CH03 TB 8e final - practice questions PDF

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Chapter 3 The Balance Sheet and Financial Disclosures True/False Questions 1. The balance sheet reports a company's financial position at a point in time. Answer: True Level of Learning: 1 Easy Learning Objective: 03-01 Topic Area: The Balance Sheet Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

2. A company’s market value is generally less than its book value. Answer: False Level of Learning: 1 Easy Learning Objective: 03-01 Topic Area: The Balance Sheet Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

3. All current assets are either cash or assets that will be converted into cash or consumed within 12 months or the operating cycle, whichever is longer. Answer: True Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

4. The balance of net receivables represents the amount expected to be collected. Answer: True Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

5. Prepaid expenses are classified as current assets if the services purchased are expected to expire within 12 months or the operating cycle, whichever is longer. Answer: True Level of Learning: 1 Easy Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–1

Chapter 3 The Balance Sheet and Financial Disclosures Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement 6. Assets classified as property, plant, and equipment include machinery, equipment, and inventories. Answer: False Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

7. Intangible assets usually are reported in the balance sheet as current assets. Answer: False Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

8. Accrued salaries and wages in a balance sheet represent salaries and wages that have been earned by employees but not yet paid. Answer: True Level of Learning: 1 Easy Learning Objective: 03-03 Topic Area: Liabilities Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

9. The criteria for determining which items comprise cash equivalents often is disclosed in the summary of significant accounting policies. Answer: True Level of Learning: 1 Easy Learning Objective: 03-04 Topic Area: Disclosure Notes Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–2

Chapter 3 The Balance Sheet and Financial Disclosures 10. Payment terms, interest rates, and other details of long-term liabilities usually are reported in disclosure notes. Answer: True Level of Learning: 1 Easy Learning Objective: 03-04 Topic Area: Disclosure Notes Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

11. Subsequent events are significant developments that take place after a firm's year-end, and after the financial statements are issued or available to be issued. Answer: False Level of Learning: 1 Easy Learning Objective: 03-04 Topic Area: Disclosure Notes Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement 12. Illegal acts will only need to be disclosed if the impact of the act is material. Answer: False Level of Learning: 1 Easy Learning Objective: 03-04 Topic Area: Disclosure Notes Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

13. The ultimate responsibility for the financial statements lies with the auditors. Answer: False Level of Learning: 1 Easy Learning Objective: 03-06 Topic Area: Auditor’s Report Blooms: Remember AACSB: Reflective thinking AICPA: FN Reporting 14. The compensation of top executives is disclosed in the proxy statement. Answer: True Level of Learning: 1 Easy Learning Objective: 03-05 Topic Area: Compensation of Directors and Top Executives Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–3

Chapter 3 The Balance Sheet and Financial Disclosures Blooms: Remember AACSB: Reflective thinking AICPA: BB Legal

15. Horizontal analysis involves expressing each item in the financial statements as a percentage of an appropriate total, or base amount, within the same year. Answer: False Level of Learning: 1 Easy Learning Objective: 03-07 Topic Area: Using Financial Statement Information Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

16. Liquidity refers to the riskiness of a company with regard to the amount of liabilities in its capital structure. Answer: False Level of Learning: 1 Easy Learning Objective: 03-08 Topic Area: Risk Analysis Blooms: Remember AACSB: Reflective thinking AICPA: FN Risk Analysis

17. A payment on account has no effect on working capital but will increase the current ratio if it is already greater than 1.0. Answer: True Level of Learning: 2 Medium Learning Objective: 03-08 Topic Area: Liquidity Ratios Blooms: Analyze AACSB: Analytic AICPA: FN Risk Analysis

18. Segment reporting requires disclosure of each customer that accounts for more than 5% of total enterprise revenue. Answer: False Level of Learning: 1 Easy Learning Objective: 03-Appendix 3 Topic Area: Reporting Segment Inforrmation Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–4

Chapter 3 The Balance Sheet and Financial Disclosures

Multiple Choice Questions 19. The balance sheet reports: a. Net income at a point in time. b. Cash flows for a period of time. c. Assets and equities at a point in time. d. Assets and liabilities for a period of time. Answer: c Level of Learning: 2 Medium Learning Objective: 03-01 Topic Area: The Balance Sheet Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement 20.

Current assets include cash and all other assets expected to become cash or be consumed: a. Within one year. b. Within one operating cycle. c. Within one year or one operating cycle, whichever is shorter. d. Within one year or one operating cycle, whichever is longer. Answer: d Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

21. Red Onion Restaurant would classify a six-month prepaid insurance policy as: a. Property, plant, and equipment. b. Investment. c. Current asset. d. Goodwill. Answer: c Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

22. An asset that is generally not expected to be converted to cash or consumed within one year or the operating cycle is: a. Building. b. Accounts receivable. c. Inventory. Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–5

Chapter 3 The Balance Sheet and Financial Disclosures d.

Supplies.

Answer: a Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

23. Long-term solvency refers to: a. The efficiency with which a company manages its resources. b. The profitability of a company for a period of time. c. The amount of current assets relative to long-term assets. d. The riskiness of a company with regard to the amount of liabilities in its capital structure. Answer: d Level of Learning: 1 Easy Learning Objective: 03-01 Topic Area: The Balance Sheet Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

24. Which is a shareholders' equity account in the balance sheet? a. Accumulated depreciation. b. Paid-in capital. c. Salaries payable. d. Accounts receivable. Answer: b Level of Learning: 1 Easy Learning Objective: 03-01 Topic Area: Classification of Elements - Shareholders’ Equity Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

25. Rent collected in advance is: a. An asset account in the balance sheet. b. A liability account in the balance sheet. c. A shareholders' equity account in the balance sheet. d. A temporary account, not in the balance sheet at all. Answer: b Level of Learning: 1 Easy Learning Objective: 03-03 Topic Area: Liabilities Blooms: Understand AACSB: Reflective thinking Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–6

Chapter 3 The Balance Sheet and Financial Disclosures AICPA: FN Measurement

26. Notes payable that are due in two years are: a. Current liabilities. b. Long-term intangible assets. c. Long-term liabilities. d. Long-term investments. Answer: c Level of Learning: 1 Easy Learning Objective: 03-03 Topic Area: Liabilities Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

27. Which of the following is never a current liability account? a. Accrued payroll. b. Dividends payable. c. Prepaid rent. d. Subscriptions collected in advance from customers. Answer: c Level of Learning: 1 Easy Learning Objective: 03-03 Topic Area: Liabilities Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

28. New Oaks Winery requires two months to make wine, two years to age it, one month to bottle it, two months to sell it, and one month to collect the receivable. Its operating cycle is: a. Twelve months. b. Thirty months. c. Six months. d. Three months. Answer: b Level of Learning: 2 Medium Learning Objective: 03-02 Topic Area: Assets Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

29. Long-term assets generally include: a. Inventory held for sale. b. Prepaid rent. c. Accounts receivable. Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–7

Chapter 3 The Balance Sheet and Financial Disclosures d.

Land held for a possible future plant site.

Answer: d Level of Learning: 1 Medium Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

Use the following to answer questions 30–33: Listed below are year-end account balances (in $millions) taken from the records of Symphony Stores.

Accounts receivable–trade Building and equipment Cash–checking Interest receivable Inventory Land Notes receivable (long-term) Petty cash fund Prepaid rent Supplies Trademark Accounts payable–trade Accumulated depreciation Additional paid-in capital Allowance for uncollectible accounts Cash dividends payable Common stock, at par Income tax payable Notes payable (long-term) Retained earnings Deferred revenues TOTALS

Debit 730 920 34 30 16 150 450 5 20 8 40

_____ 2,403

Credit

560 80 485 20 30 15 65 800 308 40 _____ 2,403

30. What would Symphony report as total current assets? a. $823. b. $838. c. $843. d. $1,696. Answer: a Level of Learning: 3 Hard Learning Objective: 03-02 Topic Area: Assets Blooms: Apply AACSB: Analytic Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–8

Chapter 3 The Balance Sheet and Financial Disclosures AICPA: FN Measurement Feedback: Total current assets: ($680 – 20) + 34 + 50 + 30 + 16 + 5 + 20 + 8 = $823

31. What would Symphony report as total assets? a. $2,338. b. $2,323. c. $2,318. d. $2,303. Answer: d Level of Learning: 3 Hard Learning Objective: 03-02 Topic Area: Assets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Feedback: Total assets: ($680 – 20) + ($920 – 80) + 34 + 50 + 30 + 16 + 150 + 450 + 5 + 20 + 8 + 40 = $2,303

32. What would Symphony report as total shareholders' equity? a. $323. b. $808. c. $838. d. $928. Answer: b Level of Learning: 3 Hard Learning Objective: 03-01 Topic Area: Classification of Elements - Shareholders’ Equity Blooms: Apply AACSB: Analytic AICPA: FN Measurement Feedback: Total shareholders’ equity: $485 + 15 + 308 = $808 33. What is the amount of working capital for Symphony? a. $ 98. b. $143. c. $128. d. $113. Answer: c Level of Learning: 3 Hard Learning Objective: 03-08 Topic Area: Liquidity Ratios Blooms: Apply AACSB: Analytic AICPA: FN Risk Analysis Feedback: Current assets: ($680 – 20) + 34 + 50 + 30 + 16 + 5 + 20 + 8 = Current liabilities: $560 + 30 + 65 + 40 = Working capital

$823 695 $128

Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–9

Chapter 3 The Balance Sheet and Financial Disclosures

34. Assets do not include: a. Property, plant, and equipment. b. Investments. c. Paid-in capital. d. Unexpired insurance. Answer: c Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

35. Cash equivalents would not include: a. Cash not available for current operations. b. Money market funds. c. U.S. treasury bills. d. Bank drafts. Answer: a Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

36. Cash equivalents would include: a. Highly liquid equity securities. b. Accounts receivable from a financial institution. c. Restricted funds for bonds that mature in three years. d. Debt instruments with maturity dates of less than three months from the date of the purchase. Answer: d Level of Learning: 1 Easy Learning Objective: 03-02 Topic Area: Assets Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

37. Accrued liabilities: a. Are generally paid in services rather than cash. b. Result from payment before services are received. c. Result from services received before payment. d. Are deferred charges to expense. Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–10

Chapter 3 The Balance Sheet and Financial Disclosures Answer: c Level of Learning: 1 Easy Learning Objective: 03-03 Topic Area: Liabilities Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

38. Janson Corporation Co.'s trial balance included the following account balances at December 31, 2016: Accounts receivable Inventories Patent Investments Prepaid insurance Note receivable, due 2019

$12,000 40,000 12,000 30,000 6,000 50,000

Investments consist of treasury bills that were purchased in November and mature in January. Prepaid insurance is for the next two years. What amount should be included in the current asset section of Janson’s December 31, 2016, balance sheet? a. b. c. d.

$ 88.000. $ 85,000. $ 55,000. $135,000.

Answer: b Level of Learning: 2 Medium Learning Objective: 03-02 Topic Area: Assets Blooms: Apply AACSB: Analytic AICPA: FN Measurement Feedback: $12,000 + 40,000 + 30,000 + 3,000 (1/2 of prepaid insurance) = $85,000. 39. Janson Corporation Co.'s trial balance included the following account balances at December 31, 2016: Accounts payable Bond payable, due 2025 Salaries payable Note payable, due 2017 Note payable, due 2021

$25,000 22,000 16,000 20,000 40,000

What amount should be included in the current liability section of Janson’s December 31, 2016, balance sheet? a. $ 63,000. b. $ 41,000. c. $ 61,000. Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–11

Chapter 3 The Balance Sheet and Financial Disclosures d. $101,000. Answer: c Level of Learning: 2 Medium Learning Objective: 03-03 Topic Area: Liabilities Blooms: Apply AACSB: Analytic AICPA: FN Measurement Feedback: $25,000 + 16,000 + 20,000 = $61,000.

40. The usual difference between accounts payable and notes payable is: a. Legally enforceable debt. b. Current–noncurrent classification. c. Known payment terms. d. Explicitly stated interest. Answer: d Level of Learning: 2 Medium Learning Objective: 03-03 Topic Area: Liabilities Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

41. Which of the following would be disclosed in the summary of significant accounting policies disclosure note?

a. b. c. d.

Composition of Long-term debt No Yes No Yes Yes No No

Depreciation Method Yes

Answer: a Level of Learning: 1 Easy Learning Objective: 03-04 Topic Area: Disclosure Notes Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

42. Which of the following is not a required disclosure for related-party transactions? a. The nature of the relationship. b. A description of the transactions. c. The amounts due from or to related parties. d. The impact of the transactions on current year’s income. Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–12

Chapter 3 The Balance Sheet and Financial Disclosures Answer: d Level of Learning: 1 Easy Learning Objective: 03-04 Topic Area: Disclosure Notes Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

43. Disclosure notes would not include: a. Depreciation methods used and estimated useful life. b. Definition of cash equivalents. c. Details of pension plans. d. Data to adjust the financial statements so that they are not misleading. Answer: d Level of Learning: 1 Easy Learning Objective: 03-04 Topic Area: Disclosure Notes Blooms: Remember AACSB: Reflective thinking AICPA: FN Measurement

44. The principal concern with accounting for related-party transactions is: a. The size of the transactions. b. Differences between economic substance and legal form. c. The absence of legally binding contracts. d. The lack of accurate data to record transactions. Answer: b Level of Learning: 2 Medium Learning Objective: 03-04 Topic Area: Disclosure Notes Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement

45. A subsequent event for an entity with a December 31, 2016, year-end would not include: a. A change in the estimated useful lives of equipment in January 2017. b. An issuance of bonds in January 2017. c. An acquisition of another company in January 2017. d. A major uncertainty at December 31, resolved in January 2017. Answer: a Level of Learning: 2 Medium Learning Objective: 03-04 Topic Area: Disclosure Notes Blooms: Understand AACSB: Reflective thinking AICPA: FN Measurement Intermediate Accounting, Eighth Edition, Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3–13

Chapter 3 The Balance Sheet and Financial Disclosures 46. How are ...