Intermediate Accounting Volume 1, 11th Canadian Edition by Bruce J. McConomy; Donald E. Kieso Test Bank

Intermediate Accounting Volume 1, 11th Canadian Edition by Bruce J. McConomy; Donald E. Kieso Test Bank

Description

WITH ANSWERS

Intermediate Accounting Volume 1, 11th Canadian Edition by Bruce J. McConomy; Donald E. Kieso Test Bank

CHAPTER 5

 

FINANCIAL POSITION AND CASH FLOWS

 

CHAPTER STUDY OBJECTIVES

 

 

1. Understand the statement of financial position and statement of cash flows from a business perspective. It is important to understand how users of financial statements use the SFP and the cash flow statement. For example, potential investors in a company may use the SFP to analyze a companys liquidity and solvency in order to assess risk of investing. In addition, the SFP provides details about the companys financial structure. Users may use a companys statement of cash flows to assess its earnings quality and obtain information about its operating, investing, and financing activities.

 

 

2. Identify the uses and limitations of a statement of financial position. The SFP provides information about the nature and amounts of investments in enterprise resources, obligations to creditors, and the owners equity in net resources. The SFP contributes to financial reporting by providing a basis for (1) calculating rates of return, (2) evaluating the enterprises capital structure, and (3) assessing the enterprises liquidity, solvency, and financial flexibility. The limitations of a SFP are as follows: (1) The SFP often does not reflect current value, because accountants have adopted a historical cost basis in valuing and reporting many assets and liabilities. (2) Judgments and estimates must be used in preparing a SFP. (3) The SFP leaves out many items that are of financial value to the business but cannot be recorded objectively, such as its human resources, customer base, and reputation.

 

 

3. Identify the major classifications of a statement of financial position. The SFPs general elements are assets, liabilities, and equity. The major classifications within the SFP on the asset side are current assets; investments; property, plant, and equipment; intangible assets; and other assets. The major classifications of liabilities are current and long-term liabilities. In a corporation, owners equity is generally classified as shares, contributed surplus, retained earnings, and accumulated other comprehensive income.

 

 

4. Prepare a classified statement of financial position. The most common format lists liabilities and shareholders equity directly below assets on the same page.

 

 

5. Identify statement of financial position information that requires supplemental disclosure. Five types of information are normally supplemental to account titles and amounts presented in the SFP. (1) Contingencies: Material events that have an uncertain outcome. (2) Accounting policies: Explanations of the valuation methods that are used or the basic assumptions that are made for inventory valuation, amortization methods, investments in subsidiaries, and so on. (3) Contractual situations: Explanations of certain restrictions or covenants that are attached to specific assets or, more likely, to liabilities. (4) Additional information: Clarification by giving more detail about the composition of SFP items. (5) Subsequent events: Events that happen after the date of the SFP.

 

 

6. Identify major disclosure techniques for the statement of financial position. There are four methods of disclosing pertinent information in the SFP: (1) Parenthetical explanations: Additional information or description is often provided by giving explanations in parentheses that follow the item. (2) Notes: Notes are used if additional explanations or descriptions cannot be shown conveniently as parenthetical explanations. (3) Cross-reference and contra items: A direct relationship between an asset and a liability is cross-referenced on the SFP. (4) Supporting schedules: Often a separate schedule is needed to present more detailed information about certain assets or liabilities because the SFP provides just a single summary item.

 

 

7. 7. Indicate the purpose and identify the content of the statement of cash flows. The main purpose of a statement of cash flows is to provide relevant information about an enterprises cash receipts and cash payments during a period. Reporting the sources, uses, and net increase or decrease in cash lets investors, creditors, and others know what is happening to a companys most liquid resource. Cash receipts and cash payments during a period are classified in the statement of cash flows into three different activities: (1) Operating activities: Involve the cash effects of transactions that enter into the determination of net income. (2) Investing activities: Include making and collecting loans and acquiring and disposing of investments (both debt and equity) and property, plant, and equipment. (3) Financing activities: Involve liability and owners equity items and include (a) obtaining capital from owners and providing them with a return on their investment and (b) borrowing money from creditors and repaying the amounts borrowed.

 

 

8. Prepare a statement of cash flows using the indirect method. This involves determining cash flows from operations by starting with net income and adjusting it for noncash activities, such as changes in accounts receivable (and other current asset/liability) balances, depreciation, and gains/losses. It is important to look carefully at prior years operating activities that might affect cash this year, such as cash collected this year from last years credit sales and cash spent this year for last years accrued expenses. The cash flows from investing and financing activities can then be determined by analyzing changes in SFP accounts and the cash account.

 

 

9. Understand the usefulness of the statement of cash flows. Creditors examine the statement of cash flows carefully because they are concerned about being paid. The amount of net cash flow provided by operating activities in relation to the companys liabilities is helpful in making this assessment. In addition, measures such as a free cash flow analysis provide creditors and shareholders with a better picture of the companys financial flexibility.

 

 

10. Identify differences in accounting between ASPE and IFRS. Illustration 5-24 outlines the major differences in how both sets of standards account for and present items on the SFP and statement of cash flows. Both sets of standards largely require that the same SFP elements be presented. In addition, IFRS requires presentation of biological assets, investment properties, and provisions. The statement of cash flow presentation requirements are similar.

 

 

11. 11. Identify the significant changes planned by the IASB regarding financial statement presentation. The IASB has been planning to change the way financial statements are presented by issuing a new standard on financial statement presentation. However, the project was paused in 2011 until the IASB concludes its ongoing deliberations about its future work plan. In June 2014, the IASB issued a more targeted Exposure Draft called the Disclosure InitiativeProposed Amendments to IAS 7. It proposes amendments to provide additional information to financial statement users about financing activities (other than those that relate to equity items).

 

 

12. Identify the major types of financial ratios and what they measure (Appendix 5A).

Ratios express the mathematical relationship between one quantity and another, in terms of a percentage, a rate, or a proportion. Liquidity ratios measure the short-term ability to pay maturing obligations. Activity ratios measure how effectively assets are being used. Profitability ratios measure an enterprises success or failure. Coverage ratios measure the degree of protection for long-term creditors and investors.

 

 

Multiple Choice QUESTIONS

 

Answer           No.      Description

b                 1.       Earnings quality

d                 2.       Limitation of the balance sheet

d                 3.       Uses of the statement of financial position

b                 4.       Uses of the statement of financial position

c                 5.       Uses of the statement of financial position

d                 6.       Definition of solvency

a                 7.       Definition of financial flexibility

b                 8.       Risk of business failure

d                 9.       Limitations of the statement of financial position

d               10.       Monetary assets

c               11.       Monetary assets

b               12.       Financial instruments

c               13.       Non-monetary assets

b               14.       Non-monetary assets

c               15.       Basis of classifying assets

d               16.       Definition of operating cycle

a               17.       Identification of current asset

d               18.       Identification of non-current asset

c               19.       Classification of securities

b               20.       Intangible assets

c               21.       Identification of current liabilities

d               22.       Definition of working capital

b               23.       Identification of working capital items

b               24.       Definition of liabilities

a               25.       Identification of long-term liabilities

d               26.       Classification of equity section accounts

c               27.       Classification of shareholders equity

d               28.       Current assets on the balance sheet

b               29.       Value of receivables

c               30.       Calculate total current assets

b               31.       Calculate total current assets

d               32.       Calculate total current liabilities

b               33.       Calculate retained earnings balance

b               34.       Calculate current and long-term liabilities

d               35.       Supplementary disclosure

b               36.       Supplementary disclosure

c               37.       Summary of significant accounting policies

d               38.       Methods of disclosure

d               39.       Contra account

d               40.       Accounting policies

c               41.       Definition of statement of cash flows

a               42.       Disclosure of revenue-producing activities on the statement of cash flows

b               43.       Identify an investing activity

c               44.       Identify a financing activity

a               45.       Identify an investing activity

c               46.       Statement of cash flow

b               47.       Classification of investing activity

c               48.       Classification of investing activity

a               49.       Classification of operating activity

d               50.       Classification of financing activity

b               51.       Classification of investing activity

a               52.       Preparation of statement of cash flows under indirect method

c               53.       Cash flows from operating activities

d               54.       Preparation of statement of cash flows under indirect method

c               55.       Preparation of statement of cash flows under direct method

b               56.       Preparation of statement of cash flows under direct method

c               57.       Classification of operating activity

b               58.       Cash debt coverage ratio

c               59.       Current cash debt coverage ratio

d               60.       Financial flexibility measure

c               61.       Calculation of free cash flow

b               62.       Financial flexibility

c               63.       Calculation of free cash flow

a               64.       Disclosures under ASPE

c               65.       Disclosures under IFRS

c               66.       Reclassification of current debt

d               67.       Special disclosure under IFRS

b               68.       Listing of current assets

c               69.       Reporting requirements for SFP

c               70.       Upcoming IABS and FASB changes to financial statement presentation

a               71.       New definitions in Exposure Draft

c               72.       New proposals in Exposure Draft

b              *73.       Definition of activity ratios

c              *74.       Definition of solvency ratios

d              *75.       Definition of asset turnover

c              *76.       Calculate asset turnover ratio

d              *77.       Calculate rate of return on assets

c              *78.       Financial or capital market risks

 

*This topic is dealt with in an Appendix to the chapter.

 

 

Exercises

   Item              Description

 

E5-79              Earnings quality

E5-80              Creditworthiness; debt to total assets

E5-81              Liquidity, solvency, and financial flexibility

E5-82              Limitations of the statement of financial position

E5-83              Terminology

E5-84              Definitions

E5-85              Account classification

E5-86              Current liabilities

E5-87              Current assets

E5-88              Account classification

E5-89              Valuation of statement of financial position items

E5-90              Statement of financial position classifications

E5-91              Statement of financial position classifications

E5-92              Statement of financial position classifications

E5-93              Statement of financial position

E5-94              Statement of financial position presentation

E5-95              Subsequent events

E5-96              Contractual disclosures and ethical consideration

E5-97              Notes

E5-98              Contra or adjunct accounts

E5-99              Statement of cash flows

E5-100                        Statement of cash flows purpose

E5101              Statement of cash flows basic format

E5-102                        Cash provided (used) by operating activities

E5-103                        Ending cash balance

E5-104                        Statement of cash flows ratios

E5-105                        Calculation of cash flow and ratio

*E5-106                       Calculation of ratios

*E5-107                       Interpretation of ratios

*E5-108                       Calculation of ratios

*E5-109                       Calculation of ratios

 

*This topic is dealt with in an Appendix to the chapter.

 

 

PROBLEMS

 

   Item              Description

 

P5-110                        Statement of financial position format

P5-111                        Statement of financial position presentation

P5-112                        Calculation of ending retained earnings

P5-113                        Statement of cash flows direct method

P5-114                        Statement of cash flows indirect method

*P5-115                       Calculation of ratios

 

*This topic is dealt with in an Appendix to the chapter.

 

MULTIPLE CHOICE QUESTIONS

 

 

1. When assessing earnings quality, financial analysts are concerned that management may attempt to manipulate information to make earnings appear better or worse than they really are. Which of the following would NOT suggest poor earnings quality?
2. a) reduction of the allowance for doubtful accounts
3. b) consistent application of GAAP
4. c) significantly higher net income than cash flows from operations
5. d) reliance on share issuances to offset repeated negative cash flow from operations

 

Answer: b

 

Difficulty: Easy

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

CPA: Audit and Assurance

CPA: Financial Reporting

CPA: Strategy & Governance

Bloomcode: Knowledge

 

 

2. Which of the following is a limitation of the balance sheet?
3. a) Many items that are of financial value are omitted.
4. b) Judgments and estimates are used.
5. c) Current fair value is not reported.
6. d) All of these answer choices are correct.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

3. The statement of financial position is useful for all of the following EXCEPT
4. a) assessing a companys risk.
5. b) evaluating a companys liquidity.
6. c) evaluating a companys financial flexibility.
7. d) determining free cash flows.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

4. The statement of financial position is useful for all of the following EXCEPT to
5. a) compute rates of return.
6. b) analyze cash inflows and outflows for the period.
7. c) evaluate capital structure.
8. d) assess future cash flows.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Understand the statement of financial position and statement of cash flows from a business perspective.

Section Reference: Usefulness of the Statements of Financial Position and Cash Flows from a Business Perspective

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

5. The statement of financial position is useful for analyzing all of the following EXCEPT
6. a) liquidity.
7. b) solvency.
8. c) profitability.
9. d) financial flexibility.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

6. An enterprises ability to pay its debts and related interest is called
7. a) liquidity.
8. b) financial flexibility.
9. c) the amount of time expected to pass until an asset is realized.
10. d) solvency.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

7. An enterprises ability to take effective actions to alter the amounts and timing of cash flows so it can respond to unexpected needs and opportunities is called
8. a) financial flexibility.
9. b) liquidity.
10. c) the quick ratio.
11. d) solvency.

 

Answer: a

 

Difficulty: Easy

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

8. Generally, as financial flexibility increases, the risk of enterprise or business failure will
9. a) increase.
10. b) decrease.
11. c) stay the same.
12. d) be eliminated.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

9. Which of the following is NOT a limitation of the statement of financial position?
10. a) Many assets are reported at historical cost.
11. b) Judgments and estimates are used.
12. c) Only hard numbers are reported.
13. d) Disclosure of all pertinent information in the notes.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify the uses and limitations of a statement of financial position.

Section Reference: Usefulness and Limitations of the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

10. Monetary assets represent
11. a) only cash.
12. b) contractual rights to receive cash.
13. c) equity investments in other companies.
14. d) cash or claims to future cash flows that are fixed and determinable in amounts and timing.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

11. Monetary assets include
12. a) cash, accounts receivable and inventory.
13. b) accounts and notes receivable and inventory.
14. c) cash, accounts and notes receivable.
15. d) accounts receivable and property, plant and equipment.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

12. Financial instruments do NOT include
13. a) cash.
14. b) inventory.
15. c) derivatives.
16. d) accounts payable.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

13. Non-monetary assets include
14. a) accounts and notes receivable and inventory.
15. b) accounts receivable and property, plant and equipment.
16. c) inventory, property, plant and equipment, and intangibles.
17. d) accounts receivable and investments.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

14. Non-monetary assets
15. a) are those for which the cash value is determinable in amount and timing.
16. b) are often measured at historical cost.
17. c) are always classified as non-current.
18. d) will required future cash outflows from the company.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Identify the major classifications of a statement of financial position.

Section Reference: Classification in the Statement of Financial Position

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

15. The basis for classifying assets as current or non-current is conversion to cash within
16. a) the accounting cycle or one year, whichever is shorter.
17. b) the accounting cycle or one year, whichever is longer.
18. c) the operating cycle or one year, whichever is longer.
19. d) the operating cycle or one year, whichever is shorter.

 

Answer: c

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

16. The operating cycle is the time between
17. a) selling products to customers and the realization of cash.
18. b) purchase of inventory and selling to customers.
19. c) manufacture of products and receiving cash from customers.
20. d) acquisition of assets for processing and the realization in cash or cash equivalents.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

17. Which of the following is a current asset?
18. a) trade instalment receivables normally collectible in eighteen months
19. b) intangible assets
20. c) investment in associates (significant influence investments)
21. d) cash designated for the purchase of property, plant and equipment

 

Answer: a

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

18. Which of the following should NOT be considered current assets in the statement of financial position?
19. a) instalment notes receivable due over eighteen months, in accordance with normal trade practice
20. b) prepaid taxes, which cover assessments for the current year
21. c) equity or debt securities purchased with cash available for current operations
22. d) franchises and copyrights

 

Answer: d

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

19. Equity or debt securities held to finance future construction of additional plants should be classified on a statement of financial position as
20. a) current assets.
21. b) property, plant, and equipment.
22. c) non-current investments.
23. d) intangible assets.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

20. Which of the following statements about intangible assets is INCORRECT?
21. a) They are capital assets that have no physical substance.
22. b) Intangibles with finite lives are amortized but not tested for impairment.
23. c) Intangibles with infinite lives are not amortized but are tested for impairment.
24. d) Internally recognized intangibles are never recognized on the statement of financial position.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

21. Which of the following is NOT a current liability?
22. a) unearned revenue
23. b) derivatives
24. c) stock dividends distributable
25. d) trade accounts payable

 

Answer: c

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

22. Working capital is
23. a) capital which has been reinvested in the business.
24. b) cash invested by owners.
25. c) cash and receivables less current liabilities.
26. d) current assets less current liabilities.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

23. An example of an item which is NOT an element of working capital is
24. a) accrued interest on notes receivable.
25. b) goodwill.
26. c) inventory.
27. d) short-term investments.

 

Answer: b

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

24. Which of the following statements best describes a liability?
25. a) Any obligation, whether enforceable or not, is a liability.
26. b) A liability is an enforceable economic burden or obligation.
27. c) A liability is a legal economic benefit.
28. d) Deferred income taxes are always shown as liabilities.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

25. Which of the following should be EXCLUDED from long-term liabilities?
26. a) derivatives
27. b) employee future benefits obligations
28. c) long-term liabilities maturing within the operating cycle, but will be paid from a sinking fund
29. d) bonds payable maturing in five years

 

Answer: a

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

26. Which of the following would NOT appear in the equity section of a statement of financial position?
27. a) preferred shares
28. b) accumulated other comprehensive income
29. c) stock dividend distributable
30. d) investment in affiliate

 

Answer: d

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

27. The shareholders equity section is usually divided into which four parts?
28. a) preferred shares, common shares, retained earnings, contributed surplus
29. b) preferred shares, common shares, retained earnings, other comprehensive income
30. c) capital shares, contributed surplus, retained earnings, accumulated other comprehensive income
31. d) capital shares, appropriated retained earnings, unappropriated retained earnings, contributed surplus

 

Answer: c

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

28. The current assets section of the balance sheet should include
29. a) machinery.
30. b) patents.
31. c) goodwill.
32. d) inventory.

 

Answer: d

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

29. Receivables are valued based on their ______.
30. a) fair value
31. b) estimated amount collectible
32. c) lower of cost or market value
33. d) historical cost

 

Answer: b

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

30. Pluto Corp.s trial balance included the following account balances at December 31, 2017:

Accounts receivable (net).       $41,000

Trading securities..           7,000

Accumulated depreciation on equipment and furniture.         15,000

Cash.         10,000

Inventory         27,000

Equipment.         25,000

Patent..           4,000

Prepaid expenses..           1,500

Land held for future business site.         18,000

In Plutos December 31, 2017 statement of financial position, the current assets total is

500. a) $104,500.
501. b) $90,500.
502. c) $86,500.
503. d) $73,500.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: $41,000 + $7,000 + $10,000 + $27,000 + $1,500 = $86,500

 

 

Use the following information for questions 3133.

 

Venus Corp.s trial balance at December 31, 2017 is properly adjusted except for the income tax expense adjustment.

Venus Corp.

Trial Balance

December 31, 2017

  Dr.                       Cr.            

Cash                                                                                          $  675,000

Accounts receivable (net)                                                          2,895,000

Inventory                                                                                     2,385,000

Property, plant, and equipment (net)                                          8,366,000

Accounts payable and accrued liabilities                                                             $ 1,981,000

Income taxes payable                                                                                                684,000

Future income tax liability                                                                                            75,000

Common stock                                                                                                       3,350,000

Contributed surplus                                                                                                 2,680,000

Retained earnings, Jan 1, 2017                                                                              4,650,000

Net sales and other revenues                                                                               12,360,000

Costs and expenses                                                                 10,080,000

Income tax expenses                                                                1,379,000                            

$25,780,000         $25,780,000

 

Other financial data for the year ended December 31, 2017:

• Included in accounts receivable is $720,000 due from a customer and payable in quarterly instalments of $90,000. The last payment is due December 29, 2019.
• The balance in the future income tax liability account relates to a temporary difference that arose in a prior year, of which $30,000 is classified as a current liability.
• During the year, estimated tax payments of $465,000 were charged to income tax expense. The current and future tax rate on all types of income is 35 percent.

 

 

31. In Venuss December 31, 2017 statement of financial position, the current assets total is
32. a) $5,955,000.
33. b) $5,595,000.
34. c) $3,060,000.
35. d) $4,495,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: $675,000 + [$2,895,000 ($90,000 x 4)] + $2,385,000 = $5,595,000

 

 

32. In Venuss December 31, 2017 statement of financial position, the current liabilities total is
33. a) $2,435,000.
34. b) $2,695,000.
35. c) $2,200,000.
36. d) $2,114,000.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: Note the adjusted income tax expense will be $798,000 [($12,360,000 $10,080,000) x 35%] = $798,000. When the expense is reduced by $581,000 ($1,379,000 $798,000 = $581,000), the liability will also be reduced by the same amount to $103,000 ($1,981,000 + $103,000) + $30,000 = $2,114,000

 

 

33. In Venuss December 31, 2017 statement of financial position, the final retained earnings balance is
34. a) $5,551,000.
35. b) $6,132,000.
36. c) $5,135,000.
37. d) $6,016,000.

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

Feedback: $4,650,000 + $12,360,000 $10,080,000 $798,000 (income tax exp) = $6,132,000

 

 

34. On January 1, 2017, Mars Inc. leased a building to Vulcan Corp. for a ten-year term at an annual rental of $160,000. At inception of the lease, Mars received $640,000, which covered the first two years rent of $320,000 and a security deposit of $320,000. This deposit will not be returned to Vulcan upon expiration of the lease, but will be applied to payment of rent for the last two years of the lease. What portion of the $640,000 should be shown as a current and long-term liability in Marss December 31, 2017 statement of financial position?

Current Liability                 Long-term Liability

1. a) $0                                $640,000
2. b) $160,000 $320,000
3. c) $320,000 $320,000
4. d) $320,000 $160,000

 

Answer: b

 

Difficulty: Medium

Learning Objective: Prepare a classified statement of financial position.

Section Reference: Preparation of the Classified Statement of Financial Position (Balance Sheet)

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

35. Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure?
36. a) Current assets
37. b) Current liabilities
38. c) Plant assets
39. d) Long-term liabilities

 

Answer: d

 

Difficulty: Easy

Learning Objective: Identify statement of financial position information that requires supplemental disclosure.

Section Reference: Additional Information Reported

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

36. Which of the following is NOT a required supplemental disclosure for the balance sheet?
37. a) Contingencies
38. b) Financial forecasts
39. c) Accounting policies
40. d) Contractual situations

 

Answer: b

 

Difficulty: Easy

Learning Objective: Identify statement of financial position information that requires supplemental disclosure.

Section Reference: Additional Information Reported

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

37. Which of the following facts concerning depreciable assets should be included in the summary of significant accounting policies?

Depreciation Method    Composition

1. a) No Yes
2. b) Yes Yes
3. c) Yes No
4. d) No No

 

Answer: c

 

Difficulty: Medium

Learning Objective: Identify statement of financial position information that requires supplemental disclosure.

Section Reference: Additional Information Reported

CPA: Financial Reporting

Bloomcode: Application

Bloomcode: Knowledge

 

 

38. Which of the following is NOT a method of disclosing additional information in the financial statements?
39. a) supporting schedules
40. b) parenthetical explanations
41. c) cross-reference and contra items
42. d) press releases

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify major disclosure techniques for the statement of financial position.

Section Reference: Techniques of Disclosure

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

39. Which of the following is a contra account?
40. a) Premium on bonds payable
41. b) Unearned revenue
42. c) Patents
43. d) Accumulated depreciation

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify major disclosure techniques for the statement of financial position.

Section Reference: Techniques of Disclosure

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

40. Significant accounting policies may NOT be
41. a) selected on the basis of judgment.
42. b) selected from existing acceptable alternatives.
43. c) unusual or innovative in application.
44. d) omitted from financial-statement disclosure.

 

Answer: d

 

Difficulty: Medium

Learning Objective: Identify major disclosure techniques for the statement of financial position.

Section Reference: Techniques of Disclosure

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

41. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
42. a) retained earnings statement.
43. b) income statement.
44. c) statement of cash flows.
45. d) statement of financial position.

 

Answer: c

 

Difficulty: Easy

Learning Objective: Indicate the purpose and identify the content of the statement of cash flows.

Section Reference: Purpose, Content, and Format of a Statement of Cash Flows

CPA: Financial Reporting

Bloomcode: Knowledge

 

 

42. On a st

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