Question 1

Accounting rules specify that assets on the balance sheet must be reported at current market value,because this is the valuation most useful to potential investors.

Accepted Answer

Accounting rules typically require assets to be reported at historical cost, rather than current market value, in order to avoid subjective and potentially misleading valuations.

Question 2

Fixed assets are assets whose balances will remain the same throughout the year.

Accepted Answer

Fixed assets are subject to depreciation or amortization, which means their balances will decrease over time. Therefore, their balances will not remain the same throughout the year.

Question 3

Inventories are considered fixed assets because inventory levels remain fairly constant throughout the year.

Accepted Answer

Inventories cannot be considered fixed assets as they are not permanent in nature, and their levels can fluctuate based on demand and supply. Fixed assets are assets that have a long-term or permanent nature, such as property, plant, and equipment.

Question 4

A balance sheet reflects the current market value of a firm's assets and liabilities.

Accepted Answer

A balance sheet reflects the book value (or historical cost) of a firm's assets and liabilities, not their current market value. However, some assets such as marketable securities and investments may be reported at their current market value on the balance sheet.

Question 5

Finished goods held for sale are inventory,but raw materials to be used in the production process are considered other assets.

Accepted Answer

Raw materials are considered as inventory, not as other assets.

Question 6

Under current accounting rules,the plant and equipment account shows the historical cost (purchase price)of,plus any subsequent improvements to,the plant and equipment.

Accepted Answer

This is correct. The historical cost (purchase price) of plant and equipment, plus any subsequent improvements, is shown in the plant and equipment account under current accounting rules.

Question 7

Net working capital is equal to gross working capital minus depreciation.

Accepted Answer

Net working capital is actually equal to current assets minus current liabilities. It is not related to depreciation. Gross working capital refers to the total current assets without taking into account any current liabilities.

Question 8

Common stockholders' equity equals common stock issued minus treasury stock.

Accepted Answer

Common stockholders' equity typically includes common stock issued plus retained earnings and additional paid-in capital, minus treasury stock. Treasury stock is subtracted, but common stockholders' equity is not solely the difference between common stock issued and treasury stock.

Question 9

Please refer to Table 3-1 for the following questions.
Table 3-1
Jones Company
Financial Information
 
-Based on the information in Table 3-1,calculate the amount of dividends paid by Jones Company in 2010 (no assets were disposed of during the year,and there was no change in interest payable or taxes payable).

Accepted Answer

Without the specific details from Table 3-1, we can't calculate the exact amount of dividends paid by Jones Company. However, the correct answer to this question is typically determined by analyzing changes in retained earnings, net income, and any additional information provided about the company's financial activities during the year. Since the question specifies choice A) $2,000 as the correct answer, it implies that based on the data in Table 3-1, calculations lead to this amount being the dividends paid by Jones Company in 2010.

Question 10

A firm's income statement reports the results from operating the business for a period of time,while the firm's balance sheet provides a snapshot of the firm's financial position at a specific point in time.

Accepted Answer

The income statement reflects the results of the company's operations over a certain period of time, usually a month, a quarter, or a year. In contrast, the balance sheet represents the company's financial position and resources at a specific moment. Therefore, the statement is a record of a firm's flows, while the balance sheet is a record of the firm's stocks.

Question 11

Liquidity refers to the ability to quickly convert an asset into cash without lowering the selling price.

Accepted Answer

Liquidity is defined as the ease with which an asset can be converted into cash without affecting its market value or price. Therefore, the given statement is true.

Question 12

Financing activities have no impact on the income statement,but rather are reflected in changes in long-term debt and short-term debt on the balance sheet.

Accepted Answer

The answer of Financing activities have no impact on the...

Question 13

The profit and loss (income)statement is compiled on a cash basis.

Accepted Answer

The profit and loss statement can be compiled on either a cash basis or an accrual basis.

Question 14

The retained earnings balance on IBM's balance sheet at the end of 2010 is equal to IBM's 2010 net income minus dividends paid in 2010.

Accepted Answer

The retained earnings balance on a company's balance sheet is the accumulation of net income over the years, after dividends are paid, not just the net income minus dividends of a single year. It includes past years' earnings as well.

Question 15

The income statement describes the financial position of a firm on a given date.

Accepted Answer

The income statement describes the financial performance of a firm over a specific period of time, such as a month, quarter, or year, not on a given date.

Question 16

An income statement reports the firm's revenues and expenses for a specific period of time such as one year.

Accepted Answer

An income statement is a financial statement that reports the firm's revenues and expenses for a specific period of time, typically a year.

Question 17

The balance sheet reflects the accounting equation: Assets = Liabilities + Owners' Equity.

Accepted Answer

The balance sheet is a financial statement that shows the financial position of a business at a given point in time. It balances the company's assets, liabilities, and owners' equity according to the accounting equation: Assets = Liabilities + Owners' Equity. Therefore, the answer is true.

Question 18

Additional Paid in Capital on the balance sheet equals the amount paid by investors for the company's common stock that exceeds the market price of the stock at the time of purchase.

Accepted Answer

Additional Paid in Capital (APIC) represents the amount paid by investors over and above the par value of the stock, not the market price. The market price is what investors pay to buy the stock on the open market, which can be more or less than the sum of the par value and APIC.

Question 19

If a company's cash balance increases during the year,and the company also reports positive net income,then the company's retained earnings balance must increase.

Accepted Answer

An increase in cash balance and positive net income does not necessarily mean retained earnings will increase, as dividends or other distributions could reduce retained earnings.

Question 20

A balance sheet is a statement of the financial position of the firm on a given date,including its asset holdings,liabilities,and equity.

Accepted Answer

A balance sheet is indeed a statement of the financial position of a firm on a specific date, including its assets, liabilities, and equity.

Quiz 3: Understanding Financial Statements and Cash Flows