Deck 7: Financial Statements Ii: the Balance Sheet and the Statement of Cash Flows

Question 1

On a balance sheet, what is the preferable presentation of notes or accounts receivable from officers, employees, or affiliated companies?

A) As trade notes and accounts receivable if they otherwise qualify as current assets
B) As assets but separately from other receivables
C) As offsets to capital
D) By means of notes or footnotes

Answer 1

B

Question 2

A measure of a company's financial flexibility is

A) Return on assets ratio
B) Return on sales ratio
C) Free cash flow
D) Accounts receivable turnover ratio

Answer 2

C

Question 3

The balance sheet can be used to analyze all of the following except

A) Financial flexibility.
B) Solvency.
C) Liquidity.
D) Profitability

Answer 3

D

Question 4

A gain on the sale of plant assets in the ordinary course of business should be presented in a statement of cash flows as a (an)

A) Source and use of cash
B) Use of cash
C) Addition to income from continuing operations
D) Deduction from income from continuing operations

Question 5

Which of the following should theoretically be presented in a statement of changes in financial position only because of the all-financial-resources concept?

A) Conversion of preferred stock to common stock
B) Purchase of treasury stock
C) Sale of common stock
D) Declaration of cash dividend

Question 6

The balance sheet discloses
E) Stocks
F) Flows
G) Both stocks and flows h. Neither stocks nor flows

Question 7

The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the

A) Statement of cash flows.
B) Retained earnings statement.
C) Statement of financial position.
D) Income statement.

Question 8

When preparing a funds statement using the all financial resources concept, the retirement of long-term debt by the issuance of common stock should be presented in a statement of changes in financial position as a Source of Funds Use of Funds

A) No No
B) No Yes
C) Yes No
D) Yes Yes

Question 9

In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?

A) Sale of merchandise on credit
B) Declaration of a cash dividend
C) Issuance of bonds payable at a discount
D) Sale of equipment at book value

Question 10

A statement of cash flows should be issued by a profit-oriented business

A) As an alternative to the statement of income and retained earnings
B) Only if the business classifies its assets and liabilities as current and noncurrent
C) Only when two-year comparative balance sheets are not issued
D) Whenever a balance sheet and a statement of income and retained earnings are issued

Question 11

Making and collecting loans and disposing of property, plant, and equipment are

A) Liquidity activities.
B) Financing activities.
C) Investing activities.
D) Operating activities

Question 12

The working capital format is one possible format for presenting a statement of changes in financial position. Which of the following formats is (are) also theoretically acceptable? Cash Quick Assets

A) Acceptable Not acceptable
B) Not acceptable Not acceptable
C) Not acceptable Acceptable
D) Acceptable Acceptable

Question 13

A transaction that would appear as an application of funds on a conventional funds statement using the all-financial-resources concept, but not on a statement using the traditional working capital concept would be the

A) Acquisition of property, plant, and equipment for cash
B) Reacquisition of bonds issued by the reporting entity
C) Acquisition of property, plant, and equipment with an issue of common stock
D) Declaration and payment of dividends

Question 14

Which of the following should be presented in a statement of cash flows supplemental schedule? Conversion of Conversion of
Long-term debt preferred stock
To common stock to common stock
A) No No

A) Yes No
B) No Yes
C) Yes Yes

Question 15

A basic objective of the statement of cash flows is to

A) Supplant the income statement and balance sheet
B) Disclose changes during the period in all asset and all liability accounts
C) Disclose the change in working capital during the period
D) Provide essential information for financial statements users in making economic decisions

Question 16

The basis for classifying assets as current or noncurrent is the period of time normally elapsed from the time the accounting entity expends cash to the time it converts

A) Inventory back to 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 to cash or 12 months, whichever is longer

Question 17

There would probably be a major difference between a statement of source and application of working capital and a cash flow statement in the treatment of

A) Dividends declared and paid
B) Sales of noninventory assets for cash at a loss
C) Payment of long-term debt
D) A change during the period in the accounts payable balance

Question 18

Current assets are presented on the balance sheet in

A) Descending order of their balances.
B) Ascending order of their balances.
C) Order of their liquidity.
D) Reverse order of their liquidity.

Question 19

When preparing a statement of changes in financial position using the cash basis for defining funds, an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings because

A) Funds were increased since inventory is a current asset
B) The net increase in inventory reduced cost of goods sold but represents an assumed use of cash
C) Inventory is an expense deducted in computing net earnings, but is not a use of funds
D) All changes in noncash accounts must be disclosed under the all financial resources concept

Question 20

The valuation basis used in conventional financial statements is

A) Replacement cost
B) Market value
C) Original cost
D) A mixture of costs and values

Question 21

Net cash provided (used) by operating activities − net cash used in acquiring property, plant is the calculation for

A) Free cash flow
B) Cash flow from investing activities
C) Working capital
D) Current ratio

Question 22

Which of the following is not an important aspect of SFAS No. 157 (FASB ASC 820)? q. A new definition of fair value.
R) A requirement that all assets and liabilities are to be measured at their fair value.
S) A fair value hierarchy used to classify the source of information used in fair value measurements (for example, market based or nonmarket based).
T) New disclosures of assets and liabilities measured at fair value based on their level in the hierarchy.

Question 23

The calculation sales/average total assets is the formula for which of the following ratios ‰. Return on assets
Š) Profit margin
‹) Asset turnover
Œ) Asset usage

Question 24

Which of the following is not a balance sheet element? i. Assets
J) Liabilities
K) Gains
L) Equities

Question 25

Discuss the following balance sheet elements as defined by SFAC No. 6:
a. Assets
Assets are probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events. An asset has three essential characteristics: (1) it embodies a probable future benefit that involves a capacity, singly or in combination with other assets, to contribute directly or indirectly to future net cash inflows; (2) a particular enterprise can obtain the benefit and control others' access to it; and (3) the transaction or other event giving rise to the enterprise's right to or control of the benefit has already occurred.
a. Liabilities
Liabilities are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of past transactions or events. A liability has three essential characteristics: (1) it embodies a present duty or responsibility to one or more other entities that entails settlement by probable future transfer or use of assets at a specified or determinable date, on occurrence of a specified event, or on demand; (2) the duty or responsibility obligates a particular enterprise, leaving it little or no discretion to avoid the future sacrifice; and (3) the transaction or other event obligating the enterprise has already happened.
b. Equity
Equity is the residual interest in the assets of an entity that remains after deducting its liabilities. In a business enterprise, the equity is the ownership interest. Equity in a business enterprise stems from ownership rights (or the equivalent). It involves a relation between an enterprise and its owners as owners rather than as employees, suppliers, customers, lenders, or in some other nonowner role.

Question 26

Level 1 of fair value hierarchy measures originally outlined in SFAS No. 157 are based on: }. Historical cost of similar assets.
~) Market prices for identical assets.
) Market prices for similar assets.
€) Unobservable inputs.

Question 27

The firm's ability to convert an asset to cash or to pay a current liability change is the definition of

A) Liquidity
B) Solvency
C) Financial flexibility
D) Working capital

Question 28

How is fair value defined in SFAS No. 157 (FASB ASC 820)?

Question 29

Investments in equity securities are disclosed as current assets on a company's balance sheet if
A) Management intends to convert them into common stock within one year.

A) Management intends to sell them within a year and they have a ready market exists.
B) Management owns less than 50% of the outstanding stock.
B) The fair market value cannot be determined.

Question 30

A firm's ability to obtain cash for business operations change is the definition of •. Liquidity
–) Solvency
—) Financial flexibility
˜) Working capital

Question 31

Which of the following is not a component of equity? m. Common stock
N) Treasury stock
O) Retained earnings
P) Unearned revenue

Question 32

The SFAS No 157 (FASB ASC 820) fair value hierarchy contains y. Two level
Z) Three levels
{) Four levels
|) Five levels

Question 33

The firm's ability to use its financial resources to adapt to change is the definition of ‘. Liquidity
’) Solvency
“) Financial flexibility
”) Working capital

Question 34

The calculation net income/average total assets is the formula for which of the following ratios . Return on assets
Ž) Profit margin
) Asset turnover
) Asset usage

Question 35

The calculation net income/sales is the formula for which of the following ratios …. Return on assets
†) Profit margin
‡) Asset turnover
ˆ) Asset usage

Question 36

List three valuation techniques currently used on the balance sheet and discuss how each are used (What accounts?).
Asset Measurement Basis
Cash Current value
Accounts receivable Expected future value
Marketable securities Fair value or amortized cost
Inventory Current or past value
Investments Fair value, amortized cost, or the result
of applying the equity method
Property, plant, and equipment Past value adjusted for depreciation

Question 37

Define the following terms:
a. Current assets
Current assets are those assets that may reasonably be expected to be realized in cash, sold or consumed during the normal operating cycle of the business or one year, whichever is longer
b. Investments
Investments may be divided into three categories:

Question 38

What is reported on the statement of cash flows?

A) Operating, investing, and financing activities of an entity for a period of time
B) All revenues and expense listed by operating, financing, and operating actitivity
C) Operating, investing, and financing activities of an entity at the balance sheet date
D) A detail of all incoming and outgoing cash flows of a business

Question 39

Which of the following is the lowest level of the SFAS 157 (FASB ASC 820) fair value hierarchy? . Unobservable inputs (that are corroborated by observable market data)
‚) Unobservable inputs (that are not corroborated by observable market data)
ƒ) Observable market-based inputs (or unobservable inputs that are corroborated by market data)
„) Quoted market prices for identical assets or liabilities in active markets

Question 40

The definition of fair value in SFAS No 157 (FASB ASC 820) is u. Entry price based
V) Exit price based
W) Replacement cost based
X) Historical cost based

Question 41

In May 2011, FASB, issued Accounting Standards Update 2011‐04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. What is the purpose of this ASU?

Question 42

Define and discuss the three major sections of the statement of cash flows.

Question 43

Define the following terms:
a. Liquidity
Liquidity is the firm's ability to convert an asset to cash or to pay a current liability. It is referred to as the "nearness to cash" of an entity's economic resources and obligations.
b. Solvency
Solvency refers to a firm's ability to obtain cash for business operations. Specifically, it refers to a firm's ability to pay its debts as they become due.
c. Financial flexibility
Financial flexibility is the firm's ability to use its financial resources to adapt to change. It is the firm's ability to take advantage of new investment opportunities or to react quickly to a "crisis" situation. Financial flexibility comes in part from quick access to the company's liquid assets. However, liquidity is only one part of financial flexibility. Financial flexibility also stems from a firm's ability to generate cash from its operations, contributed capital, or sale of economic resources without disrupting continuing operations.

Question 44

What questions does the statement of cash flows enable financial statement users to answer?

Question 45

Obtain a company's financial statements and ask the students to compute the following:
a. Return on investment
b. Adjusted return on investment
c. Profit margin ratio
d. Asset turnover ratio
e. Free cash flow
These answers are dependent on the company selected.

Question 46

After considering the significance and relevance of each of the factors that indicate the volume and level of activity for an asset or liability is not orderly, judgment must be used to determine whether the market is active and if a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value. What are some circumstances identified in FSP FAS 157-4 that might indicate that a transaction is not orderly?
a. There was not adequate exposure to the market for a period before the measurement date to allow marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions.
b. There was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant.
c. The seller is in or near bankruptcy or receivership (i.e., distressed), or the seller was required to sell to meet regulatory or legal requirements (i.e., forced).
d. The transaction price is an outlier when compared with other recent transactions for the same or similar asset or liability.

Question 47

Describe the fair value hierarchy as defined in SFAS No.157(FASB ASC 820).

Question 48

Discuss the direct versus indirect methods of preparing the statement of cash flows.