Chapter 3 Terms

Q19: When subtracting an asset's accumulated depreciation from its historic cost, the resulting value is termed the: A. book value of the asset. B. market value of the asset. C. depreciation expense. D. current asset value.

A

Q4: Which of the following assets is likely to be considered the most liquid? A. Marketable securities B. Accounts payable C. Accounts receivable D. Inventories

A

Q7: Which one of the following is an intangible asset? A. Goodwill B. Retained earnings C. Deferred income taxes D. Treasury stock

A

According to GAAP, your firm has equity worth $6 billion, debt worth $4 billion, assets worth $10 billion. The market values your firm's 100 million shares at $75 per share and the debt at $4 billion. Q: What is the market value of your assets?

A: Since (Assets = liabilities + equity), your assets must have a market value of $11.5 billion

Q10: If a payment of principal is due in 13 months on a long-term liability, that payment will now appear on the balance sheet as: A. a current liability. B. long-term debt. C. cash. D. interest expense.

B

Q15: A balance sheet may be considered backward-looking from the perspective that it: A. works backward, starting with net income. B. records historic, not current values. C. cannot forecast the future. D. records costs over many previous periods.

B

Q20: ABC Corp.'s balance sheet shows its long-term debt to be $20 million. The debt was issued with a 10% interest rate, and the current interest rate is 7%. Based on this information alone, the market value of this debt is most likely: A. less than $20 million. B. more than $20 million. C. equal to $20 million. D. unknown without knowing the maturity of the debt.

B

Q22: If market interest rates have increased since a company last borrowed long-term funds, the market value of these long-term funds will likely be: A. greater than their book value. B. less than their book value. C. equal to their book value. D. unknown without knowing the maturity of the debt.

B

Q23: Which of the following values would be most relevant for a shareholder? A. Book value of equity B. Market value of equity C. Retained earnings D. Net working capital

B

Q24: What happens to the market value of a firm's equity as the book value of the firm's equity increases? A. It increases by the same amount. B. It decreases by the same amount. C. It remains constant. D. In the short-term there is no relationship to determine this outcome but in the long-term a positive correlation is very likely

B

Q25: Which of the following statements is true for a corporation with $1 million market value of equity, $2 million market value of assets, and 1,000 shares of outstanding stock? A. Market value of liabilities exceeds book value of liabilities. B. Market value of liabilities equals $1 million. C. Book value per share equals $1,000. D. Market value per share equals $2,000.

B

Q3. Which of the following items should not be included in a listing of current assets? A. Marketable securities B. Accounts payable C. Accounts receivable D. Inventories

B

Q6: If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders' equity, then the firm has: A. no retained earnings. B. long-term debt. C. no accumulated depreciation. D. current assets.

B

Q8: Suppose Dee's just acquired the assets of Flo's Flowers. The book value of Flo's Flowers assets was $68,000 but Dee's paid a total of $75,000. The additional $7,000 paid by Dee's will be recorded on Dee's balance sheet as: A. accounts payable. B. goodwill. C. other current assets. D. property, plant, and equipment.

B

Q11: Net working capital is a measure of a company's: A. goodwill. B. short-term liabilities. C. estimated cash reservoir. D. shareholders' equity.

C

Q12: Net working capital is calculated by taking the difference between: A. total assets and total liabilities. B. inventory and accounts payable. C. current assets and current liabilities. D. cash and accounts payable.

C

Q14: The existence of goodwill on a corporate balance sheet indicates that the corporation has: A. been profitable in the past. B. depreciated its tangible assets. C. intangible assets from past acquisitions. D. retained earnings resulting from past income.

C

Q18: Depreciation expense is used to: A. allocate costs to all departments of the firm. B. determine when an asset is fully paid off. C. allocate historical cost over the life of an asset. D. equate the historical cost and market values of an asset.

C

Q2: A balance sheet portrays the value of a firm's assets and liabilities: A. over an annual period. B. over any stated period of time. C. at any stated point in time. D. only at the end of the calendar year.

C

Q5: If the value of a firm's net fixed assets equals the value of the accumulated depreciation, from an accounting context the fixed assets are: A. new. B. fully depreciated. C. one-half depreciated. D. equal in value to the firm's current assets.

C

Q9: What happens to a firm's net worth as it uses cash to repay accounts payable? A. Net worth increases. B. Net worth decreases. C. Net worth remains constant. D. Net worth decreases temporarily, until cash is replenished.

C

Q13: Which of the following statements about net working capital (NWC) is correct? A. NWC is positive for all firms. B. As NWC decreases, potential liquidity increases. C. NWC excludes inventory, which is deemed illiquid. D. Decreases in NWC can increase the firm's risk.

D

Q16: According to GAAP, assets and liabilities are typically recorded on the balance sheet at: A. historical cost plus depreciation. B. market value. C. salvage value. D. historical cost less depreciation.

D

Q17: Which of the following is correct for a fully depreciated asset? A. Market value is zero. B. Market value is greater than book value. C. Book value is greater than market value. D. The relationship between market and book values is indeterminable.

D

Q1: In general, what is changing as you read down the left-hand side of a balance sheet? A. The assets are becoming more fully depreciated. B. The assets are increasing in value. C. The assets are increasing in maturity. D. The assets are becoming less liquid.

D

Q21: Which of the following statements about depreciation is correct? A. Depreciation is subtracted from cost of goods sold to calculate net income. B. When depreciation expense is incurred, cash balances are reduced. C. Depreciation expense does not affect net income. D. Depreciation reduces the book value of assets.

D