1. Liquidity refers to the ability of an enterprise to pay its debts as they mature.
2. The balance sheet omits many items that are of financial value to the business but cannot be recorded objectively.
3. Financial flexibility measures the ability of an enterprise to take effective actions to alter the amounts and timing of cash flows.
4. Companies frequently describe the terms of all long-term liability agreements in notes to the financial statements.
5. An asset which is expected to be converted into cash, sold, or consumed within one year of the balance sheet date is always reported as a current asset.
6. Land held for speculation is reported in the property, plant, and equipment section of the balance sheet.
7. The account form and the report form of the balance sheet are both acceptable under GAAP.
8. Because of the historical cost principle, fair values may not be disclosed in the balance sheet.
9. Companies have the option of disclosing information about the nature of their operations and the use of estimates in preparing financial statements.
10. Companies may use parenthetical explanations, notes, cross references, and supporting schedules to disclose pertinent information.
11. The accounting profession has recommended that companies use the word reserve only to describe amounts deducted from assets.
12. On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners’ equity account.
13. The primary purpose of a statement of cash flows is to report the cash effects of operations during a period.
14. The statement of cash flows reports only the cash effects of operations during a period and financing transactions.
15. Financial flexibility is a company’s ability to respond and adapt to financial adversity and unexpected needs and opportunities.
16. Collection of a loan is reported as an investing activity in the statement of cash flows.
17. Companies determine cash provided by operating activities by converting net income on an accrual basis to a cash basis.
18. Significant financing and investing activities that do not affect cash are not reported in the statement of cash flows or any other place.
19. Financial statement readers often assess liquidity by using the current cash debt coverage ratio.
20. Free cash flow is net income less capital expenditures and dividends.
21. Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these
22. The balance sheet is useful for analyzing all of the following except
d. financial flexibility.
23. Balance sheet information is useful for all of the following except to
a. compute rates of return
b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows
24. Balance sheet information is useful for all of the following except
a. assessing a company’s risk
b. evaluating a company’s liquidity
c. evaluating a company’s financial flexibility
d. determining free cash flows.
25. A limitation of the balance sheet that is not also a limitation of the income statement is
a. the use of judgments and estimates
b. omitted items
c. the numbers are affected by the accounting methods employed
d. valuation of items at historical cost
26. The balance sheet contributes to financial reporting by providing a basis for all of the following except
a. computing rates of return.
b. evaluating the capital structure of the enterprise.
c. determining the increase in cash due to operations.
d. assessing the liquidity and financial flexibility of the enterprise.
27. One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is
a. failure to reflect current value information.
b. the extensive use of separate classifications.
c. an extensive use of estimates.
d. failure to include items of financial value that cannot be recorded objectively.
28. The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as
b. financial flexibility.
29. The net assets of a business are equal to
a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders’ equity.
d. none of these.
30. The correct order to present current assets is
a. cash, accounts receivable, prepaid items, inventories.
b. cash, accounts receivable, inventories, prepaid items.
c. cash, inventories, accounts receivable, prepaid items.
d. cash, inventories, prepaid items, accounts receivable.
31. The basis for classifying assets as current or noncurrent is conversion to cash within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.
32. The basis for classifying assets as current or noncurrent is the period of time normally required by the accounting entity to convert cash invested in
a. inventory back into cash, or 12 months, whichever is shorter.
b. receivables back into cash, or 12 months, whichever is longer.
c. tangible fixed assets back into cash, or 12 months, whichever is longer.
d. inventory back into cash, or 12 months, whichever is longer.
33. The current assets section of the balance sheet should include
34. Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is the bene-ficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.
35. Which of the following should not be considered as a current asset in the balance sheet?
a. Installment notes receivable due over 18 months in accordance with normal trade practice.
b. Prepaid taxes which cover assessments of the following operating cycle of the business.
c. Equity or debt securities purchased with cash available for current operations.
d. The cash surrender value of a life insurance policy carried by a corporation, the beneficiary, on its president.
36. Equity or debt securities held to finance future construction of additional plants should be classified on a balance sheet as
a. current assets.
b. property, plant, and equipment.
c. intangible assets.
d. long-term investments.
37. When a portion of inventories has been pledged as security on a loan,
a. the value of the portion pledged should be subtracted from the debt.
b. an equal amount of retained earnings should be appropriated.
c. the fact should be disclosed but the amount of current assets should not be affected.
d. the cost of the pledged inventories should be transferred from current assets to noncurrent assets.
38. Which of the following is not a long-term investment?
a. Cash surrender value of life insurance
c. Land held for speculation
d. A sinking fund
39. A generally accepted method of valuation is
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.
d. 1 and 2
40. Which item below is not a current liability?
a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable
41. Working capital is
a. capital which has been reinvested in the business.
b. unappropriated retained earnings.
c. cash and receivables less current liabilities.
d. none of these.
42. An example of an item which is not an element of working capital is
a. accrued interest on notes receivable.
c. goods in process.
d. temporary investments.
43. Long-term liabilities include
a. obligations not expected to be liquidated within the operating cycle.
b. obligations payable at some date beyond the operating cycle.
c. deferred income taxes and most lease obligations.
d. all of these.
44. Which of the following should be excluded from long-term liabilities?
a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Long-term liabilities that mature within the operating cycle and will be paid from a sinking fund
d. None of these
45. Treasury stock should be reported as a(n)
a. current asset.
c. other asset.
d. reduction of stockholders’ equity.
46. Which of the following should be reported for capital stock?
a. The shares authorized
b. The shares issued
c. The shares outstanding
d. All of these
47. Which of the following would be classified in a different major section of a balance sheet from the others?
a. Capital stock
b. Common stock subscribed
c. Stock dividend distributable
d. Stock investment in affiliate
48. The stockholders’ equity section is usually divided into what three parts?
a. Preferred stock, common stock, treasury stock
b. Preferred stock, common stock, retained earnings
c. Capital stock, additional paid-in capital, retained earnings
d. Capital stock, appropriated retained earnings, unappropriated retained earnings
49. Which of the following is not an acceptable major asset classification?
a. Current assets
b. Long-term investments
c. Property, plant, and equipment
d. Deferred charges
50. Which of the following is a contra account?
a. Premium on bonds payable
b. Unearned revenue
d. Accumulated depreciation
51. Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure?
a. Current assets
b. Current liabilities
c. Plant assets
d. Long-term liabilities
52. The presentation of long-term liabilities in the balance sheet should disclose
a. maturity dates.
b. interest rates.
c. conversion rights.
d. All of the above.
53. Which of the following is not a required supplemental disclosure for the balance sheet?
b. Financial forecasts
c. Accounting policies
d. Contractual situations
54. Typical contractual situations that are disclosed in the notes to the balance sheet include all of the following except
a. debt covenants
b. lease obligations
c. advertising contracts
d. pension obligations
55. Accounting policies disclosed in the notes to the financial statements typically include all of the following except
a. the cost flow assumption used
b. the depreciation methods used
c. significant estimates made
d. significant inventory purchasing policies
56. Which of the following best exemplifies a contingency that is reported in the notes to the financial statements?
a. Losses from potential future lawsuits
b. Loss from a lawsuit settled out of court prior to the end of the fiscal year
c. Warranty claims on future sales
d. Estimated loss from an ongoing lawsuit
57. Which of the following is not a method of disclosing pertinent information?
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
d. All of these are methods of disclosing pertinent information.
58. Significant accounting policies may not be
a. selected on the basis of judgment.
b. selected from existing acceptable alternatives.
c. unusual or innovative in application.
d. omitted from financial-statement disclosure.
59. A general description of the depreciation methods applicable to major classes of depreci-able assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income tax policy.
d. should be included in corporate financial statements or notes thereto.
60. It is mandatory that the essential provisions of which of the following be clearly stated in the notes to the financial statements?
a. Stock option plans
b. Pension obligations
c. Lease contracts
d. All of these