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CHAPTER 5
FINANCIAL POSITION AND CASH FLOWS
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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:
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
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
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
Current Liability Long-term Liability
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
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
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
Depreciation Method Composition
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
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
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
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
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
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