Chapter 3 The Balance Sheet and Financial Disclosures
True/False Questions
1. The balance sheet reports a company’s financial position at a point in time.
2. A company’s market value is generally less than its book value.
3. All current assets are either cash or assets that will be converted into cash or consumed within
12 months or the operating cycle, whichever is longer.
4. The balance of net receivables represents the amount expected to be collected.
5. Prepaid expenses are classified as current assets if the services purchased are expected to
expire within 12 months or the operating cycle, whichever is longer.
6. Assets classified as property, plant, and equipment include machinery, equipment, and
inventories.
7. Intangible assets usually are reported in the balance sheet as current assets.
8. Accrued salaries and wages in a balance sheet represent salaries and wages that have been
earned by employees but not yet paid.
9. The criteria for determining which items comprise cash equivalents often is disclosed in the
summary of significant accounting policies.
Chapter 3 The Balance Sheet and Financial Disclosures
10. Payment terms, interest rates, and other details of long-term liabilities usually are reported in
disclosure notes.
11. Subsequent events are significant developments that take place after a firm’s year-end, and
after the financial statements are issued or available to be issued.
12. Illegal acts will only need to be disclosed if the impact of the act is material.
13. The ultimate responsibility for the financial statements lies with the auditors.
14. The compensation of top executives is disclosed in the proxy statement.
15. Horizontal analysis involves expressing each item in the financial statements as a percentage
of an appropriate total, or base amount, within the same year.
16. Liquidity refers to the riskiness of a company with regard to the amount of liabilities in its
capital structure.
17. A payment on account has no effect on working capital but will increase the current ratio if it
is already greater than 1.0.
18. Segment reporting requires disclosure of each customer that accounts for more than 5% of
total enterprise revenue.
Chapter 3 The Balance Sheet and Financial Disclosures
Multiple Choice Questions
19. The balance sheet reports:
a. Net income at a point in time.
b. Cash flows for a period of time.
c. Assets and equities at a point in time.
d. Assets and liabilities for a period of time.
20. Current assets include cash and all other assets expected to become cash or be consumed:
a. Within one year.
b. Within one operating cycle.
c. Within one year or one operating cycle, whichever is shorter.
d. Within one year or one operating cycle, whichever is longer.
21. Red Onion Restaurant would classify a six-month prepaid insurance policy as:
a. Property, plant, and equipment.
b. Investment.
c. Current asset.
d. Goodwill.
22. An asset that is generally not expected to be converted to cash or consumed within one year or
the operating cycle is:
a. Building.
b. Accounts receivable.
c. Inventory.
Chapter 3 The Balance Sheet and Financial Disclosures
d. Supplies.
23. Long-term solvency refers to:
a. The efficiency with which a company manages its resources.
b. The profitability of a company for a period of time.
c. The amount of current assets relative to long-term assets.
d. The riskiness of a company with regard to the amount of liabilities in its capital structure.
24. Which is a shareholders’ equity account in the balance sheet?
a. Accumulated depreciation.
b. Paid-in capital.
c. Salaries payable.
d. Accounts receivable.
25. Rent collected in advance is:
a. An asset account in the balance sheet.
b. A liability account in the balance sheet.
c. A shareholders’ equity account in the balance sheet.
d. A temporary account, not in the balance sheet at all.
26. Notes payable that are due in two years are:
a. Current liabilities.
b. Long-term intangible assets.
c. Long-term liabilities.
d. Long-term investments.
27. Which of the following is never a current liability account?
a. Accrued payroll.
b. Dividends payable.
c. Prepaid rent.
d. Subscriptions collected in advance from customers.
28. New Oaks Winery requires two months to make wine, two years to age it, one month to bottle
it, two months to sell it, and one month to collect the receivable. Its operating cycle is:
a. Twelve months.
b. Thirty months.
c. Six months.
d. Three months.
29. Long-term assets generally include:
a. Inventory held for sale.
b. Prepaid rent.
c. Accounts receivable.
Chapter 3 The Balance Sheet and Financial Disclosures
d. Land held for a possible future plant site.
Use the following to answer questions 30–33:
Listed below are year-end account balances (in $millions) taken from the records of Symphony Stores.
Debit
Credit
Accounts receivable–trade
730
Building and equipment
920
Cash–checking
34
Interest receivable
30
Inventory
16
Land
150
Notes receivable (long-term)
450
Petty cash fund
5
Prepaid rent
20
Supplies
8
Trademark
40
Accounts payable–trade
560
Accumulated depreciation
80
Additional paid-in capital
485
Allowance for uncollectible accounts
20
Cash dividends payable
30
Common stock, at par
15
Income tax payable
65
Notes payable (long-term)
800
Retained earnings
308
Deferred revenues
40
_____
_____
TOTALS
2,403
2,403
30. What would Symphony report as total current assets?
a. $823.
b. $838.
c. $843.
d. $1,696.
31. What would Symphony report as total assets?
a. $2,338.
b. $2,323.
c. $2,318.
d. $2,303.
32. What would Symphony report as total shareholders’ equity?
a. $323.
b. $808.
c. $838.
d. $928.
33. What is the amount of working capital for Symphony?
a. $ 98.
b. $143.
c. $128.
d. $113.
Chapter 3 The Balance Sheet and Financial Disclosures
34. Assets do not include:
a. Property, plant, and equipment.
b. Investments.
c. Paid-in capital.
d. Unexpired insurance.
35. Cash equivalents would not include:
a. Cash not available for current operations.
b. Money market funds.
c. U.S. treasury bills.
d. Bank drafts.
36. Cash equivalents would include:
a. Highly liquid equity securities.
b. Accounts receivable from a financial institution.
c. Restricted funds for bonds that mature in three years.
d. Debt instruments with maturity dates of less than three months from the date of the
purchase.
37. Accrued liabilities:
a. Are generally paid in services rather than cash.
b. Result from payment before services are received.
c. Result from services received before payment.
d. Are deferred charges to expense.
Chapter 3 The Balance Sheet and Financial Disclosures
38. Janson Corporation Co.’s trial balance included the following account balances at December
31, 2016:
Accounts receivable
$12,000
Inventories
40,000
Patent
12,000
Investments
30,000
Prepaid insurance
6,000
Note receivable, due 2019
50,000
Investments consist of treasury bills that were purchased in November and mature in January.
Prepaid insurance is for the next two years. What amount should be included in the current
asset section of Janson’s December 31, 2016, balance sheet?
a. $ 88.000.
b. $ 85,000.
c. $ 55,000.
d. $135,000.
39. Janson Corporation Co.’s trial balance included the following account balances at December
31, 2016:
Accounts payable
$25,000
Bond payable, due 2025
22,000
Salaries payable
16,000
Note payable, due 2017
20,000
Note payable, due 2021
40,000
What amount should be included in the current liability section of Janson’s December 31,
2016, balance sheet?
a. $ 63,000.
b. $ 41,000.
c. $ 61,000.
Chapter 3 The Balance Sheet and Financial Disclosures
d. $101,000.
40. The usual difference between accounts payable and notes payable is:
a. Legally enforceable debt.
b. Current–noncurrent classification.
c. Known payment terms.
d. Explicitly stated interest.
41. Which of the following would be disclosed in the summary of significant accounting policies
disclosure note?
Composition of Depreciation
Long-term debt Method
a. No Yes
b. Yes No
c. Yes Yes
d. No No
42. Which of the following is not a required disclosure for related-party transactions?
a. The nature of the relationship.
b. A description of the transactions.
c. The amounts due from or to related parties.
d. The impact of the transactions on current year’s income.
Chapter 3 The Balance Sheet and Financial Disclosures
43. Disclosure notes would not include:
a. Depreciation methods used and estimated useful life.
b. Definition of cash equivalents.
c. Details of pension plans.
d. Data to adjust the financial statements so that they are not misleading.
44. The principal concern with accounting for related-party transactions is:
a. The size of the transactions.
b. Differences between economic substance and legal form.
c. The absence of legally binding contracts.
d. The lack of accurate data to record transactions.
45. A subsequent event for an entity with a December 31, 2016, year-end would not include:
a. A change in the estimated useful lives of equipment in January 2017.
b. An issuance of bonds in January 2017.
c. An acquisition of another company in January 2017.
d. A major uncertainty at December 31, resolved in January 2017.
Chapter 3 The Balance Sheet and Financial Disclosures
46. How are management’s responsibility and the auditors’ opinion on internal controls
represented in the standard auditor’s report?
Management’s Auditors’
Responsibility Responsibility
a. Implicitly Explicitly
b. Explicitly Explicitly
c. Implicitly Implicitly
d. Explicitly Implicitly
47. The final paragraph of the audit report:
a. Provides the auditors’ opinion on the fairness of the financial statements.
b. Provides the auditor’s opinion on the effectiveness of internal control.
c. Describes the scope of the audit.
d. States management’s responsibility for the financial statements.
48. The Management Discussion and Analysis section of the annual report can best be described
as:
a. Frank but objective.
b. Independent but precise.
c. Legalistic and lengthy.
d. Biased but informative.
49. An example of fraud would be:
a. Issuing a purchase order without first securing bids.
Chapter 3 The Balance Sheet and Financial Disclosures
b. Buying raw materials from an affiliated company.
c. Knowingly classifying a material noncurrent receivable as a current receivable.
d. Forgetting to accrue salaries and wages payable.
50. An example of an error would be:
a. Purchasing inventory from a related party.
b. Counting an inventory item twice when taking a physical inventory.
c. Holding back invoices so that accounts payable are understated.
d. Receiving kickbacks in exchange for issuing a purchase order to a vender.
51. An exception that is so serious that even a qualified opinion is not justified would result in:
a. A disclaimer.
b. An unqualified opinion.
c. An adverse opinion.
d. A consistency exception.
52. Liquidity refers to:
a. The amount of cash on hand at a given time.
b. The readiness of an asset to be converted to cash.
Chapter 3 The Balance Sheet and Financial Disclosures
c. The period until cash is used and refinancing becomes necessary.
d. Financial leverage.
53. Lack of long-term solvency refers to:
a. Risk of nonpayment relative to liabilities in the capital structure.
b. The length of time before long-term debt becomes due.
c. The ability to refinance long-term debt when it becomes due.
d. Long-term assets.
54. The current ratio is calculated as:
a. Current assets divided by noncurrent assets.
b. Current assets divided by total assets.
c. Current assets divided by current liabilities.
d. Current assets divided by total liabilities.
55. The acid-test ratio is also known as the:
a. Current ratio.
b. Debt to equity ratio.
c. Times interest earned ratio.
d. Quick ratio.
56. The quick ratio is:
a. The liquidity ratio divided by the equity ratio.
b. Current assets minus inventory divided by current liabilities minus accounts payable.
c. Current assets minus inventory and prepaid items divided by current liabilities.
d. Cash divided by accounts payable.
57. Working capital is equal to:
a. Current assets.
b. Current liabilities.
c. Current assets plus current liabilities.
d. Current assets minus current liabilities.
58. Which of the following is not a financing ratio?
a. Times interest earned ratio.
b. Debt to equity ratio.
c. Current ratio.
d. Return on shareholders’ equity.
59. When a company pays its bill from a plumber for previous services on account:
Chapter 3 The Balance Sheet and Financial Disclosures
a. Its debt to equity ratio always decreases.
b. Its acid-test ratio always remains unchanged.
c. Its current ratio always remains unchanged.
d. Its return on shareholders’ equity always decreases.
60. When a company accrues federal income taxes at the end of the accounting period:
a. Its acid-test ratio increases.
b. Its current ratio increases.
c. Its debt to equity ratio decreases.
d. Its debt to equity ratio increases.
61. Assume a company’s liquidity ratios all are less than 1.0 before it purchases inventory on
credit. When it makes the purchase:
a. Its current ratio decreases.
b. Its quick ratio decreases.
c. Its current ratio remains unchanged.
d. Its quick ratio remains unchanged.
62. When a company sells land for cash and recognizes a $25,000 gain:
a. Its acid-test ratio decreases.
b. Its current ratio decreases.
Chapter 3 The Balance Sheet and Financial Disclosures
c. Its debt to equity ratio decreases.
d. Cannot determine from the given information.
Use the following to answer questions 63–66:
The following partial balance sheet ($ in thousands) for Paisano Seafood Inc. is shown below.
Current assets:
Current liabilities:
Cash
$ 60
Accounts payable
$240
Accounts receivable (net)
170
Other liabilities
80
Notes receivable
50
Total current liabilities
320
Inventories
200
Long-term liabilities
110
Prepaid expenses
25
Total liabilities
430
Total current assets
505
Shareholders’ equity:
Plant assets (net)
255
Capital stock
150
Retained earnings
180
Total shareholders’ equity
330
Total assets
$760
Total liabilities and equity
$760
63. The current ratio is (rounded):
a. 1.98.
b. 1.58.
c. 1.17.
d. 0.66.
64. Working capital is:
a. $505.
b. $265.
c. $185.
d. $75.
65. Quick assets total:
a. $60.
b. $230.
c. $280.
d. $305.
66. The acid-test ratio is (rounded):
a. 0.25.
b. 0.88.
c. 1.17.
d. 1.58.
Use the following to answer questions 67–69:
Recent financial statement data for Harmony Health Foods (HHF) Inc. is shown below.
Current liabilities
$ 180
Income before interest and taxes
$ 125
10% Bonds, long-term
360
Interest expense
36
Total liabilities
540
Income before tax
89
Shareholders’ equity
Income tax
27
Capital stock
200
Net income
$ 62
Retained earnings
280
Total shareholders’ equity
480
Total liabilities and equity
$1,020
67. HHF’s debt to equity ratio is (rounded):