Deck 2: A Further Look at Financial Statements

Question 1

Liquidity ratios measure the short-term ability of a company to pay its maturing obligations and meet unexpected needs for cash.

Answer 1

True

Question 2

The main difference between intangible assets and property, plant and equipment is the length of the asset's life.

Answer 2

False

Question 3

Profitability means having enough funds on hand to pay debts when they fall due.

Answer 3

False

Question 4

The investment category on the balance sheet normally includes investments that are intended to be held for a short period of time (less than one year).

Question 5

Profitability ratios measure the operating success of a company for a given period of time.

Question 6

Earnings per share measures the net income earned on each share of common stock.

Question 7

Stockholders' equity is divided into two parts: common stock and retained earnings.

Question 8

Solvency ratios measure the short-term ability of the company to pay its maturing obligations.

Question 9

The current ratio takes into account the composition of current assets.

Question 10

Solvency ratios measure the ability of a company to survive over a short period of time.

Question 11

Solvency is a company's ability to pay interest as it comes due and to repay the balance of a debt due at its maturity.

Question 12

Earnings per share is calculated by dividing net income minus preferred stock dividends for the period by the average number of common shares outstanding during the period.

Question 13

The debt to assets ratio measures the percentage of assets financed by creditors.

Question 14

Long-term investments appear in the property, plant, and equipment section of the balance sheet.

Question 15

The current ratio is computed as current liabilities divided by current assets.

Question 16

A liability is classified as a current liability if it is to be paid within the coming year.

Question 17

Net cash provided by operating activities takes into account that a company must invest in capital expenditures just to maintain its current level of operations.

Question 18

It is possible for an asset to be a current asset even though the expected conversion of that asset into cash is to be longer than one year or the normal operating cycle.

Question 19

The excess of current assets over current liabilities is called working capital.

Question 20

Cash and supplies are both classified as current assets.

Question 21

Consistent use of the same accounting principles and methods is necessary for meaningful analysis of trends within a company.

Question 22

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

Question 23

The advantage of accounting information is that it provides exact and completely reliable measures.

Question 24

Free cash flow is net cash provided by operating activities less capital expenditures.

Question 25

Both investors and creditors have an interest in a company's ability to generate favorable cash flows.

Question 26

A major function of management is to provide the accountant with relevant and useful information.

Question 27

Consistency in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next accounting period.

Question 28

To be faithfully representative, accounting information should predict future events, confirm prior expectations, and be reported on a timely basis.

Question 29

Long-term creditors consider a high free cash flow amount an indication of solvency.

Question 30

GAAP stands for generally accepted accounting procedures.

Question 31

In the statement of cash flows, net cash provided by operating activities indicates the cash-generating capability of the company.

Question 32

Free cash flow is net cash provided by operating activities less dividends.

Question 33

The most generally accepted value used in accounting is market value.

Question 34

If a building is offered for sale at $100,000 and the buyer pays $95,000 cash for it, the buyer would record the building at $100,000.

Question 35

The periodicity assumption states that the business will remain in operation for the foreseeable future.

Question 36

For information to be useful, it must be both relevant and faithfully representative.

Question 37

The primary accounting standard-setting body in the United States is the Securities and Exchange Commission.

Question 38

Generally accepted accounting principles are rules and practices that are recognized as a general guide for financial reporting purposes.

Question 39

For accounting purposes, business transactions should be kept separate from the personal transactions of the stockholders of the business.

Question 40

In order for information to be relevant, it must be reported on a monthly basis.

Question 41

Relevance and cost are two constraints in accounting.

Question 42

In a classified balance sheet, assets are usually classified as

A)current assets; long-term assets; property, plant, and equipment; and intangible assets.
B)current assets; long-term investments; property, plant, and equipment; and common stocks.
C)current assets; long-term investments; tangible assets; and intangible assets.
D)current assets; long-term investments; property, plant, and equipment; and intangible assets.

Question 43

The economic entity assumption states that assets should be recorded at their cost.

Question 44

The going concern assumption is that the business will continue in operation long enough to carry out its existing objectives and commitments.

Question 45

Materiality is a company-specific aspect of faithful representation.

Question 46

In general, the FASB indicates that most assets must follow the fair value principle.

Question 47

The economic entity assumption is that a company will remain in operations for the foreseeable future.

Question 48

A material item is one that is likely to influence an investor's decision.

Question 49

When preparing financial statements, the accountant assumes that the business will stay in business for the foreseeable future.

Question 50

The monetary unit assumption states that transactions that can be measured in terms of money should be recorded in the accounting records.

Question 51

An intangible asset

A)derives its value from the rights and privileges it provides the owner.
B)is worthless because it has no physical substance.
C)is converted into a tangible asset during the operating cycle.
D)cannot be classified on the balance sheet because it lacks physical substance.

Question 52

Which of the following is not classified properly as a current asset?

A)Supplies
B)Debt investments
C)A fund to be used to purchase a building within the next year
D)A receivable from the sale of an asset to be collected in two years

Question 53

The monetary unit assumption has led to an increase in the notes to financial statements.

Question 54

The economic entity assumption states that economic events can be identified with a particular unit of accountability.

Question 55

The periodicity assumption states that every economic entity can be separately identified and accounted for.

Question 56

Cost constraint weighs the cost that companies incur to provide a type of information against its benefit to financial statement users.

Question 57

Materiality relates to whether an item is large enough to likely influence the decision of an investor or creditor.

Question 58

A current asset is

A)the last asset purchased by a business.
B)an asset which is currently being used to produce a product or service.
C)usually found as a separate classification in the income statement.
D)expected to be converted to cash or used in the business within a relatively short period of time.

Question 59

On a classified balance sheet, short-term investments are classified as

A)an intangible asset.
B)property, plant, and equipment.
C)a current asset.
D)a long-term investment.

Question 60

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

Question 61

The operating cycle of a company is the average time that is required to go from cash to

A)sales in producing revenues.
B)cash in producing revenues.
C)inventory in producing revenues.
D)accounts receivable in producing revenues.

Question 62

These are selected account balances on December 31, 2017. $$\begin{array} { l r } \text { Land } & \$ 150,000 \\\text { Land (held for future use) } & 225,000 \\\text { Buildings } & 1,200,000 \\\text { Inventory } & 300,000 \\\text { Equipment } & 675,000 \\\text { Furniture } & 150,000 \\\text { Accumulated Depreciation } & 450,000\end{array}$$ What is the total amount of property, plant, and equipment that will appear on the balance sheet?

A)$2,250,000
B)$1,950,000
C)$2,700,000
D)$1,725,000

Question 63

Ratios that measure the income or operating success of a company for a given period of time are

A)liquidity ratios.
B)profitability ratios.
C)solvency ratios.
D)trending ratios.

Question 64

On a classified balance sheet, companies usually list current assets

A)in alphabetical order.
B)with the largest dollar amounts first.
C)in the order in which they are expected to be converted into cash.
D)in the order of acquisition.

Question 65

Use the following data to determine the total amount of working capital. Koonce Office Supplies
Balance Sheet
December 31, 2017
$\begin{array}{lrlr}\text { Cash } & \$ 195,000 & \text { Accounts payable } & \$ 210,000 \\\text { Accounts receivable } & 150,000 & \text { Salaries and wages payable } & 30,000 \\\text { Inventory } & 165,000 & \text { Mortgage payable } & 240,000 \\\text { Prepaid insurance } & 90,000 & \text { Total liabilities } & \$ 480,000\\\text { Stock investments } & 255,000 \\\text { Land } & 270,000 \\\text { Buildings } \quad \$ 315,000& &\text { Common stock }&\$360,000\\\text { Less: Accumulated }&&\text { Retained earnings }&750,000\\\text { depreciation }\quad(60,000)&255,000&\text { Total stockholders' equity }&\$1,110,000\\\text { Trademarks } & 210,000 &\text { Total liabilities and }\\\text { Total assets } & \$ 1,590,000&\text { stockholders' equity }&\$1,590,000\end{array}$

A)$360,000
B)$390,000
C)$130,000
D)$180,000

Question 66

What is the order in which assets are generally listed on a classified balance sheet?

A)Current and long-term
B)Current; property, plant and equipment; long-term investments; intangibles
C)Current; property, plant and equipment; intangibles; long-term investments
D)Current; long-term investments; property, plant and equipment, intangibles

Question 67

Use the following data to determine the total dollar amount of assets to be classified as investments. Koonce Office Supplies
Balance Sheet
December 31, 2017
$\begin{array}{lrlr}\text { Cash } & \$ 195,000 & \text { Accounts payable } & \$ 210,000 \\\text { Accounts receivable } & 150,000 & \text { Salaries and wages payable } & 30,000 \\\text { Inventory } & 165,000 & \text { Mortgage payable } & 240,000 \\\text { Prepaid insurance } & 90,000 & \text { Total liabilities } & \$ 480,000\\\text { Stock investments } & 255,000 \\\text { Land } & 270,000 \\\text { Buildings } \quad \$ 315,000& &\text { Common stock }&\$360,000\\\text { Less: Accumulated }&&\text { Retained earnings }&750,000\\\text { depreciation }\quad(60,000)&255,000&\text { Total stockholders' equity }&\$1,110,000\\\text { Trademarks } & 210,000 &\text { Total liabilities and }\\\text { Total assets } & \$ 1,590,000&\text { stockholders' equity }&\$1,590,000\end{array}$

A)$0
B)$525,000
C)$255,000
D)$465,000

Question 68

Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment. Koonce Office Supplies
Balance Sheet
December 31, 2017
$\begin{array}{lrlr}\text { Cash } & \$ 195,000 & \text { Accounts payable } & \$ 210,000 \\\text { Accounts receivable } & 150,000 & \text { Salaries and wages payable } & 30,000 \\\text { Inventory } & 165,000 & \text { Mortgage payable } & 240,000 \\\text { Prepaid insurance } & 90,000 & \text { Total liabilities } & \$ 480,000\\\text { Stock investments } & 255,000 \\\text { Land } & 270,000 \\\text { Buildings } \quad \$ 315,000& &\text { Common stock }&\$360,000\\\text { Less: Accumulated }&&\text { Retained earnings }&750,000\\\text { depreciation }\quad(60,000)&255,000&\text { Total stockholders' equity }&\$1,110,000\\\text { Trademarks } & 210,000 &\text { Total liabilities and }\\\text { Total assets } & \$ 1,590,000&\text { stockholders' equity }&\$1,590,000\end{array}$

A)$990,000
B)$525,000
C)$735,000
D)$585,000

Question 69

Trademarks would appear in which balance sheet section?

A)Intangible assets
B)Investments
C)Property, plant, and equipment
D)Current assets

Question 70

Intangible assets are

A)listed directly under current assets on the balance sheet.
B)not listed on the balance sheet because they do not have physical substance.
C)listed after property, plant, and equipment.
D)listed as a long-term investment on the balance sheet.

Question 71

Which of the following would not be classified as a long-term liability?

A)Current maturities of long-term debt
B)Bonds payable
C)Mortgage payable
D)Lease liabilities

Question 72

Use the following data to calculate the current ratio. Koonce Office Supplies
Balance Sheet
December 31, 2017
$\begin{array}{lrlr}\text { Cash } & \$ 195,000 & \text { Accounts payable } & \$ 210,000 \\\text { Accounts receivable } & 150,000 & \text { Salaries and wages payable } & 30,000 \\\text { Inventory } & 165,000 & \text { Mortgage payable } & 240,000 \\\text { Prepaid insurance } & 90,000 & \text { Total liabilities } & \$ 480,000\\\text { Stock investments } & 255,000 \\\text { Land } & 270,000 \\\text { Buildings } \quad \$ 315,000& &\text { Common stock }&\$360,000\\\text { Less: Accumulated }&&\text { Retained earnings }&750,000\\\text { depreciation }\quad(60,000)&255,000&\text { Total stockholders' equity }&\$1,110,000\\\text { Trademarks } & 210,000 &\text { Total liabilities and }\\\text { Total assets } & \$ 1,590,000&\text { stockholders' equity }&\$1,590,000\end{array}$

A)2.13 : 1
B)1.44 : 1
C)2.86 : 1
D)2.50 : 1

Question 73

Which of the following is not a current liability?

A)Salaries and Wages Payable
B)Accounts Payable
C)Taxes Payable
D)Bonds Payable

Question 74

Liabilities are generally classified on a balance sheet as

A)small liabilities and large liabilities.
B)present liabilities and future liabilities.
C)tangible liabilities and intangible liabilities.
D)current liabilities and long-term liabilities.

Question 75

Use the following data to determine the total dollar amount of assets to be classified as current assets. Carne Auto Supplies
Balance Sheet
December 31, 2017
$\begin{array}{lrlr}\text { Cash } & \$ 70,000 & \text { Accounts payable } & \$ 130,000 \\\text { Accounts receivable } & 100,000 & \text { Salaries and wages payable } & 20,000 \\\text { Inventory } & 140,000 & \text { Mortgage payable } & 180,000 \\\text { Prepaid insurance } & 80,000 & \text { Total liabilities } & \$ 330,000 \\\text { Stock investments } & 180,000 & &\\\text { Land } & 190,000 \\\text { Buildings } \quad \$ 230,000 &&\text { Common stock }&\$240,000\\\text { Less: Accumulated }&&\text { Retained earnings }&500,000\\\text { depreciation }\quad(60,000)&170,000&\text { Total stockholders' equity }&\$740,000\\\text { Trademarks } & 140,000&\text { Total liabilities and }\\\text { Total assets }&\$1,070,000&\text { stockholders' equity }&\$1,070,000\end{array}$

A)$390,000
B)$250,000
C)$570,000
D)$330,000

Question 76

Which statement about long-term investments is not true?

A)They will be held for more than one year.
B)They are not currently used in the operation of the business.
C)They include investments in stock of other companies and land held for future use.
D)They do not include long-term notes receivable.

Question 77

Use the following data to determine the total dollar amount of assets to be classified as current assets. Koonce Office Supplies
Balance Sheet
December 31, 2017
$\begin{array}{lrlr}\text { Cash } & \$ 195,000 & \text { Accounts payable } & \$ 210,000 \\\text { Accounts receivable } & 150,000 & \text { Salaries and wages payable } & 30,000 \\\text { Inventory } & 165,000 & \text { Mortgage payable } & 240,000 \\\text { Prepaid insurance } & 90,000 & \text { Total liabilities } & \$ 480,000\\\text { Stock investments } & 255,000 \\\text { Land } & 270,000 \\\text { Buildings } \quad \$ 315,000& &\text { Common stock }&\$360,000\\\text { Less: Accumulated }&&\text { Retained earnings }&750,000\\\text { depreciation }\quad(60,000)&255,000&\text { Total stockholders' equity }&\$1,110,000\\\text { Trademarks } & 210,000 &\text { Total liabilities and }\\\text { Total assets } & \$ 1,590,000&\text { stockholders' equity }&\$1,590,000\end{array}$

A)$855,000
B)$600,000
C)$510,000
D)$435,000

Question 78

Which of the following is not considered an asset?

A)Equipment
B)Dividends
C)Accounts receivable
D)Inventory

Question 79

It is not true that current assets are resources that are expected to be

A)realized in cash within one year.
B)sold within one year.
C)consumed within one year.
D)acquired within one year.

Question 80

Equipment is classified on the balance sheet as

A)a current asset.
B)property, plant, and equipment.
C)an intangible asset.
D)a long-term investment.