) The balance sheet reflects the financial position of an entity over

True or false 1) The balance sheet reflects the financial position of an entity over a period of time. 2) Solvency is a measure of a firm's ability to pay its obligations as they mature. 3) A firm that responds quickly to unexpected circumstances exhibits a high level of financial flexibility. 4) The relevance of the balance sheet is limited because many assets are recorded at historical costs. 5) Which of the following is not a cash flow measure? 6) If an entity can borrow funds to meet an unexpected financial crisis, it exhibits high ________. 7) List three areas in which the balance sheet provides important information to financial statement users. 8) List and explain three common cash flow measures based upon balance sheet information. 9) What are three limitations associated with the balance sheet? 10) Current assets are those that a firm expects to convert into cash within one year or its operating cycle, 11) Prepaid expenses are normally considered as current assets. 12) In order to be a cash equivalent, an investment must have a maturity date of three months or less. 13) Land held for resale is classified as property, plant, and equipment. 14) The portion of long-term debt that matures during the coming year is classified as a current liability. 15) IFRS specifies that biological assets be reported on the balance sheet. 16) The IFRS definition of current liabilities differs from the definition of current liabilities under GAAP. 17) Accumulated other comprehensive income appears on an entity's income statement. 1 18) Which of the following is a current asset? A) treasury bill maturing in 2 months B) land held for investment C) equipment D) goodwill 19) Which of the following is not a cash equivalent? A) commercial paper maturing in 75 days B) bond sinking fund C) money market funds D) treasury bill maturing in 30 days 20) Which of the following is not a current liability? A) income tax payable B) accounts payable C) subscriptions collected one year in advance D) bond sinking fund 21) Which of the following is a component of shareholders' equity? A) Dividends Payable B) Investment in Common Stock C) Minority Interest D) Other Comprehensive Income 22) Which of the following is a not a component of shareholders' equity? A) Common Stock B) Other Comprehensive Income C) Additional Paid in Capital D) Treasury Stock 23) Classify the following accounts as assets (A), liabilities (L), or shareholders' equity (SE) and whether they are current (C), non-current (NC), or not applicable (N/A). Account Merchandise Inventory Unearned Rent Prepaid Insurance Bonds Payable Investment in B Company Goodwill A, L, SE C,NC,N/A 2 Additional Paid in Capital Accumulated Other Comprehensive Income Equipment Income Tax Payable 24) The report format of the balance sheet lists assets on the left side and liabilities and stockholders' equity on the right side of the statement. 25) The account format lists assets on the left side and liabilities and stockholders' equity on the right side of the statement. 26) When preparing a balance sheet using IFRS, a company may choose to list noncurrent assets first. 27) A company reporting under IFRS may list its assets in either increasing or decreasing order of liquidity. 28) When preparing a balance sheet using GAAP, the term "net assets" is used. 29) Which of the following statements regarding balance sheet presentation is true? A) IFRS does not prescribe the ordering of liabilities within current and noncurrent groups. B) The account format lists liabilities and shareholders' equity directly below the assets. C) The report format lists liabilities and shareholders' equity on the right side of the statement. D) GAAP allows assets to be listed in either increasing or decreasing order of liquidity. 30) Hendrickson Corporation's trial balance for July 31, the end of its fiscal year, included the following accounts: Accounts Receivable Inventories Copyright Investments $25,000 60,000 20,000 45,000 3 Prepaid Insurance Note receivable, due in two years Cash in Bank 9,000 75,000 5,500 Investments are treasury bills that were purchased in May and mature on August 15. Prepaid insurance is a three year policy that was purchased on July 31. The amount that should be classified as current assets in the July 31 balance sheet is ________. A) $144,500 B) $138,500 C) $93,500 D) $213,500 31) Webb Corporation's trial balance for July 31, the end of its fiscal year, included the following accounts: Accounts Receivable Inventories Franchise Investments Prepaid Insurance Note Receivable Cash in Bank $35,000 50,000 35,000 50,000 5,000 90,000 8,000 The investment account consists of marketable securities of which management plans to sell half of by December 31. Prepaid insurance is a two year policy that was purchased on July 31. The note receivable is an installment note that will be paid in three equal installments on December 31 of each year. The amount that should be classified as current assets in the July 31 balance sheet is ________. A) $150,500 B) $153,000 C) $175,500 D) $210,500 32) Glover Corporation's trial balance for December 31, the end of its fiscal year, included the following accounts: Accounts Payable Dividends Payable Bond Payable, maturing in 9 years $35,000 20,000 36,000 4 Salaries Payable Note Payable, due in 1 year Note payable, due in 5 years 8,000 30,000 60,000 The amount that should be classified as current liabilities on Glover's December 31 balance sheet is ________. A) $63,000 B) $73,000 C) $93,000 D) $153,000 33) The statement of cash flows summarizes a firm's cash inflows and outflows at a specific point in time. 34) The statement of cash flows summarizes a firm's cash flows and outflows over a period of time. 35) Dividend payments to shareholders are classified as operating activities on the statement of cash flows. 36) Purchases of fixed assets are classified as investing activities on the statement of cash flows. 37) The statement of cash flows enables financial statement users to do all of the following except ________. A) assess an entity's ability to pay liabilities and dividends B) determine the extent to which an entity will require external financing C) assess the collectibility of existing accounts receivable D) reconcile differences between net income and the associated cash receipts and payments 38) Which of the following is classified as an operating activity on a statement of cash flows? A) payment of dividends B) sale of equipment C) issuance of common stock D) purchase of inventory 39) Which of the following is classified as a financing activity on a statement of cash flows? A) purchase of a vendor's common stock. B) sale of equipment at a gain. C) payment of dividends to shareholders. D) redemption of a sinking fund. 5 40) All of the following activities are classified as operating activities on a statement of cash flows except ________. A) purchase of inventory B) sale of treasury bills with a 60-day maturity date C) payments from customers D) purchase of a Certificate of Deposit 41) When preparing a the operating section of the statement of cash flows using the indirect method, which of the following items are subtracted from net income? A) depreciation expense B) gain on sale of long-term assets C) decrease in prepaid expenses D) increase in income taxes payable 42) Which of the following is considered an investing activity when preparing the statement of cash flows? A) a purchase of equipment B) a payment on an equipment note C) sale of common stock D) payment of interest on a bond issue 43) Which of the following is not considered an investing activity when preparing the statement of cash flows? A) a purchase of equipment B) a sale of investments C) payment of dividends D) payments on notes receivable 44) Moore Corporation reported net income of $210,000 for the current year ended June 30. Accounts receivable had a beginning balance of $35,000 and an ending balance of $39,000. Accounts payable had a beginning balance of $29,000 and an ending balance of $32,000. Assuming that this is all of the relevant information, Moore's cash flows from operating activities are ________. A) $203,000 B) $209,000 C) $211,000 D) $217,000 45) Hitchcock Enterprises sold a vacant plot of land for $20,000. The 6 company had paid $5,000 for the land ten years ago. On the statement of cash flows, this transaction would be reported as a ________. A) operating cash inflow of $15,000 B) investing cash inflow of $15,000 C) investing cash flow of $20,000 D) financing cash inflow of $20,000 46) Presented below are the comparative December 31 financial statements for Martin Industries, Inc. (in $ Millions). Prepare a statement of cash flows for December 31, Year 2 using the indirect method. Martin Industries, Inc Balance Sheets At December 31, Year 2 and Year 1 Year 2 $96,71 Cash 9 100 Accounts Receivable ,000 206 Inventory ,250 1 Prepaid Insurance ,875 1,562 Land, Buildings, and Equipment ,500 (762 Accumulated Depreciation ,500) 19 Investments ,375 $1,224, Total Assets 219 $95,42 5 25 ,000 31 ,250 250 ,000 375 ,000 447 ,544 $1,224, 219 Accounts Payable Salaries Payable Notes Payable Bonds Payable Common Stock Retained Earnings 7 Year 1 $28,694 85, 313 181, 250 2, 500 1,406, 250 (715, 000) 106, 250 $1,095, 256 $185,83 8 30, 625 93, 750 375, 000 410, 044 $1,095, 256 Additional information for Year 2 (1) Sold available for sale securities costing $86,875 for $92,500. (2) Equipment costing $25,000 with a book value of $6,250 was sold for $7,500. (3) Issued 8% bonds at face value for $250,000. (4) Purchased new equipment for $181,250 and paid cash. (5) Paid cash dividends of $25,000. (6) Net income was $62,500. 47) Presented below are the December 31 financial statements for Phillips Corporation (in $ Millions). Assets Phillips Corporation Balance Sheets as of December 31 Year 2 Cash Accounts Receivable Inventory $29,025 263 ,250 243 ,000 Long-Term Investments Totals $535,275 Year 1 $162,00 0 14 1,750 30 3,750 8 1,000 $688,50 0 Liabilities and Shareholders' Equity Accounts Payable Other Current Liabilities Notes Payable Common Stock Retained Earnings Totals $162,00 0 2 0,250 13 5,000 16 8,750 20 2,500 $688,50 $535,275 0 $101,250 32 ,400 94 ,500 168 ,750 138 ,375 Phillips Corporation Income Statement For the Year Ended December 31, Year 2 8 Operating expenses $756,00 0 50 6,250 24 9,750 24 3,000 Income from operations Loss on Sale of long term investment Net loss 6,750 (1 0,125) $(3,375) Sales Cost of Goods Sold Gross Profit Cash dividends of $60,750 were paid to shareholders during Year 2. Prepare a statement of cash flows using the direct method. 48) Explain the difference between the direct and indirect methods of preparing the operating section of the statement of cash flows. Which method is preferred by GAAP? 9 Question No. Solutions al 1 False - Balance sheet reflects financial position at a point of time no 2 True - Solvency is - A measure of a firm's ability to pay its obligations as they m 3 4 True - Balance sheets do not show true value of assets. Historical co valuation. 5 6 Full question is not given If an entity can borrow funds to meet an unexpected financial crisis 7 1. The cash flow statement tells you the sources and uses of cash d 2. Balance sheet helps to know Liquidity, Solvency & Financial Flexi 3. Equity shareholders can see what they have left and what is resi 8 Three common cash flow measures based upon balance sheet info 1. Solvency :- A measure of a firm's ability to pay its obligations as t - A firm with high debt relative to equity will have iss (low solvency) 2. Liquidity :- How quickly a firm can convert assets into cash and p - Determine whether a firm will have the resources dividends, buy back equity shares. 3. Financial Flexibility :- Entity's ability to respond to unexpected n timing of cash flows. 9 Three Limitations of Balance sheets are as follows:1. Balance sheets do not show true value of assets. Historical cost i not reflect current market valuation. 2. Some of the current assets are valued on an estimated basis, so t reflect the true financial position of the business. 3. The balance sheet can not reflect those assets which cannot be e loyalty of workers. 10 Current Assets :- Resources that the firm expects to convert to cash Investments, AR, Inventory, Prepaids Operating Cycle :- The period of time from the acquisition of goods goods. 11 12 True :- Prepaid expenses are those expenses which paid in advance True :- In order to be a cash equivalent, an investment must have a 13 FALSE:- PP&E are those Assets that are tangible, long-lived, and use - Include buildings, land, machinery, natural resources 14 False:- Long-term liabilities are liabilities with a due date that exten years. Long-term liabilities are a way to show the existence of debt The portion of long-term liabilities that must be paid in the coming current liability section of the balance sheet. 15 16 True The classification of debts under GAAP is split between current liab noncurrent liabilities, which are debts that will not be repaid within classification of liabilities, as all debts are considered noncurrent on 17 False :- Accumulated other comprehensive income is an equity acc financial position (balance sheet) of an entity. 18 19 20 21 22 (A) - treasury bill maturing in 2 months (B) - bond sinking fund (C) - subscriptions collected one year in advance (D) - Other Comprehensive Income (D) -Treasury Stock 23 Account Merchandise Inventory - Asset (A), Current (C) Unearned Rent - Liability (L), Current (C) Prepaid Insurance - Assets (A), Current (C) Bonds Payable - Liability (L), Non Current (NC) Investment in B Company - Assets (A), Non current (NC) Goodwill - Assets (A), Non Current (NC) Additional Paid in Capital - Sharehoders' equity (SE), NA Accumulated Other Comprehensive Income - Sharehoders' equity Equipment - Assets (A), Non Current (NC) Income Tax Payable - Liability (L), Current (C) 24 False:- This form is more of a traditional report that is issued by com equity. 25 True:- The account form consists of two columns displaying assets o column. 26 27 FALSE :- When preparing a balance sheet using US GAAP, a compan FALSE:- A company reporting under US GAAP may list its assets in e 28 True :- Under US GAAP, Off-setting is permitted where the parties o offset and where the offsetting is enforceable by law. An exemption under master netting arrangements where a net presentation is pe 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 True :- (D) GAAP allows assets to be listed in either increasing or de (B) $138,500 (C) $175,500 (C) $93,000 False :- The statement of cash flows summarizes a firm's cash inflow TRUE :- The statement of cash flows summarizes a firm's cash flows Fales :- Dividend payments to shareholders are classified as financi True :- Purchases of fixed assets are classified as investing activities (C) assess the collectibility of existing accounts receivable (D) purchase of inventory (C) payment of dividends to shareholders (D) purchase of a Certificate of Deposit (B) gain on sale of long-term assets (A) a purchase of equipment (C) payment of dividends (B) $209,000 (C) investing cash flow of $20,000 46. Cash flow statement'!C3 Cash flows from operating activities Cash inflows - From customers = $634,500 Cash outflows - To suppliers of goods = (506,250) - For operating expenses = (230,850) Net cash used by operating activities = $(102,600) 47 Cash flows from investing activities Sale of long term investments = 70,875 Net cash flows from investing activities = 70,875 Cash flows from financing activities Payment of notes payable = (40,500) Payment of cash dividends = (60,750) Net cash flows from financing activities = (101,250) Net increase in cash = (132,975) Cash balance, January 1 = 162,000 Cash balance, December 31 = $29,025 48 The main difference between the direct method and the indirect m of the statement of cash flows. (There is no difference in the cash fl Under the direct method, the cash flows from operating activities w paid to suppliers. In contrast, the indirect method will show net inc income to the cash amount from operating activities. The direct method must also provide a reconciliation of net income automatically under the indirect method.) Nearly all corporations prepare the statement of cash flows using th Under GAAP - Use of the direct or indirect method is allowed. Und from operating activities. Solutions alongwith reasons ncial position at a point of time not over a period of time. ty to pay its obligations as they mature. w true value of assets. Historical cost is criticized for its inaccuracy since it may not reflect current market meet an unexpected financial crisis, it exhibits high Financial Flexibility. ou the sources and uses of cash during the period. quidity, Solvency & Financial Flexibilty of the business. hat they have left and what is residual amount for them after deducting liabilities from Assets es based upon balance sheet information are as follows :'s ability to pay its obligations as they mature. ebt relative to equity will have issues meeting fixed payments of debt can convert assets into cash and pay liabilities, with minimal risk of loss. her a firm will have the resources to pay currently maturing obligations, pay . bility to respond to unexpected needs and opportunities by taking actions that alter the amounts and ets are as follows:e value of assets. Historical cost is criticized for its inaccuracy since it may on. valued on an estimated basis, so the balance sheet is not in a position to of the business. ct those assets which cannot be expressed in monetary terms, such as skill, intelligence, honesty, and 1 he firm expects to convert to cash, use, or consume within one operating cycle. e.g Cash, ST ids me from the acquisition of goods to the point at which the entity receives cash from the sale of the e expenses which paid in advance & they are normally considered as current assets alent, an investment must have a maturity date of three months or less. at are tangible, long-lived, and used in the production and sale of the companies. ry, natural resources bilities with a due date that extends over one year, such as bonds payable with a maturity date of 10 way to show the existence of debt that can be paid in a time period longer than one year. s that must be paid in the coming 12-month period are moved from the long-term liability section to the ance sheet. 1 GAAP is split between current liabilities, where a company expects to settle a debt within 12 months, and ebts that will not be repaid within 12 months. With IFRS, there is no differentiation made between the bts are considered noncurrent on the balance sheet. ehensive income is an equity account. All equity accounts are reported on the statement of e sheet) of an entity. onths ear in advance e ), Current (C) rent (C) rrent (C) Current (NC) (A), Non current (NC) nt (NC) oders' equity (SE), NA ve Income - Sharehoders' equity (SE), NA ent (NC) Current (C) tional report that is issued by companies. Assets are always present first followed by liabilities and of two columns displaying assets on the left column of the report and liabilities and equity on the right e sheet using US GAAP, a company may choose to list noncurrent assets first. er US GAAP may list its assets in either increasing or decreasing order of liquidity. g is permitted where the parties owe each other determinable amounts, where there is an intention to enforceable by law. An exemption to these requirements applies to derivative financial instruments ts where a net presentation is permitted. This is not permitted under IFRS. be listed in either increasing or decreasing order of liquidity. ws summarizes a firm's cash inflows and outflows for the period not at specific point of time. ws summarizes a firm's cash flows and outflows over a period of time. reholders are classified as financing activities on the statement of cash flows. re classified as investing activities on the statement of cash flows. ting accounts receivable ties $634,500 ods = (506,250) expenses = (230,850) ties = $(102,600) es 0,875 tivities = 70,875 es 00) 750) tivities = (101,250) 0 9,025 direct method and the indirect method involves the cash flows from operating activities, the first section here is no difference in the cash flows reported in the investing and financing activities sections.) h flows from operating activities will include the amounts for lines such as cash from customers and cash ndirect method will show net income followed by the adjustments needed to convert the total net operating activities. ide a reconciliation of net income to the cash provided by operating activities. (This is done method.) e statement of cash flows using the indirect method. r indirect method is allowed. Under both methods, net income must be reconciled to net cash flows Martin Industries Inc. Cash Flow from operating Activity Net Income Add: Depreciation Add : Decrease in CA & Increase in CL Prepaid Insurance Less : Increase in CA & Decrease in CL Account Receivables Inventory Accounts Payables Salaries Payables Notes Payables Less : Extraordinary item Cash flow from Operating Activity (A) Amount (in $) 62,500.00 47500 625 -14687 -25000 -90413 -5625 -62500 -6875 -94,475.00 Cash Flow from Investing Activity Sale of Securities Purchased of equipment Sale of equipment Cash flow from Investing Activity (B) 92500 -181250 7500 -81250 Cash Flow from Financing Activity Issue of 8% bond Less ; Dividend Paid 250000 -25000 Cash flow from Financing Activity (C) 225000 Net Cash Flow (A+B+C) 49,275.00 Add: Opening Cash Balance 28694 Closing Balance 77969