ACCT 1201 Ch. 2 — Round 5: Quick Checks and Common Traps

Chapter 2 exceptions and interpretation: inventory classification, purchasing power, par value and APIC, current-ratio limits, inferring cash payments, contra-accounts, and off-balance-sheet financing. Chapter 1 background definitions removed.

A manufacturer’s inventory takes more than a year to produce and sell in its normal cycle. How does the Concepts handout classify it?

As a current asset.

Under the monetary unit assumption described in the handout, are amounts routinely adjusted for changes in money’s purchasing power?

No. They are reported in the national monetary unit without that adjustment.

What does par value mean for common stock in this chapter?

The stated amount assigned to each share, which may differ from its selling price.

Which equity account records proceeds from issuing shares above their par value?

Additional Paid-in Capital.

Is the Common Stock account always equal to all the cash raised by issuing shares?

No. With par-value shares, amounts above par go into a separate paid-in-capital account.

Why can a current ratio far above competitors suggest a problem?

It may mean too many resources are tied up in current assets instead of being used efficiently.

Does a current ratio below 1 automatically prove that a company cannot pay its bills?

No. Timing of cash flows and efficient cash management also matter.

A payable began at $500 and ended at $700. Credit purchases were $600, with no other changes. How much cash was paid?

$400. Beginning debt plus new purchases minus ending debt.

What does a contra-account do?

It reduces the related account or financial-statement category.

What does off-balance-sheet financing refer to?

Financing obligations that are not reported as liabilities on the balance sheet.

What short lease term do the slides give as an example of an obligation that may stay off the balance sheet?

An initial term of 12 months or less.