Intermediate Accounting 15th Edition By Donald E.-Kieso - Test Bank

Intermediate Accounting 15th Edition By Donald E.-Kieso – Test Bank

 

Instant Download – Complete Test Bank With Answers

 

 

Sample Questions Are Posted Below

 

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

F                 1.       Liquidity and solvency.

T                 2.       Limitations of the balance sheet.

T                 3.       Definition of financial flexibility.

T                 4.       Long-term liability disclosures.

T                 5.       Reporting restricted cash.

F                 6.       Land held for speculation.

T                 7.       Balance sheet format.

F                 8.       Purpose of statement of cash flows.

F                 9.       Statement of cash flows reporting.

T               10.       Financial flexibility.

T               11.       Collection of a loan.

T               12.       Determining cash provided by operating activities.

F               13.       Reporting significant financing and investing activities.

T               14.       Current cash debt coverage.

F               15.       Definition of free cash flow.

F               16.       Disclosure of fair values.

F               17.       Disclosure of company operations and estimates.

T               18.       Disclosure of pertinent information.

F               19.       Adjunct account.

F               20.       Definition of activity ratios.

 

 

Multiple Choice—Conceptual

Answer          No.      Description

d               21.       Limitation of the balance sheet.

c               22.       Uses of the balance sheet.

b               23.       Use of balance sheet information.

d               24.       Use of balance sheet information.

d               25.       Limitation of the balance sheet.

c              ^S26.       Uses of the balance sheet.

b              ^S27.       Criticisms of the balance sheet.

c              ^P28.       Definition of liquidity.

d               29.       Definition of net assets.

b               30.       Current assets presentation.

b               31.       Operating cycle.

d               32.       Operating cycle.

d               33.       Identification of current asset.

d               34.       Identification of current asset.

c               35.       Presentation of current asset.

b               36.       Valuation of receivables.

c               37.       Classification of inventory pledged as security.

Multiple Choice—Conceptual  (cont.)

Answer          No.      Description

b               38.       Identification of long-term investments.

d               39.       Identification of valuation methods.

b               40.       Identification of current liabilities.

d               41.       Definition of working capital.

b               42.       Identification of working capital items.

d               43.       Identification of long-term liabilities.

d               44.       Identification of long-term liabilities.

d               45.       Classification of treasury stock.

d               46.       Disclosures for common stock.

d               47.       Classification of investment in affiliate.

c               48.       Classification of owners’ equity.

d               49.       Classification of assets.

c               50.       Purpose of the statement of cash flows.

c              ^S51.       Statement of cash flows answers.

c               52.       Statement of cash flows reporting.

b               53.       Statement of cash flows objective.

d               54.       Reporting issuance of stock for machine.

d               55.       Identify a financing activity.

b               56.       Classification of cash receipts.

b               57.       Identify a financing activity.

c               58.       Cash flow from operating activities.

a               59.       Identify an investing activity.

d               60.       Preparing the statement of cash flows.

b               61.       Cash debt coverage.

b               62.       Current cash debt coverage.

d               63.       Financial flexibility measure.

c               64.       Calculation of free cash flow.

b              ^S65.       Description of financial flexibility.

b               66.       Cash debt coverage.

d              ^S67.       Balance sheet supplementary disclosure.

a               68.       Fair value hierarchy.

b               69.       Balance sheet supplementary disclosure.

c               70.       Disclosure of contractual situations.

d               71.       Disclosure of accounting policies.

d               72.       Contingency reported in financial statement notes.

d               73.       Methods of disclosure.

d               74.       Disclosure of significant accounting policies.

d               75.       Disclosure of depreciation methods used.

d               76.       Required notes to the financial statements.

d              ^P77.       Identification of contra account.

b              ^P78.       Definition of activity ratios.

 

^P Note: these questions also appear in the Problem-Solving Survival Guide.

^S Note: these questions also appear in the Study Guide.

 

 

Multiple Choice—Computational

Answer          No.      Description

c               79.       Classifying investments.

a               80.       Identifying intangible assets

b               81.       Calculate total stockholders’ equity.

d               82.       Classifying investments.

a               83.       Identifying intangible assets.

b               84.       Calculate total stockholders’ equity.

c               85.       Calculate beginning stockholders’ equity.

c               86.       Calculate ending stockholders’ equity.

d               87.       Calculate net income.

b               88.       Calculate ending cash balance.

b               89.       Calculate ending cash balance.

a               90.       Calculate cash provided by operating activities.

c               91.       Cash provided by operating activities.

c               92.       Cash provided by operating activities.

a               93.       Cash debt coverage.

b               94.       Free cash flow.

c               95.       Asset turnover ratio.

d               96.       Rate of return on assets.

 

Multiple Choice—CPA Adapted

Answer          No.      Description

d               97.       Calculate total current assets.

d               98.       Calculate total current assets.

a               99.       Calculate total current liabilities.

c             100.       Calculate retained earnings balance.

b             101.       Calculate current and long-term liabilities.

c             102.       Classification of investing activity.

a             103.       Classification of operating activity.

d             104.       Classification of financing activity.

b             105.       Classification of investing activity.

c             106.       Summary of significant accounting policies.

 

 

 

BRIEF Exercises

  Item               Description

BE5-107          Definitions.

BE5-108          Terminology.

BE5-109          Current assets.

 

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            Statement of cash flows.

E5-116            Statement of cash flows ratios.

 

 

PROBLEMS

  Item               Description

P5-117            Balance sheet format.

P5-118            Balance sheet preparation.

P5-119            Balance sheet presentation.

P5-120            Statement of cash flows preparation.

P5-121            Statement of cash flows preparation.

 

 

 

CHAPTER LEARNING OBJECTIVES

1. Explain the uses and limitations of a balance sheet.
2. Identify the major classifications of the balance sheet.
3. Prepare a classified balance sheet using the report and account formats.
4. Indicate the purpose of the statement of cash flows.
5. Identify the content of the statement of cash flows.
6. Prepare a basic statement of cash flows.
7. Understand the usefulness of the statement of cash flows.
8. Determine which balance sheet information requires supplemental disclosure.
9. Describe the major disclosure techniques for the balance sheet.

*10.Identify the major types of financial ratios and what they measure.

11. Compare the accounting procedures related to the balance sheet under GAAP and IFRS.

 

SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS

 

Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type	Item	Type
Learning Objective 1
1.	TF	3.	TF	22.	MC	24.	MC	S26.	MC	P28.	MC
2.	TF	21.	MC	23.	MC	25.	MC	S27.	MC
Learning Objective 2
4.	TF	33.	MC	40.	MC	47.	MC	83.	MC	107.	BE- CT	114.	E
5.	TF	34.	MC	41.	MC	48.	MC	84.	MC	108.	BE	117.	P
6.	TF	35.	MC	42.	MC	49.	MC	97.	MC	109.	BE	118.	P
29.	MC	36.	MC	43.	MC	79.	MC	98.	MC	110.	E	119.	P
30.	MC	37.	MC	44.	MC	80.	MC	99.	MC	111.	E
31.	MC	38.	MC	45.	MC	81.	MC	100.	MC	112.	E
32.	MC	39.	MC	46.	MC	82.	MC	101.	MC	113.	E
Learning Objective 3
7.	TF	P50.	MC	85.	MC	86.	MC	87.	MC	118.	P	119.	P
Learning Objective 4
8.	TF	9.	TF	51.	MC	S52.	MC	53.	MC	54.	MC
Learning Objective 5
10.	TF	56.	MC	59.	MC	89.	MC	103.	MC	115.	E
11.	TF	57.	MC	60.	MC	90.	MC	104.	MC
55.	MC	58.	MC	88.	MC	102.	MC	105.	MC
Learning Objective 6
12.	TF	61.	MC	92.	MC	121.	P
13.	TF	91.	MC	120.	P
Learning Objective 7
14.	TF	63.	MC	S66.	MC	116.	E-CT
15.	TF	64.	MC	93.	MC
62.	MC	65.	MC	94.	MC
Learning Objective 8
16.	TF	S68.	MC	71.	MC	106.	MC	110.	E	117.	P
17.	TF	69.	MC	72.	MC	107.	BE	112.	E
S67.	MC	70.	MC	73.	MC	108.	BE	114.	E
Learning Objective 9
18.	TF	74.	MC	76.	MC
19.	TF	75.	MC	77.	MC
Learning Objective 10
20.	TF	78.	MC	95.	MC	96.	MC
Learning Objective 11- IFRS Questions
1	TF	3	TF	5	MC	7	MC	9	MC	11	SA
2	TF	4	TF	6	MC	8	MC	10	MC	12	SA

 

Note:     TF = True-False                    E = Exercise                           CT = Critical Thinking                         MC = Multiple Choice            BE = Brief Exercise                              P = Problem    SA = Short Answer

 

 

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.

 

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.

 

20. Activity ratios measure the degree of protection for long-term creditors and investors.

 

 

 

 

True False Answers—Conceptual

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
1.	F	6.	F	11.	T	16.	F
2.	T	7.	T	12.	T	17.	F
3.	T	8.	F	13.	F	18.	T
4.	T	9.	F	14.	T	19.	F
5.	T	10.	T	15.	F	20.	F

 

 

 

 

MULTIPLE CHOICE—Conceptual

 

21. Which of the following is a limitation of the balance sheet?
22. Many items that are of financial value are omitted.
23. Judgments and estimates are used.
24. Current fair value is not reported.
25. All of these answer choices are correct.

 

22. The balance sheet is useful for analyzing all of the following except
23. liquidity.
24. solvency.
25. profitability.
26. financial flexibility.

 

23. Balance sheet information is useful for all of the following except to
24. compute rates of return
25. analyze cash inflows and outflows for the period
26. evaluate capital structure
27. assess future cash flows

 

24. Balance sheet information is useful for all of the following except
25. assessing a company’s risk
26. evaluating a company’s liquidity
27. evaluating a company’s financial flexibility
28. determining free cash flows.

 

 

25. A limitation of the balance sheet that is not also a limitation of the income statement is
26. the use of judgments and estimates
27. omitted items
28. the numbers are affected by the accounting methods employed
29. valuation of items at historical cost

 

^S26.     The balance sheet contributes to financial reporting by providing a basis for all of the following except

1. computing rates of return.
2. evaluating the capital structure of the enterprise.
3. determining the increase in cash due to operations.
4. assessing the liquidity and financial flexibility of the enterprise.

 

^S27.     One criticism not normally aimed at a balance sheet prepared using current accounting and reporting standards is

1. failure to reflect current value information.
2. the extensive use of separate classifications.
3. an extensive use of estimates.
4. failure to include items of financial value that cannot be recorded objectively.

 

^P28.     The amount of time that is expected to elapse until an asset is realized or otherwise converted into cash is referred to as

1. solvency.
2. financial flexibility.
3. liquidity.
4. exchangeability.

 

29. The net assets of a business are equal to
30. current assets minus current liabilities.
31. total assets plus total liabilities.
32. total assets minus total stockholders’ equity.
33. none of these answer choices are correct.

 

30. The correct order to present current assets is
31. cash, accounts receivable, prepaid items, inventories.
32. cash, accounts receivable, inventories, prepaid items.
33. cash, inventories, accounts receivable, prepaid items.
34. cash, inventories, prepaid items, accounts receivable.

 

31. The basis for classifying assets as current or noncurrent is conversion to cash within
32. the accounting cycle or one year, whichever is shorter.
33. the operating cycle or one year, whichever is longer.
34. the accounting cycle or one year, whichever is longer.
35. 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
33. inventory back into cash, or 12 months, whichever is shorter.
34. receivables back into cash, or 12 months, whichever is longer.
35. tangible fixed assets back into cash, or 12 months, whichever is longer.
36. inventory back into cash, or 12 months, whichever is longer.

 

33. The current assets section of the balance sheet should include
34. machinery.
35. patents.
36. goodwill.
37. inventory.

 

34. Which of the following is a current asset?
35. Cash surrender value of a life insurance policy of which the company is the beneficiary.
36. Investment in equity securities for the purpose of controlling the issuing company.
37. Cash designated for the purchase of tangible fixed assets.
38. Trade installment receivables normally collectible in 18 months.

 

35. Current assets are presented in the balance sheet in
36. ascending order of their balances.
37. descending order of their balances.
38. order of their liquidity.
39. reverse order of their liquidity.

 

36. Receivables are valued based on their ________.
37. fair value
38. estimated amount collectible
39. lower-of-cost-or-market value
40. historical cost

 

37. When a portion of inventories has been pledged as security on a loan,
38. the value of the portion pledged should be subtracted from the debt.
39. an equal amount of retained earnings should be appropriated.
40. the fact should be disclosed but the amount of current assets should not be affected.
41. 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?
39. Cash surrender value of life insurance
40. Franchise
41. Land held for speculation
42. A sinking fund

 

39. A generally accepted method of valuation is
40. trading securities at market value.
41. accounts receivable at net realizable value.
42. inventories at current cost.
43. 1
44. 2
45. 3
46. 1 and 2

 

 

40. Which item below is not a current liability?
41. Unearned revenue
42. Stock dividends distributable
43. The currently maturing portion of long-term debt
44. Trade accounts payable

 

41. Working capital is
42. capital which has been reinvested in the business.
43. unappropriated retained earnings.
44. cash and receivables less current liabilities.
45. none of these answer choices are correct.

 

42. An example of an item which is not an element of working capital is
43. accrued interest on notes receivable.
44. goodwill.
45. goods in process.
46. temporary investments.

 

43. Long-term liabilities include
44. obligations not expected to be liquidated within the operating cycle.
45. obligations payable at some date beyond the operating cycle.
46. deferred income taxes and most lease obligations.
47. all of these answer choices are correct.

 

44. Which of the following should be excluded from long-term liabilities?
45. Obligations payable at some date beyond the operating cycle
46. Most pension obligations
47. Long-term liabilities that mature within the operating cycle and will be paid from a sinking fund
48. None of these answer choices are correct.

 

45. Treasury stock should be reported as a(n)
46. current asset.
47. investment.
48. other asset.
49. reduction of stockholders’ equity.

 

46. Which of the following should be reported for capital stock?
47. The shares authorized
48. The shares issued
49. The shares outstanding
50. 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?
48. Capital stock
49. Common stock subscribed
50. Stock dividend distributable
51. Stock investment in affiliate

 

 

48. The stockholders’ equity section is usually divided into what three parts?
49. Preferred stock, common stock, treasury stock
50. Preferred stock, common stock, retained earnings
51. Capital stock, additional paid-in capital, retained earnings
52. Capital stock, appropriated retained earnings, unappropriated retained earnings

 

49. Which of the following is not an acceptable major asset classification?
50. Current assets
51. Long-term investments
52. Property, plant, and equipment
53. Deferred charges

 

50. The financial statement which summarizes operating, investing, and financing activities of an entity for a period of time is the
51. retained earnings statement.
52. income statement.
53. statement of cash flows.
54. statement of financial position.

 

^S51.     The statement of cash flows provides answers to all of the following questions except

1. where did the cash come from during the period?
2. what was the cash used for during the period?
3. what is the impact of inflation on the cash balance at the end of the year?
4. what was the change in the cash balance during the period?

 

52. The statement of cash flows reports all of the following except
53. the net change in cash for the period.
54. the cash effects of operations during the period.
55. the free cash flows generated during the period.
56. 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
54. amount of future cash flows.
55. source of future cash flows.
56. timing of future cash flows.
57. 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?
55. It would depend on whether you are using the direct or the indirect method.
56. It would be a positive $8,000 in the financing section and a negative $8,000 in the investing section.
57. It would be a negative $8,000 in the financing section and a positive $8,000 in the investing section.
58. 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?
56. Cash purchases of equipment.
57. Cash purchases of bonds issued by another company.
58. Cash received as repayment for funds loaned.
59. Cash purchase of treasury stock.

 

56. Making and collecting loans and disposing of property, plant, and equipment are
57. operating activities.
58. investing activities.
59. financing activities.
60. liquidity activities.

 

57. In preparing a statement of cash flows, sale of treasury stock at an amount greater than cost would be classified as a(n)
58. operating activity.
59. financing activity.
60. extraordinary activity.
61. investing activity.

 

58. In preparing a statement of cash flows, cash flows from operating activities
59. are always equal to accrual accounting income.
60. are calculated as the difference between revenues and expenses.
61. can be calculated by appropriately adding to or deducting from net income those items in the income statement that do not affect cash.
62. 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?
60. Sale of equipment at book value
61. Sale of merchandise on credit
62. Declaration of a cash dividend
63. Issuance of bonds payable at a discount

 

60. Preparing the statement of cash flows involves all of the following except determining the
61. cash provided by operations.
62. cash provided by or used in investing and financing activities.
63. change in cash during the period.
64. cash collections from customers during the period.

 

61. The cash debt coverage is computed by dividing net cash provided by operating activities by
62. average long-term liabilities.
63. average total liabilities.
64. ending long-term liabilities.
65. ending total liabilities.

 

62. The current cash debt coverage is often used to assess
63. financial flexibility.
64. liquidity.
65. profitability.
66. solvency.

 

63. A measure of a company’s financial flexibility is the
64. cash debt coverage.
65. current cash debt coverage.
66. free cash flow.
67. cash debt coverage and free cash flow.

 

64. Free cash flow is calculated as net cash provided by operating activities less
65. capital expenditures.
66. dividends.
67. capital expenditures and dividends.
68. capital expenditures and depreciation.

 

^S65.     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?

1. The nearness to cash of assets and liabilities.
2. The firm’s ability to respond and adapt to financial adversity and unexpected needs and opportunities.
3. The firm’s ability to pay its debts as they mature.
4. The firm’s ability to invest in a number of projects with different objectives and costs.

 

^P66.     Net cash provided by operating activities divided by average total liabilities equals the

1. current cash debt coverage.
2. cash debt coverage.
3. free cash flow.
4. current ratio.

 

^S67.     Which of the following balance sheet classifications would normally require the greatest amount of supplementary disclosure?

1. Current assets
2. Current liabilities
3. Plant assets
4. Long-term liabilities

 

68. Level 1 of fair value hierarchy measures are based on:
69. market prices for identical assets.
70. market prices for similar assets.
71. unobservable inputs.
72. historical cost of similar assets.

 

69. Which of the following is not a required supplemental disclosure for the balance sheet?
70. Contingencies
71. Financial forecasts
72. Accounting policies
73. Contractual situations

 

70. Typical contractual situations that are disclosed in the notes to the balance sheet include all of the following except
71. debt covenants
72. lease obligations
73. advertising contracts
74. pension obligations

 

71. Accounting policies disclosed in the notes to the financial statements typically include all of the following except
72. the cost flow assumption used
73. the depreciation methods used
74. significant estimates made
75. significant inventory purchasing policies

 

72. Which of the following best exemplifies a contingency that is reported in the notes to the financial statements?
73. Losses from potential future lawsuits
74. Loss from a lawsuit settled out of court prior to the end of the fiscal year
75. Warranty claims on future sales
76. Estimated loss from an ongoing lawsuit

 

73. Which of the following is not a method of disclosing pertinent information?
74. Supporting schedules
75. Parenthetical explanations
76. Cross reference and contra items
77. All of these are methods of disclosing pertinent information.

 

74. Significant accounting policies may not be
75. selected on the basis of judgment.
76. selected from existing acceptable alternatives.
77. unusual or innovative in application.
78. omitted from financial-statement disclosure.

 

75. A general description of the depreciation methods applicable to major classes of depreci-able assets
76. is not a current practice in financial reporting.
77. is not essential to a fair presentation of financial position.
78. is needed in financial reporting when company policy differs from income tax policy.
79. 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?
77. Stock option plans
78. Pension obligations
79. Lease contracts
80. All of these answer choices are correct

 

^P77.     Which of the following is a contra account?

1. Premium on bonds payable
2. Unearned revenue
3. Patents
4. Accumulated depreciation

 

78. __________ ratios measure how effectively a company uses its assets.
79. Liquidity
80. Activity

c    Profitability

1. Coverage

 

 

Multiple Choice Answers—Conceptual

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
21.	d	30.	b	39.	d	48.	c	57.	b	66.	b	75.	D
22.	c	31.	b	40.	b	49.	d	58.	c	67.	d	76.	D
23.	b	32.	d	41.	d	50.	c	59.	a	68.	a	77.	D
24.	d	33.	d	42.	b	51.	c	60.	D	69.	b	78.	b
25.	d	34.	d	43.	d	52.	c	61.	B	70.	c
26.	c	35.	c	44.	d	53.	b	62.	B	71.	D
27.	b	36.	b	45.	d	54.	d	63.	D	72.	D
28.	c	37.	c	46.	d	55.	D	64.	C	73.	d
29.	d	38.	b	47.	d	56.	b	65.	b	74.	d

Solutions to those Multiple Choice questions for which the answer is “none of these.”

29. Total assets minus total liabilities.
30. Current assets less current liabilities.
31. Many answers are possible.

 

 

 

Multiple Choice—Computational

 

79. Fulton Company owns the following investments:

Trading securities (fair value)                                  $140,000

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

1. $0.
2. exactly $140,000.
3. $140,000 or an amount greater than $140,000, depending on the circumstances.
4. exactly $210,000.

 

80. For Grimmett Company, the following information is available:

Capitalized leases                                             $600,000

Trademarks                                                          245,000

Long-term receivables                                         225,000

In Grimmett’s balance sheet, intangible assets should be reported at

1. $245,000.
2. $275,000.
3. $845,000.
4. $875,000.

 

81. Houghton Company has the following items: common stock, $800,000; treasury stock, $105,000; deferred income taxes, $125,000 and retained earnings, $390,000. What total amount should Houghton Company report as stockholders’ equity?
82. $960,000.
83. $1,085,000.
84. $1,210,000.
85. $1,295,000.
86. Kohler Company owns the following investments:

Trading securities (fair value)                                  $120,000

Available-for-sale securities (fair value)                      80,000

Held-to-maturity securities (amortized cost)               94,000

Kohler will report securities in its long-term investments section of

1. exactly $200,000.
2. exactly $214,000.
3. exactly $294,000.
4. $174,000 or an amount less than $174,000, depending on the circumstances.

 

83. For Randolph Company, the following information is available:

Capitalized leases                                             $560,000

Copyrights                                                            190,000

Long-term receivables                                         210,000

In Randolph’s balance sheet, intangible assets should be reported at

1. $190,000.
2. $220,000.
3. $750,000.
4. $780,000.

 

84. Olmsted Company has the following items: common stock, $750,000; treasury stock, $105,000; deferred income taxes, $125,000 and retained earnings, $454,000. What total amount should Olmsted Company report as stockholders’ equity?
85. $974,000.
86. $1,099,000.
87. $1,224,000.
88. $1,349,000.

 

85. Presented below are data for Antwerp Corp.

  2014              2015   

Assets, January 1                                     $2,800           $3,360

Liabilities, January 1                                  1,680                     ?

Stockholders’ Equity, Jan. 1                              ?                     ?

Dividends                                                       560                 420

Common Stock                                              504                 448

Stockholders’ Equity, Dec. 31                           ?                     ?

Net Income                                                    560                 448

Stockholders’ Equity at January 1, 2014 is

704. $ 704.
705. $ 760.
706. $1,120.
707. $1,624.

 

86. Presented below are data for Bandkok Corp.

  2014              2015   

Assets, January 1                                     $5,900           $6,480

Liabilities, January 1                                  3,240                     ?

Stockholders’ Equity, Jan. 1                              ?                     ?

Dividends                                                   1,080                 810

Common Stock                                              972                 864

Stockholders’ Equity, Dec. 31                           ?                     ?

Net Income                                                 1,280                 864

Stockholders’ Equity at January 1, 2015 is

832. $3,832.
833. $2,660.
834. $2,860.
835. $3,940.

 

87. Presented below are data for Caracas Corp.

 2014               2015

Assets, January 1                                     $4,560                    ?

Liabilities, January 1                                         ?            $2,736

Stockholders’ Equity, Jan. 1                              ?              2,750

Dividends                                                       570                 646

Common Stock                                              608                 650

Stockholders’ Equity, Dec. 31                           ?              2,266

Net Income                                                    684                     ?

Net income for 2015 is

1. $484 income.
2. $484 loss.
3. $162 loss.
4. $162 income.

 

88. Lohmeyer Corporation reports:

Cash provided by operating activities               $320,000

Cash used by investing activities                        110,000

Cash provided by financing activities                  140,000

Beginning cash balance                                        70,000

What is Lohmeyer’s ending cash balance?

1. $350,000.
2. $420,000.
3. $570,000.
4. $640,000.

 

 

89. Keisler Corporation reports:

Cash provided by operating activities               $280,000

Cash used by investing activities                        110,000

Cash provided by financing activities                  140,000

Beginning cash balance                                        70,000

What is Keisler’s ending cash balance?

1. $310,000.
2. $380,000.
3. $530,000.
4. $600,000.

 

90. During 2014 the DLD Company had a net income of $75,000. In addition, selected accounts showed the following changes:

Accounts Receivable                              $3,000 increase

Accounts Payable                                     1,000 increase

Buildings                                                    4,000 decrease

Depreciation Expense                              1,500 increase

Bonds Payable                                         8,000 increase

What was the amount of cash provided by operating activities?

1. $74,500
2. $75,000
3. $76,500
4. $84,500

 

91. Harding Corporation reports the following information:

Net income                                                         $480,000

Depreciation expense                                          140,000

Increase in accounts receivable                            60,000

Harding should report cash provided by operating activities of

1. $280,000.
2. $400,000.
3. $560,000.
4. $680,000.

 

92. Sauder Corporation reports the following information:

Net income                                                         $320,000

Depreciation expense                                            70,000

Increase in accounts receivable                            30,000

Sauder should report cash provided by operating activities of

1. $220,000.
2. $280,000.
3. $360,000.
4. $420,000.

 

93. Packard Corporation reports the following information:

Net cash provided by operating activities         $285,000

Average current liabilities                                    150,000

Average long-term liabilities                                100,000

Dividends declared                                                60,000

Capital expenditures                                            110,000

Payments of debt                                                   35,000

Packard’s cash debt coverage is

1. 1.14.
2. 1.90.
3. 2.85.
4. 4.75.

 

94. Packard Corporation reports the following information:

Net cash provided by operating activities               $285,000

Average current liabilities                                          150,000

Average long-term liabilities                                      100,000

Dividends paid                                                             60,000

Capital expenditures                                                  110,000

Payments of debt                                                         35,000

Packard’s free cash flow is

1. $100,000.
2. $115,000.
3. $175,000.
4. $225,000.

 

95. Huge Cart Inc. gives you the following information pertaining to the year 2014.

Net sales                                                                  $800,000

Cost of goods sold                                                     500,000

Current assets                                                           500,000

Current liabilities                                                        250,000

Average total assets                                                  900,000

Total liabilities                                                            550,000

Net income                                                                 150,000

The asset turnover ratio of Huge Cart Inc. is

1. 0.56
2. 0.17
3. 0.89
4. 1.13

 

 

96. Huge Cart Inc. gives you the following information pertaining to the year 2014.

Net sales                                                                  $850,000

Cost of goods sold                                                     500,000

Current assets                                                           500,000

Current liabilities                                                        250,000

Average total assets                                                  900,000

Total liabilities                                                            550,000

Net income                                                                 150,000

The rate of return on assets Huge Cart Inc. is:

55. 55.5%.
56. 30.0%.
57. 18.7%.
58. 16.6%.

 

 

 

Multiple Choice Answers—Computational

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
79.	c	83.	a	87.	d	91.	c	95.	c
80.	a	84.	b	88.	b	92.	c	96.	d
81.	b	85.	c	89.	b	93.	a
82.	d	86.	c	90.	a	94.	b

 

 

 

 

Multiple Choice—CPA Adapted

 

97. Stine Corp.’s trial balance reflected the following account balances at December 31, 2014:

Accounts receivable (net)                                                                     $19,000

Trading securities                                                                                     6,000

Accumulated depreciation on equipment and furniture                         15,000

Cash                                                                                                        16,000

Inventory                                                                                                 30,000

Equipment                                                                                               25,000

Patent                                                                                                        4,000

Prepaid expenses                                                                                     2,000

Land held for future business site                                                          18,000

In Stine’s December 31, 2014 balance sheet, the current assets total is

1. $90,000.
2. $82,000.
3. $77,000.
4. $73,000.

 

 

 

Use the following information for questions 98 through 100.

 

The following trial balance of Reese Corp. at December 31, 2014 has been properly adjusted except for the income tax expense adjustment.

Reese Corp.

Trial Balance

December 31, 2014

          Dr.                    Cr.     

Cash                                                                                         $     775,000

Accounts receivable (net)                                                            2,695,000

Inventory                                                                                      2,085,000

Property, plant, and equipment (net)                                           7,566,000

Accounts payable and accrued liabilities                                                           $  1,701,000

Income taxes payable                                                                                                654,000

Deferred income tax liability                                                                                        85,000

Common stock                                                                                                        2,350,000

Additional paid-in capital                                                                                        3,680,000

Retained earnings, 1/1/14                                                                                      3,450,000

Net sales and other revenues                                                                              13,560,000

Costs and expenses                                                                  11,180,000

Income tax expenses                                                                   1,179,000                           

$25,480,000       $25,480,000

 

Other financial data for the year ended December 31, 2014:

• Included in accounts receivable is $1,200,000 due from a customer and payable in quarterly installments of $150,000. The last payment is due December 29, 2016.
• The balance in the Deferred Income Tax Liability account pertains to a temporary difference that arose in a prior year, of which $20,000 is classified as a current liability.
• During the year, estimated tax payments of $525,000 were charged to income tax expense. The current and future tax rate on all types of income is 30%.

 

In Reese’s December 31, 2014 balance sheet,

 

98. The current assets total is
99. $6,080,000.
100. $5,555,000.
101. $5,405,000.
102. $4,955,000.

 

99. The current liabilities total is
100. $1,850,000.
101. $1,915,000.
102. $2,375,000.
103. $2,440,000.

 

100. The final retained earnings balance is
101. $4,651,000.
102. $4,736,000.
103. $5,176,000.
104. $5,105,000.
105. On January 4, 2014, Kiley Co. leased a building to Dodd Corp. for a ten-year term at an annual rental of $150,000. At inception of the lease, Kiley received $600,000 covering the first two years’ rent of $300,000 and a security deposit of $300,000. This deposit will not be returned to Dodd 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 $600,000 should be shown as a current and long-term liability in Kiley’s December 31, 2014 balance sheet?

Current Liability     Long-term Liability

1. $0 $600,000
2. $150,000 $300,000
3. $300,000 $300,000
4. $300,000 $150,000

 

102. In a statement of cash flows, receipts from sales of property, plant, and equipment and other productive assets should generally be classified as cash inflows from
103. operating activities.
104. financing activities.
105. investing activities.
106. selling activities.

 

103. In a statement of cash flows, interest payments to lenders and other creditors should be classified as cash outflows for
104. operating activities.
105. borrowing activities.
106. lending activities.
107. financing activities.

 

104. In a statement of cash flows, proceeds from issuing equity instruments should be classified as cash inflows from
105. lending activities.
106. operating activities.
107. investing activities.
108. financing activities.

 

105. In a statement of cash flows, payments to acquire debt instruments of other entities (other than cash equivalents) should be classified as cash outflows for
106. operating activities.
107. investing activities.
108. financing activities.
109. lending activities.

 

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

Depreciation Method         Composition

1. No Yes
2. Yes Yes
3. Yes No
4. No No

 

 

 

 

Multiple Choice Answers—CPA Adapted

Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.	Item	Ans.
97.	d	99.	a	101.	b	103.	a	105.	b
98.	d	100.	c	102.	c	104.	d	106.	c

 

 

DERIVATIONS — Computational

No.      Answer          Derivation

79. c
80. a
81. b                $800,000 – $105,000 + $390,000 = $1,085,000.
82. d
83. a
84. b                $750,000 – $105,000 + $454,000 = $1,099,000.
85. c                $2,800 – $1,680 = $1,120.
86. c                ($5,900 – $3,240) + $1,280 – $1,080 = $2,860.
87. d                $2,266 + $646 – $2,750 = $162.
88. b                $70,000 + $320,000 – $110,000 + $140,000 = $420,000.
89. b                $70,000 + $280,000 – $110,000 + $140,000 = $380,000.
90. a                $75,000 – $3,000 + $1,000 + $1,500 = $74,500.
91. c                $480,000 + $140,000 – $60,000 = $560,000.
92. c                $320,000 + $70,000 – $30,000 = $360,000.
93. a                $285,000 ÷ ($150,000 + $100,000) = 1.14.
94. b                $285,000 – $60,000 – $110,000 = $115,000.
95. c                $800,000 ÷ $900,000 = 0.89.
96. d                $150,000 ÷ $900,000 = 16.6%.

 

 

DERIVATIONS — CPA Adapted

No.      Answer          Derivation

97. d                $19,000 + $6,000 + $16,000 + $30,000 + $2,000 = $73,000.
98. d                $775,000 + [$2,695,000 – ($150,000 × 4)] + $2,085,000 = $4,955,000.
99. a                $1,701,000 + ($654,000 – $525,000) + $20,000 = $1,850,000.
100. c $3,450,000 + $13,560,000 – $11,180,000 – ($1,179,000 – $525,000) = $5,176,000.
101. b Conceptual.
102. c Conceptual.

No.      Answer          Derivation

103. a Conceptual.
104. d Conceptual.
105. b Conceptual.
106. c Conceptual.

 

BRIEF Exercises

 

1. 5-107—Definitions.

Provide clear, concise answers for the following.

1. What are assets?
2. What are liabilities?
3. What is equity?
4. What are current liabilities?
5. Explain what working capital is and how it is computed.
6. What are intangible assets?
7. What are current assets?

 

 

Solution 5-107

1. Assets are probable future economic benefits obtained or controlled by an entity as a result of past transactions or events.

 

2. Liabilities are probable future sacrifices of economic benefits arising from present obligations of an entity as a result of past transactions or events.

 

3. Equity is the residual interest in the net assets of an entity.

 

4. Current liabilities are obligations that are expected to be liquidated through the use of current assets or the creation of other current liabilities.

 

5. Working capital is the net amount of a company’s relatively liquid resources. It is the excess of total current assets over total current liabilities.

 

6. Intangible assets are economic resources or competitive advantages. They lack physical substance and have a high degree of uncertainty about the future benefits to be received.

 

7. Current assets are resources (future economic benefits) expected to be converted to cash, sold, or consumed in one year or the operating cycle, whichever is longer.

 

1. 5-108—Terminology.

In the space provided at right, write the word or phrase that is defined or indicated.

 

1. Obligations expected to be liquidated 1.____________________________________

through use of current assets.

 

2. Statement showing financial condition at a 2.____________________________________

point in time.

 

3. Events that depend upon future outcomes. 3.____________________________________

 

4. Probable future sacrifices of economic 4.____________________________________

benefits.

 

5. Resources expected to be converted to 5.____________________________________

cash in one year or the operating cycle,

whichever is longer.

 

6. Resources of a durable nature used in 6.____________________________________

operations.

 

7. Economic rights or competitive advantages 7.____________________________________

which lack physical substance.

 

8. Probable future economic benefits. 8.____________________________________

 

9. Residual interest in the net assets of an 9.____________________________________

entity.

 

Solution 5-108

1. Current liabilities. 6.   Property, plant, and equipment.
2. Balance sheet. 7.   Intangible assets.
3. Contingencies. 8.   Assets.
4. Liabilities. 9.   Equity.
5. Current assets.

 

 

 

1. 5-109—Current assets.

Define current assets without using the word “asset.”

 

 

Solution 5-109

Current assets are resources (future economic benefits) expected to be converted to cash, sold, or consumed in one year or the operating cycle, whichever is longer.

 

 

 

 

 

EXERCISES

 

Ex. 5-110—Account classification.

ASSETS                                                      LIABILITIES AND CAPITAL

1. Current assets f.    Current liabilities
2. Investments g.   Long-term liabilities
3. Plant and equipment h.   Preferred stock
4. Intangibles i.    Common stock
5. Other assets j.    Additional paid-in capital
6. Retained earnings
7. Items excluded from balance sheet

 

Using the letters above, classify the following accounts according to the preferred and ordinary balance sheet presentation.

 

____    1.    Bond sinking fund

____    2.    Common stock dividend distributable

____    3.    Appropriation for plant expansion

____    4.    Bank overdraft

____    5.    Bonds payable (due 2017)

____    6.    Premium on common stock

____    7.    Securities owned by another company which are collateral for that company’s note

____    8.    Equity investments (trading)

____    9.    Inventory

____ 10.    Discount on bonds payable

____ 11.    Patents

____ 12.    Unearned rent revenue

Solution 5-110

1. b 5.    g                                        9.    a
2. i 6.    j                                       10.    g
3. k 7.    l                                       11.    d
4. f 8.    a                                      12.    f

 

 

 

 

Ex. 5-111—Valuation of Balance Sheet Items.

Use the code letters listed below (a – l) to indicate, for each balance sheet item (1 – 13) listed below the usual valuation reported on the balance sheet.

_____    1.    Common stock                             _____    8.    Long-term bonds payable

_____    2.    Prepaid insurance                         _____    9.    Land (in use)

_____    3.    Natural resources                         _____ 10.    Land (future plant site)

_____    4.    Property, plant, and equipment    _____ 11.    Patents

_____    5.    Accounts receivable                     _____ 12.    Equity investments (trading)

_____    6.    Copyrights                                     _____ 13.    Accounts payable

_____    7.    Inventory

 

1. Par value
2. Current cost of replacement
3. Amount payable when due, less unamortized discount or plus unamortized premium
4. Amount payable when due
5. Market value at balance sheet date
6. Net realizable value
7. Lower of cost or market
8. Original cost less accumulated amortization
9. Original cost less accumulated depletion
10. Original cost less accumulated depreciation
11. Historical cost
12. Unexpired or unconsumed cost

 

 

 

Solution 5-111

1. a 6.     h                                    11.     h
2. l 7.     g                                    12.     e
3. i 8.     c                                    13.     d
4. j 9.     k
5. f 10.     k

 

Ex. 5-112—Balance sheet classifications.

Typical balance sheet classifications are as follows.

1. Current Assets g.   Long-Term Liabilities
2. Investments h.   Capital Stock
3. Plant Assets i.    Additional Paid-In Capital
4. Intangible Assets j.    Retained Earnings
5. Other Assets k.   Notes to Financial Statements
6. Current Liabilities l.    Not Reported on Balance Sheet

 

Indicate by use of the above letters how each of the following items would be classified on a balance sheet prepared at December 31, 2014. If a contra account, or any amount that is negative or opposite the normal balance, put parentheses around the letter selected. A letter may be used more than once or not at all.

_____ 16.    Natural resource—timberlands   _____ 17.    Deficit (no net income earned since beginning of company)   _____ 18.    Goodwill   _____ 19.    90 day notes payable   _____ 20.    Investment in bonds of another company; will be held to 2017 maturity   _____ 21.    Land held for speculation   _____ 22.    Death of company president   _____ 23.    Current maturity of bonds payable   _____ 24.    Investment in subsidiary; no plans to sell in near future   _____ 25.    Accounts payable   _____ 26.    Preferred stock ($10 par)   _____ 27.    Prepaid rent   _____ 28.    Copyright   _____ 29.    Accumulated amortization, patents   _____ 30.    Earnings not distributed to stockholders

 

 

____    1.    Accrued salaries and wages

 

____    2.    Rent revenues for 3 months collected in advance

 

____    3.    Land used as plant site

 

____    4.    Equity securities classified as trading

 

____    5.    Cash

 

____    6.    Accrued interest payable due in   30 days

 

____    7.    Premium on preferred stock issued

 

____    8.    Dividends in arrears on preferred

stock

 

____    9.    Petty cash fund

 

____ 10.    Unamortized discount on bonds payable due 2017

 

____ 11.    Common stock at par value

 

____ 12.    Bond indenture covenants

 

____ 13.    Unamortized premium on bonds payable due in 2018

 

____ 14.    Allowance for doubtful accounts

 

____ 15.    Accumulated depreciation—equipment

 

Solution 5-112

1. f 6.    f                     11.    h                    16.    c                    21.    b                 26.    h
2. f 7.    i                     12.    k                    17.    (j)                  22.    l                  27.    a
3. c 8.    k                    13.    g                    18.    d                    23.    f                  28.    d
4. a 9.    a                    14.    (a)                 19.    f                     24.    b                 29.    (d)
5. a 10.    (g)                 15.    (c)                 20.    b                    25.    f                  30.    j

 

 

 

Ex. 5-113—Balance sheet classifications.

The various classifications listed below have been used in the past by Maris Company on its balance sheet. It asks your professional opinion concerning the appropriate classification of each of the items 1-14 below.

1. Current Assets f.    Current Liabilities
2. Investments g.   Long-Term Liabilities
3. Plant and Equipment h.   Common Stock and Paid-in Capital in Excess of Par
4. Intangible Assets i.    Retained Earnings
5. Other Assets

 

Indicate by letter how each of the following items should be classified. If an item need not be reported on the balance sheet, use the letter “X.” A letter may be used more than once or not at all. If an item can be classified in more than one category, choose the category most favored by the authors of your textbook.

 

____    1.    Employees’ payroll deductions.

____    2.    Cash in sinking fund.

____    3.    Rent revenue collected in advance.

____    4.    Equipment retired from use and held for sale.

____    5.    Patents.

____    6.    Payroll cash fund.

____    7.    Goods held on consignment.

____    8.    Accrued revenue on short-term investments.

____    9.    Advances to salespersons.

____ 10.    Premium on bonds payable due two years from date.

____ 11.    Bank overdraft.

____ 12.    Salaries which company budget shows will be paid to employees within the next year.

____ 13.    Work in process.

____ 14.    Appropriation for bonded indebtedness.

 

Solution 5-113

1. f 5.     d                          9.     a                        13.     a
2. b 6.     a                        10.     g                        14.     i
3. f 7.     x                        11.     f
4. a or e 8.     a                        12.     x

 

 

 

Ex. 5-114—Balance sheet classifications.

The various classifications listed below have been used in the past by Hale Company on its balance sheet.

 

1. Current Assets e.   Current Liabilities
2. Investments f.    Long-term Liabilities
3. Plant and Equipment g.   Common Stock and Paid-in Capital in Excess of Par
4. Intangible Assets h.   Retained Earnings

 

Instructions

Indicate by letter how each of the items below should be classified at December 31, 2014. If an item is not reported on the December 31, 2014 balance sheet, use the letter “X” for your answer. If the item is a contra account within the particular classification, place parentheses around the letter. A letter may be used more than once or not at all.

 

Sample question and answer:

 

   (a)           Allowance for doubtful accounts.

 

____    1.    Customers’ accounts with credit balances.

 

____    2.    Bond sinking fund.

 

____    3.    Salaries which the company’s cash budget shows will be paid to employees in 2015.

 

____    4.    Accumulated depreciation—equipment.

 

____    5.    Appropriation for plant expansion.

 

____    6.    Amortization of patents for 2014.

 

____    7.    On December 31, 2014, Hale signed a purchase commitment to buy all of its raw materials from Delta Company for the next 2 years.

 

____    8.    Discount on bonds payable due March 31, 2017.

 

____    9.    Launching of Hale’s Internet retailing division in February, 2015.

 

____ 10.    Cash dividends declared on December 15, 2014 payable to stockholders on January 15, 2015.

 

 

 

Solution 5-114

1. e 4.     (c)                        7.     x                        10.     e
2. b 5.     h                          8.     (f)
3. x 6.     x                          9.     x

 

 

 

Ex. 5-115—Statement of cash flows.

For each event listed below, select the appropriate category which describes the effect of the event on a statement of cash flows:

1. Cash provided/used by operating activities.
2. Cash provided/used by investing activities.
3. Cash provided/used by financing activities.
4. Not a cash flow.

 

____    1.    Payment on long-term debt

 

____    2.    Issuance of bonds at a premium

 

____    3.    Collection of accounts receivable

 

____    4.    Cash dividends declared

 

____    5.    Issuance of stock to acquire land

 

____    6.    Sale of available-for-sale securities (long-term)

 

____    7.    Payment of employees’ wages

 

____    8.    Issuance of common stock for cash

 

____    9.    Payment of income taxes payable

 

____ 10.    Purchase of equipment

 

____ 11.    Purchase of treasury stock (common)

 

____ 12.    Sale of real estate held as a long-term investment

 

 

 

Solution 5-115

1. c 4.     d                          7.     a                        10.     b
2. c 5.     d                          8.     c                        11.     c
3. a 6.     b                          9.     a                        12.     b

 

 

 

 

Ex. 5-116—Statement of cash flows ratios.

Financial statements for Hilton Company are presented below:

Hilton Company

Balance Sheet

December 31, 2014

Assets                                                             Liabilities & Stockholders’ Equity

Cash                                                        $ 40,000            Accounts payable                    $ 20,000

Accounts receivable                                  35,000            Bonds payable                            50,000

Buildings and equipment                           150,000           Common stock                            65,000

Accumulated depreciation—                                            Retained earnings                      60,000

buildings and equipment                      (50,000)                                                           $195,000

Patents                                                       20,000

$195,000

 

Hilton Company

Statement of Cash Flows

For the Year Ended December 31, 2014

Cash flows from operating activities

Net income                                                                                                                 $55,000

Adjustments to reconcile net income to net cash

provided by operating activities:

Increase in accounts receivable                                        $(16,000)

Increase in accounts payable                                                 8,000

Depreciation—buildings and equipment                              15,000

Gain on sale of equipment                                                    (6,000)

Amortization of patents                                                          2,000                  3,000

Net cash provided by operating activities                                                                            58,000

Cash flows from investing activities

Sale of equipment                                                                             12,000

Purchase of land                                                                              (25,000)

Purchase of buildings and equipment                                            (48,000)

Net cash used by investing activities                                                                                  (61,000)

Cash flows from financing activities

Payment of cash dividend                                                               (15,000)

Sale of bonds                                                                                    30,000

Net cash provided by financing activities                                                                             15,000

Net increase in cash                                                                                                             12,000

Cash, January 1, 2014                                                                                                         28,000

Cash, December 31, 2014                                                                                                 $40,000

 

At the beginning of 2014, Accounts Payable amounted to $12,000 and Bonds Payable was $20,000.

 

Instructions

Calculate the following for Hilton Company:

1. Current cash debt coverage
2. Cash debt coverage
3. Free cash flow
4. Explain the purpose of free cash flow analysis.

 

Solution 5-116

Net cash provided by operating activities

1. Current cash debt coverage =  ——————————————————

Average current liabilities

 

$58,000                            $58,000

=  ——————————— =   ———— = 3.6 : 1

($12,000 + $20,000) ÷ 2        $16,000

 

Net cash provided by operating activities

1. Cash debt coverage =  ——————————————————

Average total liabilities

 

$58,000                      $58,000

=  ——————————— =   ———— = 1.1 : 1

($32,000 + $70,000) ÷ 2        $51,000

 

1. Free cash flow =  Net cash provided by operating activities –

capital expenditures and dividends

 

=  $58,000 – *$73,000 – $15,000 = $(30,000)

 

*$25,000 + $48,000

 

 

1. Free cash flow is net cash provided by operating activities less capital expenditures and dividends. The purpose of free cash flow analysis is to determine the amount of discretionary cash flow a company has for purchasing additional investments, retiring its debt, purchasing treasury stock, or simply adding to its liquidity and financial flexibility.

 

 

 

 

PROBLEMS

 

Pr. 5-117—Balance sheet format.

The following balance sheet has been submitted to you by an inexperienced bookkeeper. List your suggestions for improvements in the format of the balance sheet. Consider both terminology deficiencies as well as classification inaccuracies.

Jasper Industries, Inc.

Balance Sheet

For the Period Ended 12/31/14

Assets

Fixed Assets—Tangible

Equipment                                                                      $110,000

Less:  reserve for depreciation                                        (40,000)     $  70,000

Factory supplies                                                                                     22,000

Land and buildings                                                          400,000

Less:  reserve for depreciation                                      (150,000)       250,000

Plant site held for future use                                                                  90,000      $   432,000

Current Assets

Accounts receivable                                                                             175,000

Cash                                                                                                        80,000

Inventory                                                                                               220,000

Treasury stock (at cost)                                                                          20,000           495,000

Fixed Assets–Intangible

Goodwill                                                                                                  80,000

Notes receivable                                                                                     40,000

Patents                                                                                                  26,000           146,000

Deferred Charges

Advances to salespersons                                                                     60,000

Prepaid rent                                                                                            27,000

Returnable containers                                                                            75,000           162,000

TOTAL ASSETS                                                                                                $1,235,000

Liabilities

Current Liabilities

Accounts payable                                                                               $140,000

Allowance for doubtful accounts                                                              8,000

Common stock dividend distributable                                                    35,000

Income tax payable                                                                                42,000

Sales tax payable                                                                                   17,000      $   242,000

Long-Term Liabilities, 5% debenture bonds, due 2017                             500,000

Reserve for contingencies                                                                          150,000           650,000

TOTAL LIABILITIES                                                                                               892,000

Equity

Capital stock, $10 par value, issued 12,000 shares with

60 shares held as treasury stock                                                       $150,000

Capital surplus                                                                                        90,000

Dividends paid                                                                                      (20,000)

Earned surplus                                                                                     123,000

TOTAL EQUITY                                                                                                     343,000

TOTAL LIABILITIES AND EQUITY                                                                   $1,235,000

 

Note 1.   The reserve for contingencies has been created by charges to earned surplus and has been established to provide a cushion for future uncertainties.

Note 2.   The inventory account includes only items physically present at the main plant and warehouse. Items located at the company’s branch sales office amounting to $40,000 are excluded since the company has consistently followed this procedure for many years.

 

 

Solution 5-117

1. The heading should be as of a specific date rather than for a period of time.
2. Reserve for Depreciation is poor terminology; the title Accumulated Depreciation is more appropriate.
3. Land and buildings should be segregated into two accounts. The Accumulated Depreciation account should only be reported for the buildings.
4. Plant site held for future use should be shown in the Investments section.
5. Current assets should be shown on the balance sheet first in most situations; current assets are listed usually in order of liquidity; factory supplies should be shown as a current asset.
6. Treasury stock is not an asset, but a contra account to stockholders’ equity in most situations.
7. Notes receivable should be reported as a current asset or an investment.
8. The deferred charge items should be reclassified as follows in most situations:

Advances to salespersons—current asset

Prepaid rent—current asset

Returnable containers—current asset

9. Allowance for doubtful accounts should be shown as a contra account to accounts receivable.
10. Common stock dividend distributable should be shown in stockholders’ equity.
11. 5% debenture bonds should be shown on a separate line.
12. Reserve for Contingencies should be shown as an appropriation of retained earnings. The authors prefer the term “appropriation” to the term “reserve.”
13. Capital stock should be shown at the par value of the shares issued, $120,000. Any excess should be included in a paid-in capital account.
14. Capital surplus and earned surplus are poor terminology. The terms “additional paid-in capital” and “retained earnings” are more appropriate.
15. The dividends paid title is a misnomer. It probably is a dividends declared item that should be closed to retained earnings.
16. No reference in the body of the statement is made to the notes.  The order of the notes is wrong.
17. Note 2 indicates that the inventory account is understated by $40,000.
18. Specific identification and description of all significant accounting principles and methods that involve selection from among alternatives and/or those that are peculiar to a given industry should be disclosed in the annual report.

Pr. 5-118—Balance sheet presentation.

The following balance sheet was prepared by the bookkeeper for Kraus Company as of December 31, 2014.

Kraus Company

Balance Sheet

as of December 31, 2014

 

Cash                                           $  95,000            Accounts payable                               $  85,000

Accounts receivable (net)              52,200            Bonds payable                                      100,000

Inventory                                        62,000            Stockholders’ equity                             238,500

Investments                                   76,300

Equipment (net)                           106,000

Patents                                           32,000                                                                                      

$423,500                                                                        $423,500

 

The following additional information is provided:

1. Cash includes the cash surrender value of a life insurance policy $9,400, and a bank overdraft of $2,500 has been deducted.
2. The net accounts receivable balance includes:

(a)  accounts receivable—debit balances $60,000;

(b)  accounts receivable—credit balances $4,000;

(c)  allowance for doubtful accounts $3,800.

3. Inventory does not include goods costing $3,000 shipped out on consignment. Receivables of $3,000 were recorded on these goods.
4. Investments include investments in common stock, trading $19,000 and available-for-sale $48,300, and franchises $9,000.
5. Equipment costing $5,000 with accumulated depreciation $4,000 is no longer used and is held for sale. Accumulated depreciation on the other equipment is $40,000.

 

Instructions

Prepare a balance sheet in good form (stockholders’ equity details can be omitted.)

 

 

 

Solution 5-118

Kraus Company

Balance Sheet

As of December 31, 2014

 

Assets

Current assets

Cash                                                                                                                   $  88,100     (1)

Trading securities                                                                                                  19,000

Accounts receivable                                                      $  57,000     (2)

Less: Allowance for doubtful accounts                                3,800                         53,200

Inventories                                                                                                             65,000     (3)

*Equipment held for sale                                                                                         1,000     (4)

Total current assets                                                                                       226,300

 

Investments

Available-for-sale securities                                              48,300

Cash surrender value                                                          9,400                         57,700

 

Property, plant, and equipment

Equipment                                                                        145,000     (5)

Less: accumulated depreciation                                        40,000                       105,000

 

Intangible assets

Patents                                                                               32,000

Franchises                                                                           9,000                         41,000

Total assets                                                                                                 $430,000

 

Liabilities and Stockholders’ Equity

Current liabilities

Accounts payable                                                                                              $  89,000     (6)

Bank overdraft                                                                                                         2,500

Total current liabilities                                                                                      91,500

 

Long-term liabilities

Bonds payable                                                                                                     100,000

Total liabilities                                                                                                      191,500

 

Stockholders’ equity                                                                                                  238,500

Total liabilities and stockholders’ equity                                                            $430,000

 

(1)  ($95,000 – $9,400 + $2,500)

(2)  ($60,000 – $3,000)

(3)  ($62,000 + $3,000)

(4)  ($5,000 – $4,000)

(5)  ($106,000 + $40,000 – $5,000 + $4,000)

(6)  ($85,000 + $4,000)

 

*An alternative is to show it as an other asset.

 

 

 

Pr. 5-119—Balance sheet presentation.

Given the following account information for Leong Corporation, prepare a balance sheet in report form for the company as of December 31, 2014. All accounts have normal balances.

 

Equipment                                                  60,000

Interest Expense                                          2,400

Interest Payable                                              600

Retained Earnings                                              ?

Dividends                                                   50,400

Land                                                         137,320

Accounts Receivable                               102,000

Bonds Payable                                          78,000

Notes Payable (due in 6 months)              29,400

Common Stock                                          70,000

Accumulated Depreciation – Equip.           10,000

Prepaid Advertising                                     5,000

Service Revenue                                     341,400

Buildings                                                    80,400

Supplies                                                       1,860

Income Taxes Payable                                3,000

Utilities Expense                                          1,320

Advertising Expense                                    1,560

Salaries and Wages Expense                   53,040

Salaries and Wages Payable                         900

Accumulated Depr. – Bld.                          15,000

Cash                                                           45,000

Depreciation Expense                                 8,000

 

 

Solution 5-119

Leong Corporation
Balance Sheet
December 31, 2014
Assets
Cash		$ 45,000
Accounts Receivable		102,000
Supplies		1,860
Prepaid advertising		5,000
Total current assets			$ 153,860
Land		137,320
Building	$ 80,400
Accumulated depreciation – bld	(15,000)	65,400
Equipment	60,000
Accumulated depreciation -eq	(10,000)	50,000	252,720
Total assets			$ 406,580
Liabilities & Stockholders’ Equity
Notes payable		$ 29,400
Taxes payable		3,000
Salaries and wages payable		900
Interest payable		600
Total current liabilities			$  33,900
Long-term liabilities
Bonds payable			78,000
Total liabilities			111,900
Common stock		70,000
Retained earnings ($275,080*- $50,400)		224,680
Total stockholders’ equity			294,680
Total liabilities & stockholders’ equity			$ 406,580

 

 

 

*$341,400 – $53,040 – $8,000 – $2,400 – $1,560 – $1,320
Pr. 5-120—Statement of cash flows preparation.

Selected financial statement information and additional data for Stanislaus Co. is presented below. Prepare a statement of cash flows for the year ending December 31, 2014

December 31

2013                            2014

Cash…………………………………………………   $42,000                       $65,000

Accounts receivable (net)……………………     84,000                       144,200

Inventory…………………………………………..   168,000                       206,600

Land…………………………………………………     58,800                         21,000

Equipment…………………………………………   504,000                       789,600

TOTAL………………………………….. $856,800                  $1,226,400

Accumulated depreciation…………………..   $84,000                     $115,600

Accounts payable………………………………     50,400                         86,000

Notes payable – short-term………………….     67,200                         29,400

Notes payable – long-term…………………..   168,000                       302,400

Common stock………………………………….   420,000                       487,200

Retained earnings………………………………     67,200                       205,800

TOTAL………………………………….. $856,800                  $1,226,400

 

Additional data for 2014:

1. Net income was $220,200.
2. Depreciation was $31,600.
3. Land was sold at its original cost.
4. Dividends of $81,600 were paid.
5. Equipment was purchased for $84,000 cash.
6. A long-term note for $201,600 was used to pay for an equipment purchase.
7. Common stock was issued to pay a $67,200 long-term note payable.

 

 

Solution 5-120

Stanislaus Co.

Statement of Cash Flows

For the year ended December 31, 2014

 

Net Income                                                                               $220,200

Cash flow from operating activities

Depreciation expense                                   31,600

Increase in accounts receivable                  (60,200)

Increase in inventory                                   (38,600)

Increase in accounts payable                       35,600

Decrease in short-term notes payable         (37,800)            (69,400)

Net cash provided by operating activities                                 150,800

 

Cash flow from investing activities

Purchase equipment                                    (84,000)

Sale of land                                                   37,800

Net cash used by investing activities                                        (46,200)

 

Cash flow from financing activities

Payment of cash dividend                           (81,600)

Net cash used by financing activities                                        (81,600)

Net increase in cash                                                                   23,000

Cash at beginning of year                                                          42,000

Cash at end of the year                                                              65,000

 

 

Noncash investing and financing activities

Payment of long-term note payable with issuance of $67,200 of common stock

Payment for equipment with issuance of $201,600 long-term note

 

Pr. 5-121—Statement of cash flows preparation.

Selected financial statement information and additional data for Johnston Enterprises is presented below. Prepare a statement of cash flows for the year ending December 31, 2014

 

Johnston Enterprises

Balance Sheet and Income Statement Data

December 31,       December 31,

    2014                       2013___

Current Assets:

Cash                                                                        $143,000               $119,000

Accounts Receivable                                                 228,000                 306,000

Inventory                                                                    391,000                 340,000

Total Current Assets                                            762,000                 765,000

 

Property, Plant, and Equipment                                1,261,000              1,122,000

Less: Accumulated Depreciation                                (476,000)               (442,000)

Total Assets                                                             $1,547,000            $1,445,000

 

Current Liabilities:

Accounts Payable                                                    $187,000               $102,000

Notes Payable                                                             51,000                   68,000

Income Taxes Payable                                                85,000                   76,500

Total Current Liabilities                                                323,000                 246,500

 

Bonds Payable                                                             350,000                 391,000

Total Liabilities                                                              673,000                 637,500

 

Stockholders’ Equity:

Common Stock                                                       510,000                 467,500

Retained Earnings                                                  364,000                 340,000

Total Stockholders’ Equity                                            874,000                 807,500

Total Liabilities & Stockholders’ Equity                   $1,547,000            $1,445,000

 

Sales Revenue                                                          1,615,000            $1,513,000

Less Cost of Goods Sold                                             781,000                 731,000

Gross Profit                                                                   834,000                 782,000

Expenses:

Depreciation Expense                                            153,000                 136,000

Salaries and Wages Expense                                391,000                 357,000

Interest Expense                                                      34,000                   34,000

Loss on Sale of Equipment                                      12,000                            0

Income Before Taxes                                                   244,000                 255,000

Less Income Tax Expense                                             98,000                 102,000

Net Income                                                                 $146,000               $153,000

 

Additional Information:

During the year, Johnston sold equipment with an original cost of $133,000 and accumulated depreciation of $119,000 and purchased new equipment for $272,000.

 

Solution 5-121

Johnston Enterprises

Statement of Cash Flows

For the Year Ended December 31, 2014

 

Net Income                                                                            $ 146,000

 

Cash flow from operating activities

Depreciation expense                                 153,000

Loss on sale of equipment                           12,000

Decrease in accounts receivable                 78,000

Increase in inventory                                   (51,000)

Increase in accounts payable                       85,000

Decrease in notes payable                          (17,000)

Increase in tax payable                                  8,500           268,500

Net cash provided by operating activities                                414,500

 

Cash flow from investing activities

Sale of equipment                                           2,000

Purchase of equipment                             (272,000)

Net cash used by investing activities                                      (270,000)

 

Cash flow from financing activities

Retirement of bonds payable                        (41,000)

Issuance of common stock                            42,500

Payment of dividends                                  (122,000)**

Net cash used by financing activities                                      (120,500)

 

Net increase in cash                                                                   24,000

Beginning cash                                                                         119,000

Cash at end of year                                                                $143,000

 

**Beginning R/E + Net income – Dividends = Ending R/E

$340,000 + $146,000 – Dividends = $364,000

Dividends = $122,000

 

 

IFRS QUESTIONS

 

True/False:

1. Although the presentation formats for the balance sheet and statement of cash flows are similar under IFRS and U.S. GAAP, IFRS requires far more extensive disclosure.
2. One significant difference between a balance sheet prepared using IFRS rather than U.S. GAAP is that long-term tangible assets may be reported at fair value rather than historical cost.
3. Both IFRS and U.S. GAAP require that specific items be reported on the balance sheet.
4. Both IFRS and U.S. GAAP require current assets to be listed first on the balance sheet.

 

Answers to True/False:

1. False
2. True
3. False
4. False

 

Multiple Choice Questions:

 

5. Which of the following statements about IFRS and U.S. GAAP accounting and reporting requirements for the balance sheet is not correct?
6. The presentation formats required by IFRS and U.S. GAAP for the balance sheet are similar.
7. One difference between the reporting requirements under IFRS and those of
   U.S. GAAP balance sheet is that an IFRS balance sheet may list long-term assets first.
8. Both IFRS and U.S. GAAP require that property, plant and equipment be reported at historical cost on the balance sheet.
9. Both IFRS and U.S. GAAP require that comparative information be reported.

 

Use the following information to answer the next two questions.

 

Franco Company uses IFRS and owns property, plant and equipment with a historical cost of 5,000,000 euros. At December 31, 2013, the company reported a valuation reserve of
8,565,000 euros. At December 31, 2014, the property, plant and equipment was appraised at
5,525,000 euros.

 

6. The property, plant and equipment will be reported on the December 31, 2014 statement of financial position at
7. 5,000,000 euros.
8. 5,525,000 euros.
9. 8,565,000 euros.
10. 9,090,000 euros.

 

7. The valuation reserve at December 31, 2014 will be reported at
8. 8,040,000 euros on the Statement of Stockholders’ Equity.
9. 8,565,000 euros in the Assets section of the Statement of Financial Position
10. 9,090,000 euros in the equity section of the Statement of Financial Position.
11. 525,000 euros on the Income Statement.

 

8. Similarities between IFRS and U.S. GAAP requirements for balance sheet presentation include all of the following except:
9. Both require that changes to the valuation reserve be disclosed in the notes to the financial statements.
10. Both require disclosure of significant accounting policies.
11. Both require the preparation of financial statements annually.
12. Both generally require the use of the current/ non-current classification for both assets and liabilities.

 

9. Under IFRS, current assets are listed in:
10. the order of liquidity.
11. the reverse order of liquidity.
12. the ascending order of their balances.
13. the descending order of their balances.

 

10. Under IFRS, which of the following current assets will be listed last in a statement of financial position?
11. Inventory
12. Accounts Receivable
13. Short-term Investments Cash
14. Cash

 

Answers to Multiple Choice:

5. c
6. b
7. c
8. a
9. b
10. d

 

 

IFRS Short Answer:

 

11. Briefly describe some of the similarities and differences between U.S. GAAP and IFRS with respect to balance sheet reporting.

 

1. Among the similarities between U.S. and IFRS related to balance sheet presentation are as follows:

 

• IAS 1 specifies minimum note disclosures. These must include information about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entity’s accounting policies, and (3) the key assumptions and estimation uncertainty that could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
• Comparative prior-period information must be presented and financial statements must be prepared annually.
• Current/non-current classification for assets and liabilities is normally required. In general, post-balance sheet events are not considered in classifying items as current or non-current.

 

Differences include (1) IFRS statements may report property, plant, and equipment first in the balance sheet. Some companies report the sub-total “net assets”, which equals total assets minus total liabilities. (2) While the use of the term “reserve” is discouraged in U.S. GAAP, there is no such prohibition in IFRS.

 

12. Briefly describe the convergence efforts related to financial statement presentation.

 

2. The IASB and the FASB are working on a project to converge their standards related to financial statement presentation. This joint project will establish a common, high-quality standard for presentation of information in the financial statements, including the classification and display of line items. A key feature of the proposed framework for financial statement presentation is that each of the statements will be organized in the same format to separate an entity’s financing activities from its operating and other activities (investing) and further separates financing activities into transactions with owners and creditors. Thus, the same classifications used in the balance sheet would also be used in the income statement and the statement of cash flows.