Question 1

A balance sheet portrays the value of a firm's assets and liabilities:

Accepted Answer

A balance sheet shows the financial position of a company at a specific point in time, typically at the end of a quarter or year. Therefore, option C - "At any stated point in time" is the correct choice. Options A and D are incorrect as they specify a specific time period, which may not be applicable to all firms. Option B is also incorrect as it implies that a balance sheet can be prepared for any period, which is not correct as it is typically prepared at the end of an accounting period.

Question 2

What balancing entry is most likely to be called for if previously excluded intangible assets were added to a firm's balance sheet?

Accepted Answer

Adding previously excluded intangible assets to a firm's balance sheet would increase the total assets and, therefore, increase the shareholders' equity to maintain the accounting equation of Assets = Liabilities + Shareholders' Equity. Therefore, the most likely balancing entry would be to increase shareholders' equity.

Question 3

According to GAAP, assets and liabilities are typically recorded on the balance sheet at:

Accepted Answer

D

Question 4

Which of the following is correct for a fully depreciated asset?

Accepted Answer

A fully depreciated asset has a book value of zero because its cost has been fully allocated to depreciation expense over its useful life. However, this does not necessarily mean its market value is zero. The market value can vary based on demand, condition, and other factors, making the relationship between market and book values indeterminable without further information.

Question 5

When subtracting an asset's accumulated depreciation from its historic cost, the resulting value is termed the:

Accepted Answer

Subtracting accumulated depreciation from historic cost gives us the book value of the asset, which represents the remaining value or worth of the asset after accounting for depreciation. The market value of the asset may differ from its book value and is determined by various factors like supply and demand, economic conditions, etc. Depreciation expense, on the other hand, is the portion of an asset's cost that is expensed every year due to its wear and tear or obsolescence. Current asset value is the value of the asset at the current market price or its fair value.

Question 6

In general, what is changing as you read down the left hand side of a balance sheet?

Accepted Answer

The assets on the left side of the balance sheet are listed in order of liquidity, with the most liquid assets listed first. As you read down the left side, the assets become less liquid, meaning they become harder to convert into cash quickly or at full value.

Question 7

If market interest rates have increased since a company last borrowed long-term funds, the market value of these long-term funds will likely be:

Accepted Answer

When market interest rates increase, the value of long-term funds borrowed at a lower rate decreases. This results in the market value of the debt being lower than its book value. Therefore, choice B is the best option.

Question 8

Which of the following values would most likely interest a shareholder?

Accepted Answer

Shareholders are usually interested in the market value of their equity as it reflects the current worth of their investment in the company. Book value of equity reflects the historical cost of assets minus liabilities and may not necessarily reflect the current value of the company. Historical cost of equity and retained earnings component of equity are also not likely to be of primary interest to shareholders.

Question 9

Net working capital is calculated by taking the difference between:

Accepted Answer

Net working capital is the difference between a company's current assets (such as cash, inventory, and accounts receivable) and its current liabilities (such as accounts payable and short-term debt). Option A is the formula for calculating total equity, option B is the formula for calculating the cash conversion cycle, and option D is not relevant to net working capital.

Question 10

If the balance sheet of a firm indicates that total assets exceed current liabilities plus shareholders' equity, then the firm has:

Accepted Answer

If total assets exceed current liabilities plus shareholders' equity, it means there is a difference that is not accounted for by either current liabilities or shareholders' equity. This difference could be in the form of long-term debt. Therefore, option B is the best choice. The other options are not directly related to the given information.

Question 11

If the value of a firm's net fixed assets equals the value of the accumulated depreciation, then, from an accounting context, the fixed assets are:

Accepted Answer

The answer of If the value of a firm's net...

Question 12

Net working capital is a measure of the company's:

Accepted Answer

Net working capital measures a company's estimated liquidity, which is the ability to meet short-term financial obligations with available assets. It is calculated as the difference between current assets (such as cash, inventory and accounts receivable) and current liabilities (such as accounts payable and short-term debt). Goodwill and shareholders' equity are measures of long-term value, while short-term liabilities are only one component of net working capital.

Question 13

Which of the following assets is likely to be considered the most liquid?

Accepted Answer

Marketable securities are highly liquid assets that can be easily sold or converted into cash without significant loss in value. They are typically short-term investments and are considered a highly liquid asset. Net fixed assets, accounts payable, and inventories are all relatively less liquid than marketable securities.

Question 14

What happens to a firm's net worth as it uses cash to repay accounts payable?

Accepted Answer

The answer of What happens to a firm's net worth...

Question 15

Depreciation expense is used to:

Accepted Answer

Depreciation expense is used to allocate the historical cost of an asset over its useful life. It represents the cost of the asset that has been used up or consumed during the period, and it helps to match this cost against the revenue generated by the asset. Option A is incorrect because depreciation expense is not used to allocate costs to departments; that is the role of cost allocation methods. Option B is incorrect because depreciation expense does not determine when an asset is fully paid off; that is determined by the payment schedule for the asset. Option D is incorrect because depreciation expense does not equate historical cost and market values of an asset; that is the role of impairment testing.

Question 16

Accumulated Depreciation is used to reduce what type of account on the balance sheet?

Accepted Answer

Accumulated Depreciation is used to reduce the value of Capital Assets or Fixed Assets on the balance sheet. It represents the total amount of depreciation that has been charged to these assets over their useful life. This reduces their book value and reflects their reduced value due to wear and tear, obsolescence or deterioration. Accumulated Depreciation is a contra-asset account, which means that it is directly subtracted from the asset account to arrive at the net book value. It is not used to reduce current assets, liabilities or owners' equity.

Question 17

ABC Corp.'s balance sheet shows their long-term debt to be $10 million.The debt was issued with a 10 percent interest rate, and the current interest rate is 7 percent.Based on this information, the market value of this debt would be:

Accepted Answer

The answer of ABC Corp.'s balance sheet shows their long-term...

Question 18

What happens to the market value of a firm's equity as the book value of the firm's equity increases?

Accepted Answer

There is no set relationship between the market value and book value of a firm's equity. The market value depends on various factors such as the firm's profitability, growth potential, industry outlook, and investor sentiment, among others. Book value, on the other hand, represents the net value of the firm's assets after deducting its liabilities and is based on accounting standards. Therefore, changes in book value do not necessarily translate into changes in market value.

Question 19

Which of the following items should not be included in a listing of current assets?

Accepted Answer

Accounts payable is a liability and not a current asset, so it should not be included in a listing of current assets. Marketable securities, accounts receivable, and inventories are all examples of current assets.

Question 20

If a payment of principal is due in seven months on a long-term liability, that payment will appear on the current balance sheet now as a(n):

Accepted Answer

The payment of principal due in seven months on a long-term liability represents a current obligation because it is due within the next year. Therefore, it should be classified as a current liability on the balance sheet.

Quiz 3: Accounting and Finance