Deck 4: Structure of the Balance Sheet and Statement of Cash Flows

Question 1

Capital structure refers to how much of an entity's assets are financed by retained earnings versus by issuing new shares of stock.

Answer 1

False

Question 2

Liquidity refers to the ability of a company to generate sufficient cash flows to maintain its productive capacity and still meet interest and principal payments on long-term debt.

Answer 2

False

Question 3

Net accounts receivable is carried on the balance sheet at expected net realizable value,not at original historical cost.

Answer 3

True

Question 4

The balance sheet provides critical information for understanding an entity's capital structure.

Question 5

The elapsed time beginning with the initiation of production and ending with the cash collection of the receivables from the sale of the product refers to the company's production cycle.

Question 6

On a common-size balance sheet,each balance sheet account is expressed as a percentage of net assets.

Question 7

The Retained Earnings account is comprised of the cumulative earnings less dividends since the inception of the corporation.

Question 8

For companies whose transactions were all in dollars,cash is carried on the balance sheet at its current market value instead of its historical cost.

Question 9

For companies having monetary assets denominated in foreign currency units,these assets are converted into dollars at the historical rate of exchange that was in effect at the time of the foreign currency inflow.

Question 10

Balance sheets typically contain both "noncurrent liability" and "long-term obligation" sections.

Question 11

A firm with most of its assets invested in manufacturing facilities has considerable operating flexibility.

Question 12

On balance sheets prepared in accordance with U.S.GAAP items are generally disclosed in ascending order of liquidity.

Question 13

Inventories are reported on the balance sheet at historical cost.

Question 14

The balance sheet is an expression of the accounting equation.

Question 15

Liabilities are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.

Question 16

The balance sheet provides critical information for understanding an entity's profitability.

Question 17

The Common Stock account is reported on the balance sheet at the current market price of the stock.

Question 18

Current liabilities are liabilities expected to be settled after twelve months or one operating cycle if it is longer.

Question 19

Under U.S.GAAP,current assets are generally listed on the balance sheet in descending order of liquidity.

Question 20

An important decision in corporate finance is determining the proper mix of debt and equity financing.

Question 21

Investing activities include the cash effects of selling stocks and bonds to raise capital to purchase fixed assets.

Question 22

The cash flow statement explains why a firm's cash position has changed between successive balance sheet dates while simultaneously explaining the changes that have taken place in the firm's noncash asset,liability,and stockholders' equity accounts over the same period.

Question 23

The change in cash during a period is equal to the net income for the period.

Question 24

A related party transaction occurs when a company enters into a transaction with individuals or other companies that are connected in some way with it or its management.

Question 25

It is permissible for a firm that reports in accordance with IFRS to emphasize its liquidity by placing current assets and current liabilities in close proximity to one another on the balance sheet.

Question 26

The Summary of Significant Accounting Policies would contain an explanation of the company's revenue recognition policies.

Question 27

The Summary of Significant Accounting Policies explains the important accounting choices that the reporting entity uses to account for selected transactions and accounts.

Question 28

Subsequent events are required to be disclosed if they are material and likely to influence investors' appraisal of the risk and return prospects of the reporting entity.

Question 29

Firms that use International Financial Reporting Standards (IFRS)are required to order assets and liabilities from least liquid to most liquid on the statement of financial position.

Question 30

To facilitate global capital flows,balance sheet format and terminology used in most other countries is the same as that used under U.S.GAAP.

Question 31

Changes in a firm's cash position between successive balance sheet dates result only from the firm's operating activities.

Question 32

Operating activities result from the cash effects of producing and delivering goods and services.

Question 33

The statement of cash flows shows the user why a firm's investments and financial structure have changed between two balance sheets dates.

Question 34

The sale of fixed assets represents an investing activity.

Question 35

Issuing capital stock for cash represents an investing activity.

Question 36

Paying dividends to stockholders represents a financing activity.

Question 37

Events that occur after the financial statements are issued are referred to as subsequent events.

Question 38

It is not unusual for a start-up company to experience total negative cash flows.

Question 39

Early in 2015,a plant manager at one of ABC Corporation's 19 manufacturing facilities suffered a fatal heart attack.This information would normally be disclosed by ABC in notes to its 2014 financial statements.

Question 40

Large amounts of high interest debt on a company's balance sheet signal an ability to take advantage of profitable investment opportunities when they arise because the borrowed funds are available for use by management.

Question 41

Probable future sacrifices of economic benefits arising from an entity's present obligations to transfer resources or provide services to other entities in the future as a result of past transactions or events define

A)assets.
B)liabilities.
C)equity.
D)retained earnings.

Question 42

Under the direct method to cash flow statement preparation,net cash flows from operations is arrived at by adjusting income for the differences between accrual-basis revenues and expenses and cash inflows and outflows during the period.

Question 43

The balance sheet provides information on all of the following except

A)how management invested its money.
B)where the money came from.
C)assessing rates of return.
D)the market price of the company's stock.

Question 44

The residual interest in the resources of an entity that remains after deducting its debts to third parties defines

A)assets.
B)liabilities.
C)equity.
D)retained earnings.

Question 45

By comparing return on assets to return on common equity,statement users can determine

A)if debt financing is being used to enhance the return earned by shareholders.
B)past patterns of profitability within divisions.
C)if return on investments exceed the current market yield.
D)management's investment strategies.

Question 46

How far into the future the obligations of a company will come due refers to the company's

A)capital structure.
B)maturity structure.
C)solvency.
D)liquidity.

Question 47

Operating and financial flexibility refers to a company's ability to

A)adjust to unexpected downturns in the economic environment in which it operates or to take advantage of profitable investment opportunities as they arise.
B)generate sufficient cash flows to maintain its productive capacity and still meet interest and principal payments on long-term debt.
C)readily convert assets to cash relative to how soon liabilities will have to paid in cash.
D)increase sales.

Question 48

Most companies report their cash flow from operating activities using the direct method.

Question 49

Probable future economic benefits obtained or controlled by an entity as a result of past transactions or events define

A)assets.
B)liabilities.
C)equity.
D)retained earnings.

Question 50

Cash collected from customers can be derived by appropriately adjusting revenue for changes in accounts receivable.

Question 51

Cash paid to suppliers can be derived by adjusting costs of goods sold for changes in inventory.

Question 52

IFRS requires companies to use the direct method of reporting cash flow from operating activities because the direct method provides information not available under the indirect method.

Question 53

When adjusting accrual earnings to obtain cash flows from operations,an increase in Prepaid Rent Expense is subtracted to arrive at cash flow from operations.

Question 54

Under U.S.GAAP,cash interest from investments is reported on the statement of cash flows as part of investing activities whereas under IFRS,cash interest from investments is reported as part of financing activities.

Question 55

When adjusting accrual earnings to obtain cash flows from operations,an increase in Accounts Payable is added to arrive at cash flow from operations.

Question 56

Depreciation is subtracted from net income in arriving at a firm's cash flow from operations under the indirect method to cash flow statement preparation.

Question 57

How much of a company's assets are financed from debt versus equity sources refers to the company's

A)capital structure.
B)maturity structure.
C)solvency.
D)liquidity.

Question 58

Depreciation is added back to net income to determine cash from operating activities under the indirect method.

Question 59

Which of the following measures how readily assets can be converted to cash relative to how soon liabilities will have to be paid in cash?

A)capital structure.
B)maturity structure.
C)solvency.
D)liquidity.

Question 60

Investment analysts often compare cash flows from operations across two or more companies.

Question 61

The unpaid amount of income taxes due to the government for a given year are found on the

A)balance sheet in the account Deferred Income Taxes.
B)balance sheet in the account Income Taxes Payable.
C)income statement in the account Income Tax Expense Current.
D)income statement in the account Income Tax Expense DeferreD.

Question 62

The value of Accounts Receivable is adjusted on the balance sheet by the contra-asset account

A)Allowance for Amortization.
B)Allowance for Doubtful Accounts.
C)Bad Debt Expense.
D)Doubtful Accounts Expense.

Question 63

Cash is always measured for the balance sheet at

A)future transaction value.
B)current market value.
C)realizable future value.
D)net transaction value.

Question 64

Marketable debt and equity securities that a firm expects to hold as a short-term investment are reported on the balance sheet at

A)current market value.
B)historical cost.
C)amortized current market value.
D)amortized historical cost.

Question 65

Monetary assets are comprised of

A)cash and cash equivalents.
B)cash,cash equivalents,and accounts receivable.
C)cash,cash equivalents,accounts receivable,and notes receivable.
D)cash,accounts receivable,notes receivable,and inventory.

Question 66

The Common Stock account is reported on the balance sheet at the

A)historical par value of the stock.
B)current market value of the stock.
C)net realizable value of the stock.
D)discounted present value of the future dividends.

Question 67

Current liabilities are reported on the balance sheet at

A)current market value.
B)historical cost.
C)discounted present value.
D)future value.

Question 68

Retained earnings are reported on the balance sheet at

A)historical cost.
B)current market value.
C)net realizable value.
D)a mixture of different measurement bases.

Question 69

Common-size balance sheets may be used for all of the following except

A)gaining insights into the nature of a company's operations.
B)analyzing a company's asset and financial structure.
C)determining how management assesses the risks a company faces.
D)learning about the underlying economics of an industry.

Question 70

Balance sheets prepared in compliance with U.S.GAAP reflect a mixture of

A)historical cost and future cash values.
B)current value and discounted future cash flows.
C)discounted cash flows and future values.
D)historical cost,fair value,net realizable value,and discounted present values.

Question 71

Net property,plant and equipment are reported on the balance sheet at

A)current market value.
B)historical cost.
C)historical cost minus accumulated depreciation.
D)net realizable value.

Question 72

In a common-size balance sheet,each balance sheet account is expressed as a percentage of total

A)liabilities.
B)assets.
C)shareholders' equity.
D)assets plus shareholders' equity.

Question 73

The amount of income taxes recognized on the income statement but not yet payable to the government are found on the

A)balance sheet in the account Deferred Income Taxes.
B)balance sheet in the account Income Taxes Payable.
C)income statement in the account Income Tax Expense Current.
D)income statement in the account Income Tax Expense DeferreD.

Question 74

The Retained Earnings account is comprised of

A)cash retained in the business.
B)cash reinvested in the business by shareholders.
C)the cumulative earnings less dividends since the inception of the corporation.
D)the earnings of the corporation for the current year.

Question 75

Under U.S.GAAP,assets are presented in decreasing order of liquidity.Under IFRS,

A)fixed assets may be presented first followed by the current assets displayed in increasing order of liquidity.
B)the current assets are displayed in increasing order of liquidity.
C)investments are listed first in descending order of maturity.
D)a company may present its assets in alphabetical order if it so desires.

Question 76

Current assets are assets expected to

A)be converted to cash within twelve months.
B)be converted to cash within twelve months or one operating cycle if it is longer than twelve months.
C)remain on the books for at least twelve months.
D)remain on the books for at least twelve months or one operating cycle if longer than twelve months.

Question 77

The balance sheet amount reported for a long-term debt on the issue date is the

A)discounted present value of the future principal repayment.
B)discounted present value of the periodic interest payments.
C)sum of the future value of principal repayment and the periodic interest payments.
D)sum of the discounted present values of the future principal repayments and the periodic interest payments.

Question 78

The Additional Paid-In Capital account is reported on the balance sheet at the

A)current market value of the stock minus par value.
B)historical sales price of the stock minus the par value.
C)net realizable value of the stock minus par value.
D)discounted present value of the future dividends minus par value.

Question 79

Inventories are reported on the balance sheet at

A)current market value.
B)historical cost.
C)net realizable value.
D)the lower of cost or market.

Question 80

Long-term debt is reported on the balance sheet at

A)current market value.
B)net realizable value.
C)discounted present value.
D)future value.