Deck 5: Balance Sheet and Statement of Cash Flows

Question 1

Significant financing and investing activities that do not affect cash are not reported in the statement of cash flows or any other place.

Answer 1

False

Question 2

Free cash flow is net income less capital expenditures and dividends.

Answer 2

False

Question 3

Liquidity refers to the ability of an enterprise to pay its debts as they mature.

Answer 3

False

Question 4

Land held for speculation is reported in the property, plant, and equipment section of the balance sheet.

Question 5

Financial flexibility is a company's ability to respond and adapt to financial adversity and unexpected needs and opportunities.

Question 6

Financial statement readers often assess liquidity by using the current cash debt coverage.

Question 7

Companies may use parenthetical explanations, notes, cross references, and supporting schedules to disclose pertinent information.

Question 8

On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners' equity account.

Question 9

The primary purpose of a statement of cash flows is to report the cash effects of operations during a period.

Question 10

Companies have the option of disclosing information about the nature of their operations and the use of estimates in preparing financial statements.

Question 11

The balance sheet omits many items that are of financial value to the business but cannot be recorded objectively.

Question 12

Financial flexibility measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows.

Question 13

A company excludes from the current assets section, the amount of cash restricted for purposes other than payment of current obligations or for use in current operations.

Question 14

Collection of a loan is reported as an investing activity in the statement of cash flows.

Question 15

The statement of cash flows reports only the cash effects of operations during a period and financing transactions.

Question 16

Companies determine cash provided by operating activities by converting net income on an accrual basis to a cash basis.

Question 17

The account form and the report form of the balance sheet are both acceptable under GAAP.

Question 18

Activity ratios measure the degree of protection for long-term creditors and investors.

Question 19

Companies frequently describe the terms of all long-term liability agreements in notes to the financial statements.

Question 20

Because of the historical cost principle, fair values may not be disclosed in the balance sheet.

Question 21

Current assets are presented in the balance sheet in

A) ascending order of their balances.
B) descending order of their balances.
C) order of their liquidity.
D) reverse order of their liquidity.

Question 22

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

Question 23

The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as

A) solvency.
B) financial flexibility.
C) liquidity.
D) exchangeability.

Question 24

A limitation of the balance sheet that is not also a limitation of the income statement is

A) the use of judgments and estimates
B) omitted items
C) the numbers are affected by the accounting methods employed
D) valuation of items at historical cost

Question 25

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.

Question 26

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.

Question 27

Receivables are valued based on their ________.

A) fair value
B) estimated amount collectible
C) lower-of-cost-or-market value
D) historical cost

Question 28

Balance sheet information is useful for all of the following except to

A) compute rates of return
B) analyze cash inflows and outflows for the period
C) evaluate capital structure
D) assess future cash flows

Question 29

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.

Question 30

The current assets section of the balance sheet should include

A) machinery.
B) patents.
C) goodwill.
D) inventory.

Question 31

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.

Question 32

One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is

A) failure to reflect current value information.
B) the extensive use of separate classifications.
C) an extensive use of estimates.
D) failure to include items of financial value that cannot be recorded objectively.

Question 33

Balance sheet information is useful for all of the following except

A) assessing a company's risk
B) evaluating a company's liquidity
C) evaluating a company's financial flexibility
D) determining free cash flows.

Question 34

The balance sheet is useful for analyzing all of the following except

A) liquidity.
B) solvency.
C) profitability.
D) financial flexibility.

Question 35

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 answer choices are correct.

Question 36

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.

Question 37

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

Question 38

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

Question 39

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 answer choices are correct.

Question 40

The balance sheet contributes to financial reporting by providing a basis for all of the following except

A) computing rates of return.
B) evaluating the capital structure of the enterprise.
C) determining the increase in cash due to operations.
D) assessing the liquidity and financial flexibility of the enterprise.

Question 41

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

Question 42

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 answer choices are correct.

Question 43

Treasury stock should be reported as a(n)

A) current asset.
B) investment.
C) other asset.
D) reduction of stockholders' equity.

Question 44

The statement of cash flows helps meet the objective of financial reporting, which is to assess all of the following except the

A) amount of future cash flows.
B) source of future cash flows.
C) timing of future cash flows.
D) uncertainty of future cash flows.

Question 45

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 answer choices are correct.

Question 46

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.

Question 47

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.

Question 48

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 answer choices are correct.

Question 49

The statement of cash flows reports all of the following except

A) the net change in cash for the period.
B) the cash effects of operations during the period.
C) the free cash flows generated during the period.
D) investing transactions.

Question 50

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.

Question 51

Which of the following events will appear in the cash flows from financing activities section of the statement of cash flows?

A) Cash purchases of equipment.
B) Cash purchases of bonds issued by another company.
C) Cash received as repayment for funds loaned.
D) Cash purchase of treasury stock.

Question 52

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.

Question 53

If common stock was issued to acquire an $8,000 machine, how would the transactionappear on the statement of cash flows?

A) It would depend on whether you are using the direct or the indirect method.
B) It would be a positive $8,000 in the financing section and a negative $8,000 in the investing section.
C) It would be a negative $8,000 in the financing section and a positive $8,000 in the investing section.
D) It would not appear on the statement of cash flows but rather on a schedule of noncash investing and financing activities.

Question 54

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.

Question 55

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 answer choices are correct.

Question 56

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

Question 57

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

A) operating activities.
B) investing activities.
C) financing activities.
D) liquidity activities.

Question 58

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

Question 59

The statement of cash flows provides answers to all of the following questions except

A) where did the cash come from during the period?
B) what was the cash used for during the period?
C) what is the impact of inflation on the cash balance at the end of the year?
D) what was the change in the cash balance during the period?

Question 60

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

Question 61

For Grimmett Company, the following information is available: In Grimmett's balance sheet, intangible assets should be reported at

A) $245,000.
B) $275,000.
C) $845,000.
D) $875,000.

Question 62

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 answer choices are correct

Question 63

The cash debt coverage 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.

Question 64

Level 1 of fair value hierarchy measures are based on:

A) market prices for identical assets.
B) market prices for similar assets.
C) unobservable inputs.
D) historical cost of similar assets.

Question 65

A measure of a company's financial flexibility is the

A) cash debt coverage.
B) current cash debt coverage.
C) free cash flow.
D) cash debt coverage and free cash flow.

Question 66

Net cash provided by operating activities divided by average total liabilities equals the

A) current cash debt coverage.
B) cash debt coverage.
C) free cash flow.
D) current ratio.

Question 67

Accounting policies disclosed in the notes to the financial statements typically include all of the following except

A) the cost flow assumption used
B) the depreciation methods used
C) significant estimates made
D) significant inventory purchasing policies

Question 68

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.

Question 69

Which of the following is not a required supplemental disclosure for the balance sheet?

A) Contingencies
B) Financial forecasts
C) Accounting policies
D) Contractual situations

Question 70

Typical contractual situations that are disclosed in the notes to the balance sheet include all of the following except

A) debt covenants
B) lease obligations
C) advertising contracts
D) pension obligations

Question 71

A general description of the depreciation methods applicable to major classes of depreci-able 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.

Question 72

Fulton Company owns the following investments: Fulton will report investments in its current assets section of

A) $0.
B) exactly $140,000.
C) $140,000 or an amount greater than $140,000, depending on the circumstances.
D) exactly $210,000.

Question 73

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.

Question 74

Which of the following is a contra account?

A) Premium on bonds payable
B) Unearned revenue
C) Patents
D) Accumulated depreciation

Question 75

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.

Question 76

Which of the following best exemplifies a contingency that is reported in the notes to the financial statements?

A) Losses from potential future lawsuits
B) Loss from a lawsuit settled out of court prior to the end of the fiscal year
C) Warranty claims on future sales
D) Estimated loss from an ongoing lawsuit

Question 77

__________ ratios measure how effectively a company uses its assets.

A) Liquidity
B) Activity c Profitability
D) Coverage

Question 78

The current cash debt coverage is often used to assess

A) financial flexibility.
B) liquidity.
C) profitability.
D) solvency.

Question 79

Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure?

A) Current assets
B) Current liabilities
C) Plant assets
D) Long-term liabilities

Question 80

One of the benefits of the statement of cash flows is that it helps users evaluate financial flexibility. Which of the following explanations is a description of financial flexibility?

A) The nearness to cash of assets and liabilities.
B) The firm's ability to respond and adapt to financial adversity and unexpected needs and opportunities.
C) The firm's ability to pay its debts as they mature.
D) The firm's ability to invest in a number of projects with different objectives and costs.