Deck 6: Statements of Financial Position and Cash Flows and the Annual Report

Question 1

The IFRS definition of current liabilities differs from the definition of current liabilities under GAAP.

Answer 1

True

Question 2

What are three limitations associated with the balance sheet?

Answer 2

1. Many balance sheet accounts are reported at historical cost instead of market values or liquidation values; this limits the relevance of information in the balance sheet.
2. A number of assets and liabilities, such as human capital and reputation, are not reported on the balance sheet.
3. Many balance sheet accounts are based upon estimates as opposed to determinable amounts.

Question 3

Accumulated other comprehensive income appears on an entity's income statement.

Answer 3

False

Question 4

The balance sheet reflects the financial position of an entity over a period of time.

Question 5

A firm that responds quickly to unexpected circumstances exhibits a high level of financial flexibility.

Question 6

Land held for resale is classified as property, plant, and equipment.

Question 7

In order to be a cash equivalent, an investment must have a maturity date of three months or less when purchased.

Question 8

List and explain three common cash flow measures based upon balance sheet information.

Question 9

Current assets are those that a firm expects to convert into cash within one year or its operating cycle, whichever is longer.

Question 10

Prepaid expenses are normally reported as current assets.

Question 11

Which of the following is not a cash flow measure?

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

Question 12

If an entity can borrow funds to meet an unexpected financial crisis, it exhibits high ________.

A) liquidity
B) solvency
C) stability
D) financial flexibility

Question 13

Which of the following is not a limitation of the balance sheet?

A) Many balance sheet accounts are reported at historical cost instead of market values or liquidation values.
B) A number of assets and liabilities, such as human capital and reputation, are not reported on the balance sheet.
C) Many balance sheet accounts are based upon estimates as opposed to determinable amounts.
D) Many of the balances are reported at their liquidation values.

Question 14

The relevance of the balance sheet is limited because many assets are recorded at historical costs.

Question 15

Which of the following best describes the concept of liquidity?

A) It is a measure of an asset's ability to be quickly converted to cash without risk of loss.
B) It is a measure of a firm's long-term ability to pay its obligations as they mature.
C) It indicates an entity's ability to respond to unexpected needs
D) It indicates a firm's ability to take advantage of opportunities by taking actions that alter the amounts and timing of cash flows.

Question 16

IFRS specifies that biological assets should be reported on the balance sheet.

Question 17

List three areas in which the balance sheet provides important information to financial statement users.

Question 18

Solvency is a measure of a firm's ability to pay its obligations as they mature.

Question 19

The portion of long-term debt that matures during the coming year is classified as a current liability.

Question 20

Which of the following is a current asset?

A) treasury bill acquired with 2 months to maturity
B) land held for investment
C) equipment
D) goodwill

Question 21

Glover Corporation's trial balance for December 31, the end of its fiscal year, included the following accounts: $$\begin{array} { | l | r | } \hline \text { Accounts Payable } & \$ 40,000 \\\hline \text { Dividends Payable } & 22,000 \\\hline \text { Bond Payable, maturing in 9 years } & 36,000 \\\hline \text { Salaries Payable } & 9,000 \\\hline \text { Note Payable, due in 1 year } & 30,000 \\\hline \text { Note payable, due in 5 years } & 60,000 \\\hline\end{array}$$
The amount that should be classified as current liabilities on Glover's December 31 balance sheet is ________.

A) $71,000
B) $79,000
C) $101,000
D) $161,000

Question 22

Which of the following is not a cash equivalent?

A) commercial paper acquired with 75 days to maturity
B) bond sinking fund
C) money market funds
D) treasury bill acquired with 30 days to maturity

Question 23

Classify the following accounts as assets (A), liabilities (L), or shareholders' equity (SE) and whether they are current (C), non-current (NC), or not applicable (N/A).
$$\begin{array} { | l | l | l | } \hline{ \text { Account } } & \text { A, L, SE } & \text { C,NC,N/A } \\\hline \text { Merchandise Inventory } & & \\\hline \text { Unearned Rent (one-year lease) } & & \\\hline \text { Prepaid Insurance } & & \\\hline \text { Bonds Payable (due in 5 years) } & & \\\hline \text { Investment in B Company (to be held } & & \\5 \text { years) } & & \\\hline \text { Goodwill } & & \\\hline \text { Additional Paid-in Capital } & & \\\hline \text { Accumulated Other Comprehensive } & & \\\text { Income } & & \\\hline \text { Equipment } & & \\\hline \text { Income Tax Payable } & & \\\hline\end{array}$$

Question 24

When preparing a balance sheet using IFRS, a company may choose to list noncurrent assets first.

Question 25

Anderson Corporation's trial balance for December 31, the end of its fiscal year, included the following accounts: $$\begin{array} { | l | r | } \hline \text { Accounts Payable } & \$ 47,000 \\\hline \text { Dividends Payable } & 10,000 \\\hline \text { Bond Payable, maturing in 9 years } & 54,000 \\\hline \text { Salaries Payable } & 10,000 \\\hline \text { Note Payable, due in 1 year } & 15,000 \\\hline \text { Note payable, due in 5 years } & 70,000 \\\hline\end{array}$$
The bond payable is a serial bond with equal amounts of principal maturing each year. The note payable due in 5 years has equal principal payments due each year.
The amount that should be classified as current liabilities on Anderson's December 31 balance sheet is ________.

A) $86,000
B) $96,000
C) $102,000
D) $150,000

Question 26

Where does Accumulated Other Comprehensive Income appear?

A) on the balance sheet in the shareholders' equity section
B) on the balance sheet in the long-term liabilities section
C) on the income statement after net income
D) on the balance sheet as a long-term asset

Question 27

Presented below are selected accounts for San Marcos Corporation for December 31 of the current year.
What is working capital for San Marcos Corporation?

A) $115
B) $163
C) $298
D) $628

Question 28

Which of the following is a not a component of shareholders' equity?

A) Common Stock
B) Dividends Payable
C) Additional Paid-in Capital
D) Treasury Stock

Question 29

The account format of the balance sheet lists assets on the left side and liabilities and stockholders' equity on the right side of the statement.

Question 30

Which of the following statements regarding balance sheet presentation is true?

A) IFRS does not prescribe the ordering of liabilities within current and noncurrent groups.
B) The account format lists liabilities and shareholders' equity directly below the assets.
C) The report format lists liabilities and shareholders' equity on the right side of the statement.
D) U.S. GAAP allows assets to be listed in either increasing or decreasing order of liquidity.

Question 31

A company reporting under IFRS must list its liabilities in order of liquidity for each grouping.

Question 32

Presented below are selected accounts for San Marcos Corporation for December 31 of the current year.
What are current assets for San Marcos Corporation?

A) $963
B) $1,028
C) $1,010
D) $1,433

Question 33

Which of the following is not a component of shareholders' equity?

A) Retained Earnings
B) Paid-in Capital
C) Accrued Liabilities
D) Accumulated Other Comprehensive Income

Question 34

Classify the following accounts as assets (A), liabilities (L), or shareholders' equity (SE) and whether they are current (C), non-current (NC), or not applicable (N/A).
$$\begin{array} { | l | l | l | } \hline { \text { Account } } & \underline { \mathrm { A } , \mathrm { L } , \mathrm { SE } } & \underline { \mathrm { C } , \mathrm { NC } , \mathrm { N } / \mathrm { A } } \\\hline \text { Accounts Receivable } & & \\\text { Accounts Payable } & & \\\text { Supplies } & & \\\hline \text { Bonds Payable (due in 10 years) } & & \\\hline \begin{array} { l } \text { Investment in A Company } \\\text { (to be sold in 6 months) }\end{array} & & \\\hline \text { Copyright } & & \\\hline \text { Additional Paid-in Capital } & & \\\hline \text { Retained Earnings } & & \\\hline \text { Land } & & \\\hline \text { Wages Payable } & & \\\hline\end{array}$$

Question 35

A company reporting under IFRS may list its assets in either increasing or decreasing order of liquidity.

Question 36

Webb Corporation's trial balance for July 31, the end of its fiscal year, included the following accounts: $$\begin{array} { | l | r | } \hline \text { Accounts Receivable } & \$ 34,000 \\\hline \text { Inventories } & 52,000 \\\hline \text { Franchise } & 38,000 \\\hline \text { Investments } & 48,000 \\\hline \text { Prepaid Insurance } & 5,000 \\\hline \text { Note Receivable } & 96,000 \\\hline \text { Cash in Bank } & 6,000 \\\hline\end{array}$$
The investments account consists of marketable securities of which management plans to sell half of by December 31. The rest of the securities will be held longer than one year. Prepaid insurance is a two-year policy that was purchased on July 31. The note receivable is an installment note that will be paid in three equal installments on December 31 of each year.
The amount that should be classified as current assets in the July 31 balance sheet is ________.

A) $150,500
B) $153,000
C) $180,500
D) $214,500

Question 37

Presented below are selected accounts for San Marcos Corporation for December 31 of the current year.
What are current liabilities for San Marcos Corporation?

A) $710
B) $770
C) $795
D) $855

Question 38

The report format of the balance sheet lists assets on the left side and liabilities and stockholders' equity on the right side of the statement.

Question 39

Which of the following is not a current liability?

A) income tax payable
B) accounts payable
C) subscriptions collected one year in advance
D) bond sinking fund

Question 40

Hendrickson Corporation's trial balance for July 31, the end of its fiscal year, included the following accounts: $$\begin{array} { | l | r | } \hline \text { Accounts Receivable } & \$ 21,000 \\\hline \text { Inventories } & 57,000 \\\hline \text { Copyright } & 18,000 \\\hline \text { Investments } & 41,000 \\\hline \text { Prepaid Insurance } & 6,000 \\\hline \text { Note receivable, due in two years } & 74,000 \\\hline \text { Cash in Bank } & 4,500 \\\hline\end{array}$$ Investments are treasury bills that were purchased in May and mature on August 15. Prepaid insurance is a three-year policy that was purchased on July 31.
The amount that should be classified as current assets in the July 31 balance sheet is ________.

A) $129,500
B) $125,500
C) $82,000
D) $199,500

Question 41

The statement of cash flows summarizes a firm's cash flows and outflows over a period of time.

Question 42

San Pedro Industries
Presented below are selected accounts from the adjusted trial balance ($ Millions) for San Pedro Industries for June 30 of the current year.

Prepare a classified balance sheet using the account format for San Pedro Industries.

Question 43

Presented below are selected accounts for San Marcos Corporation for December 31 of the current year.
What are total assets for San Marcos Corporation?

A) $2,573
B) $2,618
C) $2,628
D) $2,673

Question 44

San Pedro Industries
Presented below are selected accounts from the adjusted trial balance ($ Millions) for San Pedro Industries for June 30 of the current year.

Prepare a classified balance sheet using the report format for San Pedro Industries.

Question 45

Presented below are selected accounts for San Marcos Corporation for December 31 of the current year.
What is ending retained earnings for San Marcos Corporation?

A) $308
B) $173
C) $305
D) $613

Question 46

Redemption of bonds payable is classified as a financing activity on the statement of cash flows.

Question 47

Presented below are selected accounts for San Marcos Corporation for December 31 of the current year.
What are long-term assets for San Marcos Corporation?

A) $1,175
B) $1,640
C) $1,710
D) $1,945

Question 48

The statement of cash flows summarizes a firm's cash inflows and outflows at a specific point in time.

Question 49

San Pedro Industries
Presented below are selected accounts from the adjusted trial balance ($ Millions) for San Pedro Industries for June 30 of the current year.

Prepare a classified balance sheet in IFRS-acceptable format for San Pedro Industries.

Question 50

Cash receipts from interest and dividends are classified as operating activities on a U.S. GAAP-based statement of cash flows.

Question 51

Purchases of fixed assets are classified as investing activities on the statement of cash flows.

Question 52

The statement of cash flows enables financial statement users to do all of the following except ________.

A) assess an entity's ability to pay liabilities and dividends
B) determine the extent to which an entity will require external financing
C) assess the collectability of existing accounts receivable
D) reconcile differences between net income and the associated cash receipts and payments

Question 53

Dividend payments to shareholders are classified as operating activities on the statement of cash flows.

Question 54

Presented below are selected accounts for San Marcos Corporation for December 31 of the current year.
What are total liabilities for San Marcos Corporation?

A) $1,815
B) $1,905
C) $1,950
D) $1,990

Question 55

In order to sustain operations, a firm must have positive cash flows from operating activities over the long run.

Question 56

After grouping assets as current and noncurrent what further classifications within those categories are made when compiling a balance sheet? Assume U.S. GAAP.

Question 57

Compare and contrast the presentation of assets under U.S. GAAP versus IFRS reporting.

Question 58

Presented below are selected accounts for San Marcos Corporation for December 31 of the current year.
What is total stockholders' equity for San Marcos Corporation?

A) $770
B) $918
C) $1,353
D) $1,438

Question 59

Presented below are selected accounts for San Marcos Corporation for December 31 of the current year.
What are long-term liabilities for San Marcos Corporation?

A) $920
B) $1,000
C) $1,025
D) $1,130

Question 60

List and describe the two balance sheet formats.

Question 61

When preparing the operating section of the statement of cash flows using the indirect method, which of the following items are added to net income?

A) decrease in accrued expenses
B) gain on sale of long-term assets
C) bad debt expense
D) increase in accounts receivable

Question 62

Presented below are activities from Prosser Industries, Inc.
$$\begin{array} { | l | l | } \hline { \text { Activity } } & \underline { \mathrm { O } , \mathrm { I } , \text { or F } } \\\hline \text { Purchase of equipment with cash } & \\\hline \text { Sale of treasury stock } & \\\hline \text { Payments to employees } & \\\hline \text { Sale of idle land } & \\\hline \text { Purchase of inventory with cash } & \\\hline \text { Payment of dividends to shareholders } & \\\hline \text { Redemption of bonds payable } & \\\hline \text { Sale of long-term investments } & \\\hline \text { Payment of interest on bonds payable } & \\\hline\end{array}$$
Required: Please indicate whether each of these activities is classified as an (O)perating, (I)nvesting, or (F)inancing Activity on the statement of cash flows.

Question 63

The only difference between the statement of cash flows under the indirect method and the direct method is in the reporting of cash flows from operating activities.

Question 64

Presented below are activities from Ford Enterprises, Inc.
$$\begin{array} { | l | l | } \hline { \text { Activity } } & \underline { \mathrm { O } , \mathrm { I } , \text { or F } } \\\hline \text { Purchase of buildings with cash } & \\\hline \text { Issuance of treasury stock } & \\\hline \text { Payments to vendors } & \\\hline \text { Sale of old equipment } & \\\hline \text { Sales to customers for cash } & \\\hline \text { Repayment of notes to bank } & \\\hline \text { Issuance of bonds payable } & \\\hline \text { Purchase of municipal bonds } & \\\hline \text { Receipt of interest on municipal bonds } & \\\hline\end{array}$$
Required: Please indicate whether each of these activities is classified as an (O)perating, (I)nvesting, or (F)inancing Activity on the statement of cash flows.

Question 65

Describe the statement of cash flows and its purpose including what a financial statement user can determine or assess by reviewing a well-prepared statement of cash flows.

Question 66

When preparing the operating section of the statement of cash flows using the indirect method, which of the following items are subtracted from net income?

A) depreciation expense
B) gain on sale of long-term assets
C) decrease in prepaid expenses
D) increase in income taxes payable

Question 67

All of the following activities are classified as operating activities on a statement of cash flows except ________.

A) purchase of inventory with cash
B) sale of merchandise for cash
C) receipts from customers
D) purchase of a certificate of deposit

Question 68

Complete the U.S. GAAP and IFRS columns in the table below by identifying the cash flow activity on the statement of cash flows: Operating, Investing, or Financing. If a standard allows for more than one activity classification be sure to note both. For example, if an activity can be classified as "Operating or Financing," please note both classifications.
$$\begin{array} { |l ll| } \hline\text { Activities } & \text { U.S. GAAP }&\text{IFRS} \\\hline \text { Cash receipts from interest } & \\\hline \text { Cash payments for interest } & \\\hline \text { Cash receipts from dividends } & \\\hline \text { Cash payments for dividends to } \\\text { owners }\\\hline \end{array}$$

Question 69

Which of the following is classified as an operating activity on a statement of cash flows?

A) payment of dividends
B) sale of equipment
C) issuance of common stock
D) purchase of inventory with cash

Question 70

When preparing the operating activities section of the statement of cash flows under the indirect method, depreciation expense is subtracted from net income.

Question 71

When preparing the operating activities section of the statement of cash flows under the indirect method, gains on sale of equipment are subtracted from net income.

Question 72

Which of the following is classified as a financing activity on a statement of cash flows?

A) purchase of a vendor's common stock
B) sale of equipment at a gain
C) payment of dividends to shareholders
D) redemption of a sinking fund

Question 73

When preparing the operating activities section of the statement of cash flows under the indirect method, losses on sales of equipment are omitted.

Question 74

Which of the following is classified as an investing activity on a statement of cash flows?

A) purchase of land
B) issuance of serial bonds
C) purchase of insurance policy
D) purchase of treasury stock

Question 75

When preparing the operating section of the statement of cash flows using the direct method, which of the following statements is true?

A) An increase in accounts payable is subtracted from cost of goods sold.
B) An increase in accounts receivable is added to sales.
C) Depreciation expense is added to cash flows.
D) Gains on sales of long term assets are subtracted from cash flows.

Question 76

All of the following activities are classified as investing activities on a statement of cash flows except ________.

A) purchase of land
B) sale of long-term investments
C) purchase of copyright
D) gain on sale of securities

Question 77

The FASB prefers the indirect method of preparing the operating activities section of the statement of cash flows.

Question 78

All of the following activities are classified as financing activities on a statement of cash flows except ________.

A) distribution of dividends in the form of stock
B) issuance of serial bonds
C) payment of mortgage
D) sale of treasury stock

Question 79

When preparing the operating section of the statement of cash flows using the indirect method, which of the following items are added to net income?

A) decrease in accounts payable
B) unrealized gains on trading securities
C) loss on sale of equipment
D) increase in merchandise inventory

Question 80

When preparing the operating activities section of the statement of cash flows under the direct method, an increase in accounts receivable is subtracted from sales.