Self-Test 2

How is goodwill evaluated?

Companies should determine whether goodwill has lost value, and if so, the loss in value should be written off as an impairment expense.

Which of the following liabilities would be included in the current liabilities section on the balance sheet?

Accounts payable, short-term debt, unearned revenues.

Which of the following assets would be classified as current assets on the balance sheet?

Cash equivalents, inventory, prepaid expenses.

What accounts are most likely to be found in the stockholders' equity section of the balance sheet?

Common stock, additional paid-in capital, retained earnings.

What do current liabilities and current assets have in common?

Current liabilities and current assets are those items that will be satisfied and converted into cash, respectively, in one year or one operating cycle, whichever is longer.

Which statement is false?

Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes.

What does the balance sheet summarize for a business enterprise?

Financial position at a point in time.

Where can one most typically find the cost flow assumption used for inventory valuation for a specific company?

In the notes to the financial statements.

Why would a company switch to the LIFO method of inventory valuation?

LIFO produces the largest cost of goods sold expense in a period of inflation and thereby lowers taxable income and taxes.

What are three major cost flow assumptions used by U.S. companies in valuing inventory?

LIFO, FIFO, average cost.

What type of firm generally has the highest proportion of fixed assets to total assets?

Manufacturers.

Which of the following would be classified as long-term debt?

Mortgages, long-term notes payable, bonds due in 10 years.

Assuming a period of inflation, which statement is true?

The FIFO method understates cost of goods sold on the income statement.

What does the additional paid-in capital account represent?

The amount by which the original sales price of stock exceeds the par value.

What is a common-size balance sheet?

A statement that expresses each account on the balance sheet as a percentage of total assets.

What does the retained earnings account measure?

All undistributed earnings.

What is the balancing equation for the balance sheet?

Assets=Liabilities+Stockholders' equity.

What type of firm generally has the highest proportion of inventory to total assets?

Retailers.

Which of the following items could cause the recognition of accrued liabilities?

Salaries, rent, insurance.

What items should be calculated when analyzing the accounts receivable and allowance for doubtful accounts?

The growth rates of sales, accounts receivable, and the allowance for doubtful accounts, as well as the percentage of the allowance account relative to the total or gross accounts receivable.

Why is the method of valuing inventory important?

The inventory valuation method chosen determines the value of inventory on the balance sheet and the cost of goods sold expense on the income statement, two items having considerable impact on the financial position of a company.