Deck 4: The Balance Sheet and the Statement of Shareholders Equity

Question 1

Intercompany comparison is used to evaluate a company's performance against key competitors within related industries or fields.

Answer 1

True

Question 2

The elements of the income statement, revenues, expenses, gains and losses are measured by changes in cash inflows and outflows.

Answer 2

False

Question 3

Derivative financial instruments must be reported as either assets or liabilities on the balance sheet and be measured at their net realizable value.

Answer 3

False

Question 4

Mark to Market is another name for fair value accounting which has becoming increasingly popular with U.S. GAAP for the valuation of gains and losses associated with assets and liabilities.

Question 5

The ordering of the financial statements are similar under U.S. GAAP and IFRS, assets are listed based upon liquidity, current and then long term.

Question 6

Which statement is false?

A) The balance sheet of an entity purports to show the true value of the entity.
B) The balance sheet should show a company's liquidity.
C) The balance sheet reflects the financial capital of a company.
D) The balance sheet summarizes the financial position of an entity at a point in time.

Question 7

What is the three step process necessary to report the elements of the balance sheet?

A) identify, measure, and record
B) record, measure, and report
C) identify, measure, and report
D) review, record, and report

Question 8

Under IFRS "capital and reserves" includes capital stock, additional paid-in capital, and retained earnings.

Question 9

The elements of the financial statements are defined in FASB Statement of Financial Accounting Concepts No. 8.

Question 10

The SEC requires listed companies to report changes in shareholder's equity as a separate disclosure, whereas smaller companies can report changes in a supporting schedule or as note in the financial statements.

Question 11

The cash surrender value of a life insurance policy would be considered a long-term investment.

Question 12

A distribution to owners includes paying dividends, repurchasing common shares, transferring assets to the company, rendering services, and incurring liabilities.

Question 13

A balance sheet shows the

A) fair value of a company at a particular date
B) results of the company's income-producing activities
C) financial position of a company at a particular date
D) cash inflows and outflows of a company for the accounting period

Question 14

Accounts Payable Turnover in Days and Inventory Turnover in Days are considered liquidity capability ratios.

Question 15

What statement does not report the changes in financial position of the company?

A) income statement
B) balance sheet
C) statement of cash flows
D) statement of shareholders' equity

Question 16

In order for an asset to be capitalized it must meet one of these three criteria: control, acquisition, and future benefit.

Question 17

GAAP requires disclosures relating to asset allocation and revenue recognition, any deviations from the acceptable norm must be disclosed.

Question 18

Trademarks or acquired brand names are not amortized but are reviewed annually for impairment.

Question 19

The balance sheet reports the financial position of a company at a specific date in time whereas the other three financial statements report changes in the financial position of the company.

Question 20

FASB's definition of fair value is characterized as a measure of market-based entry value, which would be the amount a company paid to acquire the asset.

Question 21

Which of the following is not a characteristic of a liability?

A) It involves a responsibility to another entity.
B) The company has little or no discretion to avoid the future sacrifice.
C) The sacrifice contributes directly or indirectly to the company's future cash inflows.
D) The transaction obligating the company has already occurred.

Question 22

Which is not a characteristic of an asset?

A) The resource must be useful only in the entity's activities and have been acquired by purchase, production, or stockholder investment.
B) The entity must be able to obtain the future benefit and control others' access to it.
C) The transaction or event giving rise to the entity's right to or control over the benefit must have already occurred.
D) The resource must singly, or in combination with other resources, have the capacity to contribute directly, or indirectly, to the entity's future net cash inflows.

Question 23

The amount of cash (or equivalent) that currently would be required to replace the service capacity of the asset is called the asset's

A) historical cost
B) current replacement cost
C) current exit value
D) present value

Question 24

The valuation method primarily used in the balance sheets of business entities is

A) current exit value
B) historical cost
C) present value
D) net realizable value

Question 25

The residual interest in a company's assets is represented by its

A) net assets
B) shareholders' equity
C) ownership interest
D) all of these choices

Question 26

Which statement is false?

A) To be a liability, the transaction or event obligating the entity must already have occurred.
B) The net worth of an entity is equal to its assets.
C) The specific identity of the "creditor" need not be known with certainty for a liability to exist.
D) Shareholders' equity may not exist apart from the corporate assets and liabilities.

Question 27

The measurement of an asset's value that considers the discounted future cash inflows (and outflows) relating to the asset is called the

A) net realizable value
B) future value
C) historical value
D) present value

Question 28

GAAP disclosures for fair value measurements now require that fair value measurements using Level 3 inputs include all of the following except

A) the valuation technique used to measure the fair value
B) a reconciliation of the Level 3 values to each of the corresponding Level 1 and Level 2 values that were not chosen
C) a reconciliation of the changes in fair value during the period
D) a related discussion

Question 29

Which of the following assets is most likely reported at its historical cost on the balance sheet?

A) short-term investments
B) merchandise inventory
C) net accounts receivable
D) prepaid insurance

Question 30

Probable future sacrifices of economic benefits arising from past transactions or events are

A) liabilities
B) revenues
C) assets
D) retained earnings

Question 31

To be recognized in the financial statements, an item must meet the definition of an element and be

A) measurable, understandable, and relevant
B) reliable, measurable, and realized
C) realized, relevant, and reliable
D) relevant, measurable, and faithfully represented

Question 32

Current assets are cash or other assets that are reasonably expected to be converted into cash, sold, or consumed within one year or a normal operating cycle. An operating cycle is defined as the company's ability to spend cash

A) to pay off the company's liabilities
B) to acquire inventory, which is sold and returned to cash
C) to acquire inventory, which is sold to customers in the normal course of business
D) in the generation of services, which can result in an increase in revenue and net income from operations

Question 33

Which of the following characteristics must an economic resource have in order to be classified as an asset?

A) acquired as a result of a past transaction
B) future economic benefit potential
C) under the control of the business entity
D) all of these choices

Question 34

The balance sheet account that is usually reported at its fair market value is

A) short-term marketable securities
B) land
C) current liabilities
D) inventory

Question 35

Which of the following statements is false regarding the hierarchy of fair value measurements now provided in GAAP?

A) The hierarchy clarified the inputs a company is to use to measure fair value.
B) The valuation method selected must be consistent with the market approach, the income approach, or the cost approach.
C) The three levels of inputs provide defined priorities for sources of available inputs for valuation.
D) The hierarchy eliminates all subjectivity and estimation from the valuation process.

Question 36

If the shareholders' equity at the end of the accounting period is greater than the shareholders' equity at the beginning of the accounting period, the firm's

A) capital has increased
B) assets have increased
C) cash has increased
D) capital has been maintained

Question 37

Assume an asset is measured by the amount of cash (or its equivalent) into which it is expected to be converted in an orderly transaction between market participants on the date of measurement. Which measurement alternative is in use in this case?

A) fair value
B) historical cost
C) present value
D) reliable value

Question 38

All of the following items would appear on the balance sheet except

A) an investment in another company's bonds
B) an investment in marketable securities
C) a realized gain on the sale of a equipment
D) the premium related to a bond liability that is still two years from maturity

Question 39

The expected exit value is also referred to as the

A) fair value
B) present value
C) input value
D) current market value

Question 40

The primary attribute of all assets is service

A) potential
B) production
C) capacity
D) contribution

Question 41

On the balance sheet, treasury stock is classified as a

A) long-term investment account
B) contra shareholders' equity account
C) companion shareholders' equity account
D) contra asset account

Question 42

Changes in the separate shareholders' equity accounts can be disclosed in all of the following ways, except a

A) financial statement
B) note to the financial statements
C) parenthetical remark
D) supporting schedule

Question 43

A leased asset under capital lease is disclosed on the balance sheet at its

A) present value
B) historical cost
C) current replacement cost
D) net realizable value

Question 44

Which of the following would typically be recorded as an intangible asset with a finite useful life?

A) franchises
B) trademarks
C) brand name
D) goodwill

Question 45

In preparing a statement of changes in shareholders' equity, the company includes land given to a shareholder as a dividend. This transaction is included in the statement because it represents

A) an investment by a shareholder that increases equity
B) an investment by a shareholder that decreases equity
C) a distribution to a shareholder that increases equity
D) a distribution to a shareholder that decreases equity

Question 46

Cash equivalents are securities that

A) management intends to convert into cash within one year
B) have maturity dates of at least six months
C) management intends to convert into cash within the normal operating cycle
D) have maturity dates of three months or less

Question 47

Which of the following would not be classified as contributed capital?

A) additional paid-in capital
B) unrealized capital
C) common stock
D) preferred stock

Question 48

Which of the following is not included in comprehensive income?

A) net income
B) unrealized gains in the fair market value of equipment
C) foreign currency translation adjustments
D) certain pension plan gains (losses) and prior service cost adjustments

Question 49

A deficit occurs when a company's

A) retained earnings are less than its common stock
B) dividends distributed are greater than comprehensive income
C) dividends and cumulative losses are greater than cumulative net income
D) retained earnings are less than assets minus liabilities

Question 50

The FASB has suggested guidelines for developing homogenous classes of assets and liabilities. For assets, this can be accomplished by following guidelines that include reporting

A) assets according to their outside use for the corporation
B) all assets the same, regardless of the implications on a company's financial flexibility
C) the valuation of assets at their net realizable value
D) assets at their fair value

Question 51

Current liabilities would include all of the following except

A) wages payable
B) obligations under capital lease contracts
C) current portion of long-term debt
D) unearned rent revenue

Question 52

Justification for having both intangible assets and other assets listed on a balance sheet include that

A) intangible assets have no physical existence and other assets are deferred charges
B) having more items listed on the balance sheet improves the users' understanding of the company
C) the intangible assets are more important than the tangible assets
D) the other asset classification is important because goodwill cannot be amortized, so it needs to be recorded on the balance sheet

Question 53

Obligations that are not expected to require the use of current assets or the creation of other current liabilities within one year or the normal operating cycle, if longer than a year, are called

A) other liabilities
B) current liabilities
C) long-term liabilities
D) contingent liabilities

Question 54

State law may require that capital stock have which of the following values?

A) stated value
B) market value
C) no-par value
D) present value

Question 55

Which is classified as a long-term investment?

A) bond premium
B) cash surrender value of life insurance
C) operating lease
D) three-year prepaid rental

Question 56

Which of the following is typically recorded at its present value?

A) long-term investments
B) long-term liabilities
C) intangible assets
D) contingent liabilities

Question 57

Which of the following is least likely to be included in long-term liabilities?

A) obligations for future pension payments
B) capital leases payable
C) liabilities on options to sell stock
D) unearned revenues

Question 58

Which of the following liabilities is properly classified as a current liability?

A) currently maturing bonds payable that will be paid out of a fund accumulated for that purpose
B) short-term notes payable being refinanced with long-term notes
C) obligations that will be paid outside the operating cycle
D) obligations for goods and services that have entered the operating cycle

Question 59

Current liabilities are defined as obligations that will be paid

A) by refinancing through issuing new long-term liabilities
B) by using existing resources properly classified as current assets
C) out of a fund classified as a long-term investment
D) by using existing resources, regardless of their classification

Question 60

Which is a component of shareholders' equity?

A) sinking funds
B) deferred charges
C) accumulated other comprehensive income
D) goodwill

Question 61

Which of the following account titles are not allowed under GAAP?

A) Revaluation reserves
B) Provisions
C) Capital
D) Revaluation reserves and provisions

Question 62

All of the following are examples of subsequent events that would be disclosed in the footnotes to the financial statements except

A) fire or flood loss
B) a litigation settlement
C) a bond issuance after the balance sheet date
D) the write off of an uncollectible account

Question 63

A comparison of a company's performance with that of its own past results is known as

A) common-size analysis
B) intercompany analysis
C) ratio analysis
D) intracompany analysis

Question 64

A reader might find information about gain contingencies in an annual report by examining

A) a contingent account receivable
B) an accrued revenue
C) a deferred revenue
D) footnote disclosures

Question 65

The ease with which an asset can be converted into cash is termed

A) financial flexibility
B) liquidity
C) operating capability
D) capital maintenance

Question 66

Certain differences exist between IFRS and U.S. GAAP financial statement reporting. Which of the following is false?

A) IFRS presents a different ordering of the liabilities and shareholders' equity sections.
B) IFRS allows the upward revaluation of property, plant, and equipment.
C) IFRS does not require a statement of cash flows.
D) IFRS financial statements are similar to U.S. GAAP.

Question 67

Information about a company's operating capability may be helpful to external users in

A) assessing the uncertainty of its future cash flows
B) evaluating the timing of cash flows in the near future
C) evaluating the efficiency with which the company company uses its resources to generate revenue
D) assessing a return of investment as well as a return on investment

Question 68

Which statement is not true?

A) Not all obligations that become due and will be paid within the next accounting period are classified as current liabilities.
B) The components of working capital are disclosed on the balance sheet.
C) An increasing current ratio could result from decreasing liquidity.
D) An operating cycle is the average time taken by a company to convert receivables back into cash.

Question 69

Activities between affiliated entities such as subsidiaries must be disclosed in the financial statements of a corporation as

A) segment analysis
B) significant events
C) related party transactions
D) contingent activities

Question 70

A comparison of a company's performance with that of its competitors is known as

A) common-size analysis
B) intercompany comparison
C) ratio analysis
D) intracompany comparison

Question 71

Which of the following formulas represents working capital?

A) current assets - current liabilities
B) quick assets - current liabilities
C) current assets ¸ current liabilities
D) quick assets ¸ current liabilities

Question 72

A subsequent event is an event that occurs

A) after the annual report is issued
B) anytime after the end of the accounting period
C) between the end of the accounting period and the date the annual report is issued
D) anytime before the annual report is issued

Question 73

Selected information from a company's balance sheet follows: Working capital is

A) $250
B) $230
C) $220
D) $200

Question 74

The SEC requires comparative income statements and statements of cash flows for

A) two years
B) three years
C) four years
D) the SEC does not require comparative income statements and statements of cash flows

Question 75

The ability of a company to adapt its resources to create change and react to change is called

A) financial flexibility
B) return on investment
C) operating capability
D) risk

Question 76

A reader of a set of financial statements would expect to be able to find in the statement of changes in shareholders' equity increases

A) in total assets
B) in total liabilities
C) to net income
D) from comprehensive income

Question 77

Which of the following is included under the heading "Capital and reserves" for IFRS financial statements?

A) accumulated net profits or losses
B) common stock
C) additional paid-in capital
D) all of these choices

Question 78

Under IFRS, liabilities and shareholders' equity on the balance sheet usually appear in which order?

A) capital, noncurrent liabilities, and current liabilities
B) current liabilities, noncurrent liabilities, and capital
C) capital, current liabilities, and noncurrent liabilities
D) noncurrent liabilities, current liabilities, and capital

Question 79

GAAP requires that all derivative financial instruments be reported at their

A) historical cost
B) fair value
C) present value
D) par value

Question 80

The quantity of goods or services produced in a given period or the physical capacity of the operating assets used to produce goods or services are measures of

A) financial flexibility
B) liquidity
C) operating capability
D) leverage