Deck 2: The Balance Sheet

Question 1

Accrued liabilities are a result of paying for an expense prior to the recognition of the expense.

Answer 1

False

Question 2

A common size balance sheet expresses each item on the balance sheet as a percentage of either total assets or total liabilities.

Answer 2

False

Question 3

Current assets include those assets expected to be converted into cash within one year or operating cycle.

Answer 3

True

Question 4

The straight-line depreciation method allocates an equal amount of depreciation expense to each year of the depreciation period.

Question 5

Consolidated statements are the combined financial statements of separate legal entities when the parent controls 100% of the subsidiary.

Question 6

A capital lease affects only the income statement.

Question 7

When analyzing accounts receivable and the allowance for doubtful accounts it is helpful to assess the relationship between the growth rates of sales, accounts receivable, and the allowance for doubtful accounts.

Question 8

Inventory valuation is based on an assumption regarding the flow of goods and has nothing to do with the actual order in which products are sold.

Question 9

Goodwill arises when one company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired.

Question 10

Companies that are paid in advance for services or products record a liability on the receipt of cash referred to as unearned revenue or deferred credits.

Question 11

A decline in accounts receivable when sales are increasing is a red flag that the firm is not collecting cash from its customers.

Question 12

Most manufacturing firms use the accelerated depreciation method while retailers use the straight-line depreciation method for financial reporting purposes.

Question 13

A deferred tax asset is recorded when expenses are recorded on the income statement but not allowed to be deducted for tax purposes until a later accounting period.

Question 14

Marketable securities are also referred to as short-term investments.

Question 15

Temporary differences are a result of recording revenues or expenses on financial statements in an accounting period different from when these items are recorded on the firm's tax return.

Question 16

Marketable securities should be valued at fair market value.

Question 17

Accounts payable are short-term obligations that arise from credit extended by suppliers for the purchase of goods and services.

Question 18

Accounts receivable are balances owed to suppliers.

Question 19

The balance sheet shows the financial position of a company n a particular date.

Question 20

Using FIFO during a period of inflation would result in net income being overstated relative to the LIFO method.

Question 21

Contingencies refer to the amounts owed by companies to settle lawsuits.

Question 22

Which of the following statements is true?

A) Land should be depreciated over the period of time it benefits the firm.
B) Accelerated depreciation must be used for financial reporting purposes.
C) Fixed assets are reported at historical cost plus accumulated depreciation.
D) The total amount of depreciation over the asset's life is the same regardless of depreciation method, although the rate of depreciation varies.

Question 23

Which type of firm would carry little or no inventory?

A) A manufacturing firm.
B) A retail firm.
C) A service firm.
D) A wholesale firm.

Question 24

What does the term "net realizable value" mean with regard to the accounts receivable account?

A) The gross amounts owed by customers for credit purchases.
B) Total accounts receivable plus an amount estimated for bad debts.
C) The allowance for doubtful accounts less bad debt expense.
D) Actual amounts of accounts receivable less an allowance for doubtful accounts.

Question 25

If a company chooses the LIFO method of inventory valuation, which inventory will appear as ending inventory on the balance sheet?

A) The last inventory purchased.
B) The first inventory purchased.
C) An average of all inventory purchased.
D) The actual inventory which has not been sold.

Question 26

The inventory of a retail company is comparable to which type of inventory of a manufacturing company?

A) Finished goods.
B) Work in process.
C) Supplies.
D) Raw materials.

Question 27

Which of the following would cause the recognition of a liability?

A) Credit extended by suppliers.
B) Receipt of cash in advance for services.
C) Recognition of expense prior to the actual payment of cash.
D) All of the above.

Question 28

Which item below does not describe a balance sheet?

A) Assets = Liabilities + Stockholders' Equity.
B) Financial position at a point in time.
C) Assets - Liabilities = Stockholders' Equity.
D) Assets + Liabilities = Stockholders' Equity.

Question 29

Items related to the quality of financial reporting on the balance sheet, such as off-balance-sheet financing, should be assessed when analyzing this financial statement.

Question 30

What causes the creation of a deferred tax account on the balance sheet?

A) Permanent differences in income tax accounting.
B) The use of the straight-line method of depreciation for both reporting and tax purposes.
C) Temporary differences in the recognition of revenue and expense for taxable income relative to reported income.
D) Municipal bond revenue and life insurance premiums on officers.

Question 31

The commitments and contingencies account listed on a balance sheet is meant to draw attention to the fact that required disclosures can be found in the notes to the financial statements.

Question 32

The retained earnings account is the sum of every dollar a company has earned since its inception, less any payments made to shareholders in the form of cash or stock dividends.

Question 33

The retained earnings account is increased (decreased) by net income (loss) and increased by dividends each year.

Question 34

What are current assets?

A) Assets purchased within the last year.
B) Assets which will be used within the next month.
C) Assets are the net working capital of the firm.
D) Assets expected to be converted into cash within one year or operating cycle.

Question 35

Which items would be classified as liabilities?

A) Accounts payable, unearned revenue, pension liabilities.
B) Common stock, retained earnings, bonds payable.
C) Commitments and contingencies, additional paid-in capital, notes payable.
D) Deferred taxes, accrued expenses, treasury stock.

Question 36

Which of the following items would not be considered when analyzing accounts receivable and allowance for doubtful accounts?

A) The relationship among changes in sales, accounts receivable and the allowance for doubtful accounts.
B) A comparison of actual write-offs relative to amounts recognized as bad debts.
C) The relationship between accounts receivable, inventory , and accounts payable.
D) An analysis of the "Valuation and Qualifying Accounts" schedule required in the Form 10-K.

Question 37

How are marketable securities valued on the balance sheet?

A) Historical cost.
B) At cost or fair value depending on how the securities are classified.
C) Market value.
D) At fair value with the difference between cost and fair value reported as revenue.

Question 38

Which of the following statements is false?

A) Goodwill arises when one company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired.
B) Goodwill should be depreciated.
C) Goodwill must be evaluated annually to determine if there has been a loss of value.
D) If the carrying value of goodwill exceeds the fair value, the excess book value must be written off as an impairment expense.

Question 39

Which of the following statements is false?

A) Annual reports must include three-year audited balance sheets and two-year audited income statements.
B) The balance sheet is prepared on a particular date.
C) Interim statements are generally prepared quarterly.
D) When a parent company owns more than 50% of the voting stock of a subsidiary, the financial statements are consolidated for both entities.

Question 40

Which of the following statements about a common-size balance sheet is true?

A) Each item on a common-size balance sheet is expressed as a percentage of sales.
B) The common-size balance sheet reveals the composition of expenses relative to revenues.
C) The common-size balance sheet reveals the capital and debt structure of the firm.
D) Each item on a common-size balance sheet is expressed as a percentage of net income.

Question 41

Which statement best describes the retained earnings account?

A) The retained earnings account is equal to the cash account less dividends paid.
B) Retained earnings are funds a company has chosen to reinvest in the operations of a business rather than pay out to stockholders in dividends.
C) Retained earnings represent unused cash of the firm.
D) The retained earnings account is the measurement of all distributed earnings.