Chapter 2

Under accrual accounting principles, the cost of inventory should be reported as an expense in the income statement when it is sold, regardless of when it was purchased. Select one: True Correct False

Under accrual accounting, the cost of inventory is reported as expense in the period in which it is used up, typically at the point of sale. Purchased inventories that have not yet been sold are reported as assets, notwithstanding whether or not they have been paid for. The correct answer is 'True'.

As inventory and property plant and equipment on the balance sheet are consumed, they are reflected: Select one: A. As a revenue on the income statement B. As an expense on the income statement Correct C. As a use of cash on the statement of cash flows D. On the balance sheet because assets are never consumed E. Both B and C because the financial statements articulate

As assets are consumed (used up), their cost is transferred to the income statement as expenses. Cash is not involved so C and E are incorrect. The correct answer is: As an expense on the income statement

in order for an asset to be reported on the balance sheet, it must be owned by the company and be expected to provide future benefits.

Assets reported on the balance sheet must be owned OR CONTROLLED by the company and must be expected to provide future benefits. These benefits can relate to the expected receipt of cash or another asset, or the expected decrease in a liability. The correct answer is 'False'.

Articulation refers to the concept that financial statements are linked to each other and linked across time. Select one: True Correct False

Balance sheets are linked over time because the permanent accounts' closing balance last period becomes the opening balance in the current period. The statements are linked to each other via cash (statements of cash flow and balance sheets), via retained earnings (income statements and balance sheets), and via equity accounts (statements of stockholders' equity and balance sheets). The correct answer is 'True'.

The book value of stockholders' equity (the amount reported on the balance sheet) is most typically equal to the market value of the equity of a company.

Book value and market value differ for many reasons, including reporting assets at historical costs instead of current market value, and differences between the accounting periods in which transactions are recognized in the financial statements and when the value implications of those transactions are recognized by the capital markets. The correct answer is 'False'.

In its fiscal year ended February 1, 2013 balance sheet, Dell Inc. reported cash of $13,852 million at the beginning of the year. The statement of cash flows reports the following (in millions): Net cash flow operating activities $3,283 Net cash from investing activities (3,316 ) Change in cash during the year (1,283 ) What did Dell report for "Net cash from financing activities" during fiscal year ended 2013? Select one: A. $1,250 million cash inflow B. $1,250 million cash outflow Correct C. $2,033 million cash inflow D. $2,033 million cash outflow E. None of the above

Change in cash during the year = Cash from operations + Cash from investing + Cash from financing. $(1,283) = $3,283 - $(3,316) + Cash from financing Cash from financing = $(1,250) million The correct answer is: $1,250 million cash outflow

statement of cash flows usually does not include which of the following? Select one: A. Net income B. Increase in accounts receivable C. Contributed capital Correct D. Depreciation expense E. None of the above

Contributed capital is a balance sheet account and is not included in the statement of cash flows. Changes in the contributed capital account would be included, however, in the financing section of the statement of cash flows. The correct answer is: Contributed capital

Net working capital = Current assets + current liabilities

Net working capital = Current assets less current liabilities. The correct answer is 'False'.

In 2013, Delphi Automotive PLC had current assets of $5,752 million and current liabilities of $3,894 million. The firm's net working capital is:

Net working capital = current assets - current liabilities. Net working capital = $5,752 - $3,894 Net working capital = $1,858 million The correct answer is: $1,858 million

Assets are reported on the balance sheet at their current market value.

Rationale: Assets are generally reported at historical costs. An exception is marketable securities. The correct answer is 'False'.

Which of the following is included as a component of stockholders' equity? Select one: A. Prepaid property taxes B. Dividends C. Accounts payable D. Retained earnings Correct E. Buildings

Retained earnings is a component of stockholders' equity. Dividends affect retained earnings but they are not reported as a separate component. The correct answer is: Retained earnings

Pfizer Inc., a pharmaceutical company, reported net income for fiscal 2013 of $22,003 million, retained earnings at the start of the year of $54,240 million and dividends of $6,511 million. If there were no other transactions during the year that affected retained earnings, what was the balance of retained earnings at the end of the year? Select one: A. $69,732 million Correct B. $38,748 million C. $124,926 million D. $47,729 million E. There is not enough information to calculate the amount.

Retained earnings, 2013 = Retained earnings, 2012 + Net Income - Dividends. Retained earnings, 2013 = $54,240 + $22,003 - $6,511 Ending retained earnings = $69,732 million The correct answer is: $69,732 million

During 2013, Skechers U.S.A., Inc. had Sales of $1,846.4 million, Gross profit of $818.8 million and Selling, general, and administrative expenses of $730.7 million. What was Skechers' Cost of sales for 2013? Select one: A. $1,115.7 million B. $1,027.6 million Correct C. $88.1 million D. $1,549.5 million E. There is not enough information to calculate the amount.

Sales - Cost of sales = Gross profit $1,846.4 - Cost of sales = $818.8 Cost of sales = $1,027.6 million The correct answer is: $1,027.6 million

In its December 31, 2013 financial statements, Harley-Davidson reported the following (in millions): Long-term Assets Current Liabilities Long-term Liabilities Total Liabilities Equity $5,416 $2,510 $3,886 $6,396 $3,009 At December 31, 2013, current assets amount to:

Total assets = Total liabilities + Equity Total assets - long-term assets = current assets. Current assets = $6,396 + $3,009 - $5,416 Current assets = $3,989 million The correct answer is: $3,989 million

A customer's prepayment for services not yet rendered is initially recorded as unearned revenue (a liability). Then, at the end of the accounting period, the unearned revenue is moved from the balance sheet to the income statement. This is an example of the revenue recognition principle. Select one: True False Correct

Unearned revenue is recorded for customer prepayments. But it is only moved to the income statement when the services have been rendered and not automatically at the end of the accounting period. The correct answer is 'False'.

Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of maturity.

ssets are reported in the order that they are generally expected to be converted into cash. Receivables are, thus, reported before inventories, and inventories before PPE. Liabilities are reported in order of maturity, with current liabilities expected to be paid within one year and long-term liabilities expected to be paid over a longer period of time. The correct answer is 'True'.

According to the revenue recognition principle, companies are required to record revenue when cash is received as this provides the most objective evidence for the auditors. Select one: True False Correct

the revenue recognition principle states that revenue may be recognized in the income statement when it is earned and realized or realizable. Cash is objective but not necessary for revenue to be earned. The correct answer is 'False'.