BALANCE SHEET AND STATEMENT OF CASH FLOWS

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Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these

d

The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.

c

The net assets of a business are equal to
a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders' equity.
d. none of these

d Total assets minus total liabilities.

The correct order to present current assets is
a. Cash, accounts receivable, prepaid items, inventories.
b. Cash, accounts receivable, inventories, prepaid items.
c. Cash, inventories, accounts receivable, prepaid items.
d. Cash, inventories, prepaid items, accounts receivable.

b

The basis for classifying assets as current or noncurrent is conversion to cash within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.

b

The basis for classifying assets as current or noncurrent is the period of time normally required by the accounting entity to convert cash invested in
a. inventory back into cash, or 12 months, whichever is shorter.
b. receivables back into cash, or 12 months, whichever is longer.
c. tangible fixed assets back into cash, or 12 months, whichever is longer.
d. inventory back into cash, or 12 months, whichever is longer.

d

The current assets section of the balance sheet should include
a. machinery.
b. patents.
c. goodwill.
d. inventory

d

Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is the beneficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.

d

Which of the following should not be considered as a current asset in the balance sheet?
a. Installment notes receivable due over 18 months in accordance with normal trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of the business.
c. Equity or debt securities purchased with cash available for current operations.
d. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary, on its president.

d

Equity or debt securities held to finance future construction of additional plants should be classified on a balance sheet as
a. current assets.
b. property, plant, and equipment.
c. intangible assets.
d. long-term investments.

d

When a portion of inventories has been pledged as security on a loan,
a. the value of the portion pledged should be subtracted from the debt.
b. an equal amount of retained earnings should be appropriated.
c. the fact should be disclosed but the amount of current assets should not be affected.
d. the cost of the pledged inventories should be transferred from current assets to noncurrent assets.

c

Which of the following is not a long-term investment?
a. Cash surrender value of life insurance
b. Franchise
c. Land held for speculation
d. A sinking fund

b

A generally accepted method of valuation is
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.
a. 1
b. 2
c. 3
d. 1 and 2

d

Which item below is not a current liability?
a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable

b

Working capital is
a. capital which has been reinvested in the business.
b. unappropriated retained earnings.
c. cash and receivables less current liabilities.
d. none of these.

d Current assets less current liabilities.

An example of an item which is not an element of working capital is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.

b

Long-term liabilities include
a. obligations not expected to be liquidated within the operating cycle.
b. obligations payable at some date beyond the operating cycle.
c. deferred income taxes and most lease obligations.
d. all of these.

d

Which of the following should be excluded from long-term liabilities?
a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Long-term liabilities that mature within the operating cycle and will be paid from a sinking fund
d. None of these

d Many answers are possible.

Treasury stock should be reported as a(n)
a. current asset.
b. investment.
c. other asset.
d. reduction of stockholders' equity.

d

Which of the following should be reported for capital stock?
a. The shares authorized
b. The shares issued
c. The shares outstanding
d. All of these

d

Which of the following would be classified in a different major section of a balance sheet from the others?
a. Capital stock
b. Common stock subscribed
c. Stock dividend distributable
d. Stock investment in affiliate

d

The stockholders' equity section is usually divided into what three parts?
a. Preferred stock, common stock, treasury stock
b. Preferred stock, common stock, retained earnings
c. Capital stock, additional paid-in capital, retained earnings
d. Capital stock, appropriated retained earnings, unappropriated retained earnings

c

Which of the following is not an acceptable major asset classification?
a. Current assets
b. Long-term investments
c. Property, plant, and equipment
d. Deferred charges

d

Which of the following is not a method of disclosing pertinent information?
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
d. All of these are methods of disclosing pertinent information.

d

Significant accounting policies may not be
a. selected on the basis of judgment.
b. selected from existing acceptable alternatives.
c. unusual or innovative in application.
d. omitted from financial-statement disclosure.

d

A general description of the depreciation methods applicable to major classes of depreciable assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income tax policy.
d. should be included in corporate financial statements or notes thereto.

d

It is mandatory that the essential provisions of which of the following be clearly stated in the notes to the financial statements?
a. Stock option plans
b. Pension obligations
c. Lease contracts
d. All of these

d

A generally accepted account title is
a. Prepaid Revenue.
b. Appropriation for Contingencies.
c Earned Surplus.
d. Reserve for Doubtful Accounts.

c

The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
a. retained earnings statement.
b. income statement.
c. statement of cash flows.
d. statement of financial position.

d

Making and collecting loans and disposing of property, plant, and equipment are
a. operating activities.
b. investing activities.
c. financing activities.
d. liquidity activities.

d

In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be classified as a(n)
a. operating activity.
b. financing activity.
c. extraordinary activity.
d. investing activity.

b

In preparing a statement of cash flows, cash flows from operating activities
a. are always equal to accrual accounting income.
b. are calculated as the difference between revenues and expenses.
c. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
d. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do affect cash.

c

In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount

a

Preparing the statement of cash flows involves all of the following except determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities.
c. change in cash during the period.
d. cash collections from customers during the period.

d

The cash debt coverage ratio is computed by dividing net cash provided by operating activities by
a. average long-term liabilities.
b. average total liabilities.
c. ending long-term liabilities.
d. ending total liabilities.

b

The current cash debt coverage ratio is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.

b

A measure of a company's financial flexibility is the
a. cash debt coverage ratio.
b. current cash debt coverage ratio.
c. free cash flow.
d. cash debt coverage ratio and free cash flow

d

Free cash flow is calculated as net cash provided by operating activities less
a. capital expenditures.
b. dividends.
c. capital expenditures and dividends.
d. capital expenditures and depreciation.

c

Trent Corp.'s trial balance reflected the following account balances at December 31, 2004:
Accounts receivable (net) $19,000
Trading securities 6,000
Accumulated depreciation on equipment and furniture 15,000
Cash 11,000
Inventory 30,000
Equipment 25,000
Patent 4,000
Prepaid expenses 2,000
Land held for future business site 18,000
In Trent's December 31, 2004 balance sheet, the current assets total is
a. $85,000.
b. $77,000.
c. $72,000.
d. $68,000.

d $19,000 + $6,000 + $11,000 + $30,000 + $2,000 = $68,000.

On January 4, 2004, Frye Co. leased a building to Cole Corp. for a ten-year term at an annual rental of $120,000. At inception of the lease, Frye received $480,000 covering the first two years' rent of $240,000 and a security deposit of $240,000. This deposit will not be returned to Cole upon expiration of the lease but will be applied to payment of rent for the last two years of the lease. What portion of the $480,000 should be shown as a current and long-term liability in Frye's December 31, 2004 balance sheet?
Current Liability Long-term Liability
a. $0 $480,000
b. $120,000 $240,000
c. $240,000 $240,000
d. $240,000 $120,000

b Conceptual.

Which of the following facts concerning fixed assets should be included in the summary of significant accounting policies?
Depreciation Method Composition
a. No Yes
b. Yes Yes
c. Yes No
d. No No

c Conceptual.

In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from
a. operating activities.
b. financing activities.
c. investing activities.
d. selling activities.

c Conceptual.

In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for
a. operating activities.
b. borrowing activities.
c. lending activities.
d. financing activities.

a Conceptual.

In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from
a. lending activities.
b. operating activities.
c. investing activities.
d. financing activities.

d Conceptual.

In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for
a. operating activities.
b. investing activities.
c. financing activities.
d. lending activities

b Conceptual.

Provide clear, concise answers for the following.
1. What are assets?
2. What are liabilities?
3. What is equity?
4. What are current liabilities?
5. Explain what working capital is and how it is computed.
6. What are intangible assets?
7. What are current assets?

1. Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.
2. Liabilities are probable future sacrifices of economic benefits arising from present obligations of an entity as a result of past transactions or events.
3. Equity is the residual interest in the net assets of an entity.
4. Current liabilities are obligations that are expected to be liquidated through the use of current assets or the creation of other current liabilities.
5. Working capital is the net amount of a company's relatively liquid resources. It is the excess of total current assets over total current liabilities.
6. Intangible assets are economic resources or competitive advantages. They lack physical substance and have a high degree of uncertainty about the future benefits to be received.
7. Current assets are resources (future economic benefits) expected to be converted to cash, sold, or consumed in one year or the operating cycle, whichever is longer.

Obligations expected to be liquidated 1. __________________________________
through use of current assets.

Current liabilities.

Statement showing financial condition at a 2. __________________________________
point in time.

Balance sheet.

Events that depend upon future outcomes.

Contingencies.

Probable future sacrifices of economic 4. __________________________________
benefits.

Liabilities.

Resources expected to be converted to 5. __________________________________
cash in one year or the operating cycle,
whichever is longer.

Current assets.

Resources of a durable nature used in 6. __________________________________
operations.

Property, plant, and equipment.

Economic rights or competitive advantages 7.__________________________________
which lack physical substance.

Intangible assets.

Probable future economic benefits.

Assets.

Residual interest in the net assets of an 9.__________________________________
entity.

Equity.

Define current assets without using the word "asset."

Current assets are resources (future economic benefits) expected to be converted to cash, sold, or consumed in one year or the operating cycle, whichever is longer.

Typical balance sheet classifications are as follows.
a. Current Assets g. Long-Term Liabilities
b. Investments h. Capital Stock
c. Plant Assets i. Additional Paid-In Capital
d. Intangible Assets j. Retained Earnings
e. Other Assets k. Notes to Financial Statements
f. Current Liabilities l. Not Reported on Balance Sheet
Indicate by use of the above letters how each of the following items would be classified on a balance sheet prepared at December 31, 2004. If a contra account, or any amount that is negative or opposite the normal balance, put parentheses around the letter selected. A letter may be used more than once or not at all.
____ 16. Natural resource—timberlands
____ 17. Deficit (no net income earned since beginning of company)
____ 18. Goodwill
____ 19. 90 day notes payable
____ 20. Investment in bonds of another company; will be held to 2007 maturity
____ 21. Land held for speculation
____ 22. Death of company president
____ 23. Current maturity of bonds payable
____ 24. Investment in subsidiary; no plans to sell in near future
____ 25. Trade accounts payable
____26. Preferred stock ($10 par)
____27. Prepaid rent for next 12 months
____ 28. Copyright
____ 29. Accumulated amortization, patents
____ 30. Earnings not distributed to stockholders
____ 1. Accrued salaries and wages
____ 2. Rental revenues for 3 months collected in advance
____ 3. Land used as plant site
____ 4. Equity securities classified as trading
____ 5. Cash
____ 6. Accrued interest payable due in 30 days
____ 7. Premium on preferred stock issued
____ 8. Dividends in arrears on preferred
stock
____ 9. Petty cash fund
____ 10. Unamortized discount on bonds payable due 2007
____ 11. Common stock at par value
____ 12. Bond indenture covenants
____ 13. Unamortized premium on bonds payable due in 2013
____ 14. Allowance for doubtful accounts
____ 15. Accumulated depreciation

1. f 6. f 11. h 16. c 21. b 26. h
2. f 7. i 12. k 17. (j) 22. l 27. a
3. c 8. k 13. g 18. d 23. f 28. d
4. a 9. a 14. (a) 19. f 24. b 29. (d)
5. a 10. (g) 15. (c) 20. b 25. f 30. j

The various classifications listed below have been used in the past by Pyle Company on its balance sheet. It asks your professional opinion concerning the appropriate classification of each of the items 1-14 below.
a. Current Assets f. Current Liabilities
b. Investments g. Long-Term Liabilities
c. Plant and Equipment h. Common Stock and Paid-in Capital in Excess of Par
d. Intangible Assets i. Retained Earnings
e. Other Assets
Indicate by letter how each of the following items should be classified. If an item need not be reported on the balance sheet, use the letter "X." A letter may be used more than once or not at all. If an item can be classified in more than one category, choose the category most favored by the authors of your textbook.
____ 1. Employees' payroll deductions.
____ 2. Cash in sinking fund.
____ 3. Rent revenue collected in advance.
____ 4. Equipment retired from use and held for sale.
____ 5. Patents.
____ 6. Payroll cash fund.
____ 7. Goods held on consignment.
____ 8. Accrued revenue on temporary investments.
____ 9. Advances to salespersons.
____ 10. Premium on bonds payable due two years from date.
____ 11. Bank overdraft.
____ 12. Salaries which company budget shows will be paid to employees within the next year.
____ 13. Work in process.
____ 14. Appropriation for bonded indebtedness.

1. f 5. d 9. a 13. a
2. b 6. a 10. g 14. i
3. f 7. x 11. f
4. a or e 8. a 12. x

The various classifications listed below have been used in the past by Lowe Company on its balance sheet.
a. Current Assets e. Current Liabilities
b. Investments f. Long-term Liabilities
c. Plant and Equipment g. Common Stock and Paid-in Capital in Excess of Par
d. Intangible Assets h. Retained Earnings
Instructions
Indicate by letter how each of the items below should be classified at December 31, 2004. If an item is not reported on the December 31, 2004 balance sheet, use the letter "X" for your answer. If the item is a contra account within the particular classification, place parentheses around the letter. A letter may be used more than once or not at all.
Sample question and answer:
(a) Allowance for doubtful accounts.
____ 1. Customers' accounts with credit balances.
____ 2. Bond sinking fund.
____ 3. Salaries which the company's cash budget shows will be paid to employees in 2005.
____ 4. Accumulated depreciation.
____ 5. Appropriation for plant expansion.
____ 6. Amortization of patents for 2004.
____ 7. On December 31, 2004, Lowe signed a purchase commitment to buy all of its raw materials from Delta Company for the next 2 years.
____ 8. Discount on bonds payable due March 31, 2007.
____ 9. Launching of Lowe's Internet retailing division in February, 2005.
____ 10. Cash dividends declared on December 15, 2004 payable to stockholders on January 15, 2005

1. e 4. (c) 7. x 10. e
2. b 5. h 8. (f)
3. x 6. x 9. x

For each event listed below, select the appropriate category which describes the effect of the event on a statement of cash flows:
a. Cash provided/used by operating activities.
b. Cash provided/used by investing activities.
c. Cash provided/used by financing activities.
d. Not a cash flow.
____ 1. Payment on long-term debt
____ 2. Issuance of bonds at a premium
____ 3. Collection of accounts receivable
____ 4. Cash dividends declared
____ 5. Issuance of stock to acquire land
____ 6. Sale of available-for-sale securities (long-term)
____ 7. Payment of employees' wages
____ 8. Issuance of common stock for cash
____ 9. Payment of income taxes payable
____ 10. Purchase of equipment
____ 11. Purchase of treasury stock (common)
____ 12. Sale of real estate held as a long-term investment

1. c 4. d 7. a 10. b
2. c 5. d 8. c 11. c
3. a 6. b 9. a 12. b

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