Deck 2: A Further Look at Financial Statements

Question 1

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.

Answer 1

True

Question 2

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.

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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 8

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

Question 9

Cash and supplies are both classified as current assets.

Question 10

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

Question 11

Revenues have the effect of increasing retained earnings.

Question 12

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

Question 13

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 14

The retained earnings statement describes the changes in retained earnings during the period.

Question 15

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

Question 16

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

Question 17

The retained earnings statement is more comprehensive than the statement of stockholders' equity.

Question 18

Most companies use a retained earnings statement rather than a statement of stockholders' equity.

Question 19

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

Question 20

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 21

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

Question 22

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

Question 23

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

Question 24

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

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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 30

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

Question 31

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

Question 32

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

Question 33

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

Question 34

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

Question 35

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

Question 36

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

Question 37

GAAP stands for generally accepted accounting procedures.

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

Relevance and cost are two constraints in accounting.

Question 43

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

Question 44

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

Question 45

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 46

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

Question 47

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

Question 48

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

Question 49

Materiality is a company-specific aspect of faithful representation.

Question 50

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

Question 54

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

Question 55

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

Question 56

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

Question 57

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

Question 58

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

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

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

Question 61

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.

Question 62

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 63

Use the following data to calculate the current ratio.

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

Question 64

Use the following data to determine the total dollar amount of assets to be classified as current assets.

A) $195,000
B) $125,000
C) $285,000
D) $165,000

Question 65

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 66

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 67

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 68

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 69

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 70

Use the following data to determine the total amount of working capital.

A) $240,000
B) $390,000
C) $130,000
D) $180,000

Question 71

Use the following data to determine the total dollar amount of assets to be classified as investments.

A) $0
B) $350,000
C) $170,000
D) $310,000

Question 72

Which of the following is not considered an asset?

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

Question 73

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 74

Use the following data to determine the total dollar amount of assets to be classified as current assets.

A) $570,000
B) $400,000
C) $340,000
D) $290,000

Question 75

Use the following data to determine the total dollar amount of assets to be classified as property, plant, and equipment.

A) $660,000
B) $350,000
C) $490,000
D) $390,000

Question 76

Trademarks would appear in which balance sheet section?

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

Question 77

These are selected account balances on December 31, 2014. $$\begin{array} { l r } \text { Land } & \$ 100,000 \\\text { Land (held for future use) } & 150,000 \\\text { Buildings } & 800,000 \\\text { Inventory } & 200,000 \\\text { Equipment } & 450,000 \\\text { Furniture } & 100,000 \\\text { Accumulated Depreciation } & 300,000\end{array}$$ What is the total amount of property, plant, and equipment that will appear on the balance sheet?

A) $1,500,000
B) $1,300,000
C) $1,800,000
D) $1,150,000

Question 78

Which of the following is not a current liability?

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

Question 79

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 80

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.