ACCT 3110 Intermediate Financial 1 Chapter 3 SB
Which of the following opinions is necessary when the auditor finds exceptions that are so material that the financial statements may be misleading?
adverse
Related third-party transactions _____ required to be disclosed in the notes to the financial statements.
are
The role of a(n) is to attest to the fairness of the financial statements they have examined. (Enter only one word.)
audit
The financial statement that displays a firm's financial position on a particular date is the . (Enter one word per blank)
balance sheet
Which of the following items are required disclosures in the notes to financial statements? (Select all that apply.)
- related third-party transactions - description of subsequent events - significant accounting policies
Which of the following accounts represent amounts shareholders have invested in the company? (Select all that apply.)
- common stock - additional paid-in capital
Which of the following items are included in the numerator for the current ratio but are excluded from the numerator of the quick or acid-test ratio? (Select all that apply.)
- inventory - prepaid assets
The two sources of stockholders' equity are amounts ______.
- paid in from shareholders - earned by the corporation
Shareholders' equity is composed of which of the following accounts? (Select all that apply.)
- paid-in capital - retained earnings
Which of the following items requires supplemental disclosures in the notes to the financial statements? (Select all that apply.)
- pension plans - long-term debt - leases
A(n) is an unintentional mistake in the financial statements, whereas is intentional distortion of the financial statements. (Enter one word per blank.)
Blank 1: error Blank 2: fraud
The full-disclosure principle requires financial statements to provide all information regarding the company. (Enter one word per blank.)
Blank 1: material Blank 2: relevant
The accumulated net income earned since the inception of the corporation and not yet paid to shareholders is referred to as . (Enter one word per blank.)
Blank 1: retained Blank 2: earnings
Current assets minus current liabilities equals . (Enter one word per blank.)
Blank 1: working Blank 2: capital
Which of the following is a likely example of a related-party transaction?
Borrowing or lending money at unusually low interest rates.
True or false: Accounts receivable result from the sale of goods or services for cash.
False
True or false: Current ratio gives a complete and accurate picture of a company's liquidity
False
True or false: Information about fair value is commonly listed as an additional disclosure on the face of the financial statements.
False
True or false: Investments are assets used directly in the operations of the business.
False
True or false: Working capital is a popular measure of a company's ability to satisfy its long-term obligations.
False
The intentional misappropriation of assets or deceitful financial reporting is known as
Fraud
An analysis provided by the company's management is included in the
Management Discussion and Analysis.
Which of the following items are considered cash equivalents? (Select all that apply.)
Money market funds quickly converted into cash. Commercial paper due in less than 3 months.
A ratio used to measure liquidity is the
current ratio.
Financial is the ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities and needs. (Enter only one word.)
flexibility
What is the principle that requires that financial statements provide all material relevant information concerning the entity?
full-disclosure
The higher the debt to equity ratio is for a company, then the ______ the risk of insolvency is for that company.
higher
An asset that has no physical substance is referred to as a(n) ______ asset.
intangible
Assets minus liabilities, measured according to GAAP, is not likely to be representative of the value of the entity. (Enter only one word.)
market
The mathematical formula for working capital is current assets ______ current liabilities.
minus
Retained earnings represents the accumulated reported since the inception of the corporation and not yet paid to shareholders as dividends. (Enter one word per blank.)
net income
Which of the following is included with the annual report to help evaluate a firm's financial performance and financial health?
note disclosures
Additional are critical to understanding financial statements and to evaluating a firm's performance. (Enter only one word.)
notes
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. (Enter only one word.)
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.
A summary of significant accounting policies includes information regarding
the choice of accounting policies.
A customer pays in advance for services to be performed in a future period. In which account should the transaction be recorded?
unearned revenues
An error is _____; fraud is _____ misappropriation of assets or fraudulent financial reporting.
unintentional; intentional
On the balance sheet, current assets are listed in the order of their what?
Liquidity
The full-disclosure principle requires that financial statements report which of the following?
All material relevant information.
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.
What is included in a company's paid in capital? (Select all that apply.)
- Additional paid-in capital - Common stock
Which of the following are common disclosures on the face of a financial statement? (Select all that apply.)
- Allowance for uncollectible accounts - Common stock information
Which of the following are required disclosures for related-party transactions? (Select all that apply.)
- Amounts due to or from related parties. - Nature of the relationship.
Which of the following are included in the summary of significant accounting policies included in the notes to the financial statements? (Select all that apply.)
- Choice between LIFO and FIFO. - Items included in cash and cash equivalents. - Method of depreciation.
Which of the following ratios are used to evaluate a company's ability to pay long-term debts? (Select all that apply.)
- Debt to equity ratio - Times interest earned ratio
Which of the following are required disclosures for related-party transactions? (Select all that apply.)
- Description of transaction. - Dollar amount of transaction. - Nature of the relationship.
The Management Discussion and Analysis section of the financial statements includes a perspective on which of the following? (Select all that apply.)
- Operations - Liquidity - Capital resources
What additional factors should be considered when assessing current ratio and liquidity? (Select all that apply.)
- Portion of current assets made up of cash. - Line of credit or borrowing ability. - Portion of current assets made up of non-cash assets.
Which of the following are subsequent events that must be disclosed in the notes to the financial statements? (Select all that apply.)
- Sale of a business. - Issuance of debt securities. - Event that affects a loss contingency.
Which of the following items are included in the professional opinions given in the auditor's report? (Select all that apply.)
- The effectiveness of internal control. - The fairness of the financial statements.
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
You are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency? Company A 2.5 Company B 1.0 Company C 0.9 Company D 3.0
D
Which of the following is a ratio used to evaluate a company's solvency?
Debt to equity
What information does the times interest earned ratio provide to investors or creditors?
It provides the creditor with an indication of the ability of the debtor to pay the interest on its debts.
Which type of analysis is used to determine if the company can pay its short-term debts as they come due?
Liquidity analysis
What refers to the riskiness of a company with regard to the amount of liabilities in its capital structure?
Long-term solvency
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.
An "unqualified" audit opinion represents which of the following?
The financial statements are fairly presented in conformity with generally accepted accounting principles.
Which of the following is a subsequent event that must be disclosed in the notes to the financial statements?
The issuance of debt or equity securities.
Which of the following is true regarding disclosure notes?
They explain or elaborate on data presented in the financial statements.
What is the role of the auditor?
To attest to the fairness of the financial statements.
What is the role of the auditor's attest function?
To provide an opinion on 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.
True or false: Any event having a material effect on operations that occurs after a company's year-end but before the financial statements are issued requires a subsequent event disclosure.
True
True or false: The debt to equity ratio indicates the extent to which a company relies on creditors to provide resources for the company.
True
Which type of audit opinion indicates the financial statements are prepared in accordance with U.S. GAAP?
Unqualified
What account is affected when a customer pays in advance for services to be performed in the future?
deferred revenues
A(n) occurs when the auditor does not have sufficient information to express an opinion. (Enter only one word.)
disclaimer
Which of the following will be given if an auditor believes that insufficient evidence has been gathered to successfully express an opinion on the financial statements?
disclaimer
Obligations to other entities are classified as on the balance sheet. (Enter only one word.)
liabilities
The current ratio and the quick ratio are used to measure of a company indicating the ability to pay current obligations. (Enter only one word.)
liquidity
The readiness of a company to pay its short-term debts as they come due is referred to as ______.
liquidity
Times interest earned ratio measures a company's ability to its interest charges.
pay
A(n) audit opinion occurs when there is an exception to the standard opinion but not of sufficient seriousness to invalidate the whole of the financial statements. (Enter only one word.)
qualified
Which of the following opinions is used when an auditor has an exception to the standard opinion but there is not sufficient seriousness to invalidate the financial statements as a whole?
qualified
The _____ ratio provides a more rigorous indication of liquidity than does the _____ ratio.
quick; current
Borrowing or lending money at an interest rate significantly different from the market interest rate is a likely example of a(n) transaction. (Enter only one word per blank.)
related party
If a company has a large amount of long-term debt in its capital structure, this will affect the firm's ______.
solvency
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
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?
$24,000
On January 1, Year 1, Renquist Corp. borrowed $100,000 by signing a 5-year note payable with annual interest of 8%. The terms of the contract require Renquist to repay the principal over 5 years with a payment of $20,000 made at the end of each year. On December 31, Year 1, Renquist made the first payment plus interest. On January 1, Year 2, what portion of the note should be classified as noncurrent liabilities?
$60,000
Which of the following are limitations of the balance sheet? (Select all that apply.)
- Assets minus liabilities is not representative of the company's true market value - The balance sheet is heavily reliant on estimates rather than determinable amounts
What are the primary elements found on a balance sheet?
- Equity - Liabilities - Assets
Which of the following are included in inventory? (Select all that apply.)
- Finished goods - Raw materials - Work in process
Which of the following transactions would be recorded as a prepaid expense? (Select all that apply.)
- Insurance paid for 6 months. - Rent for an office building paid for 12 months.
Current assets include which of the following? (Select all that apply.)
- Short term investments - Cash
Which of the following are limitations of the balance sheet? (Select all that apply.
- The balance sheet is heavily reliant on estimates rather than determinable amounts - Assets minus liabilities is not representative of the company's true market value
How are current liabilities satisfied? (Select all that apply.)
- The use of current assets. - The creation of other current liabilities.
Which of the following describe long-term liabilities? (Select all that apply.)
- They do not require the creation of current liabilities for payment. - They do not require the use of current assets.
Which of the following items are considered cash equivalents? (Select all that apply.)
- 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 investments would be classified as a cash equivalent? (Select all that apply.)
- U.S. Treasury bills with a maturity of 90 days - Money market funds
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. (Enter one word per blank.)
- accounts - note
Which of the following should be classified as current liabilities? (Select all that apply.)
- accrued salaries - accounts payable - current maturities of long-term debt
Which of the following should be classified as current liabilities? (Select all that apply.)
- accrued warranties - unearned revenues - income taxes payable
Schwinn is a company that makes bicycles. Which of the following items would be included in Schwinn's inventory? (Select all that apply.)
- bicycle chains - bicycle tires - finished bicycles
Which of the following are noncurrent assets? (Select all that apply.)
- intangible assets - land - building
An investment should be classified as current on the balance sheet if (Select all that apply.)
- it will be sold within 12 months. - management has the intent and ability to liquidate it in the near term.
Which of the following are classified as long-term liabilities? (Select all that apply.)
- lease obligations of more than 1 year - bonds payable
Property, plant, and equipment is a(n) ______ asset. (Select all that apply.)
- long-lived - tangible
Which of the following items should be included in cash on the balance sheet? (Select all that apply.)
- money orders - cashier's checks - cash on hand
Which of the following items are included in property, plant, and equipment? (Select all that apply.)
- natural resources - land - buildings
Which of the following items are included in investments? (Select all that apply.)
- note receivable due in 5 years - cash reserved to purchase land
Which of the following items are included in property, plant, and equipment? (Select all that apply.)
- oil wells - mineral mines - furniture - machines
Which of the following may be recorded on the balance sheet as intangible assets? (Select all that apply.)
- patents - copyrights - trademarks
Which of the following are classified as long-term liabilities? (Select all that apply.)
- pension obligations - lease obligations longer than 1 year - notes due in more than 1 year
Which of the following are noncurrent assets? (Select all that apply.)
- property - machines - investments with maturity of 18 months
Which of the following are accrued liabilities? (Select all that apply.)
- salaries payable - interest payable - warranty liabilities
Which of the following are common characteristics of property, plant, and equipment? (Select all that apply.)
- tangible - long-lived - used in normal operations
Which of the following are characteristics of plant, property, and equipment? (Select all that apply.)
- tangible - used long-term in production
Which of the following are accrued liabilities? (Select all that apply.)
- taxes payable - utilities payable
Mueller Company reports a long-term notes payable on its balance sheet. In its financial statement notes, Mueller Company should disclose
- the interest rate on the loan - the maturity date of the loan - the payment terms of the loan
Cohen Company purchases a new building with a long-term notes payable. In the notes to the financial statements, it must disclose the following:
- the interest rate on the loan - the payment terms of the loan - the maturity date of the loan
Indicate the order of the following current assets on the balance sheet.
1. Cash and cash Equivalents 2. Accounts receivable 3. Inventory 4. Prepaid Expenses
result from the sale of goods or services on credit. (Enter one word per blank.)
Accounts Receivables
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.
The current versus noncurrent classification applies to what in the financial statements?
Assets and liabilities
Which of the following items is classified as cash?
Bank drafts
Deferred revenues and accrued salaries payable are examples of what?
Current liabilities
True or false: The balance sheet displays all items at their fair value or market value.
False
True or false: The balance sheet will directly measure the company's market value.
False
The ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities is known as what?
Financial flexibility
consist of assets that a retail or wholesale company acquires for resale or goods that manufacturers produce for sale. (Enter only one word.)
Inventory
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 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.
What asset is listed as a separate item on the balance sheet because it has an unlimited life and is not depreciated?
Land
Obligations to other entities are known as what?
Liabilities
How are property, plant, and equipment presented on the balance sheet?
Original cost less accumulated depreciation
The purpose of the balance sheet is to report
a company's financial position on a specific date.
An expense that has been incurred but not yet paid results is a(n)
accrued liability.
A company's total assets minus its total liabilities as shown on the balance sheet is known as the value. (Enter only one word.)
book
If an accounts receivable is due within 60 days, it is classified on the balance sheet as a(n) asset. (Enter only one word.)
current
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
Assets are classified as long-term if:
they are expected to be converted to cash or consumed in more than one operating cycle
A liability is classified as current if it is due
within 1 year or the current operating cycle, whichever is longer.
Assets not used directly in the operations of the business are called what?
Investments
Why are inventories reported as current assets?
They are normally sold within the operating cycle.
True or false: The operating cycle for most firms is 1 year or less.
True
Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events are referred to as . (Enter one word per blank)
assets
Simply put, are the economic resources of a company. (Enter only one word.)
assets
What are the primary elements found on a balance sheet?
assets, liabilities, and equity
The financial statement that provides information about liquidity and long-term solvency is the
balance sheet
Investments are reported as when the company has both the intent and ability to sell within one year (or operating cycle).
current
A temporary investment or short-term marketable security should be reported in which section of the balance sheet?
current asset
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
current assets.
A ______ is satisfied within 1 year or the current operating cycle, whichever is longer.
current liability
The portion of a long-term note that is due and payable within the next 12 months should be reported on the balance sheet as a:
current liability
The two classifications used for assets and liabilities on the balance sheet are ______ and ______.
current; noncurrent
Shareholders' equity arises primarily from amounts invested by shareholders and amounts ______.
earned by the corporation
Assets are probable _____ economic benefits as a result of _____ transactions or events.
future; past
Land held for speculation, noncurrent receivables, and cash set aside for future plant expansion are all examples of . (Enter only one word.)
investments
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.
Unearned revenue represents cash received from a customer for goods or services to be provided in a(n) period. (Enter only one word.)
later
Long-term are obligations that will not be satisfied in the next year or operating cycle, whichever is longer. (Enter only one word.)
liabilities
The balance sheet provides useful information about a company's and long-term solvency. (Enter only one word.)
liquidity
A _____ firm will include finished goods, work in process, and raw materials as part of their inventory.
manufacturing
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. (Enter only one word.)
operating
The accounts common stock and paid-in capital in excess of par are classified as
paid-in capital.
Which of the following items represents an expense paid in advance that creates benefits used in the future?
prepaid expense
Which of the following items should not be included in cash and cash equivalents in the balance sheet?
restricted cash
Investments in stock and debt securities of other corporations are included as _____ if the company has the ability and intent to sell them within the next 12 months.
short-term investments
Barsky Corp. has the following items: Cash $5,000 Prepaid expenses 2,000 Building 40,000 Land 20,000 Inventory 15,000 Total noncurrent assets on the balance sheet is
$60,000.
