classify an investment as a cash equivalent versus a short-term investment?
It is a highly liquid investment with a maturity date of 3 months or less from date of purchase.
Which type of analysis is used to determine if the company can pay its short-term debts as they come due?
Liquidity analysis
True or false: Aggregated financial statements are difficult to analyze because they do not contain information regarding a company's various operations.
True Reason: Segment reporting is needed to provide additional information about the various products, operating units, income, and assets.
True or false: Operational risk refers to how adept a company is at withstanding various events that might impair its ability to earn profits.
True Reason: Operational risk refers to how effectively a company can manage its ability to earn profits under different circumstances.
True or false: Aggregated financial statements are difficult to analyze because they do not contain information regarding a company's various operations.
True Reason: Segment reporting is needed to provide additional information about the various products, operating units, income, and assets.
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
Which of the following are liquidity ratios?
acid-test or quick ratio current ratio
The role of a(n) ________ is to attest to the fairness of the financial statements they have examined.
auditor, auditors, or audit
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 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 items should be included in cash on the balance sheet?
cashier's checks cash on hand money orders
Shareholders' equity arises primarily from amounts invested by shareholders and amounts Blank______.
earned by the corporation
The two sources of shareholders' equity are amounts ______.
earned by the corporation paid in from shareholders
True or false: The debt to equity ratio is calculated as total liabilities divided by common stock.
false Reason: The debt to equity ratio is total liabilities divided by total owners' equity.
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
What is the principle that requires that financial statements provide all material relevant information concerning the entity?
full-disclosure
Unearned revenue represents cash received from a customer for goods or services to be provided in a(n) _____ period.
future, subsequent, or later
The type of analysis that uses ratio analysis or trend analysis of financial statements across multiple years is called _____ analysis.
horizontal
Which of the following items are included in property, plant, and equipment?
natural resources land buildings mineral mines oil wells machines furniture
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
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
The risk that a company may not effectively manage its business and might impair its ability to earn profits is known as ______ risk.
operational
A ratio used to measure liquidity is the
quick ratio.
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
Which of the following should be classified as current liabilities?
unearned revenues income taxes payable accrued warranties current maturities of long-term debt accounts payable accrued salaries
which of the following are common characteristics of property, plant, and equipment?
used in normal operations long-lived tangible
Which of the following are characteristics of plant, property, and equipment?
used long-term in production tangible
A liability is classified as current if it is due
within 1 year or the current operating cycle, whichever is longer.
A manufacturing firm will use which of the following accounts to record inventory?
work in process raw material finished goods