Deck 2: A Further Look at Financial Statements

Question 1

The investment classification on the statement of financial position normally includes investments that are intended to be held for a short period of time (less than one year).

Answer 1

False

Question 2

Cash and office supplies are both classified as current assets.

Answer 2

True

Question 3

The main difference between intangible assets and property, plant, and equipment is the length of the asset's life.

Answer 3

False

Question 4

Inventories and prepaid expenses are classified as long-term investments.

Question 5

Identify and calculate ratios for analyzing a company's liquidity, solvency, and profitability.

Question 6

All long-lived assets including land have estimated useful lives over which they are expected to generate revenue.

Question 7

Describe the framework for the preparation and presentation of financial statements.

Question 8

Mortgages and pension liabilities are examples of non-current liabilities.

Question 9

All long-lived assets are depreciated over their estimated useful lives.

Question 10

Shareholders' equity consists of two parts: common and preferred shares.

Question 11

Intracompany comparisons are based on comparisons with competitors in the same industry.

Question 12

Identify the sections of a classified statement of financial position.

Question 13

Long-term investments appear in the property, plant, and equipment section of the statement of financial position.

Question 14

A liability is normally classified as a current liability if it is to be paid within the coming year.

Question 15

Shareholders' equity is divided into at least two parts: share capital and retained earnings.

Question 16

The statement of financial position is normally presented as follows, when ordered in order of liquidity: Current assets, current liabilities, non-current assets, non-current liabilities, and shareholders' equity.

Question 17

The statement of financial position is normally presented as follows, when ordered in order of reverse liquidity: Non-current assets, current assets, shareholders' equity, non-current liabilities, and current liabilities.

Question 18

Listing assets and liabilities in reverse order of liquidity is not permitted in Canada.

Question 19

Special rights and privileges that provide a future economic benefit to the company are classified as intangible assets.

Question 20

Calculating financial ratios can give clues to underlying conditions that may not be noticed by examining each financial statement item separately.

Question 21

The price-earnings ratio is a measure of liquidity.

Question 22

Analysis of financial statements is enhanced with the use of comparative data.

Question 23

A single ratio by itself is not very meaningful.

Question 24

All companies, regardless of size, should have a current ratio of at least 2:1.

Question 25

Solvency ratios measure the short-term ability of the company to pay its maturing obligations.

Question 26

Liquidity ratios are concerned with the frequency and amounts of dividend payments.

Question 27

The debt to total assets ratio measures the percentage of assets financed by creditors rather than shareholders.

Question 28

Working capital is the difference between total assets and current liabilities.

Question 29

The current ratio is calculated by dividing total assets by total liabilities.

Question 30

From a creditor's point of view, the higher the total debt to total assets ratio, the lower the risk that the company may be unable to pay its obligations.

Question 31

Solvency ratios measure the entity's ability to survive over a long period.

Question 32

Earnings per share is frequently compared across companies in the same industry.

Question 33

The current ratio takes into account the composition of current assets.

Question 34

The most liquid resource is inventory.

Question 35

The excess of current assets over current liabilities is called working capital.

Question 36

Earnings per share is the only ratio that must be presented in the financial statements for publicly traded companies.

Question 37

A current ratio of 1.2 to 1 indicates that a company's current assets exceed its current liabilities.

Question 38

The price-earnings ratio is calculated by dividing the market price per share by the earnings per share.

Question 39

Earnings per share is calculated by dividing profit for the period by the dollar value in the common shares account.

Question 40

Profitability means having enough funds on hand to pay debts when they fall due.

Question 41

Information has predictive value if it helps users confirm or correct their previous predictions.

Question 42

The conceptual framework is fundamentally similar for both Canadian publicly traded companies and Canadian private companies.

Question 43

The two fundamental qualitative characteristics are faithful representation and relevance.

Question 44

Faithful representation means that accounting information must be complete, neutral, and free from material error.

Question 45

The objective of financial reporting is to provide financial information about a company that is useful to existing and potential investors, lenders, and other creditors in making decisions about providing resources to the company.

Question 46

The two fundamental qualitative characteristics are relevance and timeliness.

Question 47

Canada has adopted International Financial Reporting Standards for publicly traded companies.

Question 48

Materiality and relevance are both defined in terms of what influences or makes a difference to a decision maker.

Question 49

Comparability in accounting means that a company uses the same generally accepted accounting principles from one accounting period to the next.

Question 50

The higher the price-earnings ratio, the higher are investors' expectations of the company's future profitability.

Question 51

Having a conceptual framework of accounting ensures that standards and practices are clear and consistent.

Question 52

Enhancing qualitative characteristics include timeliness and comparability.

Question 53

Consistency aids comparability when a company uses the same accounting principles and methods from year to year or when companies with similar circumstances use the same accounting principles.

Question 54

In order for information to be relevant, it must be reported on a timely basis.

Question 55

Accounting information does not have to be understood by the average user with a general business background in order to be useful.

Question 56

Information is relevant if it will make a difference in a user's decision(s).

Question 57

Financial reporting does not have to present the economic substance of a transaction in order to provide a faithful representation of what really happened.

Question 58

The objective of financial reporting is to provide financial information that is useful to all types of internal and external users in making decisions.

Question 59

Under the going concern assumption, reporting assets, such as land, at their cost may be more appropriate than reporting land at its fair value.

Question 60

Companies using Accounting Standards for Private Enterprises (ASPE) are not required to present earnings per share information in their financial statements.

Question 61

Information has verifiability if the information is comparable.

Question 62

If a company is not a going concern, the classification of its assets and liabilities does not matter.

Question 63

The cost constraint ensures that information costs less than budget.

Question 64

A conceptual framework is still under development for companies using International Financial Reporting Standards (IFRS).

Question 65

The cost basis of accounting states that assets and liabilities should be recorded at their cost not only when originally acquired, but also during the time the entity holds them.

Question 66

The going concern assumption states that the business will continue in operation for the foreseeable future.

Question 67

Fair values may not always be representationally faithful.

Question 68

Qualitative characteristics help ensure that the information provided in financial statements is useful.

Question 69

Using a simplified version of Canadian GAAP for small companies in order to reduce the cost of providing financial information is an example of the application of materiality.

Question 70

The fair value basis of accounting states that all assets and liabilities can be reported at fair value.

Question 71

Comparability and understandability are examples of enhancing qualitative characteristics.

Question 72

Elements of financial statements include assets, equity, and expenses, but not liabilities.

Question 73

The cost constraint ensures that the value of information provided is greater than the cost of providing it.

Question 74

Two recognition principles are the fair value basis of accounting and the going concern assumption.

Question 75

Two measurement principles are historical cost and fair value.

Question 76

A current asset is
(a)the last asset purchased by a business.
(b)an asset which is not currently being used to produce a product or service.
(c)usually found as a separate classification in the income statement.
(d)expected to be converted to cash or used in the business within a relatively short period of time.

Question 77

On a classified statement of financial position, prepaid expenses are classified as
(a)a current liability.
(b)property, plant, and equipment.
(c)a current asset.
(d)a long-term investment.

Question 78

The going concern assumption underlies the preparation of financial statements.

Question 79

In general, standard setters require that most assets be recorded using historical cost because cost is representationally faithful.

Question 80

In order to compare the financial statements of different companies, it would be desirable to have each company develop its own set of accounting rules and practices.