Intermediate Accounting 2
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, Year 1, Renquist Corp. borrowed $100,000 by signing a 5-year interest bearing 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. What portion of the note should be classified as current liabilities?
$20,000
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
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.
Crazen Company has the following information in its financial statements: Cash 3,000 Accounts receivable 4,000 Inventory 5,000 Prepaid Rent 2,000 Accounts payable 10,000 What is Crazen's quick or acid-test ratio?
.70
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
Coral Company has the following financial statement information: Current assets 30,000 Noncurrent assets 70,000 Current liabilities 20,000 Noncurrent liabilities 40,000 Stockholders' equity 40,000 What is the debt to equity ratio?
1.5
If revenue from a single customer is ______% or greater, then a company must disclose that fact, together with the amounts of revenue from that customer and the operating segment that earned the revenue.
10
Miles Company has the following financial statement information: Earnings before interest and taxes $50,000 Net income 30,000 Common stock 100,000 Additional paid-in capital 160,000 Retained earnings 40,000 What is return on stockholders' equity?
10%
What is the threshold of revenues, assets, or income that qualifies a segment to be disclosed?
10%
Skylark has the following information in its financial statements: Cash 1,000 Accounts receivable 4,000 Short-term investments in trading securities 3,000 Inventory 2,000 Accounts payable 5,000 What is Skylark's current ratio? What is their quick or acid-test ratio?
2.0 1.6
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
Welston Corp. has the following information in its financial statements: Income before interest and taxes $10,000 Additional paid-in capital 30,000 Tax expense 2,000 Common stock 10,000 Interest expense 3,000 Retained earnings 60,000 Net income 5,000 What is the times interest earned ratio?
3.33
Boswell Corp. has the following information in its financial statements: Income before interest and taxes $20,000 Common stock 40,000 Tax expense 4,000 Interest expense 5,000 Additional paid-in capital 50,000 Retained earnings 40,000 Net income 11,000 What is the times interest earned ratio?
4.0
Linton Company has the following financial statement information: Current assets 20,000 Noncurrent assets 80,000 Current liabilities 20,000 Noncurrent liabilities 60,000 Stockholders' equity 20,000 What is the debt to equity ratio?
4.0
Larson Company has the following financial statement information: Earnings before interest and taxes 40,000 Net income 10,000 Common stock 20,000 Additional paid-in capital 140,000 Retained earnings 40,000 What is return on stockholders' equity?
5%
When a company discloses its segments, what amount of consolidated revenue must be reported?
75%
Which of the following situations would require an explanatory paragraph even though the auditors' report is unqualified?
A significant matter concerning the financial statements and a related-party transaction. Uncertainty regarding a contingency for which a loss is material in amount
________ ________result from the sale of goods or services on credit
Accounts Receivable
Quick assets divided by current liabilities is which ratio?
Acid test ratio
What is included in a company's paid in capital?
Additional paid-in capital Common stock
A ___ audit opinion occurs when the exceptions to the standard opinion are so great that the financial statements may be misleading.
Adverse
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.
Which of the following statements is true regarding errors, fraud, and illegal acts?
An illegal act is a violation of the law.
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.
Current _____ include cash and other items that will be converted to cash or consumed within the coming year.
Assets
Simply put, ___________are the economic resources of a company.
Assets
The three primary elements of a balance sheet are _______, liabilities, and shareholders' equity.
Assets
The financial statement that displays a firm's financial position on a particular date is the _____ _____
Balance Sheet
The financial statement that provides information about liquidity and long-term solvency is the
Balance Sheet
Which of the following financial statements shows a firm's financial position on a particular date?
Balance Sheet
Which of the following items is classified as cash?
Bank drafts
A company's total assets minus its total liabilities as shown on the balance sheet is known as the _____ value.
Book
Which of the following is a likely example of a related-party transaction?
Borrowing or lending money at unusually low interest rates.
The Management Discussion and Analysis section of the financial statements includes a perspective on which of the following?
Capital resources Operations Liquidity
Which of the following are common disclosures on the face of a financial statement?
Common stock information Allowance for uncollectible accounts
you are analyzing the following four companies based on their debt to equity ratio. Which company has the highest risk of insolvency?
Company D
If an accounts receivable is due within 60 days, it is classified on the balance sheet as a(n) _____ Asset
Current
In a balance sheet, how are assets classified?
Current and noncurrent.
Deferred revenues and accrued salaries payable are examples of what?
Current liabilities
Which of the following are required disclosures for related-party transactions?
Description of transaction. Dollar amount of transaction. Nature of the relationship. Amounts due to or from related parties.
Which of the following are required SEC disclosures?
Director compensation Executive stock option information Executive compensation
Additional _____ are critical to understanding financial statements and to evaluating a firm's performance
Disclosures
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: 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
True or false: The times interest earned formula is net income divided by interest expense.
False
True or false: Working capital is a popular measure of a company's ability to satisfy its long-term obligations.
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
Financial ______ is the ability of a company to alter cash flows in order to take advantage of unexpected investment opportunities and needs.
Flexibility
Unearned revenue represents cash received from a customer for goods or services to be provided in a ____ period.
Future
______ analysis compares financial statements of 2 or more years; ______ analysis examines the relationships between financial statement items of the same year.
Horizontal; vertical
Ownership of an exclusive right to something such as a product, a process, or a name is called what?
Intangible asset
____ consist of assets that a retail or wholesale company acquires for resale or goods that manufacturers produce for sale.
Inventories
Which of the following are subsequent events that must be disclosed in the notes to the financial statements?
Issuance of debt securities. Sale of a business. Event that affects a loss contingency.
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.
A liability has which of the following characteristics?
It is a present obligation. It is a probable future sacrifice of an economic benefit. It is due to a past transaction or event.
Which of the following are included in the summary of significant accounting policies included in the notes to the financial statements?
Items included in cash and cash equivalents. Method of depreciation. Choice between LIFO and FIFO.
Which of the following are characteristics of an operating segment?
Its operating results are regularly reviewed by the chief operating decision maker. It engages in business to earn revenues and incur expenses. Discrete financial information is available.
What situation would require an auditor to use an explanatory paragraph in the auditor's report, even though the report is unqualified?
Lack of consistency due to a change in accounting principle.
Long-term _____ are obligations that will not be satisfied in the next year or operating cycle, whichever is longer.
Liabilities
Obligations to other entities are classified as on the balance sheet.
Liabilities
Simply put, _____________ are the obligations of a company.
Liabilities
What are the primary elements found on a balance sheet?
Liabilities Assets Equity
Common practice requires that current assets are presented on the balance sheet in the order of
Liquidity
The balance sheet provides useful information about a company's _____ and long-term solvency.
Liquidity
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
An analysis provided by the company's management is included in the
Management Discussion and Analysis.
Who is responsible for the information in the annual report?
Management of the company.
The full-disclosure principle requires financial statements to provide all ____ ____ information regarding the company.
Material Relevant
Which of the following investments would be classified as a cash equivalent?
Money market funds U.S. Treasury bills with a maturity of 90 days
When a receivable is supported by a formal agreement that specifies payment terms, it is called a ____ ____
Notes Receivable
What does a liability represent?
Obligations owed to other entities
The time period necessary to convert cash to raw materials, convert raw materials into finished products, sell the products, and collect on the account receivable is referred to as the ______ cycle.
Operating
How are property, plant, and equipment presented on the balance sheet?
Original cost less accumulated depreciation
What additional factors should be considered when assessing current ratio and liquidity?
Portion of current assets made up of non-cash assets. Portion of current assets made up of cash. Line of credit or borrowing ability.
Which of the following are examples of prepaid expenses?
Prepaid insurance. Rent paid in advance
Which of the following are likely examples of a related-party transaction?
Selling goods to affiliated companies. Loaning money to officers and directors. Borrowing or lending money at an unusually low interest rate to an affiliated company.
Short-term investments are sometimes called which of the following?
Short-term marketable securities Temporary investments
Consistent with IAS 1, the statement that reports an organization's assets, liabilities and shareholders' equity is titled
Statement of financial position
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
Subsequent
Accounts receivable represents which of the following?
The amount owed by customers.
Which of the following are limitations of the balance sheet?
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
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.
How are current liabilities satisfied?
The creation of other current liabilities. The use of current assets.
Which of the following items are included in the professional opinions given in the auditor's report?
The effectiveness of internal control. The fairness of the financial statements.
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 are key differences between U.S. GAAP and IFRS in the presentation of a balance sheet?
The order in which assets and liabilities are presented The title of the statement
Which of the following assertions is correct regarding balance sheets prepared under IFRS and U.S. GAAP.
There are more similarities than differences between the statements
Why are inventories reported as current assets?
They are normally sold within the operating cycle.
Which of the following ratios are used to evaluate a company's ability to pay long-term debts?
Times interest earned ratio Debt to equity ratio
What is the role of the auditor?
To attest to the fairness of 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.
Which of the following must be disclosed for major customers?
Total revenue from each major customer The operating segment reporting the revenue from the major customer
True or false: Aggregated financial statements are difficult to analyze because they do not contain information regarding a company's various operations.
True
True or false: Balance sheets prepared under IFRS and U.S. GAAP show more similarities than differences.
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
True or false: The operating cycle for most firms is 1 year or less.
True
Which of the following items are considered cash equivalents?
U.S. Treasury bills due in 2 months. Money market funds that are quickly converted to cash. Commercial paper due in 1 month
Which type of audit opinion indicates the financial statements are prepared in accordance with U.S. GAAP?
Unqualified
Examining expenses as a percentage of total sales for the current year is an example of____ analysis.
Vertical
The type of analysis that examines the relationship of items on the financial statements of one year is called
Vertical
Other assets represents
a catch-all category of noncurrent assets
The purpose of the balance sheet is to report
a company's financial position on a specific date.
Another term for a trade receivable that occurs in the course of a company's normal trade or business is
accounts receivable.
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.
accounts;notes
An expense that has been incurred but not yet paid results is a
accrued liability.
Which of the following opinions is necessary when the auditor finds exceptions that are so material that the financial statements may be misleading?
adverse
Zantron Corp. pays $100,000 for robotic equipment to be used in its production facility. Zantron should include this transaction as
an increase in plant, property, and equipment.
Related third-party transactions _____ required to be disclosed in the notes to the financial statements.
are
Which of the following is a probable future economic benefit obtained or controlled by a particular entity as a result of past transactions or events?
asset
The current ratio is expressed as current ____ divided by current ____
assets; liabilities
The role of a(n)____ is to attest to the fairness of the financial statements they have examined.
auditor
Schwinn is a company that makes bicycles. Which of the following items would be included in Schwinn's inventory?
bicycle tires bicycle chains finished bicycles
Which of the following are noncurrent assets?
building land intangible assets
Which of the following items should be included in cash on the balance sheet?
cashier's checks money orders cash on hand
Which of the following accounts represent amounts shareholders have invested in the company?
common stock additional paid-in capital
The purpose of comparative financial statements is to allow users to
compare year-to-year data detect and predict trends.
Comparative financial statements refer to financial statements that are accompanied by the
corresponding financial statement of the preceding year.
Investments are reported as _____ when the company has both the intent and ability to sell within one year (or operating cycle).
current
Investments are reported as ______ when the company has both the intent and ability to sell within one year (or operating cycle).
current
Inventories held for sale in the normal course of business are classified in the balance sheet as
current assets
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
A ratio used to measure liquidity is the
current ratio.
The two classifications used for assets and liabilities on the balance sheet are ______ and ______.
current; noncurrent
Which of the following is a ratio used to evaluate a company's solvency?
debt to equity
Which type of risk is the risk of a company not being able to pay its obligations when they come due?
default risk
A ____ occurs when the auditor does not have sufficient information to express an opinion.
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
The management approach to segment reporting requires that ______ financial information is available.
discrete
Shareholders' equity arises primarily from amounts invested by shareholders and amounts
earned by the corporation
Favorable financial leverage occurs when a company
earns a return on borrowed funds that exceeds the cost of borrowing.
A(n)_____ is an unintentional mistake in the financial statements, whereas ____ is intentional distortion of the financial statements
error;fraud
When a company spends large amounts on research and development to obtain a patent on its own, the research and development cost is
expensed as incurred.
Inventory for a wholesale or retail company includes which of the following?
finished goods
What is the principle that requires that financial statements provide all material relevant information concerning the entity?
full-disclosure
Inventories include which of the following items?
goods directly consumed in production finished goods goods in production
The type of analysis that uses ratio analysis or trend analysis of financial statements across multiple years is called
horizontal
Which type of analysis uses ratios to analyze the financial statements of 2 or more years?
horizontal analysis
An asset that has no physical substance is referred to as a(n) ______ asset.
intangible
The times interest earned ratio can be calculated as (net income + interest expense + tax expense) divided by ___ expense.
interest
A technology company incurs costs to research and develop a new hand-held device and obtain a patent. This activity is an example of a
internally developed intangible asset.
Assets not used directly in the operations of the business are referred to as
investments
Assets not used directly in the operations of the business are referred to as ______
investments
Land held for speculation, noncurrent receivables, and cash set aside for future plant expansion are all examples of
investments
Which of the following items should be classified as investments on the balance sheet?
investments in stock of another company cash restricted to purchase building note receivable due in 3 years
Land is listed separately on the balance sheet because
it has an unlimited life.
U.S. GAAP requires public companies to report certain geographic area information unless
it is impracticable to do so.
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.
Which of the following are considered illegal acts?
kickbacks illegal contributions bribes
Which of the following items are included in property, plant, and equipment?
land buildings natural resources mineral mines oil wells machines furniture
Which of the following are classified as long-term liabilities?
lease obligations longer than 1 year notes due in more than 1 year pension obligations bonds payable
A company borrows funds for a project. If the interest rate charged for the borrowed funds is less than the rate of return on the project, this is referred to as favorable financial
leverage
The segment disclosure requirements for U.S. GAAP and IFRS for most items are similar; however, only IFRS requires that companies disclose total ____ of its reportable segments.
liabilities
Additional segment disclosures required under IFRS, but not under U.S. GAAP include
liabilities relating to the segment
The current ratio and the quick ratio are used to measure ____ of a company indicating the ability to pay current obligations.
liquidity
The readiness of a company to pay its short-term debts as they come due is referred to as ______
liquidity
Property, plant, and equipment is a(n) ______ asset.
long-lived tangible
Which of the following are common characteristics of property, plant, and equipment?
long-lived used in normal operations tangible
Which of the following are required U.S. GAAP disclosures for geographic areas?
long-lived assets revenues from external customers
Which of the following items should be disclosed in other long-term assets on the balance sheet?
long-term prepaid expenses noncurrent investments that are not material
Responsibility for the financial statements and other information found in the annual report lies with
management
U.S. GAAP uses a ___ approach to determine reportable operating segments.
management
What type of approach does the FASB require for segment reporting?
management
An investment should be classified as current on the balance sheet if
management has the intent and ability to liquidate it in the near term. it will be sold within 12 months.
A _____ firm will include finished goods, work in process, and raw materials as part of their inventory.
manufacturing
Retained earnings represents the accumulated ______ _____ reported since the inception of the corporation and not yet paid to shareholders as dividends
net income
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
Any receivable not expected to be collected within one year or the operating cycle, whichever is longer, is classified as a
noncurrent asset.
Which of the following is included with the annual report to help evaluate a firm's financial performance and financial health?
note disclosures
Which of the following items are included in investments?
note receivable due in 5 years cash reserved to purchase land
The risk that a company may not effectively manage its business and might impair its ability to earn profits is known as
operational
The risk that relates to how effectively a company manages its business and its ability to earn profits is referred to as ______ risk.
operational
Balance sheets often include a catch-all classification of noncurrent assets called _____ long-term assets.
other
If a company's long-term investments are not material in amount, where should they be disclosed on the balance sheet?
other 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?
paid-in capital retained earnings
The accounts common stock and paid-in capital in excess of par are classified as
paid-in capital.
Times interest earned ratio measures a company's ability to ______ its interest charges.
pay
Default risk refers to the ability of a company to
pay its obligations when they come due.
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?
prepaid assets inventory
Which of the following items represents an expense paid in advance that creates benefits used in the future?
prepaid expense
Which of the following are required segment disclosures?
profit or loss assets General information about the segment Reconciliation of total segment revenues with entity revenue
To help shareholders understand the content of executive pay packages and the commitments of the company with respect to such payments, the SEC requires that company disclose compensation information for directors and top executives in a filing called a , ____ _____which also serves to invite shareholders to the annual meeting.
proxy statement
Which document is required to provide information on executive and director compensation?
proxy statement
A ____ 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
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
Which of the following is in the numerator of the quick ratio?
quick assets
The _____ ratio provides a more rigorous indication of liquidity than does the _____ ratio.
quick; current
A manufacturing firm will use which of the following accounts to record inventory?
raw material work in process finished goods
Which of the following items are required disclosures in the notes to financial statements?
related third-party transactions significant accounting policies description of subsequent events
Which of the following items should not be included in cash and cash equivalents in the balance sheet?
restricted cash
The accumulated net income earned since the inception of the corporation and not yet paid to shareholders is referred to as
retained earnings
Which of the following methods are used to compensate directors and executives?
salaries bonuses stock options
The FASB requires that companies that engage in more than one significant business must provide supplemental information concerning individual operating
segment
When a company has distinct business units, it is necessary to provide ____ reporting information to provide additional information on each of the business units.
segment
Companies that operate in more than one significant business must provide which of the following?
segment information
Investments are reported as _____ when the company has both the intent and ability to sell within one year
short-term
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
The ability to pay its long-term debts as they become due is referred to as ______ of the company
solvency
A significant development that occurs after a company's fiscal year-end but before the financial statements are issued is called a
subsequent event.
What information does the times interest earned ratio provide to investors or creditors?
t provides the creditor with an indication of the ability of the debtor to pay the interest on its debts.
Which of the following are accrued liabilities?
taxes payable utilities payable
Goodwill is calculated as
the acquisition price above the fair value of the identifiable net assets acquired.
A summary of significant accounting policies includes information regarding
the choice of accounting policies.
During the course of an audit, the auditor is required to evaluate
the company's ability to continue for a reasonable time as a going concern.
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
Mueller Company reports a long-term notes payable on its balance sheet. In its financial statement notes, Mueller Company should disclose
the payment terms of the loan the interest rate on the loan the maturity date of the loan
Assets are classified as long-term if:
they are expected to be converted to cash or consumed in more than one operating cycle
A customer pays in advance for services to be performed in a future period. In which account should the transaction be recorded?
unearned revenues
Which of the following should be classified as current liabilities?
unearned revenues income taxes payable accrued warranties current maturities of long-term debt accounts payable accrued salaries
Analysts evaluate the performance and risk of the firm using relationships between two financial statement numbers, such as earnings per share of stock, or debt to assets. What type of analysis uses these relationships?
v
A common method of analysis is to express a relationship between the two financial statement items, such as net income divided by sales, and compare this relationship with previous years. This comparison is referred to as
vertical
The type of analysis that examines the relationships of items as a percent of total sales or as a percent of total assets is considered what type of analysis?
vertical
Goodwill is shown on the balance sheet
when one company acquires another company for a price above the fair value of the assets acquired.
A liability is classified as current if it is due
within 1 year or the current operating cycle, whichever is longer.
A popular measure of a company's ability to pay its short-term debt that is measured as current assets minus current liabilities is
working capital
Current assets minus current liabilities equals
working capital