Accounting Balance Sheet & Assets Quiz

Questions and Answers

Which of the following is the correct order for listing assets on the balance sheet?

Patents, cash, short term investments, land

Land, patents, short term investments, cash

Short term investments, cash, land, patents

Cash, short term investments, land, and patents (correct)

In what order are the following accounts and their balances listed on a classified balance sheet?

Accounts receivable, cash, inventories, equipment

Equipment, inventories, accounts receivable, cash

Cash, accounts receivable, inventories, equipment (correct)

Inventories, equipment, cash, accounts receivable

What is a current asset?

Expected to be converted to cash or used in the business within a year or operating cycle.

How are current assets arranged on a classified balance sheet?

In the order in which they are expected to be converted into cash. Signup and view all the answers

How are current assets listed on a classified balance sheet?

By liquidity. Signup and view all the answers

Which of the following is NOT classified as a current asset?

Patents Signup and view all the answers

Which of the following is NOT a current asset?

A note receivable to be collected in two years Signup and view all the answers

Where would trademarks appear on a classified balance sheet?

Intangible assets. Signup and view all the answers

Where are intangible assets listed on a classified balance sheet?

Immediately after property, plant, and equipment. Signup and view all the answers

Which of the following is an example of an intangible asset?

All of the above Signup and view all the answers

Which of the following is NOT an example of an intangible asset?

Accounts Receivable Signup and view all the answers

How is equipment classified on the balance sheet?

PPE. Signup and view all the answers

How are liabilities classified on a balance sheet?

Current liabilities and long-term liabilities. Signup and view all the answers

Which of the following is considered property, plant, and equipment on a classified balance sheet?

All of the above Signup and view all the answers

Which of the following would NOT be reported among property, plant, and equipment on a classified balance sheet?

Cash Signup and view all the answers

What account and its balance is not reported on the balance sheet or income statement?

Dividends. Signup and view all the answers

How should Hans Company report the Zimmer Corporation bonds on its classified balance sheet?

A long-term investment. Signup and view all the answers

In what classification should land be reported if it will be idle for 5 years?

A long-term investment. Signup and view all the answers

What is earnings available to common stockholders equal to?

Net income - preferred dividends. Signup and view all the answers

What are the three most common financial ratio classifications used by businesses?

Profitability ratios, liquidity ratios, and solvency ratios Signup and view all the answers

Which financial ratio classification measures the ability of the company to survive over a long period of time?

Solvency ratios Signup and view all the answers

Which financial ratio classification measures the income or operating success of a company for a given period?

Profitability ratios Signup and view all the answers

What will reporting new income of $95,000 do?

Increase both retained earnings and stockholders' equity. Signup and view all the answers

Which of the following does not affect retained earnings?

Issuing common stock to stockholders Signup and view all the answers

What is working capital?

Used to evaluate a company's short-term debt paying ability. Signup and view all the answers

What is measured by current assets minus current liabilities?

Working capital. Signup and view all the answers

How is working capital calculated?

Current assets minus current liabilities. Signup and view all the answers

What do current assets minus current liabilities measure?

Working capital. Signup and view all the answers

How is earnings per share calculated?

Net income less preferred stock dividends divided by the average common shares outstanding. Signup and view all the answers

What is earnings per share an indicator of?

Profitability. Signup and view all the answers

How is free cash flow computed?

Net cash provided by operating activities minus capital expenditures and cash dividends Signup and view all the answers

Which financial statement is typically used to compute year-end retained earnings?

Statement of stockholders' equity. Signup and view all the answers

What happens when new shares of common stock are issued?

Increase common stock. Signup and view all the answers

What does declaring and paying a cash dividend do?

Decrease retained earnings. Signup and view all the answers

Which one of the following does NOT affect retained earnings?

Issuing common stock to stockholders Signup and view all the answers

What best identifies a company's ability to pay its obligations due within a year?

Current assets divided by current liabilities. Signup and view all the answers

Long-term creditors are usually most interested in evaluating what aspect of a company?

Solvency. Signup and view all the answers

What is a short-term creditor primarily interested in?

Liquidity. Signup and view all the answers

How does liquidity relate to a company's obligations?

It describes the ability to pay obligations due within a year. Signup and view all the answers

What does liquidity refer to?

The ability of a company to pay its short-term liabilities. Signup and view all the answers

What is the current ratio?

Current assets divided by current liabilities. Signup and view all the answers

Which measures a company's ability to pay current liabilities?

Both the current ratio and working capital Signup and view all the answers

What is the importance of the current ratio?

It evaluates a company's liquidity. Signup and view all the answers

Which of the following would increase a company's current ratio?

Reclassifying a short-term debt to a long-term debt Signup and view all the answers

Which of the following would decrease the company's current ratio?

Using cash to purchase long-term investments Signup and view all the answers

Which of the following ratios measures the ability of the company to survive over a long period of time?

Solvency ratios Signup and view all the answers

When can a company change to a new accounting method?

If management can justify that the new method results in more meaningful financial information. Signup and view all the answers

Which statement is true?

Both statements are true. Signup and view all the answers

What are generally accepted accounting principles (GAAP)?

Accounting rules that are recognized as a general guide for financial reporting. Signup and view all the answers

What is the primary accounting standard-setting body in the United States?

Financial Accounting Standards Board (FASB). Signup and view all the answers

Which organization issues the majority of generally accepted accounting standards in the U.S.?

Financial Accounting Standards Board (FASB). Signup and view all the answers

What are generally accepted accounting principles?

A set of accounting rules and practices that have authoritative support. Signup and view all the answers

What is the agency of the United States Government that oversees the U.S. financial markets?

Securities Exchange Commission. Signup and view all the answers

What is a characteristic of relevance as per FASB?

Predictive value Signup and view all the answers

What is a characteristic of faithful representation?

All of the above Signup and view all the answers

All of the following are qualities of useful financial information except:

Universality Signup and view all the answers

What is the primary criterion for judging accounting information?

Usefulness for decision making. Signup and view all the answers

What defines verifiable information?

If independent observers obtain similar results using the same methods. Signup and view all the answers

What does faithful representation mean?

Information accurately depicts what really happened. Signup and view all the answers

Which of the following is NOT a quality associated with faithful representation?

Materiality Signup and view all the answers

What is materiality in accounting?

An item is material if its size is likely to influence the decision of an investor or creditor. Signup and view all the answers

Which of the following is not a characteristic of relevance?

Comparability Signup and view all the answers

Accounting information has relevance if it:

Can influence business decisions Signup and view all the answers

Which of the following statements is false?

Comparability means using the same accounting principles from year to year. Signup and view all the answers

Different companies using the same accounting principles is an example of:

Comparability Signup and view all the answers

Why should accounting information be neutral?

To enhance faithful representation. Signup and view all the answers

Which of the following does NOT affect the company's current ratio?

Paying next month's rent one month in advance Signup and view all the answers

Which of the following is considered a constraint in accounting?

Cost Signup and view all the answers

Which accounting assumption assumes that an enterprise will continue to operate long enough to fulfill its commitments?

Going concern assumption Signup and view all the answers

What denotes the concept of going concern assumption?

A business has a reasonable expectation of remaining in business for the foreseeable future. Signup and view all the answers

What does the going concern assumption imply?

The business will remain in operation for the foreseeable future. Signup and view all the answers

What defines relevant accounting information?

It is information that is capable of making a difference in a business decision. Signup and view all the answers

Why is accounting information relevant to business decisions?

Because it has predictive value. Signup and view all the answers

What is consistency an ingredient of?

Neither Signup and view all the answers

What assumption states that only monetary values are recorded in accounting?

Monetary unit assumption Signup and view all the answers

Which accounting assumption states that a business's life can be divided into periods for financial reporting?

Time period assumption Signup and view all the answers

What does the periodicity assumption state?

The life of a business can be divided into artificial time periods for financial reporting purposes. Signup and view all the answers

What does the periodicity assumption imply?

The life of a business can be divided into artificial time periods for reporting. Signup and view all the answers

What does the economic entity assumption state?

The activities of a company can be distinguished from its owners. Signup and view all the answers

What does the economic entity assumption imply?

The economic events of every entity can be separately identified and accounted for. Signup and view all the answers

What principle indicates that assets should be reported at the price received to sell an asset?

Fair value principle Signup and view all the answers

What accounting concept suggests that assets and liabilities should be reported at fair values?

Fair value principle Signup and view all the answers

Based on the following accounts, determine the amount of property, plant, and equipment to be reported on its classified balance sheet:

Eq. + Buildings + Land - Acc. Dep. Signup and view all the answers

Based on the accounts, determine the amount of current assets to be reported on its classified balance sheet:

A/R + Cash + Inventory + Prepaid Insurance Signup and view all the answers

If a corporation has current assets of $3,210,000 and current liabilities of $2,350,000, what will its new current ratio be after paying $200,000 of accounts payable?

(3,210,000 - 200,000) / (2,350,000 - 200,000) = 1.40 Signup and view all the answers

What is the current ratio?

A/R / Cash + Inventory + Short-term investments + Prepaid Insurance Signup and view all the answers

How do you determine the company's earnings per share?

(NI - Pref. Div) / Av. comm. shares outstanding Signup and view all the answers

How much is working capital?

CA - CL Signup and view all the answers

What is the company's free cash flow?

Cash collected from customers minus cash paid for new equipment minus cash dividends paid. Signup and view all the answers

Study Notes

Balance Sheet & Asset Classification

Assets are listed on a balance sheet in the order of liquidity: cash, short-term investments, land, patents.
Current assets are expected to be converted to cash or used within a year or operating cycle, whichever is longer.
Current assets on a classified balance sheet are listed based on the order of expected cash conversion.
Current assets include cash, accounts receivable, inventories, and equipment; intangible assets like trademarks and patents are listed after property, plant, and equipment.

Intangible Assets

Intangible assets include trademarks, goodwill, patents, copyrights, and trade names.
Accounts receivable is not classified as an intangible asset.

Property, Plant & Equipment (PPE)

Equipment is categorized under PPE (property, plant, and equipment).
Land, buildings, and equipment are part of PPE, but cash and inventory are not.

Liabilities Classifications

Liabilities are divided into current liabilities and long-term liabilities.
Current liabilities must be settled within a year; long-term liabilities extend beyond that.

Investment Reporting

Long-term investments include bonds and stocks expected to be held for more than one year.
Land held for future construction is classified as a long-term investment.

Financial Ratios

Common financial ratios include profitability ratios, liquidity ratios, and solvency ratios.
The current ratio, calculated as current assets divided by current liabilities, assesses a company's short-term liquidity.
Working capital is current assets minus current liabilities, essential for evaluating short-term debt-paying ability.
Earnings per share (EPS) is derived from net income minus preferred dividends divided by the average number of common shares outstanding; it indicates profitability.

Cash Flow Analysis

Free cash flow is computed as net cash provided by operating activities minus capital expenditures and cash dividends.
This metric provides insight into the financial health and operational efficiency of a company.

Financial Reporting Concepts

The primary goal of financial reporting is to provide useful financial information for decision-making, emphasizing relevance and faithful representation.
Generally Accepted Accounting Principles (GAAP) guide financial reporting, ensuring consistency and comparability across financial statements.
The Financial Accounting Standards Board (FASB) establishes most accounting standards in the U.S.

Assumptions in Accounting

Key assumptions include the going concern assumption, which estimates ongoing business operations; the monetary unit assumption, which quantifies transactions in currency; and the periodicity assumption, which divides a company's life into time periods for reporting.

Characteristics of Relevant Information

Relevant accounting information must be capable of influencing decisions, characterized by materiality and predictive value.
Faithful representation requires information to be complete, neutral, and free from error.

Constraints in Accounting

Cost is considered a constraint in accounting, impacting information that is provided.

Summary of Key Financial Principles

Comparability demands consistency in accounting principles across different firms and over time.
Neutrality of information enhances faithful representation, avoiding bias in financial reports.

Conclusion

Understanding balance sheets, liabilities, assets classifications, financial ratios, cash flow dynamics, and the principles of financial reporting is crucial for evaluating a company's financial health and operational performance.

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Description

Test your understanding of balance sheets and asset classifications with this quiz. Topics covered include current and intangible assets, as well as the classification of liabilities. Challenge yourself to identify key components related to Property, Plant, and Equipment (PPE).