Question 1

In order for an asset to be reported on the balance sheet, it must be owned or controlled by the company and be expected to provide future benefits.

Accepted Answer

An asset is reported on the balance sheet if it is owned or controlled by the company and is expected to provide future economic benefits through its use or eventual sale.

Question 2

Assets are reported on the balance sheet at their current market value.

Accepted Answer

Assets are typically reported on the balance sheet at their historical cost, not their current market value, although there are exceptions depending on the accounting standards being applied (e.g., fair value accounting under certain conditions).

Question 3

The book value of stockholders' equity (the amount reported on the balance sheet) is most typically equal to the market value of the equity of a company.

Accepted Answer

The book value of stockholders' equity, which is calculated based on historical costs minus liabilities, often differs from the market value of equity, which is determined by the current stock price multiplied by the number of outstanding shares, reflecting investor perceptions and future earnings potential.

Question 4

Assets are listed on the balance sheet in order of liquidity and liabilities are listed in order of maturity.

Accepted Answer

Assets on a balance sheet are indeed listed in order of liquidity, starting with the most liquid assets like cash and accounts receivable, and moving towards less liquid assets like inventory and fixed assets. Similarly, liabilities are listed in order of their maturity, beginning with short-term liabilities that are due within a year, and progressing to long-term liabilities that are due in more than a year.

Question 5

In addition to purchased assets like inventories and equipment, companies also may report on their balance sheets intangible assets such as the value of a brand name.

Accepted Answer

Intangible assets, including brand names, are recognized on the balance sheet if they provide future economic benefits to the company and can be measured reliably. These assets lack physical substance but are valuable resources to the company.

Question 6

Liabilities and equities are both claims against the assets of a company.

Accepted Answer

Liabilities represent what a company owes to outsiders, while equities represent the owners' claim on the assets after all liabilities have been paid off. Both are indeed claims against the company's assets.

Question 7

A customer's prepayment for services not yet rendered is initially recorded as unearned revenue (a liability). Then, at the end of the accounting period, the unearned revenue is moved from the balance sheet to the income statement. This is an example of the revenue recognition principle.

Accepted Answer

Unearned revenue is initially recorded as a liability, but it is recognized as revenue on the income statement gradually as the services are rendered or goods are delivered, not moved in total at the end of the accounting period. This process aligns with the revenue recognition principle, which states that revenue is recognized when earned, regardless of when the cash is received.

Question 8

According to the revenue recognition principle, companies are required to record revenue when cash is received as this provides the most objective evidence for the auditors.

Accepted Answer

The revenue recognition principle requires companies to record revenue when it is earned and realizable, not necessarily when cash is received. This principle is part of accrual accounting and ensures that revenue is matched with the expenses incurred to generate that revenue, providing a more accurate picture of a company's financial performance.

Question 9

Under accrual accounting principles, the cost of inventory should be reported as an expense in the income statement when it is sold, regardless of when it was purchased.

Accepted Answer

Under accrual accounting, expenses are matched with the revenues they help to generate, so the cost of inventory is recognized as an expense (Cost of Goods Sold) in the period the inventory is sold, not necessarily when it was purchased.

Question 10

The statement of cash flows has three main sections: cash flows from operating activities, cash flows from investing activities, and cash flows from capital activities.

Accepted Answer

The statement of cash flows has three main sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities, not "capital activities."

Question 11

Articulation refers to the concept that financial statements are linked to each other and linked across time.

Accepted Answer

Articulation refers to the interconnectedness of financial statements, where the elements of one statement affect or are affected by those of another, and how these relationships persist over time, ensuring consistency and coherence in financial reporting.

Question 12

The income statements of the prior and current year are linked via the balance sheet.

Accepted Answer

The income statement and the balance sheet are related but not directly linked in a sequential manner from one year to the next. The income statement reports a company's financial performance over a specific period, showing revenue, expenses, and net income. The balance sheet, on the other hand, is a snapshot of a company's financial position at a specific point in time, showing assets, liabilities, and equity. While the net income from the income statement affects the equity section of the balance sheet, the income statements of the prior and current year are not linked through the balance sheet. Instead, each year's income statement stands on its own, reporting the financial performance for that year.

Question 13

Retained earnings articulate across time which means that last period's retained earnings plus current period net income (or loss) is equal to the current period's retained earnings.

Accepted Answer

The answer of Retained earnings articulate across time which means...

Question 14

All companies must file with the SEC a detailed annual report and discussion of their business activities in their Form 10-K.

Accepted Answer

The answer of All companies must file with the SEC...

Question 15

A publicly traded company must file a Form 8-K with the SEC within four business days following a change in its certified public accounting firm.

Accepted Answer

A publicly traded company is required to file a Form 8-K with the SEC to announce significant events that shareholders should know about, including a change in the company's certified public accounting firm, within four business days of the event.

Question 16

In 2016, Southwest Airlines had negative net working capital of $(2,346) million and current assets of $4,498 million.
The firm's current liabilities are:
A) $2,152 million
B) $6,844 million
C) $2,346 million
D) $5,236 million
E) There is not enough information to calculate the amount.

Accepted Answer

Net working capital is calculated as current assets minus current liabilities. Given that Southwest Airlines had negative net working capital of $(2,346) million and current assets of $4,498 million, we can set up the equation $4,498 million - Current Liabilities = -$(2,346) million. Solving for Current Liabilities gives us $6,844 million.

Question 17

In 2016, Delphi Automotive PLC had current assets of $5,419 million and current liabilities of $4,148 million.
The firm's net working capital is:
A) $ 1,271 million
B) $ 5,419 million
C) $ (1,271) million
D) $ 9,567 million
E) None of the above

Accepted Answer

Net working capital is calculated as current assets minus current liabilities. Therefore, $5,419 million - $4,148 million = $1,271 million.

Question 18

In 2016, Kohl's Corporation had net working capital of $2,273 million and current liabilities of $2,974 million.
The firm's current assets are:
A) $ 8,221 million
B) $ (8,221) million
C) $ 5,247 million
D) $ 2,974 million
E) None of the above

Accepted Answer

Net working capital is calculated as current assets minus current liabilities. Given that Kohl's Corporation had net working capital of $2,273 million and current liabilities of $2,974 million, their current assets would be $2,273 million + $2,974 million = $5,247 million.

Question 19

Which of the following is included as a component of stockholders' equity?
A) Buildings
B) Retained earnings
C) Prepaid property taxes
D) Accounts payable
E) Dividends

Accepted Answer

Retained earnings represent the cumulative amount of net income earned by a company that is retained by the company rather than distributed to its shareholders as dividends. This makes it a component of stockholders' equity, reflecting the company's reinvested earnings.

Question 20

Interest expense appears in which financial statement?
A) Statement of stockholders' equity
B) Balance sheet
C) Income statement
D) Statement of cash flows
E) All of the above

Accepted Answer

Interest expense is reported on the income statement as it is a cost incurred by a company for borrowed funds.

Quiz 2: Introducing Financial Statements