Chapter 5

Addison, Inc. reports: Cash provided by operating activities $2,300,000 Cash used by investing activities 640,000 Cash used by financing activities 220,000 Beginning cash balance 340,000 What is Addison's ending cash balance?

$1,780,000. Cash provided by operating activities, $2,300,000 less Cash used by investing activities, $640,000 less Cash used by financing activities, $220,000 = Net increase in Cash, $1,440,000. Then add: Net increase in Cash, $1,440,000 + Beginning cash balance, $340,000 = Addison's ending cash balance, $1,780,000.

Peterson Enterprises reports the following information: Net income $5,000,000 Depreciation expense 680,000 Loss on the sale of investments 154,000 Increase in accounts receivable 320,000 Peterson should report cash provided by operating activities of

$5,514,000. Net Income, $5,000,000 plus Depreciation Expense, $680,000 plus Loss on the sale of investments, $154,000 less Increase in accounts receivable, $320,000 equals $5,514,000, the cash provided by operating activities.

Trent Co. reports the following information: Net cash provided by operating activities $430,000 Average current liabilities 300,000 Average long-term liabilities 200,000 Dividends paid 120,000 Capital expenditures 220,000 Purchase of treasury stock 22,000 Payments of debt 70,000 Trent's free cash flow is

$90,000 Net cash provided by operating activities, $430,000, less capital expenditures, $220,000, less dividends paid, $120,000 equals a free cash flow of $90,000.

Indicators of poor financial flexibility include a low debt coverage ratio and negative free cash flow.

A lower debt coverage ratio and negative free cash flow are indicators of poor financial flexibility.

Which of the following balance sheet formats lists the assets on the left side of the page and the liabilities and stockholders' equity on the right side?

Account form.

Which of the following is not one of the classifications in owners' equity? Retained earnings. Capital stock. Accumulated capital. Noncontrolling interest.

Accumulated capital.

The balance sheet is sometimes referred to as the Statement of Net Resources.

False A balance sheet reports on the financial position of a business enterprise and is sometimes referred to as the Statement of Financial Position, not the Statement of Net Resources.

Payment of dividends would come under which activity on the statement of cash flows?

Financing Financing, not investing, activities include obtaining resources from owners and providing them with a return on their investment (payment of dividends), and borrowing money from creditors and repaying the amounts borrowed.

Borrowing money from creditors is considered an investing activity on the statement of cash flows.

Financing, not investing, activities include obtaining resources from owners and providing them with a return on their investment, and borrowing money from creditors and repaying the amounts borrowed.

Which of the following is not included in the summary of significant accounting policies?

Length of operating cycle.

Which of the following is included in an owners' equity section reported in the balance sheet?

Noncontrolling interest. Classifications included in owners' equity include capital stock, retained earnings, additional paid-in capital (not accumulated capital), and noncontrolling interest (minority interest).

Receipt of interest from a Note Receivable would be reported as a cash inflow in which of the following sections:

Operating activities involve the cash effects of transactions that enter into the determination of net income, including the cash effects of interest revenue.

Which of the following are acceptable balance sheet formats?

Report form and account form. The only difference in balance sheets prepared using the report form or account form is the layout of the balance sheet. The account form lists assets on the left and liabilities and stockholders' equity on the right. The report form list the sections one above the other. Current assets and total assets will be the same in both formats.

Which of the following pairings of an item and a basis of valuation is incorrect?

Short-term investments - Generally Fair value. Receivables are valued at estimated amount collectible (not lower-of-cost-or-market), and inventories are valued at lower-of-cost-or-market. The pairing of short-term investments with generally fair value is correct.

The cash debt coverage ratio is equal to net cash provided by operating activities divided by average total liabilities.

The cash debt coverage ratio is computed as net cash provided by operating activities divided by average total liabilities.

The current cash debt coverage ratio is computed by dividing net cash provided by operating activities by average

The current cash debt coverage ratio is computed by dividing net cash provided by operating activities by average current liabilities.

The financial statement which summarizes the operating, investing, and financing activities of an entity for a period of time is the

The statement of cash flows summarizes the operating, investing, and financing activities of an entity.

Other assets include all of the following except:

Timberlands Other assets include restricted cash, property held for sale, and assets in special funds. Timberlands are reported as part of property, plant, and equipment.

Which of the following investments should always be reported as current assets? Available-for-sale securities. Held-to-maturity securities. Long-term investments. Trading securities.

Trading securities should always be reported as current assets. Available-for-sale securities and held-to-maturity securities would be classified as current or noncurrent depending on the circumstances and long-term investments would be classified as noncurrent.

Companies frequently use judgments and estimates in valuing items on the balance sheet.

True

Liquidity refers to the amount of time that is expected to elapse until a liability has to be paid.

True

The excess of current assets over current liabilities is referred to a net working capital.

True

The operating section is the first section of the statement of cash flows.

True

A liability that is payable within the next year is sometimes included in long-term debt.

True A liability that is payable within the next year is sometimes included in long-term debt if the company expects to refinance the debt through another long-term issue or to retire the debt out of non-current assets.

Typical loss contingencies include all of the following except: Possible tax assessments. Government investigations. Environmental issues. Tax operating-loss carryforwards.

Typical loss contingencies include possible tax assessments, government investigations, environmental issues, and litigation. Examples of gain contingencies include tax operating-loss carryforwards.

A company with a _________________ is better able to survive bad times, to recover from unexpected setbacks, and to take advantage of profitable and unexpected investment opportunities

a high degree of financial flexibility

The correct order to present current assets is

cash, accounts receivable, inventories, prepaid items.

Which of the following is an intangible asset?

customer lists. Intangible assets include patents, copyrights, franchises, goodwill, trademarks, trade names, and customer lists.

Activities that involve the cash effects of making and collecting loans and acquiring and disposing of property, plant, and equipment are classified as:

investing activities. Investing, not operating, activities include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment.

Assets include all of the following subclassifications except intangibles. noncontrolling interest. long-term investments. other

long-term investments.

Major limitations of the balance sheet include all of the following except:

only amounts known with absolute certainty are reported.

The balance sheet is useful for analyzing all of the following except

profitability.

Which of the following statements shows the amount of cash used to pay dividends or purchase treasury stock? statement of financial position. income statement. statement of stockholders' equity. all of these answer choices are correct.

statement of stockholders' equity. The statement of stockholders' equity shows the amount of cash used to pay dividends or purchase treasury stock.

Companies are not required to disclose information about:

the identity of all stockholders.