Test Bank Balance Sheet & Cash Flows Chapter.7

Chapter 7

Multiple Choice

1. On a balance sheet, what is the preferable presentation of notes or accounts receivable from officers, employees, or affiliated companies?
2. As trade notes and accounts receivable if they otherwise qualify as current assets
3. As assets but separately from other receivables
4. As offsets to capital
5. By means of notes or footnotes
6. The balance sheet can be used to analyze all of the following except
   1. Financial flexibility.
   2. Solvency.
   3. Liquidity.
   4. Profitability
7. The basis for classifying assets as current or noncurrent is the period of time normally elapsed from the time the accounting entity expends cash to the time it converts
8. Inventory back to cash or 12 months, whichever is shorter
9. Receivables back into cash or 12 months, whichever is longer
10. Tangible fixed assets back into cash or 12 months, whichever is longer
11. Inventory back to cash or 12 months, whichever is longer
12. Current assets are presented on the balance sheet in
    1. Descending order of their balances.
    2. Ascending order of their balances.
    3. Order of their liquidity.
    4. Reverse order of their liquidity.
13. The valuation basis used in conventional financial statements is
14. Replacement cost
15. Market value
16. Original cost
17. A mixture of costs and values
18. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
    1. Statement of cash flows.
    2. Retained earnings statement.
    3. Statement of financial position.
    4. Income statement.
19. A transaction that would appear as an application of funds on a conventional funds statement using the all-financial-resources concept, but not on a statement using the traditional working capital concept would be the
20. Acquisition of property, plant, and equipment for cash
21. Reacquisition of bonds issued by the reporting entity
22. Acquisition of property, plant, and equipment with an issue of common stock
23. Declaration and payment of dividends
24. There would probably be a major difference between a statement of source and application of working capital and a cash flow statement in the treatment of
25. Dividends declared and paid
26. Sales of noninventory assets for cash at a loss
27. Payment of long-term debt
28. A change during the period in the accounts payable balance
29. A basic objective of the statement of cash flows is to
30. Supplant the income statement and balance sheet
31. Disclose changes during the period in all asset and all liability accounts
32. Disclose the change in working capital during the period
33. Provide essential information for financial statements users in making economic decisions
34. A statement of cash flows should be issued by a profit-oriented business
35. As an alternative to the statement of income and retained earnings
36. Only if the business classifies its assets and liabilities as current and noncurrent
37. Only when two-year comparative balance sheets are not issued
38. Whenever a balance sheet and a statement of income and retained earnings are issued
39. When preparing a statement of changes in financial position using the cash basis for defining funds, an increase in ending inventory over beginning inventory will result in an adjustment to reported net earnings because
40. Funds were increased since inventory is a current asset
41. The net increase in inventory reduced cost of goods sold but represents an assumed use of cash
42. Inventory is an expense deducted in computing net earnings, but is not a use of funds
43. All changes in noncash accounts must be disclosed under the all financial resources concept
44. Which of the following should theoretically be presented in a statement of changes in financial position only because of the all-financial-resources concept?
45. Conversion of preferred stock to common stock
46. Purchase of treasury stock
47. Sale of common stock
48. Declaration of cash dividend
49. Making and collecting loans and disposing of property, plant, and equipment are
    1. Liquidity activities.
    2. Financing activities.
    3. Investing activities.
    4. Operating activities
50. In preparing a statement of cash flows, which of the following transactions would be considered an investing activity?
    1. Sale of merchandise on credit
    2. Declaration of a cash dividend
    3. Issuance of bonds payable at a discount
    4. Sale of equipment at book value
51. When preparing a funds statement using the all financial resources concept, the retirement of long-term debt by the issuance of common stock should be presented in a statement of changes in financial position as a

Source of Funds Use of Funds

1. No No
2. No Yes
3. Yes No
4. Yes Yes
5. The working capital format is one possible format for presenting a statement of changes in financial position. Which of the following formats is (are) also theoretically acceptable?

Cash Quick Assets

1. Acceptable Not acceptable
2. Not acceptable Not acceptable
3. Not acceptable Acceptable
4. Acceptable Acceptable
5. A gain on the sale of plant assets in the ordinary course of business should be presented in a statement of cash flows as a (an)
6. Source and use of cash
7. Use of cash
8. Addition to income from continuing operations
9. Deduction from income from continuing operations
10. Which of the following should be presented in a statement of cash flows supplemental schedule?

Conversion of Conversion of

Long-term debt preferred stock

to common stock to common stock

1. No No
2. No Yes

c. Yes Yes

1. Yes No
   • • 1. A measure of a company’s financial flexibility is
          1. Return on assets ratio
          2. Return on sales ratio
          3. Free cash flow
          4. Accounts receivable turnover ratio
       2. The balance sheet discloses
          1. Stocks
          2. Flows
          3. Both stocks and flows
          4. Neither stocks nor flows
       3. Which of the following is not a balance sheet element?
          1. Assets
          2. Liabilities
          3. Gains
          4. Equities
       4. Which of the following is not a component of equity?
          1. Common stock
          2. Treasury stock
          3. Retained earnings
          4. Unearned revenue
       5. Which of the following is not an important aspect of SFAS No. 157 (FASB ASC 820)?
          1. A new definition of fair value.
          2. A requirement that all assets and liabilities are to be measured at their fair value.
          3. A fair value hierarchy used to classify the source of information used in fair value measurements (for example, market based or nonmarket based).
          4. New disclosures of assets and liabilities measured at fair value based on their level in the hierarchy.
       6. The definition of fair value in SFAS No 157 (FASB ASC 820) is
          1. Entry price based
          2. Exit price based
          3. Replacement cost based
          4. Historical cost based
       7. The SFAS No 157 (FASB ASC 820) fair value hierarchy contains
          1. Two level
          2. Three levels
          3. Four levels
          4. Five levels
       8. Level 1 of fair value hierarchy measures originally outlined in SFAS No. 157 are based on:
          1. Historical cost of similar assets.
          2. Market prices for identical assets.
          3. Market prices for similar assets.
          4. Unobservable inputs.
       9. Which of the following is the lowest level of the SFAS 157 (FASB ASC 820) fair value hierarchy?
          1. Unobservable inputs (that are corroborated by observable market data)
          2. Unobservable inputs (that are not corroborated by observable market data)
          3. Observable market-based inputs (or unobservable inputs that are corroborated by market data)
          4. Quoted market prices for identical assets or liabilities in active markets
       10. The calculation net income/sales is the formula for which of the following ratios
           1. Return on assets
           2. Profit margin
           3. Asset turnover
           4. Asset usage
       11. The calculation sales/average total assets is the formula for which of the following ratios
           1. Return on assets
           2. Profit margin
           3. Asset turnover
           4. Asset usage
       12. The calculation net income/average total assets is the formula for which of the following ratios
           1. Return on assets
           2. Profit margin
           3. Asset turnover
           4. Asset usage
       13. The firm’s ability to use its financial resources to adapt to change is the definition of
           1. Liquidity
           2. Solvency
           3. Financial flexibility
           4. Working capital
       14. A firm’s ability to obtain cash for business operations change is the definition of
           1. Liquidity
           2. Solvency
           3. Financial flexibility
           4. Working capital
2. The firm’s ability to convert an asset to cash or to pay a current liability change is the definition of
   • • • 1. Liquidity
         2. Solvency
         3. Financial flexibility
         4. Working capital
3. Net cash provided (used) by operating activities − net cash used in acquiring property, plant is the calculation for
   1. Free cash flow
   2. Cash flow from investing activities
   3. Working capital
   4. Current ratio

35. Investments in equity securities are disclosed as current assets on a company’s balance sheet if

a. Management intends to sell them within a year and they have a ready market exists.

b. The fair market value cannot be determined.

1. Management intends to convert them into common stock within one year.
2. Management owns less than 50% of the outstanding stock.
3. What is reported on the statement of cash flows?
4. Operating, investing, and financing activities of an entity for a period of time
5. All revenues and expense listed by operating, financing, and operating actitivity

c. Operating, investing, and financing activities of an entity at the balance sheet date

d. A detail of all incoming and outgoing cash flows of a business

Essay

1. Discuss the following balance sheet elements as defined by SFAC No. 6:
   1. Assets
   2. Liabilities
   3. Equity
2. List three valuation techniques currently used on the balance sheet and discuss how each are used (What accounts?).
3. Define the following terms:
   1. Current assets
   2. Investments
4. Securities acquired for specific purposes, such as using idle funds for long periods or exercising influence on the operations of another company.
5. Assets not currently in use by the business organization, such as land held for a future building site.
6. Special funds to be used for special purposes in the future, such as sinking funds.
   1. Property, plant and equipment
   2. Current liabilities
   3. Treasury stock
7. How is fair value defined in SFAS No. 157 (FASB ASC 820)?
8. Describe the fair value hierarchy as defined in SFAS No.157(FASB ASC 820).
9. FSP FAS 157‐4 provided guidance on how to determine when the volume and level of activity for an asset or liability has significantly decreased and identified the circumstances in which a transaction is not orderly. What are these factors?
   1. There are few recent transactions.
   2. Price quotations are not based on current information.
   3. Price quotations vary substantially either over time or among market makers.
   4. Indexes that previously were highly correlated with the fair values of the asset or liability are demonstrably uncorrelated with recent indications of fair value for that asset or liability.
   5. There is a significant increase in implied liquidity of risk premiums, yields, or performance indicators for observed transactions or quoted prices when compared with the reporting entity’s estimate of expected cash flows, considering all available market data about credit and other nonperformance risks for the asset or liability.
   6. There is a wide bid–ask spread or a significant increase in the bid–ask spread.
   7. There is a significant decline or absence of a market for new issuances for the asset or liability or similar assets or liabilities.
   8. Little information is released publicly
10. After considering the significance and relevance of each of the factors that indicate the volume and level of activity for an asset or liability is not orderly, judgment must be used to determine whether the market is active and if a significant adjustment to the transactions or quoted prices may be necessary to estimate fair value. What are some circumstances identified in FSP FAS 157-4 that might indicate that a transaction is not orderly?
    1. There was not adequate exposure to the market for a period before the measurement date to allow marketing activities that are usual and customary for transactions involving such assets or liabilities under current market conditions.
    2. There was a usual and customary marketing period, but the seller marketed the asset or liability to a single market participant.
    3. The seller is in or near bankruptcy or receivership (i.e., distressed), or the seller was required to sell to meet regulatory or legal requirements (i.e., forced).
    4. The transaction price is an outlier when compared with other recent transactions for the same or similar asset or liability.
11. In May 2011, FASB, issued Accounting Standards Update 2011‐04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. What is the purpose of this ASU?
12. Obtain a company’s financial statements and ask the students to compute the following:
    1. Return on investment
    2. Adjusted return on investment
    3. Profit margin ratio
    4. Asset turnover ratio
    5. Free cash flow
13. Where did the profits go?
14. Why weren’t dividends larger?
15. How was it possible to distribute dividends in the presence of a loss?
16. Why are current assets down when there was a profit?
17. Why is extra financing required?
18. How was the expansion financed?
19. Where did the funds from the sale of securities go?
20. How was the debt retirement accomplished?
21. How was the increase in working capital financed?
22. Define the following terms:
    1. Liquidity
    2. Solvency
    3. Financial flexibility
23. Discuss the direct versus indirect methods of preparing the statement of cash flows.
24. Cash collected from customers
25. Interest and dividends received
26. Other operating cash receipts
27. Cash paid to employees and other suppliers of goods and services
28. Interest paid
29. Income taxes paid
30. Other operating cash payments
31. Define and discuss the three major sections of the statement of cash flows.

The three sections of the statement of cash flows are 1. Cash flows from operating activities, 2. Cash flows from investing activities and 3. Cash flows from financing activities. Cash flows from operating activities are generally the cash effect from transactions that enter into the determination of net income exclusive of financing and investing activities. Investing activities include making and collecting loans; acquiring and disposing of debt or equity securities of other companies; and acquiring and disposing of property, plant, and equipment, and other productive resources. Financing activities result from obtaining resources from owners, providing owners with a return of and a return on their investment, borrowing money and repaying the amount borrowed, and obtaining and paying for other resources from long-term creditors.