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Understanding Financial Statements

Lyn M. Fraser, Aileen Ormiston

Chapter 2

The Balance Sheet - all with Video Answers

Educators

Chapter Questions

01:32

Problem 1

________ What does the balance sheet summarize for a business enterprise?
(a) Operating results for a period.
(b) Financial position at a point in time.
(c) Financing and investment activities for a period.
(d) Profit or loss at a point in time.

Jennifer Stoner
Jennifer Stoner
Numerade Educator
01:32

Problem 1

________ What does the income statement measure for a firm?
(a) The changes in assets and liabilities that occurred during the period.
(b) The financing and investment activities for a period.
(c) The results of operations for a period.
(d) The financial position of a firm for a period.

Jennifer Stoner
Jennifer Stoner
Numerade Educator
11:28

Problem 2

________ What is the balancing equation for the balance sheet?
(a) Assets = Liabilities + Stockholders' equity.
(b) Assets + Stockholders' equity $=$ Liabilities.
(c) Assets + Liabilities $=$ Stockholders' equity.
(d) Revenues - Expenses $=$ Net income.

Puneet Prajapati
Puneet Prajapati
Numerade Educator

Problem 3

________ What is a common-size balance sheet?
(a) A statement that expresses each account on the balance sheet as a percentage of net income.
(b) A statement that is common to an industry.
(c) A statement that expresses each account on the balance sheet as a percentage of total assets.
(d) A statement that expresses each asset account on the balance sheet as percentage of total assets and each liability account on the balance sheet as a percentage of total liabilities.

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06:55

Problem 4

________ Which of the following securities would be classified as marketable securities in the current asset section of the balance sheet?
(a) Commercial paper, U.S. Treasury bills, land held for investment.
(b) Commercial paper, U.S. Treasury bills, negotiable certificates of deposit.
(c) Commercial paper, land held for investment, bonds with maturities in 10 years.
(d) U.S. Treasury bills, long-term stock investment, bonds with maturities in 10 years.

Pragya Ahuja
Pragya Ahuja
Numerade Educator

Problem 5

________ What items should be calculated when analyzing the accounts receivable and allowance for doubtful accounts?
(a) The growth rates of sales and inventories.
(b) The growth rates of sales, accounts receivable, and the allowance for doubtful accounts, as well as the percentage of the allowance account relative to the total or gross accounts receivable.
(c) The common-size balance sheet.
(d) The growth rates of all assets and liabilities.

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Problem 6

________ What type of firm generally has the highest proportion of inventory to total assets?
(a) Retailers.
(b) Wholesalers.
(c) Manufacturers.
(d) Service-oriented firms.

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02:46

Problem 7

________ Why is the method of valuing inventory important?
(a) Inventory valuation is based on the actual flow of goods.
(b) Inventories always account for more than $50 \%$ of total assets and therefore have a considerable impact on a company's financial position.
(c) Companies desire to use the inventory valuation method which minimizes the cost of goods sold expense.
(d) The inventory valuation method chosen determines the value of inventory on the balance sheet and the cost of goods sold expense on the income statement, two items having considerable impact on the financial position of a company.

Jennifer Stoner
Jennifer Stoner
Numerade Educator

Problem 8

________ What are three major cost flow assumptions used by U.S. companies in valuing inventory?
(a) LIFO, FIFO, average market.
(b) LIFO, FIFO, actual cost.
(c) LIFO, FIFO, average cost.
(d) LIFO, FIFO, double-declining balance.

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Problem 9

________ Assuming a period of inflation, which statement is true?
(a) The FIFO method understates balance sheet inventory.
(b) The FIFO method understates cost of goods sold on the income statement.
(c) The LIFO method overstates balance sheet inventory.
(d) The LIFO method understates cost of goods sold on the income statement.

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01:15

Problem 10

________ Why would a company switch to the LIFO method of inventory valuation?
(a) By switching to LIFO, reported earnings will be higher.
(b) A new tax law requires companies using LIFO for reporting purposes also to use LIFO for figuring taxable income.
(c) LIFO produces the largest cost of goods sold expense in a period of inflation and thereby lowers taxable income and taxes.
(d) A survey by Accounting Trends and Techniques revealed that the switch to LIFO is a current accounting "fad."

Nick Johnson
Nick Johnson
Numerade Educator

Problem 11

________ Where can one most typically find the cost flow assumption used for inventory valuation for a specific company?
(a) In The Risk Management Association, Annual Statement Studies.
(b) In the statement of retained earnings.
(c) On the face of the balance sheet with the total current asset amount.
(d) In the notes to the financial statements.

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Problem 12

________ What type of firm generally has the highest proportion of fixed assets to total assets?
(a) Manufacturers.
(b) Retailers.
(c) Wholesalers.
(d) Retailers and wholesalers.

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Problem 13

________ As of January 1,2002 , how is goodwill evaluated?
(a) Goodwill must be amortized over a 40-year period.
(b) No goodwill is to be recognized after January 1, 2002.
(c) Companies should determine if goodwill has lost value, and if so, the loss in value should be written off.
(d) Goodwill is to be written off at the end of the tenth year.

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Problem 14

________ Which group of items would most likely be included in the other assets account on the balance sheet?
(a) Inventories, marketable securities, bonds.
(b) Land held for investment purposes and long-term prepayments.
(c) One-year prepaid insurance policy, stock investments, copyrights.
(d) Inventories, franchises, patents.

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Problem 15

________ What do current liabilities and current assets have in common?
(a) Current assets are claims against current liabilities.
(b) If current assets increase, then there will be a corresponding increase in current liabilities.
(c) Current liabilities and current assets are converted into cash.
(d) Current liabilities and current assets are those items that will be satisfied and converted into cash, respectively, in one year or one operating cycle, whichever is longer.

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03:25

Problem 16

________ How can a reserve account be abused by management?
(a) Management can intentionally overestimate the reserve account to decrease earnings or underestimate the reserve account to increase earnings.
(b) Management can charge the estimates of obligations to be paid in the future to a reserve account.
(c) There is no way for management to abuse this account.
(d) None of the above.

Puneet Prajapati
Puneet Prajapati
Numerade Educator

Problem 17

________ Which of the following items could cause the recognition of accrued liabilities?
(a) Sales, interest expense, rent.
(b) Sales, taxes, interest income.
(c) Salaries, rent, insurance.
(d) Salaries, interest expense, interest income.

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Problem 18

________ Which statement is false?
(a) Deferred taxes are the product of temporary differences in the recognition of revenue and expense for taxable income relative to reported income.
(b) Deferred taxes arise from the use of the same method of depreciation for tax and reporting purposes.
(c) Deferred taxes arise when taxes actually paid are less than tax expense reported in the financial statements.
(d) Temporary differences causing the recognition of deferred taxes may arise from the methods used to account for items such as depreciation, installment sales, leases, and pensions.

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03:16

Problem 19

________ Which of the following would be classified as long-term debt?
(a) Mortgages, current maturities of long-term debt, bonds.
(b) Mortgages, long-term notes payable, bonds due in 10 years.
(c) Accounts payable, bonds, obligations under leases.
(d) Accounts payable, long-term notes payable, long-term warranties.

Puneet Prajapati
Puneet Prajapati
Numerade Educator

Problem 20

________ What accounts are most likely to be found in the stockholders' equity section of the balance sheet?
(a) Common stock, long-term debt, preferred stock.
(b) Common stock, additional paid-in capital, liabilities.
(c) Common stock, retained earnings, dividends payable.
(d) Common stock, additional paid-in capital, retained earnings.

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Problem 21

________ What does the additional paid-in capital account represent?
(a) The difference between the par and the stated value of common stock.
(b) The price changes that result for stock trading subsequent to its original issue.
(c) The market price of all common stock issued.
(d) The amount by which the original sales price of stock exceeds the par value.

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Problem 22

________ What does the retained earnings account measure?
(a) Cash held by the company since its inception.
(b) Payments made to shareholders in the form of cash or stock dividends.
(c) All undistributed earnings.
(d) Financial resources currently available to satisfy financial obligations.

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Problem 23

Listed below are balance sheet accounts for Elf's Gift Shop. Mark current accounts with " $\mathrm{C}$ " and noncurrent accounts with "NC."
________ (a) Long-term debt.
________ (b) Inventories.
________ (c) Accounts payable.
________ (d) Prepaid expenses.
________ (e) Equipment.
________ (f) Accrued liabilities.
________ (g) Accounts receivable.
________ (h) Cash.
________ (i) Bonds payable.
________ (j) Patents.

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01:14

Problem 24

Dot's Delicious Donuts has the following accounts on its balance sheet:
(1) Current assets.
(2) Property, plant, and equipment.
(3) Intangible assets.
(4) Other assets.
(5) Current liabilities.
(6) Deferred federal income taxes.
(7) Long-term debt.
(8) Stockholders' equity.
How would each of the following items be classified?
________ (a) Land held for speculation.
________ (b) Current maturities on mortgage.
________ (c) Cómmon stock.
________ (d) Mortgage payable.
________ (e) Balances outstanding on credit sales to customers.
________ (f) Accumulated depreciation.
________ (g) Buildings used in business.
________ (h) Accrued payroll.
________ (i) Preferred stock.
________ (j) Debt outstanding from credit extended by suppliers.
________ (k) Patents.
________ (I) Land on which warehouse is located.
________ (m) Allowance for doubtful accounts.
________ (n) Liability due to difference in taxes paid and taxes reported.
________ (o) Additional paid-in capital.

Nick Johnson
Nick Johnson
Numerade Educator

Problem 25

Match the following terms to the correct definitions.
________ (a) Consolidated financial statements.
________ (b) Current assets.
________ (c) Depreciation.
________ (d) Deferred taxes
________ (e) Allowance for doubtful accounts.
________ (f) Prepaid expenses.
________ (g) Current maturities.
(1) Used up within one year or operating cycle, whichever is longer.
(2) Expenses incurred prior to cash outflow.
(3) An agreement to use assets that is in substance a purchase.
(4) Estimation of uncollectible accounts receivable.

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