Deck 3: The Balance Sheet and Financial Disclosures

Question 1

Subsequent events are significant developments that take place after a firm's year-end, and after the financial statements are issued or available to be issued.

Answer 1

False

Question 2

The ultimate responsibility for the financial statements lies with the auditors.

Answer 2

False

Question 3

An example of vertical analysis would be comparing inventory this year to inventory last year to calculate the percentage change in inventory.

Answer 3

False

Question 4

A payment on account has no effect on working capital but will increase the current ratio if it is already greater than 1.0.

Question 5

All current assets are either cash or assets that will be converted into cash or consumed within 12 months or the operating cycle, whichever is longer.

Question 6

Payment terms, interest rates, and other details of long-term liabilities usually are reported in disclosure notes.

Question 7

All illegal acts should be disclosed in the notes to the financial statements.

Question 8

A company's market value is generally less than its book value.

Question 9

Prepaid expenses are classified as current assets if the services purchased are expected to expire within 12 months or the operating cycle, whichever is longer.

Question 10

The criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies.

Question 11

Intangible assets usually are reported in the balance sheet as current assets.

Question 12

The compensation of top executives is disclosed in the proxy statement.

Question 13

Horizontal analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year.

Question 14

Liquidity refers to the riskiness of a company with regard to the amount of total assets in its capital structure.

Question 15

The balance sheet reports a company's financial position at a point in time.

Question 16

An example of vertical analysis would be stating each individual asset as a percentage of total assets.

Question 17

Accrued salaries and wages in a balance sheet represent salaries and wages that have been earned by employees but not yet paid.

Question 18

Assets classified as property, plant, and equipment include machinery, equipment, and inventories.

Question 19

Vertical analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year.

Question 20

The balance of net receivables represents the amount expected to be collected.

Question 21

Red Onion Restaurant would classify a six-month prepaid insurance policy as:

A) Property, plant, and equipment.
B) Investment.
C) Current asset.
D) Goodwill.

Question 22

An asset that is generally not expected to be converted to cash or consumed within one year or the operating cycle is:

A) Building.
B) Accounts receivable.
C) Inventory.
D) Supplies.

Question 23

Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

- What would Symphony report as total assets?

A) $2,338 millions.
B) $2,323 millions.
C) $2,318 millions.
D) $2,303 millions.

Question 24

Which is a shareholders' equity account in the balance sheet?

A) Accumulated depreciation.
B) Paid-in capital.
C) Salaries payable.
D) Accounts receivable.

Question 25

Balance sheets prepared under IFRS often exclude a shareholders' equity section.

Question 26

Rent collected in advance is:

A) An asset account in the balance sheet.
B) A liability account in the balance sheet.
C) A shareholders' equity account in the balance sheet.
D) A temporary account, not in the balance sheet at all.

Question 27

Notes payable that are due in two years are:

A) Current liabilities.
B) Long-term intangible assets.
C) Long-term liabilities.
D) Long-term investments.

Question 28

New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is:

A) Twelve months.
B) Thirty months.
C) Six months.
D) Three months.

Question 29

Which of the following is not a current liability account?

A) Accrued payroll.
B) Dividends payable.
C) Prepaid rent.
D) Subscriptions collected in advance from customers.

Question 30

Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

-What would Symphony report as total current assets?

A) $823 millions.
B) $838 millions.
C) $843 millions.
D) $1,696 millions.

Question 31

Balance sheets prepared under IFRS often report long-term items before current items.

Question 32

Long-term assets generally include:

A) Inventory held for sale.
B) Prepaid rent.
C) Accounts receivable.
D) Land held for a possible future plant site.

Question 33

Long-term solvency refers to:

A) The efficiency with which a company manages its resources.
B) The profitability of a company over a long-term period of time.
C) The amount of current assets relative to long-term assets.
D) The risk that a company will not be able to pay its long-term debt.

Question 34

The balance sheet reports:

A) Net income at a point in time.
B) Cash flows for a period of time.
C) Assets and equities at a point in time.
D) Assets and liabilities for a period of time.

Question 35

Segment reporting requires disclosure of each customer that accounts for more than 5% of total enterprise revenue.

Question 36

Cash equivalents would not include:

A) Cash not available for current operations.
B) Money market funds.
C) U.S. treasury bills.
D) Bank drafts.

Question 37

Assets do not include:

A) Property, plant, and equipment.
B) Investments.
C) Paid-in capital.
D) Nontrade receivables.

Question 38

Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

-What is the amount of working capital for Symphony?

A) $98 millions.
B) $143 millions.
C) $128 millions.
D) $113 millions.

Question 39

Listed below are year-end account balances ($ in millions) taken from the records of Symphony Stores.

-What would Symphony report as total shareholders' equity?

A) $323 millions.
B) $808 millions.
C) $838 millions.
D) $928 millions.

Question 40

Current assets include cash and all other assets expected to become cash or be consumed:

A) Within one year.
B) Within one operating cycle.
C) Within one year or one operating cycle, whichever is shorter.
D) Within one year or one operating cycle, whichever is longer.

Question 41

An omission in the notes to the financial statements that is so serious that even a qualified opinion is not justified would result in:

A) A disclaimer.
B) An unqualified opinion.
C) An adverse opinion.
D) A consistency exception.

Question 42

How are management's responsibility and the auditors' opinion on internal controls represented in the unqualified auditor's report?

A) Option a
B) Option b
C) Option c
D) Option d

Question 43

Which of the following would be an amount computed using horizontal analysis?

A) The ratio of cost of goods sold to total sales for the current year.
B) The percentage change in the cash balance from last year to this year.
C) The difference between current assets and current liabilities at the end of the year.
D) The ratio of inventory to total assets at the end of the year.

Question 44

A subsequent event for an entity with a December 31, 2018, year-end would not include:

A) A change in the estimated useful lives of equipment in January 2019.
B) An issuance of bonds in January 2019.
C) An acquisition of another company in January 2019.
D) A major uncertainty at December 31, resolved in January 2019.

Question 45

Disclosure notes would not include:

A) Depreciation methods used and estimated useful life.
B) Definition of cash equivalents.
C) Details of pension plans.
D) Data to adjust the financial statements so that they are not misleading.

Question 46

Janson Corporation Co.'s trial balance included the following account balances at December 31, 2018: Investments consist of treasury bills that were purchased in November, 2018 and mature in January, 2019. Prepaid insurance is for two years. What amount should be included in the current asset section of Janson's December 31, 2018, balance sheet?

A) $88,000.
B) $85,000.
C) $55,000.
D) $135,000.

Question 47

Cash equivalents would include:

A) Highly liquid investments that can be quickly converted to cash.
B) Accounts receivable from customers.
C) Cash restricted for special purposes such as to repay debt in the future.
D) Prepaid expenses that were purchased with cash.

Question 48

Accrued liabilities:

A) Are generally paid in services rather than cash.
B) Result from payment before services are received.
C) Result from services received before payment is made.
D) Are deferred charges to expense.

Question 49

The Management's Discussion and Analysis section of the annual report can best be described as:

A) Frank but objective.
B) Independent but precise.
C) Legalistic and lengthy.
D) Biased but informative.

Question 50

Management's Report on Internal Control Over Financial Reporting:

A) Provides the auditor's opinion on the fairness of the financial statements.
B) Contains personal certification of the financial statements by the company's executives.
C) Contains a detailed description of compensation of the company's executives for the year.
D) Provides a summary of significant accounting policies used to prepare financial statements.

Question 51

Janson Corporation Co.'s trial balance included the following account balances at December 31, 2018: What amount should be included in the current liabilities section of Janson's December 31, 2018, balance sheet?

A) $63,000.
B) $41,000.
C) $61,000.
D) $101,000.

Question 52

Which of the following would be disclosed in the summary of significant accounting policies disclosure note?

A) Option a
B) Option b
C) Option c
D) Option d

Question 53

The usual difference between accounts payable and notes payable is:

A) Legally enforceable debt.
B) Current-Long-term classification.
C) Known payment terms.
D) Explicitly stated interest.

Question 54

Liquidity refers to:

A) The amount of cash on hand at a given time.
B) The readiness of an asset to be converted to cash.
C) The period until cash is used and refinancing becomes necessary.
D) Financial leverage.

Question 55

A company may compare the amount of receivables in the current year to the amount of receivables in the previous year to estimate a trend in the company's ability to collect cash from customers. This type of analysis is known as:

A) Horizontal analysis.
B) Time analysis.
C) Vertical analysis.
D) Turnover analysis.

Question 56

To understand the components of a company's profitability, an analyst may compute the ratio of each major expense classification to total sales. This type of analysis is known as:

A) Cost analysis.
B) Horizontal analysis.
C) Comparative analysis.
D) Vertical analysis.

Question 57

An example of an error would be:

A) Purchasing inventory from a related party.
B) Counting an inventory item twice when taking a physical inventory.
C) Holding back invoices so that accounts payable are understated.
D) Receiving kickbacks in exchange for issuing a purchase order to a vendor.

Question 58

Which of the following is not a required disclosure for related-party transactions?

A) The nature of the relationship.
B) A description of the transactions.
C) The amounts due from or to related parties.
D) The impact of the transactions on current year's income.

Question 59

An example of fraud would be:

A) Issuing a purchase order without first securing bids.
B) Buying raw materials from an affiliated company.
C) Knowingly classifying a material long-term receivable as a current receivable.
D) Forgetting to accrue salaries and wages payable.

Question 60

The principal concern with accounting for related-party transactions is:

A) The size of the transactions.
B) Differences between economic substance and legal form.
C) The absence of legally binding contracts.
D) The lack of accurate data to record transactions.

Question 61

The current ratio is calculated as:

A) Current assets divided by long-term assets.
B) Current assets divided by total assets.
C) Current assets divided by current liabilities.
D) Current assets divided by total liabilities.

Question 62

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

-HHF's long-term debt to equity ratio equity is:

A) 133.3%.
B) 75%.
C) 180%.
D) 0%.

Question 63

When a company pays its bill from a plumber for previous services on account:

A) Its debt to equity ratio always decreases.
B) Its acid-test ratio always remains unchanged.
C) Its current ratio always remains unchanged.
D) Its working capital decreases.

Question 64

Which of the following is not used when analyzing long-term solvency?

A) Times interest earned ratio.
B) Debt to equity ratio.
C) Acid-test ratio.
D) Total liabilities.

Question 65

Using borrowed funds to generate additional profits for shareholders is referred to as:

A) Liquidity management.
B) Operational expansion.
C) Capital budgeting.
D) Financial leverage.

Question 66

When a company accrues salaries at the end of the accounting period:

A) Its acid-test ratio increases.
B) Its current ratio increases.
C) Its debt to equity ratio decreases.
D) Its debt to equity ratio increases.

Question 67

The quick ratio is:

A) The liquidity ratio divided by the equity ratio.
B) Current assets minus inventory divided by current liabilities minus accounts payable.
C) Current assets minus inventory and prepaid items divided by current liabilities.
D) Cash divided by accounts payable.

Question 68

Lack of long-term solvency refers to:

A) Risk of nonpayment of long-term liabilities.
B) The length of time before long-term debt becomes due.
C) The ability to refinance long-term debt when it becomes due.
D) Long-term assets.

Question 69

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below.

- The acid-test ratio is (Round your answer to two decimal places.):

A) 0.25.
B) 0.88.
C) 1.17.
D) 1.58.

Question 70

A company that borrows funds at 6% and then generates a return on those funds of 9% typically has:

A) Greater default risk.
B) Favorable financial leverage.
C) Higher return on equity.
D) All of the other answers are true.

Question 71

When a company sells land for cash and recognizes a $25,000 gain:

A) Its acid-test ratio decreases.
B) Its current ratio decreases.
C) Its debt to equity ratio decreases.
D) Cannot determine from the given information.

Question 72

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

- HHF's debt to equity ratio is (Round your answer to two decimal places.):

A) 0.75.
B) 1.13.
C) 0.53.
D) 1.80.

Question 73

The acid-test ratio is also known as the:

A) Current ratio.
B) Debt to equity ratio.
C) Times interest earned ratio.
D) Quick ratio.

Question 74

Working capital is equal to:

A) Current assets.
B) Current liabilities.
C) Current assets plus current liabilities.
D) Current assets minus current liabilities.

Question 75

Which of the following features is typical of a balance sheet prepared under IFRS?

A) A shareholders' equity section often is not included.
B) Assets often are listed after liabilities.
C) Long-term items often are listed before current items.
D) Assets sometimes do not equal liabilities plus shareholders' equity.

Question 76

Assume a company's liquidity ratios all are less than 1.0 before it purchases inventory on credit. When it makes the purchase:

A) Its current ratio decreases.
B) Its quick ratio decreases.
C) Its current ratio remains unchanged.
D) Its quick ratio remains unchanged.

Question 77

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below.

- Quick assets total:

A) $60 thousand.
B) $230 thousand.
C) $280 thousand.
D) $305 thousand.

Question 78

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below.

- Working capital is:

A) $505 thousand.
B) $265 thousand.
C) $185 thousand.
D) $75 thousand.

Question 79

The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below.

- The current ratio is (Round your answer to two decimal places.):

A) 1.98.
B) 1.58.
C) 1.17.
D) 0.66.

Question 80

Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.

-HHF's times interest earned ratio is (Round your answer to two decimal places.):

A) 3.47.
B) 1.73.
C) 2.47.
D) 10.0.