Deck 4: Balance Sheet: Presenting and Analyzing Resources and Financing

Question 1

Realization is the presumption that a firm will remain in operation long enough to carry out its current plans.and in the normal course of its operations, realize changes in the fair values of its assets either by using those assets or selling them.

Answer 1

False

Question 2

The balance sheet amount of shareholders' equity does not, and is not intended to, provide the user of the financial reports with a measure of the market value of common equity.

Answer 2

True

Question 3

Authoritative accounting guidance precludes the recognition of some resources as assets and some obligations as liabilities.

Answer 3

True

Question 4

Historically, recognition has described a preference for financial reporting such "that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets."

Question 5

Accounting records all executory promises.

Question 6

The balance sheet does provides all the information an analyst wants or needs about a firm's resources and the claims on those resources.

Question 7

Investors would view measurements that reflect current conditions as the most relevant for making investment decisions.

Question 8

The principal objective of accounting reports as currently prepared is to present accurately the results of operations and the financial condition of the firm.

Question 9

Conservatism emphasizes the early recognition of losses and delayed recognition of gains.

Question 10

The current replacement cost of an asset is the amount a firm would have to pay to obtain another asset with identical service potential; it is an entry value that reflects economic conditions at the measurement date.

Question 11

The same asset can have different measurements for tax purposes, for financial reporting purposes, and for internal managerial decision-making purposes.

Question 12

Accounting does not normally recognize mutually unexecuted contracts as assets or liabilities.

Question 13

One can analyze the financial health of a business from a single financial statement considered in isolation such as the balance sheet.

Question 14

The amounts reported on the balance sheet for assets, liabilities, and shareholders' equity reflect current market conditions.

Question 15

The balance sheet portrays the effects of a firm's investing and financing decisions.

Question 16

The amounts that firms report as received from owners are equal to the amounts the firm received when it originally issued the shares of stock.

Question 17

Shareholders' equity is a residual interest or claim-that is, the owners (shareholders) of a firm have a claim on assets not required to meet the claims of creditors.

Question 18

A potential investor can easily ascertain market value of common equity for a given publicly traded firm by looking up the most recent share price (as reported in various online services) and then multiplying this share price times the number of common shares outstanding, as reported on the balance sheet.

Question 19

Depreciation allocates the asset's cost to the periods of benefit in some systematic and rational way, and it attempts to track changes in the asset's fair value.

Question 20

Acquisition cost includes all costs required to prepare an asset for its intended use.

Question 21

Both U.S.GAAP and IFRS require reporting that results in the more conservative measurement of earnings.

Question 22

Which of the following is/are true?

A)Not all future benefits qualify as assets.
B)All assets provide future benefits.
C)Not all future benefits are assets.
D)Answers a, b, and c are correct.
E)None of these answer choices is correct.

Question 23

Which of the following is a measurement attribute used in U.S.GAAP to measure inventories whose usefulness (typically, in terms of salability) to the firm has declined below the cost of the inventories?

A)Current Replacement Cost
B)Net Realizable Value
C)Fair Value
D)Present Value of Future Net Cash Flows
E)Acquisition cost

Question 24

The balance sheet perfectly describes both resources and financing (claims on those resources).

Question 25

The criteria for asset recognition include(s):

A)the firm owns or controls the right to use the item.
B)the right to use the item arises as a result of a past transaction or exchange.
C)the future benefit has a relevant measurement attribute that can be quantified with sufficient reliability.
D)Answers a, b and c are correct.
E)None of these answer choices is correct.

Question 26

IFRS defines _____ as a current exchange value, which can mean either a current entry price or a current exit price.

A)Current Replacement Cost
B)Net Realizable Value
C)Fair Value
D)Present Value of Future Net Cash Flows
E)Acquisition cost

Question 27

What is a probable future economic benefit that a firm controls because of a past event or transaction?

A)asset
B)liability
C)shareholders' equity
D)revenue
E)expense

Question 28

In assessing the financial condition of a firm, an astute analyst recognizes that historical costs are reflected on the balance sheet and adjusts the reported numbers.

Question 29

In IFRS, "probable" as recognition criterion for liabilities with uncertain amount and/or timing means "more likely than not"-approximately 51%.

Question 30

_____ is the net cash (selling price less selling costs) that the firm would receive if it sold the asset today, in orderly fashion in an arm's-length transaction. It is an example of an exit value, because it reflects a price that the firm would receive in a transaction in which an asset leaves the firm.

A)Current Replacement Cost
B)Net Realizable Value
C)Fair Value
D)Present Value of Future Net Cash Flows
E)Acquisition cost

Question 31

The _____ of an asset is the amount a firm would have to pay to obtain another asset with identical service potential; it is an entry value that reflects economic conditions at the measurement date.

A)Current Replacement Cost
B)Net Realizable Value
C)Fair Value
D)Present Value of Future Net Cash Flows.
E)Acquisition cost

Question 32

In the recognition criteria for liabilities with uncertain amount and/or timing, "probable" is used in U.S.GAAP to refer to a relatively high threshold of likelihood-a rule of thumb used in practice is approximately 80%.

Question 33

Balance sheets based on U.S.GAAP and IFRS omit some items and measure others with bias, relative to measurements based on current economic conditions.

Question 34

Firms that use International Financial Reporting Standards (IFRS) may, but need not list their assets from least liquid to most liquid, with the same ordering used to list liabilities.

Question 35

Applying asset and liability definitions and recognition criteria under U.S.GAAP and IFRS results in the balance sheet including all economic benefits (resources) and obligations.

Question 36

A balance sheet prepared according to U.S.GAAP lists assets from most liquid to least liquid, where liquid refers to the ease of converting the asset into cash.

Question 37

Which of the following terms describes the presumption that a firm will remain in operation long enough to carry out its current plans, and will, in the normal course of its operations, realize changes in the fair values of its assets either by using those assets or selling them?

A)going concern
B)relevance
C)reliability
D)recognition
E)realization

Question 38

Under U.S.GAAP, assets and liabilities are listed on the balance sheet in order of decreasing liquidity, so the most liquid assets (liabilities) are shown first, under their respective categories.

Question 39

A balance sheet prepared according to U.S.GAAP lists liabilities starting with those that the firm will discharge soonest (the most current or closest to maturity liabilities) and ending with those that it will pay latest (the most noncurrent or distant to maturity liabilities).

Question 40

_____ is the amount that results from using an appropriate interest rate to discount one or more future cash flows to the present.It is the sum of the present values of the individual future cash inflows and outflows associated with an asset.It is not, in and of itself, a measurement attribute.Rather, it is a means of arriving at a measurement attribute.

A)Current Replacement Cost
B)Net Realizable Value
C)Fair Value
D)Present Value of Future Net Cash Flows
E)Acquisition cost

Question 41

Many firms disaggregate the initial amounts they received from shareholders for common shares into the par or nominal or stated value of the shares and the amounts received in excess of this value, called:

A)additional paid-in capital (APIC).
B)share premium.
C)capital contributed in excess of par value.
D)Choices a, b, and c are correct.
E)None of these answer choices is correct.

Question 42

Any subsequent sale of a firm's previously issued common shares from one investor to another (such as occurs on public stock exchanges):

A)increases the recorded amounts of shareholders' equity.
B)decreases the recorded amounts of shareholders' equity.
C)has as no effect on the recorded amounts of shareholders' equity.
D)increases or decreases the recorded amounts of shareholders' equity depending on the facts and circumstances.
E)None of these answer choices is correct.

Question 43

The criteria for liability recognition include(s):

A)the item represents a present obligation, not a potential future commitment or intent.
B)the obligation must exist as a result of a past transaction or exchange, called the obligating event.
C)the obligation must require a probable future economic resource that the firm has little or no discretion to avoid.
D)the obligation must have a relevant measurement attribute that the firm can quantify with sufficient reliability.
E)All of these answers are correct.

Question 44

Which of the following is/are true regarding accounting liabilities?

A)All accounting liabilities are obligations.
B)Not all obligations are accounting liabilities.
C)An item must meet the definition of a liability.
D)An item must recognition criteria.
E)All of these answers are correct.

Question 45

Many firms disaggregate the initial amounts they received from shareholders for common shares into the _____ and the amounts received in excess of this value, called additional paid-in capital (APIC), share premium, or capital contributed in excess of par value.

A)par value of the shares
B)nominal value of the shares
C)stated value of the shares
D)Choices a, b, and c are correct.
E)None of these answer choices is correct.

Question 46

_____ means that the information is pertinent to the decisions of users of financial reports, in the sense that the information can make a difference in those decisions.

A)Conservatism
B)Realization
C)Recognition
D)Relevance
E)Reliability

Question 47

_____ measures the net assets generated by a firm from operations exceeding dividends declared.

A)Assets
B)Liabilities
C)Shareholders' equity
D)Additional Paid-in-Capital
E)Retained earnings

Question 48

_____ are probable future sacrifices of economic benefits arising from present obligations of a particular entity to transfer assets or provide services to other entities in the future as a result of a past event or transaction.

A)Assets
B)Liabilities
C)Shareholders' equity
D)Revenues
E)Expenses

Question 49

The sum of the par value amount and the additional paid-in capital amount is the total amount received from shareholders for the shares when the firm first issued them.This total amount is also called _____.

A)contributed capital
B)paid-in capital.
C)treasury stock
D)Both answer choices a and b are correct.
E)None of these answer choices is correct.

Question 50

Corporate laws within many jurisdictions require that, within _____, firms distinguish between amounts received from owners and amounts generated by operations which the firm has not distributed to owners.

A)cash
B)shareholders' equity
C)retained earnings
D)paid-in-capital
E)par value

Question 51

An investor can easily ascertain the _____ of common equity for a given publicly traded firm by looking up the most recent share price (as reported in various online services) and then multiplying this share price times the number of common shares outstanding, as reported on the balance sheet.

A)market value
B)state value
C)par value
D)nominal value
E)liquidation value

Question 52

Which of the following is/are true about amounts received from shareholders for the firm's shares when the firm first issued them?

A)The firm assigns the par value of a share of stock at an amount it chooses.
B)Par values are typically small, often $1 or less per share.
C)Par values are rarely equal the amounts the firm receives when it issues the shares.
D)The sum of the par value amount and the additional paid-in capital amount is the total amount received from shareholders.
E)All of these answers are true.

Question 53

Historically, _____ has described a preference for financial reporting such "that possible errors in measurement be in the direction of understatement rather than overstatement of net income and net assets."

A)conservatism
B)reliability
C)realization
D)recognition
E)relevance

Question 54

The measurement of the assets and liabilities on the balance sheet also determines the measurement of ______________.

A)additional paid-in-capital
B)common stock
C)retained earnings
D)total shareholders' equity
E)par value

Question 55

_____ is the basis for the practice of reporting certain assets at the lower of acquisition cost or fair value.The requirement to test assets for impairment and to record impairment charges rests on the notion that balance sheet carrying values of assets should not exceed the amount of cash that the firm expects to receive by using or selling the asset.

A)Conservatism
B)Reliability
C)Relevance
D)Recognition
E)Realization

Question 56

_____ means that the information presented is reasonably free from error and bias and faithfully represents what it purports to represent.

A)Conservatism
B)Realization
C)Relevance
D)Reliability
E)Recognition

Question 57

The distinction between recognition and realization is essential to accrual accounting, hence the importance accorded to recognition criteria.Firms recognize items that qualify for inclusion in the financial statements when they enter the financial statements. In the case of value decreases, the firm

A)recognizes the decreases as impairment expenses when it realizes the collection of the reduced cash flows.
B)recognizes the decreases as cost of goods sold when the decreases occur before it realizes the collection of the reduced cash flows.
C)recognizes the decreases as impairment expenses when the decreases occur before it realizes the collection of the reduced cash flows.
D)recognizes the decreases as cost of goods sold when it realizes the collection of the reduced cash flows.
E)None of these answer choices is correct.

Question 58

In a rising stock market, the result of any subsequent sale of a firm's previously issued common shares from one investor to another (such as occurs on public stock exchanges):

A)the total paid-in capital amount reported on a balance sheet will usually be less than the current market value of the common shares.
B)the total paid-in capital amount reported on a balance sheet will usually be greater than the current market value of the common shares.
C)the total paid-in capital amount reported on a balance sheet will usually be equal to the current market value of the common shares.
D)the total paid-in capital amount reported on a balance sheet will be eliminated.
E)None of these answer choices is correct.

Question 59

An accounting _____ arises when a firm incurs an obligation to make a future sacrifice that, because of a past event or transaction, it has little or no discretion to avoid.

A)asset
B)liability
C)shareholders' equity
D)revenue
E)expense

Question 60

_____ is a residual interest or claim-that is, the owners (shareholders) of a firm have a claim on assets not required to meet the claims of creditors.

A)Retained Earnings
B)Shareholders' equity
C)Additional Paid-in-Capital
D)Deficit
E)Par Value

Question 61

The acquisition cost for nonmonetary assets includes

A)invoice price, only.
B)invoice price and transportation costs, only.
C)invoice price, transportation costs, and installation costs, only.
D)invoice price, transportation costs, installation costs, and handling charges, only.
E)invoice price, transportation costs, installation costs, handling charges, and first year's maintenance cost.

Question 62

At December 31, Year 1, Adam Corporation has 5,000 shares of par value common stock, additional paid-in capital of $25,000, total shareholders' equity of $80,000, and retained earnings of $45,000.What is the par value per share?

A)$1.00
B)$1.50
C)$2.00
D)$2.50
E)$3.00

Question 63

At December 31, Year 1, Bolton Corporation has par value common stock with a par value of $1.50 per share, Additional paid-in capital of $60,000, total shareholders' equity of $100,000, and retained earnings of $25,000.What is the number of common stock shares?

A)5,000
B)10,000
C)15,000
D)20,000
E)25,000

Question 64

On January 1, Year 3, All Business Machines (ABM) issued 1,000 shares of its common stock for a building.Real estate appraisers estimated the building to have a market value of $55,000 on the date of acquisition.The common stock of ABM sold for $50 per share on the date of the acquisition.On January 1, Year 3, ABM paid $650 in real estate transfer taxes, $500 in real estate legal fees for recording the transaction, $1,750 in property taxes for Year 3, and $2,000 for a two-year insurance policy beginning January 1, Year 3.At what amount should the building appear in the Building account of ABM on January 1, Year 3?

A)$51,150
B)$52,900
C)$56,150
D)$59,900
E)$61,900

Question 65

When analyzing a balance sheet

A)one looks for a reasonable match between the nature and mix of assets and mix of liabilities plus shareholders' equity.
B)the proportion of short-term versus long-term financing should match the proportion of current assets versus noncurrent assets.
C)the mix of long-term debt versus shareholders' equity should reflect the degree of operating risk.
D)Answers a, b, and c are correct.
E)None of these answer choices is correct.

Question 66

The more variable the firm's cash flows from operating activities, the more risk that the firm will not have sufficient cash to meet the required payments.Failure to meet these obligations can result in

A)default.
B)creditor intervention in the management of the firm.
C)regulatory intervention in the management of the firm.
D)bankruptcy.
E)All of these answer choices are correct.

Question 67

Which of the following is not cash?

A)coins and currency
B)bank checks and money orders
C)bank deposits and time deposits
D)corporate stocks and bonds that the firm plans to hold for a relatively short period of time
E)All of these answer choices are categorized as cash.

Question 68

Firms use long-term financing for

A)assets they expect to convert to cash in the short run.
B)assets to be used over long periods.
C)liabilities they expect to convert to cash in the short run.
D)liabilities to be used over long periods.
E)shareholders' equity they expect to convert to cash in the short run.

Question 69

The principal objective of accounting reports as currently prepared is to present ______ the results of operations and the financial condition of the firm.

A)fairly
B)accurately
C)objectively
D)subjectively
E)correctly

Question 70

Firms use short-term financing for

A)assets they expect to convert to cash in the short run.
B)assets to be used over long periods.
C)liabilities they expect to convert to cash in the short run.
D)liabilities to be used over long periods.
E)shareholders' equity they expect to convert to cash in the short run.

Question 71

For a firm to recognize an asset

A)a resource must represent a future economic benefit that the firm controls as a result of a past transaction or exchange.
B)the firm must be able to measure the resource with sufficient reliability.
C)must impose a future economic sacrifice because of a past event or transaction that the firm has little or no discretion to avoid.
D)Both choices a and b are correct.
E)None of these answer choices is correct.

Question 72

Which of the following is/are true regarding the balance sheet?

A)The balance sheet does not provide all the information an analyst wants or needs about a firm's resources and the claims on those resources.
B)Authoritative accounting guidance precludes the recognition of some resources on the balance sheet as assets and some obligations as liabilities
C)Amounts reported on the balance sheet for assets, liabilities, and shareholders' equity do not necessarily reflect current market conditions.
D)Astute analysts recognize the features of the balance sheet and adjust the reported numbers.
E)All of these answer choices are correct.

Question 73

Retained earnings are

A)a source of financing for assets.
B)cash.
C)other non-cash assets.
D)the sum of a firm's dividend declarations.
E)the source of net assets generated by the earnings process.

Question 74

Retained earnings represent the source of net assets generated by the earnings process that exceed the firm's dividend declarations.Common practice refers to the process of curtailing dividends to accumulate assets, represented by retained earnings, as _____.

A)operating activities
B)investing activities
C)external financing
D)internal financing
E)dividend seizure

Question 75

Assume that Trader Pete's, an organic food retailer in the United States, recently purchased a new refrigeration system for its Washington, DC, store.Trader Pete's paid $1.3 million for the refrigeration unit and paid an additional $120,000 to modify the unit to meet its specific needs.Trader Pete's paid $55,000 for the transportation and installation of the unit, plus $48,000 for an annual insurance premium for the first year, which begins next month.Finally, assume that Trader Pete's hired a refrigeration technician, who is charged with the maintenance of the unit; that technician's annual salary is $80,000.How much should Trader Pete's record as the acquisition cost of the refrigeration unit?

A)$1,300,000
B)$1,420,000
C)$1,475,000
D)$1,523,000
E)$1,603,000

Question 76

Accountants record assets at

A)acquisition cost
B)the present value of the future net cash flows based on estimated receipts and operating expenses
C)current economic value
D)current replacement cost
E)appraised value

Question 77

When a firm has accumulated losses, rather than profits, the Retained Earnings account is typically called:

A)Negative cash balance
B)Ordinary Loss
C)Accumulated Excess
D)Accumulated Deficit
E)Insolvency

Question 78

Long-term debt imposes financing risk because it

A)decreases the need for shareholders' equity.
B)requires principal and interest payments.
C)requires a default before filing for bankruptcy.
D)can result in default, creditor or regulatory intervention in the management of the firm.
E)None of these answer choices is correct.

Question 79

The _____ account accumulates the amounts of the undistributed earnings over time.

A)Treasury Stock
B)Cash
C)Additional Paid-in-Capital
D)Retained Earnings
E)Common Stock

Question 80

Key factors in preparing a balance sheet is/are deciding

A)whether items meet the definitions for assets and liabilities.
B)whether items meet the recognition criteria for assets and liabilities.
C)how to measure the items.
D)Answers a, b, and c are correct.
E)None of these answer choices is correct.