Chapter 11—THE BALANCE SHEET
TRUE/FALSE
1. If the balance sheet and income statement are non-articulated, they are linked together
mathematically without any loose ends.
2. With the articulated approach to financial statements, each statement is defined and measured
independently of the other.
3. The comprehensive income approach required in SFAS No. 130 favors articulation.
4. One consequence of the revenue-expense approach is to burden the balance sheet with by-
products of income measurement rules.
5. There are only a few examples of accounting standards that emphasize the effects of transactions
on the income statement to the exclusion of their impact on the balance sheet.
6. Under the revenue-expense approach, the income statement is regarded as simply a way of
classifying and reporting on changes that occur in a firm’s net assets.
7. The definition of assets establishes what types of economic factors will appear in the balance
sheet.
8. The asset-liability approach is arguably superior to a revenue-expense approach to defining
accounting elements.
9. Unrealized capital adjustments in owners’ equity are becoming more prevalent as a result of
SFAC No. 130 on comprehensive income.
10. The asset-liability approach complements the expense-liability approach because the former is
applicable to the balance sheet and the latter is applicable to the income statement.
Chapter 11—THE BALANCE SHEET
11. Although the revenue-expense approach is the basic orientation of current financial reporting
practice, some specific accounting standards reflect an asset-liability approach.
12. The FASB defines comprehensive income using the income-expense approach to defining
accounting elements.
13. The “future service potential” of an asset may be realized as a direct market exchange for another
asset, or through conversion in a manufacturing operation for finished goods.
14. An executory contract is a contract unperformed by both parties.
15. An asset should be initially recorded at either its historical acquisition cost or its cash equivalent
purchase price, whichever is greater.
16. Inventory is carried at the lower of historical cost or replacement cost.
17. SFAS requires that abnormal amounts of idle facility costs, freight, handling, and spoilage be
treated as current period costs.
18. In SFAS No. 121, both the recognition and measurement criteria for the impairment of asset
event is based on the excess of the carrying value of the asset over its fair market value less costs
of disposal.
19. In SFAS No. 153, when exchanged assets have significantly different cash flows, the new asset is
recorded at book value of the traded in asset.
20. All intangible assets are initially recorded at the sacrifice incurred to acquire the assets.
21. A constructive obligation is one that is implied rather than expressly written.
Chapter 11—THE BALANCE SHEET
22. Although not specifically mentioned in the most recent definition of liabilities, deferred credits
continue to be part of the liability section in the balance sheet under present practices.
23. APB Statement 4 and SFAC No. 5 indicate that liabilities are measured at amounts established in
the transaction, usually amounts to be paid it the future, but never discounted.
24. The only method allowed by GAAP in accounting for convertible bonds is to treat the debt as
conventional debt until conversion.
25. Manditorily redeemable financial instruments are classified as assets on the balance sheet.
26. Owners’ equity is defined as the stockholders’ residual interest in the net assets of the firm.
27. In a sole proprietorship, there is a legal distinction between contributed capital and earned capital.
28. There is a movement in accounting policy toward fair or current values on the balance sheet.
29. U.S. Corporations are not permitted to trade in their own securities.
30. Derivatives are financial instruments whose value is based upon other financial instruments,
stock indexes or interest rates, or interest rate indexes.
31. SFAS 133 values derivatives at fair value.
32. SFAS No. 142 converted goodwill into a non-amortizable asset subject to its own impairment
rules.
Chapter 11—THE BALANCE SHEET
MULTIPLE CHOICE
1. Which of the following is a true statement?
a. Under the articulated concept, accounting elements are defined using the revenue-expense
approach rather than the asset-liability approach.
b. The articulated approach severs the mathematical relationships between the balance sheet and
income statement.
c. Under the articulated approach, contributed capital, retained earnings, and unrealized capital
adjustments are subclassifications of owners’ equity.
d. Recent SFASs have advocated the non-articulated approach to financial statements.
2. Which of the following is a true statement?
a. Under the articulation approach, all accounting transactions are reported on the income
statement.
b. Because income is a subclassification of retained earnings, the income statement and balance
sheet articulate.
c. Under articulation, adjustments to the income of prior years are reflected on the current year
income statement.
d. All transactions can be easily categorized using the current accounting classification system.
3. Which of the following is not true regarding the revenue-expense approach to defining
accounting elements?
a. The revenue-expense approach defines assets and liabilities as a by-product of revenues and
expenses.
b. Under the revenue-expense approach, the balance sheet is burdened with by-products of
income measurement rules.
c. Deferred charges and deferred credits are ambiguous debits and credits that appear on the
balance sheet under the revenue-expense approach.
d. There are very few examples of the use of the revenue-expense approach in recent accounting
standards.
4. Which of the following is not true regarding the asset-liability approach to defining accounting
elements?
a. The asset-liability approach focuses on the measurement of net assets.
b. The asset-liability approach is arguably superior to the revenue-expense approach.
c. The asset-liability approach is the basic orientation of current financial reporting practices.
d. SFAS No. 109 uses the asset-liability approach by focusing income tax accounting on the
recognition of tax assets and liabilities.
Chapter 11—THE BALANCE SHEET
5. Which of the following is a true statement?
a. Asset-liability advocates are not prepared to tolerate a fluctuating income statement that may
include unrealized holding gains and losses.
b. Asset-liability advocates and revenue-expense advocates are polarized in part because the
financial statements are non-articulated.
c. Revenue-expense proponents are prepared to introduce deferred charges and deferred credits
in order to smooth income measurement.
d. With articulation, it is possible to have a revenue-expense-based income statement and an
asset-liability-based balance sheet.
6. Which of the following is not a formal definition of assets that has been used by the accounting
profession in the US?
a. Something represented by a debit balance that is or would be properly carried forward upon a
closing of books of account according to the rules or principles of accounting, on the basis that it
represents either a property right or value acquired, or an expenditure made which has created a
property or is properly applicable to the future.
b. Economic resources of an enterprise that are recognized and measured in conformity with
generally accepted accounting principles as well as certain deferred charges that are not resources
but that are recognized and measured in conformity with generally accepted accounting
principles.
c. Probable future economic benefits obtained or controlled by a particular entity as a result of
past transactions or events.
d. Only those economic resources that can be severed from the firm and sold.
7. Which of the following applies to the measurement and recognition of an asset?
a. A pervasive principle in accounting is that an asset is measured at the market value of the
consideration exchanged or sacrificed to acquire it and place it in operating condition.
b. In some cases, an asset may be recorded at an amount greater than its cash equivalent
purchase price.
c. When the consideration given for an asset is non-monetary, the market value of that
consideration generally provides the most reliable basis for measuring acquisition cost.
d. Assets are always measured and reported based on historical cost.
8. Which one of the following measurement bases applies to receivables?
a. Historical cost
b. An approximation of net realizable value
c. Selling price through factoring
d. Discounted present value
Chapter 11—THE BALANCE SHEET
9. Which one of the following measurement bases applies to investments not subject to equity
accounting that are classified as trading securities?
a. Current value
b. Book value
c. Effective rate of interest method
d. Lower-of-cost or market
10. Which one of the following measurement bases applies to investments that are classified as held-
to-maturity?
a. Current value
b. Book value
c. Effective rate of interest method
d. Lower-of-cost or market
11. Which of the following is not a true statement regarding assets as they appear on the balance
sheet?
a. Historical cost gives a good indication of the productive value of assets.
b. Assets held for sale and measured at net realizable value represent a high degree of certainty
as to measurement reliability.
c. Certain types of deferred charges do not have any direct effect on future cash flows.
d. In terms of additivity, it is questionable if a balance sheet should be added.
12. Which of the following statements is not true regarding the three major definitions of accounting
liabilities that have evolved over time?
a. Two of the three definitions imply a proprietary view of the firm.
b. The first definition made no distinction between owner’s equity and liabilities.
c. Not all definitions have included deferred credits as liabilities.
d. In all three definitions, liabilities include only credit balances that involve a debtor and
creditor relation.
13. Which one of the following types of liabilities is not currently recognized on balance sheets?
a. Deferred credits
b. Constructive obligations
c. Equitable obligations
d. Contingent liabilities
Chapter 11—THE BALANCE SHEET
14. Which one of the following types of liabilities represents a duty not contractually present but
which may nevertheless exist due to ethical principles of fairness?
a. Deferred credits
b. Constructive obligations
c. Equitable obligations
d. Contingent liabilities
15. Which of the following types of liabilities do not represent obligations on the firm to transfer
assets in the future, but are past transactions being postponed from the income statement until
future periods?
a. Deferred credits
b. Constructive obligations
c. Equitable obligations
d. Contingent liabilities
16. Which one of the following types of liabilities represents an existing situation involving
uncertainty as to possible gain or loss that will ultimately be resolved when one or more future
events occur or fail to occur?
a. Deferred credits
b. Constructive obligations
c. Equitable obligations
d. Contingent liabilities
17. Which of the following is a true statement?
a. There is more variety in liability groups than in asset groups.
b. Most liabilities are non-contractual in nature.
c. There are natural subclassifications of liabilities and assets that can be inferred from the
balance sheet.
d. Liabilities are measured at amounts established in the transaction, usually amounts to be paid
in the future, sometimes discounted.
18. Current liabilities are initially measured at:
a. face value.
b. present value based on current interest rates.
c. present value plus stated interest.
d. book value.
Chapter 11—THE BALANCE SHEET
19. Non-current liabilities are initially measured at:
a. face value.
b. present value based on current interest rates.
c. present value plus stated interest.
d. book value.
20. After non-current liabilities have been initially measured, they are recorded on subsequent
balance sheets at:
a. face value.
b. present value based on current interest rates.
c. present value plus stated interest.
d. book value.
21. Which of the following is a true statement regarding owners’ equity?
a. APB Statement 4 and SFAC No. 6 both reflect the entity view of the firm.
b. Owners’ equity consists of only two components: contributed capital and retained earnings.
c. In a sole proprietorship, there is no legal distinction between contributed capital and earned
capital.
d. Dividends are legally paid only out of retained earnings.
22. Contributed capital is measured by:
a. the cost of assets contributed to the firm by stockholders.
b. the market value of assets contributed to the firm by stockholders.
c. the book value of assets contributed to the firm by stockholders.
d. the discounted present value of assets contributed to the firm by stockholders.
23. Which of the following is not true regarding derivatives?
a. A derivative is a financial instrument whose value is based upon another financial instrument,
stock index or interest rate, or interest rate index.
b. Derivatives can be classified into two general types: forward-based and option-based
derivatives.
c. Unrealized holding gains and losses on derivatives are not recognized.
d. SFAS No. 133 values derivatives at fair value.
Chapter 11—THE BALANCE SHEET
24. Which of the following is true regarding SFAS No. 144?
a. SFAS No. 144 changed the basic measurement rules of SFAS No. 121.
b. SFAS No. 144 converted goodwill into a non-amortizable asset.
c. Under SFAS No. 144, when several assets constitute a productive unit but the assets have
different lives, a discounted cash flow analysis is performed.
d. SFAS 144 supersedes Opinion No. 30 in terms of the valuation of assets in discontinued
segments.
ESSAY
1. Respond to the following:
a. What is meant by the “articulated” approach to financial statements?
b. How does the revenue-expense approach differ from the asset-liability approach for defining
accounting elements?
c. What, if any, would be the advantage of using a non-articulated approach to financial
statements?
Chapter 11—THE BALANCE SHEET
2. What are the three distinct types of assets that appear in the balance sheets, and what degree of
certainty and measurement reliability does each represent?
3. Describe how the definitions of assets and liabilities have evolved over the years.
4. Identify and define the five types of liabilities.
Chapter 11—THE BALANCE SHEET
5. How should stock dividends be measured and accounted for? Is this treatment justified?
6. Explain how assets and liabilities should be classified on the balance sheet. What are the
problems with this classification method?
Chapter 11—THE BALANCE SHEET