ACCT 311 Adaptive Practice Ch. 5

Q 5.14: When calculating cash provided by operations in the statement of cash flows using the indirect method, how would an increase in Accounts Receivable and an increase in Accounts Payable be handled? A An increase in Accounts Receivable would be deducted from net income, and an increase in Accounts Payable would be added to net income. B Both an increase in Accounts Receivable and an increase in Accounts Payable would be added to net income. C An increase in Accounts Receivable would be added to net income, and an increase in Accounts Payable would be deducted from net income. D Both an increase in Accounts Receivable and an increase in Accounts Payable would be deducted from net income.

A An increase in Accounts Receivable would be deducted from net income, and an increase in Accounts Payable would be added to net income.

Q 5.07: Why are prepaid expenses included in the current assets section of the balance sheet? A Because they will be consumed within one year or the operating cycle, whichever is longer. B Because if they had not been already paid they would require the use of cash during the next year or operating cycle. C Because they were already included in operating expenses on the income statement in the year cash was expended. D Because they reflect payments that were made in a prior period that will not be charged to expense in the current period.

A Because they will be consumed within one year or the operating cycle, whichever is longer.

Q 5.10: Which of the following questions would not be answered by looking at the Statement of Cash Flows? A What is the impact of inflation on the cash balance at the end of the year? B Where did the cash come from during the period? C What was the change in the cash balance during the period? D What was the cash used for during the period?

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

Q 5.15: Coulter Industries sold 2 million shares of stock for $27.50 per share, for a gross income of $55 million. When the accountants at Coulter prepare the statement of cash flows, this transaction would be classified as a(n) ________ activity. A financing B investing C operating D equity

A financing

Q 5.08: A liability to be paid next year by issuing new long-term debt or by __________ would not be included in the current liability section of the balance sheet. A paying the debt with noncurrent assets B paying with restricted cash C paying the debt with current assets D paying cash that the company expects to earn in the next year

A paying the debt with noncurrent assets

Q 5.11: Which financial statement is the most effective at providing information about a company's sources and uses of cash? A statement of cash flows B income statement C balance sheet D statement of owners' equity

A statement of cash flows

Q 5.03: When using GAAP, which of the following qualities of the balance sheet limits risk rather than results in a limitation criticism of the financial statement? A Only amounts known with certainty are reported. B An extensive use of estimates. C Use of historical cost to value assets and liabilities. D Failure to include items of financial value that cannot be recorded objectively.

A. Only amounts known with certainty are reported.

Q 5.02: Which of the following describes the term solvency? A The ability of an enterprise to pay its debts as they mature. B The amount of time that is expected to elapse until a liability has to be paid. C The amount of time that is expected to elapse until an asset is realized. D The amount of time that is expected to elapse until an asset is converted into cash.

A. The ability of an enterprise to pay its debts as they mature.

Q 5.06: Which of the following items should be classified as a current asset? A Trade installment receivables normally collectible in 20 months. B A deposit on equipment ordered, delivery of which will be made within 7 months. C Cash designated for the redemption of callable bonds. D Cash surrender value of a life insurance policy of which the company is a beneficiary.

B A deposit on equipment ordered, delivery of which will be made within 7 months.

Q 5.09: What is the main difference between the account form and the report form of the balance sheet? A The report form lists assets on one side and liabilities and owners' equity on the other side, whereas the account form lists assets on top and liabilities and owners' equity on the bottom. B The account form lists assets on one side and liabilities and owners' equity on the other side, whereas the report form lists assets on top and liabilities and owners' equity on the bottom. C The report form lists only assets and liabilities, whereas the account form lists assets, liabilities, and owners' equity. D The account form lists every individual account, whereas the report form lists subtotals from groups of similar accounts.

B The account form lists assets on one side and liabilities and owners' equity on the other side, whereas the report form lists assets on top and liabilities and owners' equity on the bottom.

Q 5.19: The term "reserve" as it relates to preparation of financial statements is used correctly in which of the following ways? A When "reserve" is used to describe amounts deducted from assets, such as "reserve for depreciation". B When "reserve" is used to describe an appropriation of retained earnings, such as "reserve for preferred dividends". C When "reserve" is used in connection with an estimated liability, such as "estimated reserve for product warranty". D When "reserve" is used to describe the setting aside of funds for the subsequent payment of an existing liability, such as "reserve for bonds payable".

B When "reserve" is used to describe an appropriation of retained earnings, such as "reserve for preferred dividends".

Q 5.05: The formal distinction between some current and noncurrent assets is somewhat arbitrary. Which of the following statements best illustrates this point? A 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 operating cycle. B Cash in a checking account is a current asset, while cash in a savings account is more permanent and is normally classified as noncurrent. C Accounts receivable due in less than one year or the operating cycle are classified as current assets, while accounts receivable due in longer than one year or the operating cycle are classified as noncurrent. D Inventory that may be sold next year, or in the subsequent year as demand dictates may be classified as current or noncurrent.

C Accounts receivable due in less than one year or the operating cycle are classified as current assets, while accounts receivable due in longer than one year or the operating cycle are classified as noncurrent.

Q 5.12: An accountant would be least likely to use which one of the following basic information sources when preparing the statement of cash flows? A Selected transaction data. B The current income statement. C An analysis of sales by territory. D Comparative balance sheets.

C An analysis of sales by territory.

Q 5.16: The financial flexibility of a company can best be described by which of the following statements? A Financial flexibility describes the firm's ability to invest in a number of projects with different objectives and costs. B Financial flexibility measures the firm's ability to pay its debts as they mature. C Financial flexibility is the firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities. D Financial flexibility depends on the nearness to cash of assets and liabilities.

C Financial flexibility is the firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities.

Q 5.18: Estrada Industries has $3.5 million in long-term assets. They use the straight-line method of depreciation for these assets. This is an example of ________ to be disclosed on financial statements. A a contingency that needs B GAAP that does not need C an accounting policy that needs D a contractual situation that does not

C an accounting policy that needs

Q 5.13: Under which activity classification section would the payment of cash dividends to the common shareholders be reported on a company's statement of cash flows? A Investing Activities. B Significant Transactions. C Operating Activities. D Financing Activities.

D Financing Activities.

Q 5.04: A delivery truck is purchased with $1,240 cash and a $4,760 note. Based on this transaction, A assets and liabilities will increase but by different amounts. B owners' equity will be increased. C assets will increase and liabilities will decrease. D assets and liabilities will change by the same amount, respectively.

D assets and liabilities will change by the same amount, respectively.

Q 5.17: When classifying items on a balance sheet, __________ often require the greatest amount of supplementary disclosure. A current assets B plant assets C current liabilities D long-term liabilities

D long-term liabilities

Q 5.20: Frazier Enterprises needs to include an explanation of a line item on the balance sheet. The explanation will be three sentences long. The best method of disclosure to use is a A supporting schedule. B cross-reference. C parenthetical explanation. D note.

D note.

Q 5.01: In financial reporting, the balance sheet is least likely to provide a basis for which one of the following assessments? A computing rates of return. B assessing the liquidity and financial flexibility of the enterprise. C evaluating the capital structure of the enterprise. D determining the increase in cash due to operations.

D. Determining the increase in cash due to operations