Chapter 2 Practice Quiz Answers

Assets=Liabilities+(Stockholders’) Equity

The balancing equation is expressed as:

Common-size balance sheets allow for comparison of firms with different levels of total assets by introducing a common denominator.

The common-size balance sheet reveals the composition of assets within major categories.

The common-size balance sheet reveals the capital and the debt structure of the firm.

True statements about common-size balance sheets

Accounts receivable, inventory, cash equivalents

Accounts that would be classified as current assets on the balance sheet.

money market funds

commercial paper

US treasury bills

Cash equivalents

Trading securities and securities available for sale.

What marketable securities are reported at fair value?

Accounts receivable is growing at a large rate and the allowance for doubtful accounts is decreasing.

what should alert the analyst to the potential for manipulation when analyzing accounts receivables and the allowance for doubtful accounts?

FIFO

Which method of inventory assumes the last units purchased will remain in ending inventory on the balance sheet?

a retail firm

Which type of firm would most likely carry the most finished goods inventory?

LIFO

Which method of inventory would be least likely to be used by a European firm

income tax concept

LIFO is…

generally deflationary.

Using FIFO for high-technology products makes sense if the firm is trying to reduce taxes because the technology industry is ….

historical cost less accumulated depreciation

Fixed assets are reported as what on the balance sheet?

When one company acquires another company for a price in excess of the fair market value of the net identifiable assets acquired.

when will a firm regard goodwill on its books?

Notes payable and deferred taxes.

Which of the following accounts could be categorized as either a current or noncurrent liability depending on date the debt is due?

Mortgages, convertible debentures, bonds payable.

Which items would be classified as long-term debt?

As current or noncurrent assets or liabilities.

How are deferred taxes recorded on a balance sheet?

retained earnings

Which stockholders’ equity account represents the sum of every dollar a company has earned since its inception, less any payments made to shareholders in the form of dividends?

discretionary expenses

an item that would not be a quality of financial reporting issue related to the balance sheet

Financial position at a point in time.

What does the balance sheet summarize for a business enterprise?

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.

What items should be calculated when analyzing the accounts receivable and allowance for doubtful accounts?

retailers

What type of firm generally has the highest proportion of inventory to total assets?

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.

Why is the method of valuing inventory important?

LIFO, FIFO, average cost

What are three major cost flow assumptions used by U.S. companies in valuing inventory?

understates cost of goods sold

the FIFO method does what on the income statement?

LIFO produces the largest cost of goods sold expense in a period of inflation and thereby lowers taxable income and taxes.

Why would a company switch to the LIFO method of inventory valuation?

In the notes to the financial statements.

Where can one most typically find the cost flow assumption used for inventory valuation for a specific company?

manufacturers

What type of firm generally has the highest proportion of fixed assets to total assets?

Companies should determine whether goodwill has lost value, and if so, the loss in value should be written off as an impairment expense.

How is goodwill evaluated?

Accounts payable, short-term debt, unearned revenues.

Which of the following liabilities would be included in the current liabilities section on the balance sheet?

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.

What do current liabilities and current assets have in common?

Salaries, rent, insurance

Which items could cause the recognition of accrued liabilities?

Mortgages, long-term notes payable, bonds due in 10 years

which would be classified as long term debts?

Common stock, additional paid-in capital, retained earnings

What accounts are most likely to be found in the stockholders' equity section of the balance sheet?

The amount by which the original sales price of stock exceeds the par value.

What does the additional paid-in capital account represent?

All undistributed earnings.

What does the retained earnings account measure?