Exam 5: Foundations of Financial Reporting and the Classified Balance Sheet

Expensing a building in the year of purchase represents an abuse of which of the following accounting conventions?

Investors and creditors use financial statements to evaluate a company's ability to pay dividends and interest.

Relevance is comprised of all of the following except

Bill Pierce owns several ice cream shops all within 50 miles of his home.He has plans to expand the number of shops he owns.This planned expansion will require a large bank loan.Bill has always done his own accounting work and has prepared a set of financial statements for each of the past five years of operations to present to the bank.Because some periods were more profitable than others,Bill attempted to streamline his earnings by switching depreciation and inventory valuation methods frequently.This created the appearance that his company earnings were very consistent over the years.Discuss the merits of Bill's financial statements with regard to his streamlining decisions.

Which of the following is a measure of liquidity?

Full disclosure of all important facts aids in overcoming the limitations of accounting information.

Faithful representation is comprised of all of the following except

The debt to equity ratio equals

A debt to equity ratio of 0.5 means that one-third of a company's total assets are financed by creditors.

To be useful for decision making,financial reporting must enable the user to assess cash flow prospects and assess management's stewardship.

Contributed capital is shown on a corporate balance sheet as two amounts: the par value of the issued stock and retained earnings.

Illegal acts of a small dollar amount can be ignored because they are immaterial.

A company with a current ratio of 1.0 is considered more liquid than a company with a current ratio of 2.0.

The convention of consistency pertains to the use of the same accounting principles by firms in the same industry.

Asset turnover measures how efficiently assets are used to produce revenues.

Accounting information contains numerous estimates,classifications,summarizations,judgments,and allocations.

Which accounting convention could cause an overload of information for the financial statement user?

Use the following information to calculate the liquidity and profitability ratios listed below.Round to two decimal places. a.Current ratio b.Working capital c.Return on equity d.Profit margin e.Debt to equity ratio f.Return on assets g.Asset turnover

Use this balance sheet and income statement for the first year of operations for Cane Construction to answer the following question.Use ending balances whenever average balances are required for computing ratios. -The return on assets for Cane Construction is

Which of the following accounting conventions would an accountant most likely apply when facing major uncertainties?