CHAPTER 5
BALANCE SHEET AND STATEMENT OF CASH FLOWS
IFRS questions are available at the end of this chapter.
TRUE-FALSE—Conceptual
Answer No. Description
MULTIPLE CHOICE—Conceptual
Answer No. Description
Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 2
MULTIPLE CHOICE—Conceptual (cont.)
Answer No. Description
Balance Sheet and Statement of Cash Flows
5 – 3
MULTIPLE CHOICE—Computational
Answer No. Description
MULTIPLE CHOICE—CPA Adapted
Answer No. Description
BRIEF EXERCISES
Item Description
BE5–107 Definitions.
BE5–108 Terminology.
BE5–109 Current assets.
Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 4
EXERCISES
Item Description
E5–110 Account classification.
E5–111 Valuation of balance sheet items.
E5–112 Balance sheet classifications.
E5–113 Balance sheet classifications.
E5–114 Balance sheet classifications.
E5–115 Balance sheet classifications.
E5–116 Balance sheet classifications.
E5–117 Statement of cash flows.
E5–118 Statement of cash flows.
E5–119 Statement of cash flows.
E5-120 Statement of cash flows ratios.
PROBLEMS
Item Description
P5-121 Balance sheet format.
P5-122 Balance sheet preparation.
P5-123 Balance sheet presentation.
P5–124 Statement of cash flows preparation.
P5-125 Statement of cash flows preparation.
CHAPTER LEARNING OBJECTIVES
1. Explain the uses, limitations, and content of the balance sheet.
2. Prepare a classified balance sheet.
3. Explain the purpose, content, and preparation of the statement of cash flows.
4. Describe additional types of information provided.
*5. Identify the major types of financial ratios and what they measure.
6. Compare the accounting procedures related to the balance sheet under GAAP and IFRS.
Balance Sheet and Statement of Cash Flows
5 – 5
SUMMARY OF QUESTIONS BY LEARNING OBJECTIVES AND BLOOM’S TAXONOMY
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TRUE-FALSE STATEMENTS
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MULTIPLE CHOICE QUESTIONS
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BRIEF EXERCISES
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EXERCISES
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PROBLEMS
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Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 6
TRUE FALSE—Conceptual
1. Liquidity refers to the ability of an enterprise to pay its debts as they mature.
2. The balance sheet omits many items that are of financial value to the business but cannot
be recorded objectively.
3. Financial flexibility measures the ability of an enterprise to take effective actions to alter the
amounts and timing of cash flows.
4. Companies frequently describe the terms of all long-term liability agreements in notes to the
financial statements.
5. A company excludes from the current assets section, the amount of cash restricted for
purposes other than payment of current obligations or for use in current operations.
6. Land held for speculation is reported in the property, plant, and equipment section of the
balance sheet.
7. The account form and the report form of the balance sheet are both acceptable under
GAAP.
8. The primary purpose of a statement of cash flows is to report the cash effects of operations
during a period.
9. The statement of cash flows reports only the cash effects of operations during a period and
financing transactions.
Balance Sheet and Statement of Cash Flows
5 – 7
10. Financial flexibility is a company’s ability to respond and adapt to financial adversity and
unexpected needs and opportunities.
11. Collection of a loan is reported as an investing activity in the statement of cash flows.
12. Companies determine cash provided by operating activities by converting net income on an
accrual basis to a cash basis.
13. Significant financing and investing activities that do not affect cash are not reported in the
statement of cash flows or any other place.
14. Financial statement readers often assess liquidity by using the current cash debt coverage.
15. Free cash flow is net income less capital expenditures and dividends.
16. Because of the historical cost principle, fair values may not be disclosed in the balance
sheet.
17. Companies have the option of disclosing information about the nature of their operations
and the use of estimates in preparing financial statements.
18. Companies may use parenthetical explanations, notes, cross references, and supporting
schedules to disclose pertinent information.
19. On the balance sheet, an adjunct account reduces either an asset, a liability, or an owners’
equity account.
Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 8
20. Activity ratios measure the degree of protection for long-term creditors and investors.
Balance Sheet and Statement of Cash Flows
5 – 9
MULTIPLE CHOICE—Conceptual
21. Which of the following is a limitation of the balance sheet?
a. Many items that are of financial value are omitted.
b. Judgments and estimates are used.
c. Current fair value is not reported.
d. All of these answer choices are correct.
22. The balance sheet is useful for analyzing all of the following except
a. liquidity.
b. solvency.
c. profitability.
d. financial flexibility.
23. Balance sheet information is useful for all of the following except to
a. compute rates of return
b. analyze cash inflows and outflows for the period
c. evaluate capital structure
d. assess future cash flows
24. Balance sheet information is useful for all of the following except
a. assessing a company’s risk
b. evaluating a company’s liquidity
c. evaluating a company’s financial flexibility
d. determining free cash flows.
25. A limitation of the balance sheet that is not also a limitation of the income statement is
a. the use of judgments and estimates
b. omitted items
c. the numbers are affected by the accounting methods employed
d. valuation of items at historical cost
26. The balance sheet contributes to financial reporting by providing a basis for all of the
following except
a. computing rates of return.
b. evaluating the capital structure of the enterprise.
c. determining the increase in cash due to operations.
d. assessing the liquidity and financial flexibility of the enterprise.
Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 10
27. One criticism not normally aimed at a balance sheet prepared using current accounting
and reporting standards is
a. failure to reflect current value information.
b. the extensive use of separate classifications.
c. an extensive use of estimates.
d. failure to include items of financial value that cannot be recorded objectively.
28. The amount of time that is expected to elapse until an asset is realized or otherwise
converted into cash is referred to as
a. solvency.
b. financial flexibility.
c. liquidity.
d. exchangeability.
29. The net assets of a business are equal to
a. current assets minus current liabilities.
b. total assets plus total liabilities.
c. total assets minus total stockholders’ equity.
d. none of these answer choices are correct.
30. The correct order to present current assets is
a. cash, accounts receivable, prepaid items, inventories.
b. cash, accounts receivable, inventories, prepaid items.
c. cash, inventories, accounts receivable, prepaid items.
d. cash, inventories, prepaid items, accounts receivable.
31. The basis for classifying assets as current or noncurrent is conversion to cash within
a. the accounting cycle or one year, whichever is shorter.
b. the operating cycle or one year, whichever is longer.
c. the accounting cycle or one year, whichever is longer.
d. the operating cycle or one year, whichever is shorter.
32. The basis for classifying assets as current or noncurrent is the period of time normally
required by the accounting entity to convert cash invested in
a. inventory back into cash, or 12 months, whichever is shorter.
b. receivables back into cash, or 12 months, whichever is longer.
c. tangible fixed assets back into cash, or 12 months, whichever is longer.
d. inventory back into cash, or 12 months, whichever is longer.
33. The current assets section of the balance sheet should include
Balance Sheet and Statement of Cash Flows
5 – 11
a. machinery.
b. patents.
c. goodwill.
d. inventory.
34. Which of the following is a current asset?
a. Cash surrender value of a life insurance policy of which the company is the
beneficiary.
b. Investment in equity securities for the purpose of controlling the issuing company.
c. Cash designated for the purchase of tangible fixed assets.
d. Trade installment receivables normally collectible in 18 months.
35. Current assets are presented in the balance sheet in
a. ascending order of their balances.
b. descending order of their balances.
c. order of their liquidity.
d. reverse order of their liquidity.
36. Receivables are valued based on their ________.
a. fair value
b. estimated amount collectible
c. lower-of-cost-or-market value
d. historical cost
37. When a portion of inventories has been pledged as security on a loan,
a. the value of the portion pledged should be subtracted from the debt.
b. an equal amount of retained earnings should be appropriated.
c. the fact should be disclosed but the amount of current assets should not be affected.
d. the cost of the pledged inventories should be transferred from current assets to
noncurrent assets.
38. Which of the following is not a long-term investment?
a. Cash surrender value of life insurance
b. Franchise
c. Land held for speculation
d. A sinking fund
39. A generally accepted method of valuation is
Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 12
1. trading securities at market value.
2. accounts receivable at net realizable value.
3. inventories at current cost.
a. 1
b. 2
c. 3
d. 1 and 2
40. Which item below is not a current liability?
a. Unearned revenue
b. Stock dividends distributable
c. The currently maturing portion of long-term debt
d. Trade accounts payable
41. Working capital is
a. capital which has been reinvested in the business.
b. unappropriated retained earnings.
c. cash and receivables less current liabilities.
d. none of these answer choices are correct.
42. An example of an item which is not an element of working capital is
a. accrued interest on notes receivable.
b. goodwill.
c. goods in process.
d. temporary investments.
43. Long-term liabilities include
a. obligations not expected to be liquidated within the operating cycle.
b. obligations payable at some date beyond the operating cycle.
c. deferred income taxes and most lease obligations.
d. all of these answer choices are correct.
44. Which of the following should be excluded from long-term liabilities?
a. Obligations payable at some date beyond the operating cycle
b. Most pension obligations
c. Long-term liabilities that mature within the operating cycle and will be paid from a
sinking fund
d. None of these answer choices are correct.
45. Treasury stock should be reported as a(n)
Balance Sheet and Statement of Cash Flows
5 – 13
a. current asset.
b. investment.
c. other asset.
d. reduction of stockholders’ equity.
46. Which of the following should be reported for capital stock?
a. The shares authorized
b. The shares issued
c. The shares outstanding
d. All of these answer choices are correct.
47. Which of the following would be classified in a different major section of a balance sheet
from the others?
a. Capital stock
b. Common stock subscribed
c. Stock dividend distributable
d. Stock investment in affiliate
48. The stockholders’ equity section is usually divided into what three parts?
a. Preferred stock, common stock, treasury stock
b. Preferred stock, common stock, retained earnings
c. Capital stock, additional paid-in capital, retained earnings
d. Capital stock, appropriated retained earnings, unappropriated retained earnings
49. Which of the following is not an acceptable major asset classification?
a. Current assets
b. Long-term investments
c. Property, plant, and equipment
d. Deferred charges
50. The financial statement which summarizes operating, investing, and financing activities of
an entity for a period of time is the
a. retained earnings statement.
b. income statement.
c. statement of cash flows.
d. statement of financial position.
51. The statement of cash flows provides answers to all of the following questions except
Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 14
a. where did the cash come from during the period?
b. what was the cash used for during the period?
c. what is the impact of inflation on the cash balance at the end of the year?
d. what was the change in the cash balance during the period?
52. The statement of cash flows reports all of the following except
a. the net change in cash for the period.
b. the cash effects of operations during the period.
c. the free cash flows generated during the period.
d. investing transactions.
53. The statement of cash flows helps meet the objective of financial reporting, which is to
assess all of the following except the
a. amount of future cash flows.
b. source of future cash flows.
c. timing of future cash flows.
d. uncertainty of future cash flows.
54. If common stock was issued to acquire an $8,000 machine, how would the transaction
appear on the statement of cash flows?
a. It would depend on whether you are using the direct or the indirect method.
b. It would be a positive $8,000 in the financing section and a negative $8,000 in the
investing section.
c. It would be a negative $8,000 in the financing section and a positive $8,000 in the
investing section.
d. It would not appear on the statement of cash flows but rather on a schedule of
noncash investing and financing activities.
55. Which of the following events will appear in the cash flows from financing activities section
of the statement of cash flows?
a. Cash purchases of equipment.
b. Cash purchases of bonds issued by another company.
c. Cash received as repayment for funds loaned.
d. Cash purchase of treasury stock.
56. Making and collecting loans and disposing of property, plant, and equipment are
a. operating activities.
b. investing activities.
c. financing activities.
d. liquidity activities.
Balance Sheet and Statement of Cash Flows
5 – 15
57. In preparing a statement of cash flows, sale of treasury stock at an amount greater than
cost would be classified as a(n)
a. operating activity.
b. financing activity.
c. extraordinary activity.
d. investing activity.
58. In preparing a statement of cash flows, cash flows from operating activities
a. are always equal to accrual accounting income.
b. are calculated as the difference between revenues and expenses.
c. can be calculated by appropriately adding to or deducting from net income those items
in the income statement that do not affect cash.
d. can be calculated by appropriately adding to or deducting from net income those items
in the income statement that do affect cash.
59. In preparing a statement of cash flows, which of the following transactions would be
considered an investing activity?
a. Sale of equipment at book value
b. Sale of merchandise on credit
c. Declaration of a cash dividend
d. Issuance of bonds payable at a discount
60. Preparing the statement of cash flows involves all of the following except determining the
a. cash provided by operations.
b. cash provided by or used in investing and financing activities.
c. change in cash during the period.
d. cash collections from customers during the period.
61. The cash debt coverage is computed by dividing net cash provided by operating activities
by
a. average long-term liabilities.
b. average total liabilities.
c. ending long-term liabilities.
d. ending total liabilities.
62. The current cash debt coverage is often used to assess
a. financial flexibility.
b. liquidity.
c. profitability.
d. solvency.
Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 16
63. A measure of a company’s financial flexibility is the
a. cash debt coverage.
b. current cash debt coverage.
c. free cash flow.
d. cash debt coverage and free cash flow.
64. Free cash flow is calculated as net cash provided by operating activities less
a. capital expenditures.
b. dividends.
c. capital expenditures and dividends.
d. capital expenditures and depreciation.
65. One of the benefits of the statement of cash flows is that it helps users evaluate financial
flexibility. Which of the following explanations is a description of financial flexibility?
a. The nearness to cash of assets and liabilities.
b. The firm’s ability to respond and adapt to financial adversity and unexpected needs
and opportunities.
c. The firm’s ability to pay its debts as they mature.
d. The firm’s ability to invest in a number of projects with different objectives and costs.
66. Net cash provided by operating activities divided by average total liabilities equals the
a. current cash debt coverage.
b. cash debt coverage.
c. free cash flow.
d. current ratio.
67. Which of the following balance sheet classifications would normally require the greatest
amount of supplementary disclosure?
a. Current assets
b. Current liabilities
c. Plant assets
d. Long-term liabilities
68. Level 1 of fair value hierarchy measures are based on:
a. market prices for identical assets.
b. market prices for similar assets.
c. unobservable inputs.
d. historical cost of similar assets.
Balance Sheet and Statement of Cash Flows
5 – 17
69. Which of the following is not a required supplemental disclosure for the balance sheet?
a. Contingencies
b. Financial forecasts
c. Accounting policies
d. Contractual situations
70. Typical contractual situations that are disclosed in the notes to the balance sheet include
all of the following except
a. debt covenants
b. lease obligations
c. advertising contracts
d. pension obligations
71. Accounting policies disclosed in the notes to the financial statements typically include all
of the following except
a. the cost flow assumption used
b. the depreciation methods used
c. significant estimates made
d. significant inventory purchasing policies
72. Which of the following best exemplifies a contingency that is reported in the notes to the
financial statements?
a. Losses from potential future lawsuits
b. Loss from a lawsuit settled out of court prior to the end of the fiscal year
c. Warranty claims on future sales
d. Estimated loss from an ongoing lawsuit
73. Which of the following is not a method of disclosing pertinent information?
a. Supporting schedules
b. Parenthetical explanations
c. Cross reference and contra items
d. All of these are methods of disclosing pertinent information.
74. Significant accounting policies may not be
a. selected on the basis of judgment.
b. selected from existing acceptable alternatives.
c. unusual or innovative in application.
d. omitted from financial-statement disclosure.
Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 18
75. A general description of the depreciation methods applicable to major classes of
depreciable assets
a. is not a current practice in financial reporting.
b. is not essential to a fair presentation of financial position.
c. is needed in financial reporting when company policy differs from income tax policy.
d. should be included in corporate financial statements or notes thereto.
76. It is mandatory that the essential provisions of which of the following be clearly stated in
the notes to the financial statements?
a. Stock option plans
b. Pension obligations
c. Lease contracts
d. All of these answer choices are correct
77. Which of the following is a contra account?
a. Premium on bonds payable
b. Unearned revenue
c. Patents
d. Accumulated depreciation
78. __________ ratios measure how effectively a company uses its assets.
a. Liquidity
b. Activity
c Profitability
d. Coverage
Balance Sheet and Statement of Cash Flows
5 – 19
Solutions to those Multiple Choice questions for which the answer is “none of these.”
Test Bank for Intermediate Accounting, Seventeenth Edition
5 – 20
MULTIPLE CHOICE—Computational
79. Fulton Company owns the following investments:
Trading securities (fair value) $160,000
Available-for-sale securities (fair value) 70,000
Held-to-maturity securities (amortized cost) 94,000
Fulton will report investments in its current assets section of
a. $0.
b. exactly $160,000.
c. $160,000 or an amount greater than $160,000, depending on the circumstances.
d. exactly $230,000.
80. For Grimmett Company, the following information is available:
Capitalized leases $600,000
Trademarks 275,000
Long-term receivables 225,000
In Grimmett’s balance sheet, intangible assets should be reported at
a. $275,000.
b. $500,000.
c. $825,000.
d. $875,000.
81. Houghton Company has the following items: common stock, $1,600,000; treasury stock,
$210,000; deferred income taxes, $250,000 and retained earnings, $780,000. What total
amount should Houghton Company report as stockholders’ equity?
a. $1,390,000.
b. $2,170,000.
c. $2,420,000.
d. $2,590,000.
82. Kohler Company owns the following investments:
Trading securities (fair value) $120,000
Available-for-sale securities (fair value) 90,000
Held-to-maturity securities (amortized cost) 94,000
Kohler will report securities in its long-term investments section of
a. exactly $210,000.
b. exactly $214,000.
c. exactly $294,000.
d. $184,000 or an amount less than $184,000, depending on the circumstances.