CHAPTER 5 BALANCE SHEET AND STATEMENT OF CASH FLOWS TRUE FALSE—Conceptual 1. Liquidity refers to the ability ability of an enterprise to pay its its debts as they mature. 2. The balance balance sheet omits many many items that that are of financial financial value to the business business but cannot be recorded objectively. objectively. 3. Financial Financial flexibility flexibility measures measures the ability of an enterprise enterprise to take effectiv effective e actions to alter the amounts and timin of cash flo!s. ". #ompanies frequently describe the terms of all lon$term liability liability areements in notes to the financial statements. %. &n asset !hich !hich is expected expected to be converted into into cash' sold' or consumed consumed !ithin !ithin one year of the balance sheet date is al!ays reported as a current asset. (. Land held for speculation speculation is reported reported in the property property'' plant' and equipment equipment section section of the balance sheet. ). The accoun accountt form form and the report report form of the balance balance sheet sheet are both both accept acceptabl able e under under *&&+. ,. The primary primary purpose purpose of a statement statement of cash cash flo!s is to report report the cash effects effects of operations operations durin a period. -. The statement statement of cash flo!s flo!s reports only the cash cash effects effects of operations operations durin a period and financin transactions. 1. Financial Financial flexibility flexibility is a company/s company/s ability to respond and adapt to financial financial adversity and unexpected needs and opportunities. 11. 11. #ollection of a loan is reported as an investin activity activity in the statement statement of cash cash flo!s. 12. #ompanies #ompanies determine determine cash provided provided by operatin activiti activities es by convertin convertin net income on an accrual basis to a cash basis. 13. 0inificant 0inificant financin financin and investin investin activities activities that that do not affect affect cash are not reported in the statement of cash flo!s or any other place. 1". Financial Financial statement statement readers readers often assess assess liquidity liquidity by usin the current cash debt coverae coverae ratio. 1%. Free cash flo! flo! is net income less capital capital expenditure expenditures s and dividends. dividends. 1(. ecaus ecause e of the histor historica icall cost cost princi principle ple'' fair fair values values may not be disclo disclosed sed in the balance balance sheet.
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
5+,
1). #ompanies #ompanies have the option option of disclosin disclosin information information about the nature of their operations operations and the use of estimates in preparin financial statements. 1,. #ompanies #ompanies may use parenthetic parenthetical al explanations' explanations' notes' cross references references'' and supportin supportin schedules to disclose pertinent information. 1-. The accountin accountin profession profession has recommended recommended that companies companies use the !ord reserve reserve only to describe amounts deducted from assets. 2. n the balance sheet' sheet' an adjunct account reduces reduces either an asset' asset' a liability liability'' or an o!ners/ equity account.
T!ue T!ue False Ans)e!s— Conceptual "te#
Ans*
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1. 2. 3. ". %.
F T T T F
(. ). ,. -. 1.
F T F F T
11. 12. 13. 1". 1%.
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Ans*
F F T F F
MULT"PLE CHO"CE—Conceptual 21.
hich hich of of the the follo! follo!in in is is a limi limitat tation ion of of the the balanc balance e sheet4 sheet4 a. 5any items that are of financial financial value value are are omitted omitted.. b. 6udme 6udments nts and esti estimat mates es are are used. used. c. #urren #urrentt fair fair valu value e is not report reported. ed. d. &ll of of th these
22.
The bala balance nce shee sheett is usefu usefull for anal analy7 y7in in all all of the foll follo! o!in in excep exceptt a. liqui iquidi dity ty.. b. solvency. cy. c. prof profit itab abililit ity y. d. fina financ ncia iall flex flexib ibililit ity y.
23.
alanc alance e sheet sheet inform informati ation on is usefu usefull for all all of the foll follo!i o!in n except except to a. comp comput ute e rate rates s of of ret retur urn n b. analy7e analy7e cash cash inflo! inflo!s s and outflo!s outflo!s for the period c. eval evalua uate te capi capita tall stru struct ctur ure e d. asse assess ss fut futur ure e cash cash flo flo!s !s
2".
alanc alance e sheet sheet inform informati ation on is usefu usefull for all all of the foll follo!i o!in n except except a. assess assessin in a comp company any8s 8s risk risk b. evalua evaluatin tin a comp company any8s 8s liqu liquidi idity ty c. evalua evaluatin tin a compan company8 y8s s financi financial al flexib flexibili ility ty d. determ determini inin n free free cash cash flo!s flo!s..
alance 0heet and 0tatement of #ash Flo!s
5+-
2%.
& limitation limitation of of the balance balance sheet sheet that is not also a limitation limitation of of the income income statement statement is a. the use of of judm judment ents s and estima estimates tes b. omit omitte ted d ite items ms c. the numbers numbers are affect affected ed by the the accountin accountin methods methods employe employed d d. valuat valuation ion of of items items at at histor historica icall cost cost
0
2(. 2(.
The The bala balanc nce e shee sheett cont contri ribu bute tes s to finan financi cial al report reportin in by provi providi din n a basi basis s for for all all of the follo!in except a. comp comput utin in rates rates of of retu return rn.. b. evaluatin evaluatin the capita capitall structur structure e of the enterp enterprise. rise. c. determinin determinin the increase increase in in cash cash due due to operations. operations. d. assessin assessin the liquidity liquidity and financi financial al flexibili flexibility ty of the the enterprise. enterprise.
0
2).
ne criti criticis cism m not normall normally y aimed aimed at a balance balance sheet prepa prepared red usin usin curre current nt accoun accountin tin and reportin standards is a. failure failure to to reflec reflectt curren currentt value value information information.. b. the extensive extensive use of separat separate e classif classificati ications. ons. c. an exten extensiv sive e use use of estima estimates tes.. d. failure failure to include include items of financial financial value value that cannot cannot be recorded recorded objectiv objectively ely..
+
2,. 2,.
The The amount amount of time that that is expec expecte ted d to elaps elapse e unti untill an asset asset is reali7 reali7ed ed or othe other! r!is ise e converted into cash is referred to as a. solvency. cy. b. fina financ ncia iall flex flexib ibililit ity y. c. liquidity. d. exch exchan anea eabi bilility ty..
2-. 2-.
The The net net ass asset ets s of of a bus busin ines ess s are are equ equal al to to a. current current asse assets ts minus minus curren currentt liabili liabilitie ties. s. b. total total asset assets s plus plus total total liabi liabilit lities ies.. c. total assets assets minus minus total stockholder stockholders8 s8 equity equity.. d. none none of the thes se.
3. 3.
The The corr correc ectt orde orderr to pres presen entt curre current nt ass asset ets s is a. cash' accounts accounts receiv receivable' able' prepaid prepaid items' items' invent inventories. ories. b. cash' accounts accounts receiv receivable' able' inventorie inventories' s' prepaid prepaid items. items. c. cash' inventories' inventories' accounts accounts receivable receivable'' prepaid prepaid items. items. d. cash' inventories' inventories' prepaid prepaid items' items' accounts accounts receiv receivable. able.
31.
The basis basis for classi classifyin fyin assets assets as current current or noncurrent noncurrent is is conversi conversion on to cash !ithin !ithin a. the account accountin in cycle cycle or one year' year' !hichever !hichever is is shorter shorter.. b. the operatin operatin cycle cycle or one one year' year' !hichev !hichever er is loner loner.. c. the account accountin in cycle cycle or one year' year' !hichever !hichever is is loner. loner. d. the operatin operatin cycle cycle or one one year' year' !hichev !hichever er is shorter shorter..
32.
The basis basis for for classif classifyin yin assets assets as current current or noncu noncurre rrent nt is the perio period d of time normal normally ly required by the accountin entity to convert cash invested in a. inventory inventory back back into cash' or 12 months' months' !hichev !hichever er is shorter shorter.. b. receivable receivables s back into into cash' cash' or 12 months months'' !hichever !hichever is loner. loner. c. tanible tanible fixed fixed assets assets back back into cash' cash' or or 12 months' months' !hichev !hichever er is loner. loner. d. inventory inventory back back into cash' or 12 months' months' !hichev !hichever er is loner. loner.
5+.
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
33.
The current assets section of the balance sheet should include a. machinery. b. patents. c. ood!ill. d. inventory.
3".
hich of the follo!in is a current asset4 a. #ash surrender value of a life insurance policy of !hich the company is the bene$ ficiary. b. 9nvestment in equity securities for the purpose of controllin the issuin company. c. #ash desinated for the purchase of tanible fixed assets. d. Trade installment receivables normally collectible in 1, months.
3%.
hich of the follo!in should not be considered as a current asset in the balance sheet4 a. 9nstallment notes receivable due over 1, months in accordance !ith normal trade practice. b. +repaid taxes !hich cover assessments of the follo!in operatin cycle of the business. c. :quity or debt securities purchased !ith cash available for current operations. d. The cash surrender value of a life insurance policy carried by a corporation' the beneficiary' on its president.
3(.
:quity or debt securities held to finance future construction of additional plants should be classified on a balance sheet as a. current assets. b. property' plant' and equipment. c. intanible assets. d. lon$term investments.
3).
hen a portion of inventories has been pleded as security on a loan' a. the value of the portion pleded should be subtracted from the debt. b. an equal amount of retained earnins should be appropriated. c. the fact should be disclosed but the amount of current assets should not be affected. d. the cost of the pleded inventories should be transferred from current assets to noncurrent assets.
3,.
hich of the follo!in is not a lon$term investment4 a. #ash surrender value of life insurance b. Franchise c. Land held for speculation d. & sinkin fund
3-.
& enerally accepted method of valuation is 1. tradin securities at market value. 2. accounts receivable at net reali7able value. 3. inventories at current cost. a. 1 b. 2 c. 3 d. 1 and 2
alance 0heet and 0tatement of #ash Flo!s
5+5
".
hich item belo! is not a current liability4 a. ;nearned revenue b. 0tock dividends distributable c. The currently maturin portion of lon$term debt d. Trade accounts payable
"1.
orkin capital is a. capital !hich has been reinvested in the business. b. unappropriated retained earnins. c. cash and receivables less current liabilities. d. none of these.
"2.
&n example of an item !hich is not an element of !orkin capital is a. accrued interest on notes receivable. b. ood!ill. c. oods in process. d. temporary investments.
"3.
Lon$term liabilities include a. obliations not expected to be liquidated !ithin the operatin cycle. b. obliations payable at some date beyond the operatin cycle. c. deferred income taxes and most lease obliations. d. all of these.
"".
hich of the follo!in should be excluded from lon$term liabilities4 a. bliations payable at some date beyond the operatin cycle b. 5ost pension obliations c. Lon$term liabilities that mature !ithin the operatin cycle and !ill be paid from a sinkin fund d.
"%.
Treasury stock should be reported as a=n> a. current asset. b. investment. c. other asset. d. reduction of stockholders8 equity.
"(.
hich of the follo!in should be reported for capital stock4 a. The shares authori7ed b. The shares issued c. The shares outstandin d. &ll of these
").
hich of the follo!in !ould be classified in a different major section of a balance sheet from the others4 a. #apital stock b. #ommon stock subscribed c. 0tock dividend distributable d. 0tock investment in affiliate
5+/
+
0
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
",.
The stockholders8 equity section is usually divided into !hat three parts4 a. +referred stock' common stock' treasury stock b. +referred stock' common stock' retained earnins c. #apital stock' additional paid$in capital' retained earnins d. #apital stock' appropriated retained earnins' unappropriated retained earnins
"-.
hich of the follo!in is not an acceptable major asset classification4 a. #urrent assets b. Lon$term investments c. +roperty' plant' and equipment d. ?eferred chares
%.
hich of the follo!in is a contra account4 a. +remium on bonds payable b. ;nearned revenue c. +atents d. &ccumulated depreciation
%1.
The financial statement !hich summari7es operatin' investin' and financin activities of an entity for a period of time is the a. retained earnins statement. b. income statement. c. statement of cash flo!s. d. statement of financial position.
%2.
The statement of cash flo!s provides ans!ers to all of the follo!in questions except a. !here did the cash come from durin the period4 b. !hat !as the cash used for durin the period4 c. !hat is the impact of inflation on the cash balance at the end of the year4 d. !hat !as the chane in the cash balance durin the period4
%3.
The statement of cash flo!s reports all of the follo!in except a. the net chane in cash for the period. b. the cash effects of operations durin the period. c. the free cash flo!s enerated durin the period. d. investin transactions.
%".
The statement of cash flo!s helps meet the objective of financial reportin' !hich is to assess all of the follo!in except the a. amount of future cash flo!s. b. source of future cash flo!s. c. timin of future cash flo!s. d. uncertainty of future cash flo!s.
alance 0heet and 0tatement of #ash Flo!s
5+0
%%.
9f common stock !as issued to acquire an @,' machine' ho! !ould the transaction appear on the statement of cash flo!s4 a. 9t !ould depend on !hether you are usin the direct or the indirect method. b. 9t !ould be a positive @,' in the financin section and a neative @,' in the investin section. c. 9t !ould be a neative @,' in the financin section and a positive @,' in the investin section. d. 9t !ould not appear on the statement of cash flo!s but rather on a schedule of noncash investin and financin activities.
%(.
hich of the follo!in events !ill appear in the cash flo!s from financin activities section of the statement of cash flo!s4 a. #ash purchases of equipment. b. #ash purchases of bonds issued by another company. c. #ash received as repayment for funds loaned. d. #ash purchase of treasury stock.
%).
5akin and collectin loans and disposin of property' plant' and equipment are a. operatin activities. b. investin activities. c. financin activities. d. liquidity activities.
%,.
9n preparin a statement of cash flo!s' sale of treasury stock at an amount reater than cost !ould be classified as a=n> a. operatin activity. b. financin activity. c. extraordinary activity. d. investin activity.
%-.
9n a. b. c.
(.
9n preparin a statement of cash flo!s' !hich of the follo!in transactions !ould be considered an investin activity4 a. 0ale of equipment at book value b. 0ale of merchandise on credit c. ?eclaration of a cash dividend d. 9ssuance of bonds payable at a discount
(1.
+reparin the statement of cash flo!s involves all of the follo!in except determinin the a. cash provided by operations. b. cash provided by or used in investin and financin activities. c. chane in cash durin the period. d. cash collections from customers durin the period.
preparin a statement of cash flo!s' cash flo!s from operatin activities are al!ays equal to accrual accountin income. are calculated as the difference bet!een revenues and expenses. can be calculated by appropriately addin to or deductin from net income those items in the income statement that do not affect cash. d. can be calculated by appropriately addin to or deductin from net income those items in the income statement that do affect cash.
5+1
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
(2.
The cash debt coverae ratio is computed by dividin net cash provided by operatin activities by a. averae lon$term liabilities. b. averae total liabilities. c. endin lon$term liabilities. d. endin total liabilities.
(3.
The current cash debt coverae ratio is often used to assess a. financial flexibility. b. liquidity. c. profitability. d. solvency.
(".
& measure of a company/s financial flexibility is the a. cash debt coverae ratio. b. current cash debt coverae ratio. c. free cash flo!. d. cash debt coverae ratio and free cash flo!.
(%.
Free cash flo! is calculated as net cash provided by operatin activities less a. capital expenditures. b. dividends. c. capital expenditures and dividends. d. capital expenditures and depreciation.
0
((.
ne of the benefits of the statement of cash flo!s is that it helps users evaluate financial flexibility. hich of the follo!in explanations is a description of financial flexibility4 a. The nearness to cash of assets and liabilities. b. The firm8s ability to respond and adapt to financial adversity and unexpected needs and opportunities. c. The firm8s ability to pay its debts as they mature. d. The firm8s ability to invest in a number of projects !ith different objectives and costs.
+
().
0
(,.
hich of the follo!in balance sheet classifications !ould normally require the reatest amount of supplementary disclosure4 a. #urrent assets b. #urrent liabilities c. +lant assets d. Lon$term liabilities
(-.
The presentation of lon$term liabilities in the balance sheet should disclose a. maturity dates. b. interest rates. c. conversion rihts. d. &ll of the above.
alance 0heet and 0tatement of #ash Flo!s
5+2
).
hich of the follo!in is not a required supplemental disclosure for the balance sheet4 a. #ontinencies b. Financial forecasts c. &ccountin policies d. #ontractual situations
)1.
Typical contractual situations that are disclosed in the notes to the balance sheet include all of the follo!in except a. debt covenants b. lease obliations c. advertisin contracts d. pension obliations
)2.
&ccountin policies disclosed in the notes to the financial statements typically include all of the follo!in except a. the cost flo! assumption used b. the depreciation methods used c. sinificant estimates made d. sinificant inventory purchasin policies
)3.
hich of the follo!in best exemplifies a continency that is reported in the notes to the financial statements4 a. Losses from potential future la!suits b. Loss from a la!suit settled out of court prior to the end of the fiscal year c. arranty claims on future sales d. :stimated loss from an onoin la!suit
)".
hich of the follo!in is not a method of disclosin pertinent information4 a. 0upportin schedules b. +arenthetical explanations c. #ross reference and contra items d. &ll of these are methods of disclosin pertinent information.
)%.
0inificant accountin policies may not be a. selected on the basis of judment. b. selected from existin acceptable alternatives. c. unusual or innovative in application. d. omitted from financial$statement disclosure.
)(.
& eneral description of the depreciation methods applicable to major classes of depreci$ able assets a. is not a current practice in financial reportin. b. is not essential to a fair presentation of financial position. c. is needed in financial reportin !hen company policy differs from income tax policy. d. should be included in corporate financial statements or notes thereto.
)).
9t is mandatory that the essential provisions of !hich of the follo!in be clearly stated in the notes to the financial statements4 a. 0tock option plans b. +ension obliations c. Lease contracts d. &ll of these
5 + 34
),.
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
& enerally accepted account title is a. +repaid Aevenue. b. &ppropriation for #ontinencies. c :arned 0urplus. d. Aeserve for ?oubtful &ccounts.
Mult%ple C(o%ce Ans)e!s —Conceptual "te#
21. 22. 23. 2". 2%. 2(. 2). 2,. 2-.
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d c b d d c b c d
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3. 31. 32. 33. 3". 3%. 3(. 3). 3,.
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b b d d d d d c b
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d b d b d d d d d
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c d d c c c b d d
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0olutions to those 5ultiple #hoice questions for !hich the ans!er is Bnone of these.C 2-. Total assets minus total liabilities. "1. #urrent assets less current liabilities. "". 5any ans!ers are possible.
MULT"PLE CHO"CE—Co#putat%onal )-.
Fulton #ompany o!ns the follo!in investmentsD Tradin securities =fair value> &vailable$for$sale securities =fair value> Eeld$to$maturity securities =amorti7ed cost>
@12' )' -"'
Fulton !ill report investments in its current assets section of a. @. b. exactly @12'. c. @12' or an amount reater than @12'' dependin on the circumstances. d. exactly @1-'. ,.
For *rimmett #ompany' the follo!in information is availableD #apitali7ed leases Trademarks Lon$term receivables
@(' 1-%' 22%'
9n *rimmett/s balance sheet' intanible assets should be reported at a. @1-%'. b. @22%'. c. @)-%'. d. @,2%'.
d d d b
alance 0heet and 0tatement of #ash Flo!s
5 + 33
,1.
Eouhton #ompany has the follo!in itemsD common stock' @-' treasury stock' @1%' deferred taxes' @12%' and retained earnins' @3-'. hat total amount should Eouhton #ompany report as stockholders/ equity4 a. @1'('. b. @1'1,%'. c. @1'31'. d. @1'3-%'.
,2.
Gohler #ompany o!ns the follo!in investmentsD Tradin securities =fair value> &vailable$for$sale securities =fair value> Eeld$to$maturity securities =amorti7ed cost>
@12' )' -"'
Gohler !ill report securities in its lon$term investments section of a. exactly @1-'. b. exactly @21"'. c. exactly @2,"'. d. @1("' or an amount less than @1("'' dependin on the circumstances. ,3.
For Aandolph #ompany' the follo!in information is availableD #apitali7ed leases Trademarks Lon$term receivables
@%(' 1,' 21'
9n Aandolph/s balance sheet' intanible assets should be reported at a. @1,'. b. @21'. c. @)"'. d. @))'. ,".
lmsted #ompany has the follo!in itemsD common stock' @-' treasury stock' @1%' deferred taxes' @12%' and retained earnins' @"%"'. hat total amount should lmsted #ompany report as stockholders/ equity4 a. @1'12"'. b. @1'2"-'. c. @1'3)"'. d. @1'"--'.
,%.
+resented belo! are data for &nt!erp #orp. &ssets' 6anuary 1 Liabilities' 6anuary 1 0tockholders8 :quity' 6an. 1 ?ividends #ommon 0tock 0tockholders8 :quity' ?ec. 31
212
213
@2'( 1'(, 4 %( %" 4 %(
@3'3( 4 4 "2 "", 4 "",
5 + 3,
,(.
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
+resented belo! are data for andkok #orp. &ssets' 6anuary 1 Liabilities' 6anuary 1 0tockholders8 :quity' 6an. 1 ?ividends #ommon 0tock 0tockholders8 :quity' ?ec. 31
212
213
@%'" 3'2" 4 1', -)2 4 1'2,
@('", 4 4 ,1 ,(" 4 ,("
213
21"
@"'%( 4 4 %) (, 4 (,"
4 @2')3( 2')% ("( (% 2'1(( 4
0tockholders8 :quity at 6anuary 1' 213 is a. @3'332. b. @2'1(. c. @2'3(. d. @3'"". ,).
+resented belo! are data for #aracas #orp. &ssets' 6anuary 1 Liabilities' 6anuary 1 0tockholders8 :quity' 6an. 1 ?ividends #ommon 0tock 0tockholders8 :quity' ?ec. 31
,,.
Lohmeyer #orporation reportsD #ash provided by operatin activities #ash used by investin activities #ash provided by financin activities einnin cash balance hat is Lohmeyer/s endin cash balance4 a. @2%'. b. @32'. c. @")'. d. @%"'.
@22' 11' 1"' )'
alance 0heet and 0tatement of #ash Flo!s ,-.
5 + 3-
Geisler #orporation reportsD #ash provided by operatin activities #ash used by investin activities #ash provided by financin activities einnin cash balance
@2"' 11' 1"' )'
hat is Geisler/s endin cash balance4 a. @2)'. b. @3"'. c. @"-'. d. @%('. -.
?urin 212 the ?L? #ompany had a net income of @%%'. 9n addition' selected accounts sho!ed the follo!in chanesD &ccounts Aeceivable @3' increase &ccounts +ayable 1' increase uildin "' decrease ?epreciation :xpense 1'% increase onds +ayable ,' increase hat !as the amount of cash provided by operatin activities4 a. @%"'% b. @%%' c. @%('% d. @("'%
-1.
Eardin #orporation reports the follo!in informationD
@"%' 1"' ('
Eardin should report cash provided by operatin activities of a. @2%'. b. @3)'. c. @%3'. d. @(%'. -2.
0auder #orporation reports the follo!in informationD
@3' )' 3'
0auder should report cash provided by operatin activities of a. @2'. b. @2('. c. @3"'. d. @"'.
5 + 3.
-3.
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
+ackard #orporation reports the follo!in informationD
@23%' 1%' 1' (' 11' 3%'
+ackard/s cash debt coverae ratio is a. .-". b. 1.%-. c. 2.3%. d. 3.-2. -".
+ackard #orporation reports the follo!in informationD
@23%' 1%' 1' (' 11' 3%'
+ackard/s free cash flo! is a. @%'. b. @(%'. c. @12%'. d. @1)%'. -%.
+edio #orporation reports the follo!in informationD
@2)%' 1%' 1' (' 11' 3%'
alance 0heet and 0tatement of #ash Flo!s -(.
5 + 35
+edio #orporation reports the follo!in informationD
@2)%' 1%' 1' (' 11' 3%'
Mult%ple C(o%ce Ans)e!s— Co#putat%onal "te#
)-. ,. ,1. ,2.
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c a b d
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a b c c
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d b b a
"te#
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Ans*
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a b
Solut%on 5+340
1. &ssets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events. 2. Liabilities are probable future sacrifices of economic benefits arisin from present obliations of an entity as a result of past transactions or events. 3. :quity is the residual interest in the net assets of an entity. ". #urrent liabilities are obliations that are expected to be liquidated throuh the use of current assets or the creation of other current liabilities. %. orkin capital is the net amount of a company/s relatively liquid resources. 9t is the excess of total current assets over total current liabilities. (. 9ntanible assets are economic resources or competitive advantaes. They lack physical substance and have a hih deree of uncertainty about the future benefits to be received. ). #urrent assets are resources =future economic benefits> expected to be converted to cash' sold' or consumed in one year or the operatin cycle' !hichever is loner. E* 5+341HTerminoloy.
9n the space provided at riht' !rite the !ord or phrase that is defined or indicated. 1. bliations expected to be liquidated throuh use of current assets.
1.IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
5 + 3/
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
2. 0tatement sho!in financial condition at a point in time.
2.IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
3. :vents that depend upon future outcomes.
3.IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
". +robable future sacrifices of economic benefits.
".IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
%. Aesources expected to be converted to cash in one year or the operatin cycle' !hichever is loner.
%.IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
(. Aesources of a durable nature used in operations.
(.IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
). :conomic rihts or competitive advantaes !hich lack physical substance.
).IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
,. +robable future economic benefits.
,.IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
-. Aesidual interest in the net assets of an entity.
-.IIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIIII
Solut%on 5+341
1. 2. 3. ". %.
#urrent liabilities. alance sheet. #ontinencies. Liabilities. #urrent assets.
(. ). ,. -.
+roperty' plant' and equipment. 9ntanible assets. &ssets. :quity.
Solut%on 5+342
#urrent assets are resources =future economic benefits> expected to be converted to cash' sold' or consumed in one year or the operatin cycle' !hichever is loner.
alance 0heet and 0tatement of #ash Flo!s
5 + 30
E* 5+334H&ccount classification.
a. b. c. d. e.
&00:T0 #urrent assets 9nvestments +lant and equipment 9ntanibles ther assets
L9&9L9T9:0 &
;sin the letters above' classify the follo!in accounts accordin to the preferred and ordinary balance sheet presentation. IIIII 1. ond sinkin fund IIIII 2. #ommon stock dividend distributable IIIII 3. &ppropriation for plant expansion IIIII ". ank overdraft IIIII %. onds payable =due 21%> IIIII (. +remium on common stock IIIII ). 0ecurities o!ned by another company !hich are collateral for that company8s note IIIII ,. :quity investments =tradin> IIIII -. 9nventory IIIII 1. ?iscount on bonds payable IIIII 11. +atents IIIII 12. ;nearned revenue Solut%on 5+334
1. 2. 3. ".
b i k f
%. (. ). ,.
j l a
-. 1. 11. 12.
a d f
5 + 31
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
E* 5+333HJaluation of alance 0heet 9tems.
;se the code letters listed belo! =a K l> to indicate' for each balance sheet item =1 K 13> listed belo! the usual valuation reported on the balance sheet. IIIIII 1. #ommon stock
IIIIII ,. Lon$term bonds payable
IIIIII 2. +repaid expenses
IIIIII -. Land =in use>
IIIIII 3.
IIIIII 1. Land =future plant site>
IIIIII ". +roperty' plant' and equipment
IIIIII 11. +atents
IIIIII %. &ccounts receivable
IIIIII 12. :quity investments =tradin>
IIIIII (. #opyrihts
IIIIII 13. &ccounts payable
IIIIII ). 9nventory a. +ar value b. #urrent cost of replacement c. &mount payable !hen due' less unamorti7ed discount or plus unamorti7ed premium d. &mount payable !hen due e. 5arket value at balance sheet date f.
. Lo!er of cost or market h. riinal cost less accumulated amorti7ation i.
riinal cost less accumulated depletion
j.
riinal cost less accumulated depreciation
k. Eistorical cost l.
;nexpired or unconsumed cost
Solut%on 5+333
1. 2. 3. ". %.
a l i j f
(. ). ,. -. 1.
h c k k
11. 12. 13.
h e d
alance 0heet and 0tatement of #ash Flo!s
5 + 32
E* 5+33,Halance sheet classifications.
Typical balance sheet classifications are as follo!s. a. #urrent &ssets . b. 9nvestments h. c. +lant &ssets i. d. 9ntanible &ssets j. e. ther &ssets k. f. #urrent Liabilities l.
Lon$Term Liabilities #apital 0tock &dditional +aid$9n #apital Aetained :arnins
9ndicate by use of the above letters ho! each of the follo!in items !ould be classified on a balance sheet prepared at ?ecember 31' 212. 9f a contra account' or any amount that is neative or opposite the normal balance' put parentheses around the letter selected. & letter may be used more than once or not at all. IIIII 1. &ccrued salaries and !aes IIIII 2. Aental revenues for 3 months collected in advance IIIII 3. Land used as plant site IIIII ". :quity securities classified as tradin IIIII %. #ash IIIII (. &ccrued interest payable due in 3 days IIIII ). +remium on preferred stock issued IIIII ,. ?ividends in arrears on preferred stock IIIII -. +etty cash fund IIIII 1. ;namorti7ed discount on bonds payable due 21% IIIII 11. #ommon stock at par value IIIII 12. ond indenture covenants IIIII 13. ;namorti7ed premium on bonds payable due in 21( IIIII 1". &llo!ance for doubtful accounts IIIII 1%. &ccumulated depreciationH equipment
IIIIII 1(. IIIIII 1,. *ood!ill IIIIII 1-. - day notes payable IIIIII 2. 9nvestment in bonds of another company !ill be held to 21% maturity IIIIII 21. Land held for speculation IIIIII 22. ?eath of company president IIIIII 23. #urrent maturity of bonds payable IIIIII 2". 9nvestment in subsidiary no plans to sell in near future IIIIII 2%. &ccounts payable IIIIII2(.
+referred stock =@1 par>
IIIIII2).
+repaid rent
IIIIII 2,. #opyriht IIIIII 2-. &ccumulated amorti7ation' patents IIIIII 3. :arnins not distributed to stockholders
5 + ,4
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
Solut%on 5+33,
1. 2. 3. ". %.
f f c a a
(. ). ,. -. 1.
f i k a =>
11. 12. 13. 1". 1%.
h k =a> =c>
1(. 1). 1,. 1-. 2.
c =j> d f b
21. 22. 23. 2". 2%.
b l f b f
2(. 2). 2,. 2-. 3.
h a d =d> j
E* 5+33-Halance sheet classifications.
The various classifications listed belo! have been used in the past by 5aris #ompany on its balance sheet. 9t asks your professional opinion concernin the appropriate classification of each of the items 1$1" belo!. a. b. c. d. e.
#urrent &ssets 9nvestments +lant and :quipment 9ntanible &ssets ther &ssets
f. . h. i.
#urrent Liabilities Lon$Term Liabilities #ommon 0tock and +aid$in #apital in :xcess of +ar Aetained :arnins
9ndicate by letter ho! each of the follo!in items should be classified. 9f an item need not be reported on the balance sheet' use the letter M. & letter may be used more than once or not at all. 9f an item can be classified in more than one cateory' choose the cateory most favored by the authors of your textbook. IIIII 1. :mployees8 payroll deductions. IIIII 2. #ash in sinkin fund. IIIII 3. Aent revenue collected in advance. IIIII ". :quipment retired from use and held for sale. IIIII %. +atents. IIIII (. +ayroll cash fund. IIIII ). *oods held on consinment. IIIII ,. &ccrued revenue on short$term investments. IIIII -. &dvances to salespersons. IIIII 1. +remium on bonds payable due t!o years from date. IIIII 11. ank overdraft. IIIII 12. 0alaries !hich company budet sho!s !ill be paid to employees !ithin the next year. IIIII 13. ork in process. IIIII 1". &ppropriation for bonded indebtedness.
alance 0heet and 0tatement of #ash Flo!s
5 + ,3
Solut%on 5+33-
1. 2. 3. ".
f b f a or e
%. (. ). ,.
d a x a
-. 1. 11. 12.
a f x
13. 1".
a i
E* 5+33.Halance sheet classifications.
The various classifications listed belo! have been used in the past by Eale #ompany on its balance sheet. a. b. c. d.
#urrent &ssets 9nvestments +lant and :quipment 9ntanible &ssets
e. f. . h.
#urrent Liabilities Lon$term Liabilities #ommon 0tock and +aid$in #apital in :xcess of +ar Aetained :arnins
"nst!uct%ons
9ndicate by letter ho! each of the items belo! should be classified at ?ecember 31' 212. 9f an item is not reported on the ?ecember 31' 212 balance sheet' use the letter M for your ans!er. 9f the item is a contra account !ithin the particular classification' place parentheses around the letter. & letter may be used more than once or not at all. 0ample question and ans!erD =a>
&llo!ance for doubtful accounts.
IIIII 1. #ustomers8 accounts !ith credit balances. IIIII 2. ond sinkin fund. IIIII 3. 0alaries !hich the company8s cash budet sho!s !ill be paid to employees in 213. IIIII ". &ccumulated depreciationHequipment. IIIII %. &ppropriation for plant expansion. IIIII (. &morti7ation of patents for 212. IIIII ). n ?ecember 31' 212' Eale sined a purchase commitment to buy all of its ra! materials from ?elta #ompany for the next 2 years. IIIII ,. ?iscount on bonds payable due 5arch 31' 21%. IIIII -. Launchin of Eale/s 9nternet retailin division in February' 213. IIIII 1. #ash dividends declared on ?ecember 1%' 212 payable to stockholders on 6anuary 1%' 213.
5 + ,,
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
Solut%on 5+33.
1. e 2. b 3. x
". %. (.
=c> h x
). ,. -.
x =f> x
1.
e
E* 5+335H0tatement of cash flo!s.
For each event listed belo!' select the appropriate cateory !hich describes the effect of the event on a statement of cash flo!sD a. #ash providedNused by operatin activities. b. #ash providedNused by investin activities. c. #ash providedNused by financin activities. d. IIIII ). +ayment of employees8 !aes IIIII ,. 9ssuance of common stock for cash IIIII -. +ayment of income tax payable IIIII 1. +urchase of equipment IIIII 11. +urchase of treasury stock =common> IIIII 12. 0ale of real estate held as a lon$term investment
Solut%on 5+335
1. c 2. c 3. a
". %. (.
d d b
). ,. -.
a c a
1. 11. 12.
b c b
alance 0heet and 0tatement of #ash Flo!s
5 + ,-
PROBLEMS Solut%on 5+330
1. The headin should be as of a specific date rather than for a period of time. 2. Aeserve for ?epreciation is poor terminoloy the title &ccumulated ?epreciation is more appropriate. 3. Land and buildins should be sereated into t!o accounts. The &ccumulated ?epreciation account should only be reported for the buildins. ". +lant site held for future use should be sho!n in the 9nvestments section. %. #urrent assets should be sho!n on the balance sheet first in most situations current assets are listed usually in order of liquidity factory supplies should be sho!n as a current asset. (. Treasury stock is not an asset' but a contra account to stockholders8 equity in most situations. ).
5 + ,.
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
alance 0heet as of ?ecember 31' 212 #ash &ccounts receivable =net> 9nventory 9nvestments :quipment =net> +atents
@ ,%' %2'2 %)' )('3 1(' 32' @",'%
&ccounts payable Lon$term liabilities 0tockholders8 equity
@ -' 1' 21,'%
@",'%
The follo!in additional information is providedD 1. #ash includes the cash surrender value of a life insurance policy @-'"' and a bank overdraft of @2'% has been deducted. 2. The net accounts receivable balance includesD =a> accounts receivableHdebit balances @(' =b> accounts receivableHcredit balances @"' =c> allo!ance for doubtful accounts @3',. 3. 9nventory does not include oods costin @3' shipped out on consinment. Aeceivables of @3' !ere recorded on these oods. ". 9nvestments include investments in common stock' tradin @1-' and available$for$sale @",'3' and franchises @-'. %. :quipment costin @%' !ith accumulated depreciation @"' is no loner used and is held for sale. &ccumulated depreciation on the other equipment is @"'. "nst!uct%ons
+repare a balance sheet in ood form =stockholders8 equity details can be omitted.>
alance 0heet and 0tatement of #ash Flo!s
5 + ,5
Solut%on 5+331
Graus #ompany alance 0heet &s of ?ecember 31' 212 &ssets #urrent assets #ash Tradin securities &ccounts receivable LessD &llo!ance for doubtful accounts 9nventories P:quipment held for sale Total current assets 9nvestments &vailable$for$sale securities #ash surrender value
@ ),'1 1-' @ %)' 3',
=2> %3'2 (' 1' 211'3
",'3 -'"
+roperty' plant' and equipment :quipment LessD accumulated depreciation 9ntanible assets +atents Franchises Total assets
1"%' "' 32' -'
=1>
=3> =">
%)') =%> 1%'
"1' @"1%'
Liabilities and 0tockholders8 :quity #urrent liabilities &ccounts payable ank overdraft Total current liabilities Lon$term liabilities Total liabilities 0tockholders8 equity Total liabilities and stockholders8 equity =1> =2> =3> ="> =%> =(>
=@,%' K @-'" Q @2'%> =@(' K @3'> =@%)' Q @3'> =@%' K @"'> =@1(' Q @"' K @%' Q @"'> =@-' Q @"'>
P&n alternative is to sho! it as an other asset.
@ -"' 2'% -('% 1' 1-('% 21,'% @"1%'
=(>
5 + ,/
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
P!* 5+332 Halance sheet presentation.
*iven the follo!in account information for Leon #orporation' prepare a balance sheet in report form for the company as of ?ecember 31' 212. &ll accounts have normal balances. :quipment 9nterest :xpense 9nterest +ayable Aetained :arnins ?ividends Land 9nventory onds +ayable #ommon 0tock &ccumulated ?epreciation $ :quip. +repaid &dvertisin Aevenue uildins 0upplies Taxes +ayable ;tilities :xpense &dvertisin :xpense 0alaries and aes :xpense 0alaries and aes +ayable &ccumulated ?epr. $ ld. #ash ?epreciation :xpense
%' 2'" ( 4 %'" 13)'32 12' ),' 1-'" (' 1' %' 3"1'" ,'" 1',( 3' 1'32 1'%( %3'" - 1%' 3%' ,'
alance 0heet and 0tatement of #ash Flo!s
5 + ,0
Solut%on 5+332
Leon #orporation alance 0heet ?ecember 31' 212 &ssets #ash 9nventory 0upplies +repaid advertisin Total current assets Land uildin &ccumulated depreciation $ bld :quipment &ccumulated depreciation $eq Total assets Liabilities R 0tockholders8 :quity Total stockholders8 equity Total liabilities R stockholders8 equity
P@3"1'" $ @%3'" $ @,' $ @2'" $ @1'%( $ @1'32
@ 3%' 12' 1',( %' @ 1"3',( 13)'32 @ ,'" =1%'> %' =1'>
(%'" "'
2"2')2 @ 3,('%,
@ 1-'" 3' - ( @ 23'- ),' 11'- (' 22"'(, 2,"'(, @ 3,('%,
5 + ,1
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
alance 0heet and 0tatement of #ash Flo!s P!* 5+3,4 H0tatement of cash flo!s preparation.
0elected financial statement information and additional data for 0tanislaus #o. is presented belo!. +repare a statement of cash flo!s for the year endin ?ecember 31' 212 ?ecember 31 211
212
#ash....................................................... @"2' &ccounts receivable =net>....................... ,"' 9nventory................................................. 1(,' Land....................................................... %,', :quipment.............................................. %"' TT&L.........................................@,%(',
@)%' 1""'2 21'( 1(' ),-'( @1'22('"
&ccumulated depreciation....................... @,"' &ccounts payable................................... %'"
@11%'( ,(' 2-'" 32'" ",)'2 2%', @1'22('"
&dditional data for 212D 1.
5 + ,2
5 + -4
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
Solut%on 5+3,4
0tanislaus #o. 0tatement of #ash Flo!s For the year ended ?ecember 31' 212
@2"'2 31'( =('2> =33'(> 3%'( =3)',>
=("'"> 1)%',
=,"'> "2', ="1'2> =11'(> =11'(> 33' "2' )%'
alance 0heet and 0tatement of #ash Flo!s
5 + -3
P!* 5+3,3 H0tatement of cash flo!s preparation.
0elected financial statement information and additional data for 6ohnston :nterprises is presented belo!. +repare a statement of cash flo!s for the year endin ?ecember 31' 212 6ohnston :nterprises alance 0heet and 9ncome 0tatement ?ata ?ecember 31' 212 #urrent &ssetsD #ash &ccounts Aeceivable 9nventory Total #urrent &ssets +roperty' +lant' and :quipment LessD &ccumulated ?epreciation Total &ssets #urrent LiabilitiesD &ccounts +ayable
?ecember 31' 211III
@1(3' 22,' 3-1' ),2'
@11-' 3(' 3"' )(%'
1'2"1' =")('> @1'%")'
1'122' =""2'> @1'""%'
@1))' %1' ,%' 313'
@12' (,' )('% 2"('%
3%' ((3'
3-1' (3)'%
%1' 3)"' ,,"' @1'%")'
"()'% 3"' ,)'% @1'""%'
1'(1%' )31' ,,"'
@1'%13' )31' ),2'
1%3' 3-1' 3"' 12' 2-"' 11,' @1)('
13(' 3%)' 3"' 2%%' 12' @1%3'
&dditional 9nformationD ?urin the year' 6ohnston sold equipment !ith an oriinal cost of @1%3' and accumulated depreciation of @11-' and purchased ne! equipment for @2)2'.
5 + -,
Test Bank o! "nte!#e$%ate Account%n&' Fou!teent( E$%t%on
Solut%on 5+3,3
6ohnston :nterprises 0tatement of #ash Flo!s For the Sear :nded ?ecember 31' 212
@ 1)('
#ash flo! from operatin activities ?epreciation expense Loss on sale of equipment ?ecrease in accounts receivable 9ncrease in inventory 9ncrease in accounts payable ?ecrease in notes payable 9ncrease in tax payable
1%3' 12' ),' =%1'> )%' =1)'> ,'%
#ash flo! from investin activities 0ale of equipment +urchase of equipment
22' =2)2'>
#ash flo! from financin activities Aetirement of bonds payable 9ssuance of common stock +ayment of dividends
2%,'% "3"'%
=2%'> ="1'> "2'% =1"2'>PP
=1"'%> ""' 11-' @1(3'
alance 0heet and 0tatement of #ash Flo!s
5 + --
"FRS 6UEST"ONS T!ue7False8
1. <houh the presentation formats for the balance sheet and statement of cash flo!s are similar under 9FA0 and ;.0. *&&+' 9FA0 requires far more extensive disclosure. 2. ne sinificant difference bet!een a balance sheet prepared usin 9FA0 rather than ;.0. *&&+ is that lon$term tanible assets !ill be reported at fair value rather than historical cost. 3. oth 9FA0 and ;.0. *&&+ require that specific items be reported on the balance sheet. ". oth 9FA0 and ;.0. *&&+ require current assets to be listed first on the balance sheet. Ans)e!s to T!ue7False8
1. 2. 3. ".
False True False False
Mult%ple C(o%ce 6uest%ons8
1. hich of the follo!in statements about 9FA0 and ;.0. *&&+ accountin and reportin requirements for the balance sheet is not correct4 a. The presentation formats required by 9FA0 and ;.0. *&&+ for the balance sheet are similar. b. ne difference bet!een the reportin requirements under 9FA0 and those of ;.0. *&&+ balance sheet is that an 9FA0 balance sheet may list lon$term assets first. c. oth 9FA0 and ;.0. *&&+ require that property' plant and equipment be reported at historical cost on the balance sheet. d. oth 9FA0 and ;.0. *&&+ require that comparative information be reported. Use the following information to answer the next two questions.
Franco #ompany uses 9FA0 and o!ns property' plant and equipment !ith a historical cost of %'' euros. &t ?ecember 31' 211' the company reported a valuation reserve of ,'3(%' euros. &t ?ecember 31' 212' the property' plant and equipment !as appraised at %'32%' euros. 2. The property' plant and equipment !ill be reported on the ?ecember 31' 212 balance sheet at a. %'' euros. b. %'32%' euros. c. ,'3(%' euros. d. ,'(-' euros. 3. The valuation reserve at ?ecember 31' 212 !ill be reported at a. ,'"' euros on the 0tatement of 0tockholders8 :quity. b. ,'3(%' euros in the &ssets section of the alance 0heet c. ,'(-' euros in the stockholders8 equity section of the alance 0heet. d. 32%' euros on the 9ncome 0tatement.
