Chapter 3 The Balance Sheet and Financial Disclosures
a. 0.75.
b. 1.13.
c. 0.53.
d. 1.80.
68. HHF’s times interest earned ratio is (rounded):
a. 3.47.
b. 1.73.
c. 2.47.
d. 10.0.
69. HHF’s long-term debt to equity ratio equity is:
a. 133.3%.
b. 75%.
c. 180%.
d. 0%.
70. Which of the following is not a required segment reporting disclosure according to U.S.
GAAP?
a. Segment profit or loss.
b. Segment assets.
c. Segment liabilities.
d. General information about the operating segment.
Chapter 3 The Balance Sheet and Financial Disclosures
71. Which of the following is not a required segment reporting disclosure according to
International Financial Reporting Standards?
a. Segment profit or loss.
b. Segment assets.
c. Segment liabilities.
d. All are required disclosures.
72. Which of the following is not a characteristic that defines a reportable operating segment
according to U.S. GAAP?
a. Operating results are regularly reviewed by the enterprise’s chief operating officer.
b. Discrete financial information is available.
c. Engages in business activities from which it may recognize revenues and incur expenses.
d. Represents more than 20% of total company revenues, assets, or net income.
Matching Pair Questions
73. Listed below are 5 terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the correct term.
Chapter 3 The Balance Sheet and Financial Disclosures
1. Unqualified opinion
a. Independent and professional report about the fairness of
the financial statements.
2. Disclaimer
3. Auditors’ report
b. Given by an auditor when there is a limitation of audit
procedures or a departure from GAAP.
4. Qualified opinion
5. Adverse opinion
c. Given by an auditor when financial statements are
presented fairly in conformity with GAAP.
d. Given by an auditor when there are substantial reporting
errors and a qualified opinion is not appropriate.
e. Given by an auditor when information is insufficient to
express an opinion.
Answer:
2. Disclaimer
b. Given by an auditor when there is a limitation of audit
procedures or a departure from GAAP.
4. Qualified opinion
d. Given by an auditor when there are substantial reporting
errors and a qualified opinion is not appropriate.
74. Listed below are 5 terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the correct term.
1. Current ratio
a. Also known as the quick ratio.
2. Acid-test ratio
b. Refers to riskiness of a company with regard to the
amount of liabilities in its capital structure.
3. Long-term solvency
4. Liquidity
c. Relates to the amount of time before an asset is
converted to cash or a liability is paid.
5. Debt to equity ratio
d. If four to one, 80% of assets are debt-financed.
e. Current assets divided by current liabilities.
Chapter 3 The Balance Sheet and Financial Disclosures
Answer:
1. Current ratio
a. Also known as the quick ratio.
2. Acid-test ratio
3. Long-term solvency
5. Debt to equity ratio
d. If four to one, 80% of assets are debt-financed.
e. Current assets divided by current liabilities.
75. Listed below are 5 terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the correct term.
1. Long-term liabilities
a. Obligations payable in more than one year or
longer than the operating cycle.
2. Current liabilities
3. Intangible asset
b. Ownership of an exclusive right.
4. Current assets
c. Items expected to be converted to cash or
consumed within one year or the operating cycle.
5. Property, plant, and equipment
d. Obligations payable within one year or the
operating cycle.
e. Includes buildings and land used in operations.
Answer:
1. Long-term liabilities
a. Obligations payable in more than one year or
longer than the operating cycle.
2. Current liabilities
3. Intangible asset
b. Ownership of an exclusive right.
4. Current assets
5. Property, plant, and equipment
d. Obligations payable within one year or the
operating cycle.
e. Includes buildings and land used in operations.
Chapter 3 The Balance Sheet and Financial Disclosures
76. Listed below are 5 terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the correct term.
1. Notes receivable
a. Insurance premiums paid in advance.
2. Short-term investments
b. Goods to be sold in the ordinary course of
business.
3. Inventories
4. Accounts receivable
c. Due from customers in the ordinary course of
business.
5. Prepaid expenses
d. Formal agreement that specifies customer’s
payment terms.
e. Liquid investments not classified as cash
equivalents.
Answer:
1. Notes receivable
a. Insurance premiums paid in advance.
2. Short-term investments
3. Inventories
c. Due from customers in the ordinary course of
business.
5. Prepaid expenses
e. Liquid investments not classified as cash
equivalents.
77. Listed below are 5 terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the correct term.
Chapter 3 The Balance Sheet and Financial Disclosures
1. Subsequent events
a. Management’s views on its operations, liquidity,
and capital resources.
2. Proxy statement
3. MD&A
b. Includes disclosures of executive compensation.
4. Auditors’ report
c. Independent and professional opinion about the
fairness of the financial statements.
5. Summary of significant
accounting policies
d. Occurs after the fiscal year-end, but before the
statements are issued.
e. Information about the company’s choices from
among various alternative accounting methods.
Answer:
1. Subsequent events
2. Proxy statement
3. MD&A
b. Includes disclosures of executive compensation.
4. Auditors’ report
d. Occurs after the fiscal year-end, but before the
statements are issued.
e. Information about the company’s choices from
among various alternative accounting methods.
78. Listed below are 5 terms followed by a list of phrases that describe or characterize the
terms. Match each phrase with the correct term.
Chapter 3 The Balance Sheet and Financial Disclosures
1. Paid-in capital
a. Accumulated net income less dividends since the
inception of the corporation.
2. Accumulated deficit
3. Deferred revenue
b. Cash received from a customer for goods or services
to be provided in a future period.
4. Operating cycle
5. Retained earnings
c. Converting cash to inventory to receivables to cash.
d. A negative retained earnings balance.
e. Amounts invested by shareholders in the corporation.
Answer:
1. Paid-in capital
3. Deferred revenue
b. Cash received from a customer for goods or services
to be provided in a future period.
4. Operating cycle
5. Retained earnings
c. Converting cash to inventory to receivables to cash.
d. A negative retained earnings balance.
e. Amounts invested by shareholders in the corporation.
79. Listed below are ten terms followed by a list of phrases that describe or characterize the terms.
Match each phrase with the correct term.
1. Related-party transactions
a. Material events that occur after the end of the fiscal year and
before the statements are issued.
2. Deferred revenues
3. Accounts receivable
b. Obligations to suppliers of merchandise or of services
purchased on account.
4. Inventories
5. Accounts payable
c. Transactions with owners, managers, and affiliated companies.
6. Prepaid expense
d. Net income less dividends since inception of the corporation.
7. Retained earnings
e. Management’s views on significant events.
8. Subsequent events
f. Amounts due from customers.
9. MD&A
g. Goods to be sold in the ordinary course of business.
10. Franchise
h. Asset recorded when an expense is paid for in advance.
i. Cash received from a customer in advance of providing a good
or service.
j. An intangible asset.
Answer:
80. Carter Appliances is preparing its annual report for the current fiscal year. The company’s
controller has asked for your help in determining how best to disclose information about the
following items:
1. A subsequent event.
2. Inventory costing method.
3. Composition of accrued liabilities.
4. Useful lives of depreciable assets.
5. Information on long-term leases.
6. Allowance for uncollectible accounts.
7. Revenue recognition policy.
8. Pension plans.
Required: Indicate whether the above items should be disclosed (a) in the summary of
significant accounting policies note, (b) in a separate disclosure note, or (c) on the face of the
balance sheet
Answers:
Chapter 3 The Balance Sheet and Financial Disclosures
Chapter 3 The Balance Sheet and Financial Disclosures
Problems
81. As controller for Henderson, you are attempting to reconstruct and revise the following
balance sheet prepared by a staff accountant.
Henderson Manufacturing Company
Balance Sheet
At December 31, 2016
($ in 000s)
Assets
Current assets:
Cash $ 1,600
Accounts receivable 4,300
Allowance for uncollectible accounts (500)
Finished goods inventory 5,000
Prepaid expenses 2,400
Total current assets 12,800
Noncurrent assets:
Investments 2,000
Raw materials and work in process inventory 3,200
Equipment 18,000
Accumulated depreciation–equipment (8,000)
Franchise ?
Total assets $ ?
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable $6,200
Note payable 8,000
Interest payable–note 200
Deferred revenue 2,400
Total current liabilities 16,800
Long-term liabilities:
Bonds payable 7,000
Interest payable–bonds 200
Shareholders’ equity:
Common stock $ ?
Retained earnings ? ?
Total liabilities and shareholders’ equity ?
Additional information ($ in 000s):
1. Certain records that included the account balances for the franchise and shareholders’
equity items were lost. However, a complete, preliminary balance sheet prepared before
the records were lost showed a debt to equity ratio of 1.5. That is, total liabilities are 150%
of total shareholders’ equity. Retained earnings at the beginning of the year was $4,300.
Net income for 2016 was $2,500, and $800 in cash dividends were declared and paid to
shareholders.
2. The investments represent treasury bills purchased in December 2016 that mature in
January 2017. These are considered cash equivalents.
3. Interest on both the note and the bonds is payable annually.
4. The note payable is due in annual installments of $800 each.
Chapter 3 The Balance Sheet and Financial Disclosures
5. Deferred revenue will be earned equally over the next 18 months.
6. The common stock represents 500,000 shares of no par stock authorized, 300,000 shares
issued and outstanding.
Required:
Prepare a complete, corrected, classified balance sheet.
Answer:
Chapter 3 The Balance Sheet and Financial Disclosures
Chapter 3 The Balance Sheet and Financial Disclosures
82. You recently joined the internal auditing department of Kaitlyn Sportswear Corporation. As
one of your first assignments, you are examining a balance sheet prepared by a staff
accountant.
Kaitlyn Sportswear Corporation
Balance Sheet
At December 31, 2016
Chapter 3 The Balance Sheet and Financial Disclosures
In the course of your examination you uncover the following information pertaining to the
balance sheet:
1. The land and buildings represent the corporate headquarters and manufacturing facilities.
2. The note receivable is due in 2018. The balance of $80,000 includes $5,000 of accrued
interest. The next interest payment is due in July 2017.
3. The note payable is due in installments of $50,000 per year. Interest on both the notes and
bonds is payable annually.
4. The company’s investments consist of marketable equity securities of other corporations.
Management does not intend to liquidate any investments in the coming year.
5. Deferred revenue will be earned ratably (equally) over the next two years.
Required:
Identify and explain the deficiencies in the statement prepared by the company’s accountant.
Include in your answer items that require additional disclosure, either on the face of the
statement or in a note.
Answer:
Assets
Current assets:
Cash ………………………………………….
$ 220,000
Accounts receivable, net ………………
340,000
Note receivable …………………………..
80,000
Inventories …………………………………
600,000
Prepaid expenses …………………………
40,000
Total current assets ……………………
1,280,000
Other assets:
Land ………………………………………….
$ 500,000
Buildings, net ……………………………..
2,200,000
Equipment, net …………………………….
400,000
Investments …………………………………
50,000
Patent ………………………………………..
60,000
Total other assets ………………………
3,156,000
Total assets …………………………...
$4,346,000
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable ……………………….
$ 165,000
Salaries payable ………………………….
75,000
Interest payable …………………………..
45,000
Total current liabilities ………………
285,000
Long-term liabilities:
Note payable ………………………………
$300,000
Bonds payable …………………………...
500,000
Deferred revenue …………………………
80,000
Total long-term liabilities …………..
880,000
Shareholders’ equity:
Common stock …………………………...
$2,000,000
Retained earnings ……………………….
1,181,000
Total shareholders’ equity …………
3,181,000
Total liabilities and
shareholders’ equity …………….
$4,346,000
Chapter 3 The Balance Sheet and Financial Disclosures
Chapter 3 The Balance Sheet and Financial Disclosures
83. Presented below is a partial trial balance for the Messenger Corporation at December 31,
2016.
Account Title
Debits
Credits
Cash and cash equivalents
30,000
Accounts receivable
195,000
Raw materials inventory
36,000
Note receivable
120,000
Interest receivable
4,000
Interest payable
7,000
Marketable securities
48,000
Land
100,000
Buildings
1,500,000
Accumulated depreciation–buildings
740,000
Work in process inventory
38,000
Finished goods inventory
98,000
Equipment
400,000
Accumulated depreciation–equipment
230,000
Franchise (net of amortization)
120,000
Prepaid insurance (for the next year)
60,000
Deferred revenue
48,000
Accounts payable
240,000
Note payable
500,000
Salaries payable
6,000
Cash restricted for payment of note
payable
100,000
Allowance for uncollectible accounts
24,000
Sales revenue
900,000
Cost of goods sold
500,000
Salaries expense
48,000
Additional information:
1. The note receivable, along with any accrued interest, is due on November 1, 2017.
2. The note payable is due in 2021. Interest is payable annually.
3. The marketable securities consist of equity securities of other corporations. Management
does not intend to sell any of the securities in the next year.
4. Deferred revenue will be earned equally over the next 18 months.
Required:
Determine the company’s working capital (current assets minus current liabilities) at
December 31, 2016.
Chapter 3 The Balance Sheet and Financial Disclosures
Chapter 3 The Balance Sheet and Financial Disclosures
84. The December 31, 2016, post-closing trial balance ($ in thousands) for Libby Corporation is
presented below:
Debits
Credits
Cash
22,500
Investments (long-term)
55,000
Accounts receivable
30,000
Allowance for uncollectible accounts
7,500
Prepaid insurance
4,500
Inventories
100,000
Land
45,000
Buildings
140,000
Accumulated depreciation–buildings
50,000
Equipment
132,500
Accumulated depreciation–equipment
30,000
Patents (unamortized balance)
5,000
Accounts payable
37,500
Notes payable, due 2017
65,000
Interest payable
10,000
Bonds payable, due 2026
120,000
Common stock, no par, 20,000 shares
authorized, issued, and outstanding
150,000
Retained earnings
_______
64,500
Totals
534,500
534,500
Required: Prepare a classified balance sheet for Libby Corporation at December 31, 2016.
Cash
$ 22,500
Accounts receivable
$30,000
Less: Allowance for uncollectible accounts
22,500
Inventories
100,000
Prepaid insurance
Total current assets
149,500
Investments
55,000
Property, plant, and equipment:
Land
45,000
Buildings
140,000
Equipment
132,500
317,500
Less: Accumulated depreciation
Net property, plant, and equipment
237,500
Intangibles:
Patents
Total assets
$447,000
Chapter 3 The Balance Sheet and Financial Disclosures
85. Compute the current ratio for Marjoram Company. Round your answer to two decimal places.
86. Compute the acid-test ratio for Marjoram Company. Round your answer to two decimal
places.