Chapter 5

Amy Carlson Company had current assets of $12000, current liabilities of $20000, net sales of $40000, cost of goods sold of $24000, and net income of $8000. What is Amy Carlson's profit margin on sales?

20% (8000/40000)

Which of the following items should never be included in the current section of the balance sheet?

A pension fund

Of the following statements, which best illustrates the fact that the formal distinction made between current and noncurrent assets is somewhat arbitrary?

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 operation cycle.

Which of the following would not be considered a basic source of information useful in preparing a statement of cash flows?

An analysis of sales by territory

The payment of cash dividends to the common shareholders would be reported on a company's statements of cash flows under the classifaction of

Financing Activities

How would the two items shown below be handled in arriving at cash provided by operations in the statement of cash flows?

Increase in Accounts Receivable: Deduce from net income Increase in Accounts Payable: Add to net income

Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure?

Long-term liabilities

Which of the following is not a current asset?

The cash surrender value of a life insurance policy carried by a corporation on its president

One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibitity?

The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities

Which of the following reflects proper use of the term "reserve" in the preparation of financial statements?

The term used to describe an appropriation of retained earnings in the stockholders' equity section of the balance sheet.

Lindsey Corp. is concerned with measuring its ability to meet interest payments as they come due. Lindsey Corp. would most likely use which following ratio?

Times interest earned

How are the following items handled in computing the total stockholders' equity section of the balance sheet?

Treasury Stock: Subtracted Additional Paid-in Capital: Added

The statement of cash flows provides answers to all of the following questions except:

What is the impact of inflation on the cash balance at the end of the year?

If $1240 cash and a $4760 note are given in exchange for a delivery truck to be used in a business:

assets and liabilities will change by the same amount.

A characteristic of all assets and liabilities comprising working capital is that they are

current

The balance sheet contributes to financial reporting by providing a basis for all of the following except

determining the increase in cash due to operations

Prepaid expenses are included in the current assets section of the balance sheet because

if they had not been already paid they would require the use of cash during the next year or operating cycle

If a company converted a short-term note payable into a long-term note payable, this transaction would

increase only working capital

The primary purpose of the balance sheet is to reflect

items of value, debts, and net worth.

For accounting purposes the "operating cycle concept"

permits some assets to be classified as current even though they are more than one year removed from becoming cash

Solvency refers to:

the ability of an enterprise to pay its debts as they mature

One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is:

the extensive use of separate classifications

One of the main reasons for separating liabilities into current and long term is:

to provide decision makers with information regarding currently maturing debts.

Of the following items, the one which should be classified as a current asset is

trade installment receivables normally collectible in 20 months

A liability to be paid next year would not be included in the current liability section of the balance sheet if the debt is expected to be refinanced through another long-term issue, or

when the debt is retired out of noncurrent assets.