Deck 11: The Balance Sheet

Question 1

The "future service potential" of an asset may be realized as a direct market exchange for another asset, or through conversion in a manufacturing operation for finished goods.

Answer 1

True

Question 2

Unrealized capital adjustments in owners' equity are becoming more prevalent as a result of SFAC No. 130 on comprehensive income.

Answer 2

False

Question 3

With the articulated approach to financial statements, each statement is defined and measured independently of the other.

Answer 3

False

Question 4

SFAS requires that abnormal amounts of idle facility costs, freight, handling and spoilage be treated as current period costs.

Question 5

Under the revenue-expense approach, the income statement is regarded as simply a way of classifying and reporting on changes that occur in a firm's net assets.

Question 6

The asset-liability approach complements the expense-liability approach because the former is applicable to the balance sheet and the latter is applicable to the income statement.

Question 7

The comprehensive income approach required in SFAS No. 130 favors articulation.

Question 8

The FASB defines comprehensive income using the income-expense approach to defining accounting elements.

Question 9

All intangible assets are initially recorded at the sacrifice incurred to acquire the assets.

Question 10

In SFAS No. 121, both the recognition and measurement criteria for the impairment of asset event is based on the excess of the carrying value of the asset over its fair market value less costs of disposal..

Question 11

An executory contract is a contract unperformed by both parties.

Question 12

An asset should be initially recorded at either its historical acquisition cost or its cash equivalent purchase price, whichever is greater.

Question 13

Although the revenue-expense approach is the basic orientation of current financial reporting practice, some specific accounting standards reflect an asset-liability approach.

Question 14

The asset-liability approach is arguably superior to a revenue-expense approach to defining accounting elements.

Question 15

One consequence of the revenue-expense approach is to burden the balance sheet with by-products of income measurement rules.

Question 16

There are only a few examples of accounting standards that emphasize the effects of transactions on the income statement to the exclusion of their impact on the balance sheet.

Question 17

In SFAS No. 153, when exchanged assets have significantly different cash flows, the new asset is recorded at book value of the traded in asset.

Question 18

If the balance sheet and income statement are nonarticulated, they are linked together mathematically without any loose ends.

Question 19

The definition of assets establishes what types of economic factors will appear in the balance sheet.

Question 20

Inventory is carried at the lower of historical cost or replacement cost.

Question 21

SFAS 133 values derivatives at fair value.

Question 22

Which of the following is not true regarding the asset-liability approach to defining accounting elements?

A) The asset-liability approach focuses on the measurement of net assets.
B) The asset-liability approach is arguably superior to the revenue-expense approach.
C) The asset-liability approach is the basic orientation of current financial reporting practices.
D) SFAS No. 109 uses the asset-liability approach by focusing income tax accounting on the recognition of tax assets and liabilities.

Question 23

U.S. Corporations are not permitted to trade in their own securities.

Question 24

SFAS No. 142 converted goodwill into a nonamortizable asset subject to its own impairment rules.

Question 25

The only method allowed by GAAP in accounting for convertible bonds is to treat the debt as conventional debt until conversion.

Question 26

Which of the following is a true statement?

A) Under the articulated concept, accounting elements are defined using the revenue-expense approach rather than the asset-liability approach.
B) The articulated approach severs the mathematical relationships between the balance sheet and income statement.
C) Under the articulated approach, contributed capital, retained earnings, and unrealized capital adjustments are subclassifications of owners' equity.
D) Recent SFASs have advocated the nonarticulated approach to financial statements.

Question 27

Which of the following is a true statement?

A) Asset-liability advocates are not prepared to tolerate a fluctuating income statement that may include unrealized holding gains and losses.
B) Asset-liability advocates and revenue-expense advocates are polarized in part because the financial statements are nonarticulated.
C) Revenue-expense proponents are prepared to introduce deferred charges and deferred credits in order to smooth income measurement.
D) With articulation, it is possible to have a revenue-expense based income statement and an asset-liability based balance sheet.

Question 28

Manditorily redeemable financial instruments are classified as assets on the balance sheet.

Question 29

Owners' equity is defined as the stockholders' residual interest in the net assets of the firm.

Question 30

Which one of the following measurement bases applies to receivables?

A) Historical cost
B) An approximation of net realizable value
C) Selling price through factoring
D) Discounted present value

Question 31

Which of the following is a true statement?

A) Under the articulation approach, all accounting transactions are reported on the income statement.
B) Because income is a subclassification of retained earnings, the income statement and balance sheet articulate.
C) Under articulation, adjustments to the income of prior years are reflected on the current year income statement.
D) All transactions can be easily categorized using the current accounting classification system.

Question 32

Which of the following is not a formal definition of assets that has been used by the accounting profession in the United States?

A) Something represented by a debit balance that is or would be properly carried forward upon a closing of books of account according to the rules or principles of accounting, on the basis that it represents either a property right or value acquired, or an expenditure made which has created a property or is properly applicable to the future
B) Economic resources of an enterprise that are recognized and measured in conformity with generally accepted accounting principles as well as certain deferred charges that are not resources but that are recognized and measured in conformity with generally accepted accounting principles
C) Probable future economic benefits obtained or controlled by a particular entity as a result of past transactions or events
D) Only those economic resources that can be severed from the firm and sold

Question 33

Derivatives are financial instruments whose value is based upon other financial instruments, stock indexes or interest rates, or interest rate indexes.

Question 34

Which of the following is not true regarding the revenue-expense approach to defining accounting elements?

A) The revenue-expense approach defines assets and liabilities as a by-product of revenues and expenses.
B) Under the revenue-expense approach, the balance sheet is burdened with by-products of income measurement rules.
C) Deferred charges and deferred credits are ambiguous debits and credits that appear on the balance sheet under the revenue-expense approach.
D) There are very few examples of the use of the revenue-expense approach in recent accounting standards.

Question 35

APB Statement 4 and SFAC No. 5 indicate that liabilities are measured at amounts established in the transaction, usually amounts to be paid it the future, but never discounted.

Question 36

Which of the following applies to the measurement and recognition of an asset?

A) A pervasive principle in accounting is that an asset is measured at the market value of the consideration exchanged or sacrificed to acquire it and place it in operating condition.
B) In some cases, an asset may be recorded at an amount greater than its cash equivalent purchase price.
C) When the consideration given for an asset is nonmonetary, the market value of that consideration generally provides the most reliable basis for measuring acquisition cost.
D) Assets are always measured and reported based on historical cost.

Question 37

In a sole proprietorship, there is a legal distinction between contributed capital and earned capital.

Question 38

There is a movement in accounting policy toward fair or current values on the balance sheet.

Question 39

Although not specifically mentioned in the most recent definition of liabilities, deferred credits continue to be part of the liability section in the balance sheet under present practices.

Question 40

A constructive obligation is one that is implied rather than expressly written.

Question 41

Which of the following is not true regarding derivatives?

A) A derivative is a financial instrument whose value is based upon another financial instrument, stock index or interest rate, or interest rate index.
B) Derivatives can be classified into two general types: forward-based and option-based derivatives.
C) Unrealized holding gains and losses on derivatives are not recognized.
D) SFAS No. 133 values derivatives at fair value.

Question 42

Identify and define the five types of liabilities.

Question 43

Describe how the definitions of assets and liabilities have evolved over the years.

Question 44

Which of the following is a true statement?

A) There is more variety in liability groups than in asset groups.
B) Most liabilities are noncontractual in nature.
C) There are natural subclassifications of liabilities and assets that can be inferred from the balance sheet.
D) Liabilities are measured at amounts established in the transaction, usually amounts to be paid in the future, sometimes discounted.

Question 45

Current liabilities are initially measured at:

A) Face value.
B) Present value based on current interest rates.
C) Present value plus stated interest.
D) Book value.

Question 46

Which one of the following types of liabilities is not currently recognized on balance sheets?

A) Deferred credits
B) Constructive obligations
C) Equitable obligations
D) Contingent liabilities

Question 47

Noncurrent liabilities are initially measured at:

A) Face value.
B) Present value based on current interest rates.
C) Present value plus stated interest.
D) Book value.

Question 48

How should stock dividends be measured and accounted for? Is this treatment justified?

Question 49

Which one of the following measurement bases applies to investments that are classified as held-to-maturity?

A) Current value
B) Book value
C) Effective rate of interest method
D) Lower-of-cost-or-market

Question 50

Which one of the following measurement bases applies to investments not subject to equity accounting that are classified as trading securities?

A) Current value
B) Book value
C) Effective rate of interest method
D) Lower-of-cost-or-market

Question 51

What are the three distinct types of assets that appear in the balance sheets, and what degree of certainty and measurement reliability does each represent?

Question 52

Which of the following types of liabilities do not represent obligations on the firm to transfer assets in the future, but are past transactions being postponed from the income statement until future periods?

A) Deferred credits
B) Constructive obligations
C) Equitable obligations
D) Contingent liabilities

Question 53

Which of the following is a true statement regarding owners' equity?

A) APB Statement 4 and SFAC No. 6 both reflect the entity view of the firm.
B) Owners' equity consists of only two components: contributed capital and retained earnings.
C) In a sole proprietorship, there is no legal distinction between contributed capital and earned capital.
D) Dividends are legally paid only out of retained earnings.

Question 54

Respond to the following:
a.
What is meant by the "articulated" approach to financial statements?
b.
How does the revenue-expense approach differ from the asset-liability approach for defining accounting elements?
c.
What, if any, would be the advantage of using a nonarticulated approach to financial statements?

Question 55

After noncurrent liabilities have been initially measured, they are recorded on subsequent balance sheets at:

A) Face value.
B) Present value based on current interest rates.
C) Present value plus stated interest.
D) Book value.

Question 56

Which one of the following types of liabilities represents an existing situation involving uncertainty as to possible gain or loss that will ultimately be resolved when one or more future events occur or fail to occur?

A) Deferred credits
B) Constructive obligations
C) Equitable obligations
D) Contingent liabilities

Question 57

Which of the following statements is not true regarding the three major definitions of accounting liabilities that have evolved over time?

A) Two of the three definitions imply a proprietary view of the firm.
B) The first definition made no distinction between owner's equity and liabilities.
C) Not all definitions have included deferred credits as liabilities.
D) In all three definitions, liabilities include only credit balances that involve a debtor and creditor relation.

Question 58

Which of the following is not a true statement regarding assets as they appear on the balance sheet?

A) Historical cost gives a good indication of the productive value of assets.
B) Assets held for sale and measured at net realizable value represent a high degree of certainty as to measurement reliability.
C) Certain types of deferred charges do not have any direct effect on future cash flows.
D) In terms of additivity, it is questionable if a balance sheet should be added.

Question 59

Contributed capital is measured by:

A) The cost of assets contributed to the firm by stockholders.
B) The market value of assets contributed to the firm by stockholders.
C) The book value of assets contributed to the firm by stockholders.
D) The discounted present value of assets contributed to the firm by stockholders.

Question 60

Which one of the following types of liabilities represents a duty not contractually present but which may nevertheless exist due to ethical principles of fairness?

A) Deferred credits
B) Constructive obligations
C) Equitable obligations
D) Contingent liabilities

Question 61

Explain how assets and liabilities should be classified on the balance sheet. What are the problems with this classification method?